Management Meet Update Institutional Equities KEC International Reuters: KECL.BO; Bloomberg: KECI IN Healthy Order Inflow Traction Expected To Continue We had a meeting with the management of KEC International (KEC) recently to get the latest business update. The management is optimistic about healthy order inflows continuing from domestic as well as international markets. Following are the key takeaways: Improved execution pace in PGCIL projects: While order placement traction from Power Grid Corporation of India (PGCIL) remains steady at Rs2bn per year, the pace of execution of projects improved significantly. PGCIL s focus on commissioning its high capital work-in-progress of Rs56bn as well as a significant improvement in the pace of receiving last-mile clearances from the Central government led to faster completion of projects. KEC completed 15 projects for PGCIL last year. The annual addressable opportunity size for KEC from PGCIL orders stands at Rs7bn-Rs8bn in case of transmission lines and Rs5bn-Rs6bn in case of sub-stations. In FY15, KEC s market share in PGCIL tenders stood at 15%, which it aims to scale up further. Healthy order inflow from SEBs: KEC is witnessing healthy order placement activity from the state electricity boards (SEBs) of Karnataka, Tamil Nadu, West Bengal, Orissa, Bihar, Uttar Pradesh and Madhya Pradesh. The total T&D capex outlay of SEBs is Rs2bn- Rs25bn per annum. The terms of trade in certain SEBs have also improved with timely payment, focus on faster execution and incentivising contractors by offering bonus for before-time completion (a case in point is Karnataka, where KEC completed a project two months ahead of schedule and will get a bonus for it). SEB projects are also larger in value compared to those of PGCIL as they are lump-sum turnkey contracts with supply of equipments (eg. conductors) also included in the scope of work. Also, the margins are 5bps-1bps higher compared to PGCIL tenders. Consequently, the share of orders from SEBs in the order book of KEC has equaled the share of PGCIL contracts. International orders to remain steady: KEC expects its international order inflows to remain steady driven by the Middle East, Africa and SAARC countries. In the MENA region (17% of FY15 order book), KEC is exposed to primarily three countries Saudi Arabia, Abu Dhabi and Oman where order placement traction has not been affected despite the recent fall in crude oil prices. With the continuous thrust on investment in public infrastructure projects in these three countries, a robust growth in order inflows is expected, especially from Saudi Arabia which has increased its public infrastructure capex multifold. In Africa and Central Asia (11% of FY15 order book), creation of power infrastructure through various multilateral agency-funded projects will drive good order inflows for KEC, particularly from countries like Kenya, Uganda, Mozambique, Ethiopia, Zambia and Tanzania. In the SAARC region excluding India (driven by Bhutan and Bangladesh), KEC has received healthy orders (9% of FY15 order book). The only geography where KEC has not been able to scale up much is the Far East (2% of FY15 order book) where it had limited success in four countries (Malaysia, Indonesia, Philippines and Laos). Net revenue 69,795 79,18 84,678 94,194 15,119 EBITDA 3,814 4,933 5,118 6,782 8,515 Adjusted PAT 652 849 73 1,781 2,814 Adjusted EPS (Rs) 2.5 3.3 2.7 6.9 1.9 EPS growth (%) (69.) 3.3 (17.2) 153.2 58. EBITDA margin (%) 5.5 6.2 6. 7.2 8.1 PER (x) 42.6 32.7 39.5 15.6 9.9 P/BV (x) 2.4 2.3 2.1 1.9 1.6 EV/EBITDA (x) 11.2 9.6 9.6 7.2 5.6 Dividend yield (%).5.6.8 1.2 1.9 RoCE (%) 12.3 13.5 11.9 15.5 19.3 RoE (%) 5.8 7.3 5.6 12.7 17.8 9 June 215 BUY Sector: Capital Goods CMP: Rs18 Target Price: Rs131 Upside: 22% Chirag Muchhala chirag.muchhala@nirmalbang.com +91-22-3926 892 Key Data Current Shares O/S (mn) 257.1 Mkt Cap (Rsbn/US$mn) 27.7/431.6 52 Wk H / L (Rs) 155/72 Daily Vol. (3M NSE Avg.) 1,574,124 One-Year Indexed Stock Performance 13 12 11 1 9 8 7 6 5 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Price Performance (%) KEC International NSE CNX NIFTY INDEX 1 M 6 M 1 Yr KEC International 8.6 8.4 (9.9) Nifty Index (1.8) (4.7) 6.1 Source: Bloomberg Please refer to the disclaimer towards the end of the document.
1QFY11 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Institutional Equities SAE Towers likely to stabilise KEC s 1% subsidiary in the American continent, SAE Towers, is likely to stabilise in FY16 as against operating losses suffered in FY15. Its Brazil manufacturing plant (65,mt capacity), which services only Brazil market, suffered inventory pile-up following slowdown in economic activity because of national elections in November 214, leading to unabsorbed overheads and thereby hurting margins. While the inventory dispatch problem has not been completely resolved yet, the outlook for FY16 is better because of a healthy order book. The second manufacturing plant of SAE Towers in Mexico (35,mt capacity), which services the US, Mexico and Canada markets, continues to remain badly impacted by: (a) Predatory pricing by a new entrant in Mexico, and (b) Slowdown in Canada and some parts of North America because of the fall in crude oil prices. Overall, the management expects low single-digit margins for SAE Towers for FY16. Update on railway and water segments and BOOT projects In the railway segment (1.6% of FY15 revenue), KEC is focusing on mid-to-large sized projects worth around Rs1bn with a clear benchmark on minimum threshold margin. In the long run, railways can offer good opportunities for KEC in verticals like DFCCs (dedicated freight corridors), metro rail and railway electrification. In the water segment (1.6% of FY15 revenue), KEC wants to focus solely on waste water treatment projects and is executing four projects currently two each in Uttarakhand and Bangalore. KEC expects the scale-up to be gradual in the water segment. For the transmission line BOOT (Build, Own, Operate and Transfer) projects, KEC is bidding for smaller projects valued at ~Rs3bn for gaining experience, but it is not looking to create a significant portfolio of BOOT projects. It is also entering in pre-bid tie-up with other BOOT players to offer EPC services. Outlook and valuation Driven by better margin transmission orders, stabilisation of SAE Towers & cable business and completion of legacy projects in railway & water segments, KEC is poised to register a healthy expansion in its operating margin profile. We have factored in margin recovery of 7.2%/8.1% for FY16E/FY17E, respectively, leading to a 21bps operating margin expansion over FY15-FY17E. A 1% CAGR in adjusted earnings over FY15- FY17E (on a suppressed base), a healthy rise in return ratios (RoE likely to rise from 5.6% in FY15 to 17.8% in FY17E), reasonable valuation (current P/E of 1xFY17E earnings versus past eight years median P/E of 13.6x), high scalability potential owing to a strong transmission capex outlay likely over the next five years in India and strong international order inflow makes us positive on the stock. We have retained Buy rating on KEC with a target price of Rs131 based on 12xFY17E earnings. Exhibit 1: Order inflow and order book position (Rsmn) 3, 25, 2, 15, 1, 5, (Rsmn) 12, 1, 8, 6, 4, 2, Order intake (LHS) Order backlog (RHS) 2 KEC International
Nov-7 May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 Jun-14 Dec-14 Jun-15 Nov-7 May-8 Nov-8 May-9 Nov-9 May-1 Nov-1 May-11 Nov-11 May-12 Nov-12 May-13 Nov-13 Jun-14 Dec-14 Jun-15 Institutional Equities Exhibit 2: Segment-wise order book break-up as of FY15-end 5% 6% 4% 1% 75% T&D SAE Towers Railways Cables Water Exhibit 3: Geography-wise order book break-up as of FY15-end 2% 1% 11% 51% 17% 9% India SAARC MENA Africa & Central Asia South East Asia Americas Exhibit 4: P/E charts (x) 35 (Rs) 25 3 25 2 15 1 5 (Median P/E = 13.6x) 2 15 1 5 P/E Median P/E 5x 1x 15x 2x 25x KEC stock price Source: BSE, Nirmal Bang Institutional Equities Research Source: BSE, Nirmal Bang Institutional Equities Research 3 KEC International
Institutional Equities Financial statements (consolidated) Exhibit 5: Income statement Net sales 69,795 79,18 84,678 94,194 15,119 % growth 2. 13.2 7.2 11.2 11.6 Raw material costs 53,31 59,594 64,527 7,551 78,29 Staff costs 4,829 5,661 5,865 6,782 7,463 Other overheads 7,852 8,831 9,168 1,79 1,932 Total expenditure 65,981 74,86 79,56 87,412 96,65 EBITDA 3,814 4,933 5,118 6,782 8,515 % growth (19.1) 29.3 3.8 32.5 25.5 EBITDA margin (%) 5.5 6.2 6. 7.2 8.1 Other income 16 138 116 113 126 Interest costs 1,944 2,633 3,89 3,112 3,11 Depreciation 561 75 881 956 1,73 Profit before tax 1,47 1,733 1,264 2,827 4,467 Tax 818 883 561 1,46 1,653 Adjusted net profit 652 849 73 1,781 2,814 Extra-ordinary items (1) (182) 97 - - Reported net profit 65 668 1,61 1,781 2,814 Adjusted PAT margin (%).9 1.1.8 1.9 2.7 Adjusted EPS (Rs) 2.5 3.3 2.7 6.9 1.9 % growth (69.) 3.3 (17.2) 153.2 58. Exhibit 7: Balance sheet Share capital 514 514 514 514 514 Reserves 1,958 11,42 12,784 14,174 16,386 Net worth 11,472 11,916 13,298 14,688 16,9 Short-term loans 9,612 15,247 16,81 15,581 15,81 Long-term loans 7,78 6,26 7,37 7,7 6,57 Total loans 16,69 21,273 23,451 22,651 21,651 Deferred tax liability (net) 621 514 527 527 527 Total Liabilities 28,783 33,72 37,277 37,866 39,79 Gross block 13,296 14,26 13,775 14,775 15,875 Depreciation 3,514 4,283 5,164 6,121 7,194 Net block 9,782 9,742 8,611 8,654 8,682 Capital work-in-progress 31 18 2 2 2 Goodwill 3,424 3,778 3,943 3,943 3,943 Inventories 3,96 5,52 4,764 5,419 6,48 Debtors 28,87 38,78 38,529 42,323 46,656 Cash 1,556 1,44 2,63 1,469 1,331 Loans and advances 6,618 7,16 9,57 9,32 8,64 Other current assets 7,836 8,52 9,655 1,55 11,668 Total current assets 48,84 6,197 64,518 68,793 74,343 Creditors 24,671 32,131 33,248 35,759 39,212 Other current liabilities & provisions 8,893 8,64 6,747 7,965 8,877 Total current liabilities 33,564 4,194 39,995 43,723 48,88 Net current assets 15,276 2,3 24,523 25,69 26,255 Total assets 28,783 33,72 37,277 37,866 39,79 Exhibit 3: Exhibit 6: Cash flow EBIT 3,253 4,227 4,237 5,826 7,442 (Inc.)/dec. in working capital (4,26) (4,843) (3,897) (1,141) (1,323) Cash flow from operations (953) (615) 34 4,685 6,119 Other income 16 138 116 113 126 Depreciation 561 75 881 956 1,73 Interest paid (-) (1,944) (2,633) (3,89) (3,112) (3,11) Tax paid (-) (71) (991) (547) (1,46) (1,653) Dividends paid (-) (152) (18) (271) (391) (62) Net cash from operations (3,37) (3,576) (2,57) 1,25 1,962 Capital expenditure (-) (1,639) (545) 23 (1,) (1,1) Net cash after capex (4,677) (4,121) (2,34) 25 862 Inc./(dec.) in short-term borrowing 4,739 5,635 834 (5) (5) Inc./(dec.) in long-term borrowing (43) (1,52) 1,344 (3) (5) Inc./(dec.) in total borrowings 4,39 4,583 2,178 (8) (1,) Cash from financial activities 4,39 4,583 2,178 (8) (1,) Others (15) (579) 785 - - Opening cash balance 2,29 1,556 1,44 2,63 1,469 Closing cash balance 1,556 1,44 2,63 1,469 1,331 Change in cash balance (473) (116) 623 (595) (138) Exhibit 4: Exhibit 8: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS 2.5 3.3 2.7 6.9 1.9 Book value 44.6 46.3 51.7 57.1 65.7 Valuation (x) P/E 42.6 32.7 39.5 15.6 9.9 P/BV 2.4 2.3 2.1 1.9 1.6 EV/EBITDA 11.2 9.6 9.6 7.2 5.6 EV/sales.6.6.6.5.5 Return ratios (%) RoCE 12.3 13.5 11.9 15.5 19.3 RoE 5.8 7.3 5.6 12.7 17.8 RoIC 13.2 14.2 12.6 16.3 2.1 Profitability ratios (%) EBITDA margin 5.5 6.2 6. 7.2 8.1 EBIT margin 4.7 5.3 5. 6.2 7.1 PAT margin.9 1.1.8 1.9 2.7 Turnover ratios Total asset turnover ratio (x) 2.6 2.5 2.4 2.5 2.7 Debtor days 151 176 166 164 162 Inventory days 21 23 21 21 21 Creditors days 169 197 188 185 183 Solvency ratios (x) Debt-equity 1.5 1.8 1.8 1.5 1.3 Interest coverage 1.7 1.6 1.4 1.9 2.4 4 KEC International
Institutional Equities Rating track Date Rating Market price (Rs) Target price (Rs) 29 November 212 Buy 62 79 2 January 213 Buy 67 79 7 January 213 Buy 68 79 31 January 213 Buy 61 79 2 April 213 Buy 57 79 9 April 213 Buy 55 79 9 May 213 Buy 49 68 22 May 213 Buy 47 68 9 July 213 Buy 32 68 6 August 213 Buy 25 41 7 October 213 Buy 29 41 29 October 213 Buy 34 41 13 February 214 Buy 54 65 5 May 214 Hold 77 85 1 August 214 Accumulate 12 126 9 October 214 Buy 16 126 3 November 214 Buy 12 13 9 January 215 Buy 93 13 6 February 215 Buy 86 124 27 March 215 Buy 74 124 15 April 215 Buy 14 124 8 May 215 Buy 99 131 5 KEC International
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