KEC International Ltd.

Investment Summary KEC International Ltd. Independent Equity Research March - 2016 Equentis Wealth Advisory Services (P) Ltd Registered Office: 712, Raheja Chambers, Nariman Point, Mumbai 400021 India Tel: +91 22 61013800 Email: info@researchandranking.com

Quantitative Factors - Checklist KEC INTERNATIONAL LIMITED Sr. No. Aspect Required Criteria for Equentis 5x5 strategy F10-15 Actual Value (Historical) Condition Met? (/N) F16-21E Future Value (Forecasted) Condition Met? (/N) 1 Top-line 20-30% over 5yr period 17% N 17% N 2 EBITDA 25-35% over 5yr period 6% N 21% N 3 PAT 30-40% over 5yr period (3)% N 32% 4 ROCE 5 D/E Ratio At least 15% with increasing bias Around 1-1.5xs with declining bias Avg - 19%. Avg -1.3x Avg - 21%.Steady rise from 14.6% in F15 to 24% in F21E Avg 1.1x Steady drop from 1.5x in F15 to 1.0x in F21E 6 Working Capital Intensity Less than 25-30% of net sales Avg 16.3% Avg 16.7% 7 Dividend Payout 15-20% Avg - 20% Avg - 20% Note: - On revenue and operating profit growth front KEC does not meet Equentis criteria for company selection, however it qualifies on the basis of expected growth in net profits. Further return ratios and capital structure of the company is expected to improve significantly going forward, following the expected rise in profitability and capital efficiency. We believe that it is the growth in net profits and improvement in return parameters that will determine the company s valuation trajectory going forward, hence KEC qualifies to be the part of Equentis s 5x5 universe. 2

Qualitative Factors - Checklist Sr.No. Aspect Comment Required Criteria for Equentis 5x5 strategy- Met? Part of the RPG Group, one of India s leading business houses 1 Management pedigree, track record and integrity Successfully grown business through a balanced diversification strategy Established a large global enterprise through acquisitions and partnerships Maintains regular interactions within external stake holders ensuring consistent information flow with adequate disclosures Promoters have consistently increased their stake in the company to over 50%. 2 Ownership Profile None of promoter holding is pledged Institutional holding high at 30%+ - some prominent investors include names like UTI, LIC of India and Fidelity Growth Partners, a PE fund with USD 300 bn assets under management. Strong capability in executing EPC projects with over 7 decades of track record KEC is the largest power T&D EPC player in India having ~25-30% market share in PGCIL orders 3 Business USP & Market Leadership A prominent player in the international markets as well, where it enjoys strong local presence in some of the key growth regions such as Americas and Africa. Flexible business model backed by balanced revenue flows from international and domestic operations New levers for growth in place with entry in other infra EPC space including railways and water treatment. 4 Past strategies towards acquisitions, capital allocation, fiscal prudence, capital spends, cash flow mgmt, dividend payouts, bonus, concern for minority s/hs 5 Succession Planning Strong management focus on capital efficiency improvement- consistently stayed ahead of peers in working capital management and thereby earning high return ratios Average capex has been maintained below 3.3% of sales during past 5 years, which includes its overseas acquisition of USD 95 mn in F11 Company has handsomely rewarded investors with average dividend payouts of ~20% since F09. KEC is part of a large group with 3 rd generation involved in operations of the Group s other ventures A professionally managed company with Mr. Vimal Kejriwal, a veteran in the industry having over 3 decades of experience, at the helm of operations. 3

Highlights 1. We are positive on the growth prospects of KEC in the coming years. Our outlook on the company finds strength from its leadership position in the power T&D segment in India coupled with its strong presence in the international geographies. We believe that the company is best placed in the sector to benefit from the expected growth in order flows. 2. T&D Order inflow gaining traction There is relatively high visibility on domestic ordering activity, whereas trajectory for international orders is difficult to predict at this point in time. Even if we assume international order flows to slow down over the next 1-2 years (even though management interactions indicate no cause of worry), we believe that the growth in domestic ordering will keep KEC on track to achieve the estimated 17-18% growth in topline over F16-21 ( Rs 200 bn in F21 against Rs 90 bn in F16). Here we would like to point out that in our projections we have not assumed a significant rise in contribution from the company s non-t&d EPC segments, such as railways, cables, Water treatment and Solar, which together constitute ~15% of the order book. We are very optimistic about the growth prospects of all the non-t&d segments as well but await higher traction in order flows to take a decisive view on the growth trajectory that these segments may chart out going forward. We believe that the non-t&d segments can provide a huge upside trigger going forward and thereby boost order book growth even further. 3. Margin expansion underway - Margins which were under pressure since F12 due to increase in competitive intensity in the domestic market, reduced profitability in SAE operations and entry into new business verticals, are set to improve as the company completes all the legacy orders by the end of F16 and as SAE operations as well as new business verticals turnaround. Going forward we expect the operating margins to improve by almost 200 bps to reach 8.8% by F21. 4. Improving capital structure supported by higher capital efficiency In view of no large capex plan and the proposed savings in working capital, we believe that KEC can support 20-25% growth (absolute basis) in revenue for the next 2-3 years through internal accruals itself. In the latest interaction also, management has reiterated its target for working capital reduction and has expressed its confidence in improving leverage by maintaining debt at current levels (Rs 20-21 billion) to support future sales growth. We therefore anticipate interest cost as a percentage to sales to come down as well as capital structure to improve substantially with D:E reaching ~1.0x level by F21 as compared to 1.54x reported in F15. 5. Strong growth in net profits- Healthy growth in sales, improvement in profitability, low depreciation and interest costs as a proportion to sales should translate in the PAT margins to go up grow from 1.9% in F15 to 3.8% by F21. Resultantly, we expect 4.0x growth in PAT i.e. of 32.3% over F16-21 to Rs 7.4 billion. EPS of Rs 6.3 in F15 is projects to increase to Rs 28.7 by F21. 6. A notable global player in the T&D EPC space- KEC is the largest T&D EPC player in India with nearly double the size of operations as compared to its nearest competitor in the space. Domestically the company has maintained its lead in PGCIL orders and currently holds close to 25-30% market share. Further RPG Group s vision of setting up a truly global enterprise has enabled KEC to emerge as a strong contender in the global power T&D arena, wherein it is ranked no.1 in South & North America and in Africa, while enjoying a prominent position in the Middle Eastern markets. Further due to geographically diversified revenue mix and efficient capital management, KEC has stayed ahead of its peers in terms of sales growth and return parameters as well. 4

Valuations & Recommendation Increase in cash flows from operations, limited capex and rationalization of capital structure should translate in 4.0x growth in net profit of the company. Overall we project EPS of the Company to increase from Rs 6.3 per share in F15, to Rs 7.1 in F16 (o growth 13%) and further to Rs 28.7 by F21, implying an EPS of 32.3% over F16-21. KEC currently trades at a PE of 16x on the consolidated TTM EPS of Rs 6.8. Over the next 4-5 years we expect the stock price to grow by 4.5-5.0x, this is arrived at by valuing the F21 EPS of Rs 28.7 at 18-20x PE. Valuation reflects our confidence in the management capability in capturing high growth opportunities both in India and in the overseas market. Our outlook also finds strength from its leadership position in the power T&D segment and its superiority in managing working capital requirement as compared to its peers. We therefore believe that KEC is best placed in the sector to benefit from the expected growth in order flows. The table below details the sensitivity of F21 target price to different levels of EPS estimates and PE multiples. F-21 EPS sensitivity -15% -10% -5% 0% 5% 10% 15% F-21 EPS est. (Rs./-) 24.4 25.8 27.2 28.7 30.1 31.5 33.0 PE 14xs 341.0 361.0 381.1 401.1 421.2 441.3 461.3 PE 16xs 389.7 412.6 435.5 458.4 481.4 504.3 527.2 PE 18xs 438.4 464.2 490.0 515.8 541.5 567.3 593.1 PE 20xs 487.1 515.8 544.4 573.1 601.7 630.4 659.0 PE 22xs 535.8 567.3 598.8 630.4 661.9 693.4 724.9 PE 24xs 584.5 618.9 653.3 687.7 722.1 756.4 790.8 PE 26xs 633.2 670.5 707.7 745.0 782.2 819.5 856.7 Note shaded cells indicate fair value of equity range Recommendation- We are very positive on the overall growth story that is unfolding for KEC and therefore strongly recommend buying into the stock for the long term investors, having 4-5 years investment horizon. At the current market price of Rs 110-115, KEC can be a strong value creator, with over 4.5-5.0x return potential over the next five year period. Risks to the recommendation Slowdown in order flows Entire growth in revenue hinges upon the expectation of order pick up in the domestic markets in the immediate term and sustained strength in the international markets. In case there are delays in domestic tendering process or international markets continue to languish beyond estimated time period, then our projections would face the risk of downward revision. Subsidiary and new vertical turn around- Our assumption on margin expansion assumes turnaround in SAE operations and improvement in the performance of new verticals from F16 onward and would need to be monitored closely for any deviations. Capital efficiency improvement Interest outgo will increase for the company if it is unable to improve working capital efficiency as targeted or undertakes higher than Rs 1,000 million p.a. capex over the next 2-3 years impacting the growth in PAT during the projection period Input cost fluctuation- KEC derives sizable revenue from international operations (~53% of revenue in F15), which are fixed price in nature and therefore are vulnerable to adverse input cost movements. The company tries to mitigate this risk by hedging the exposure to the extent possible but there are always some uncovered positions in its order book. 5

Consolidated Financial Summary Consolidated (INR mn) F11 F12 F13 F14 F15 F16E F17E F18E F19E F20E F21E 3yr (F12-15) 5yr (F10-15) 3yr (F16-19E) Gross Revenues 45,712 59,177 71,187 80,927 86,573 89,988 98,596 113,033 134,473 162,808 199,773 13.5% 17.0% 14.3% 17.3% o 15.7% 29.5% 20.3% 13.7% 7.0% 3.9% 9.6% 14.6% 19.0% 21.1% 22.7% Net Revenues 44,765 58,147 69,795 79,018 84,678 88,060 96,484 110,612 131,592 159,320 195,494 13.3% 16.7% 14.3% 17.3% o 14.6% 29.9% 20.0% 13.2% 7.2% 4.0% 9.6% 14.6% 19.0% 21.1% 22.7% EBITDA 5,200 5,059 4,307 5,566 5,779 6,759 7,757 9,225 10,975 13,765 17,282 4.5% 5.6% 17.5% 20.7% o 18.3% -2.7% -14.9% 29.2% 3.8% 16.9% 14.8% 18.9% 19.0% 25.4% 25.5% EBITDA margins 11.6% 8.7% 6.2% 7.0% 6.8% 7.7% 8.0% 8.3% 8.3% 8.6% 8.8% Reported PAT 2,056 2,093 650 668 1,610 1,816 2,597 3,525 4,386 5,688 7,366-8.4% -3.2% 34.2% 32.3% o 8.4% 1.8% -68.9% 2.6% 141.2% 12.8% 43.0% 35.7% 24.4% 29.7% 29.5% PAT margins 4.6% 3.6% 0.9% 0.8% 1.9% 2.1% 2.7% 3.2% 3.3% 3.6% 3.8% FCFF -2,171 4,485-2,188-925 2,134 2,777 3,035 3,634 2,159 1,135 1,739 Debt:Equity 1.43 1.01 1.27 1.52 1.54 1.36 1.22 1.07 1.02 1.03 1.02 Asset turns 1.93 2.57 2.65 2.63 2.51 2.54 2.61 2.77 2.88 2.92 2.99 Net working capital/gross sales 20.4% 11.2% 13.3% 15.2% 16.9% 16.8% 16.8% 16.3% 16.3% 16.8% 16.8% Capex/Gross sales 10.4% 3.1% 2.4% 1.2% -0.6% 1.1% 1.0% 0.9% 1.5% 1.8% 2.0% ROCE 20.6% 21.1% 15.1% 16.5% 14.6% 16.9% 18.7% 20.9% 21.9% 23.2% 24.4% RoE 21.7% 18.9% 5.7% 5.6% 12.1% 12.4% 15.6% 18.2% 19.3% 21.0% 22.5% EBIT/Gross Interest Expense 3.0 2.3 1.6 1.5 1.3 2.1 2.3 2.7 2.9 3.1 3.3 Shares o/s (mn) 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 EPS 8.0 8.1 2.5 2.6 6.3 7.1 10.1 13.7 17.1 22.1 28.7 P/E 16.8 14.9 10.4 7.7 6.2 4.7 3.7 EV: 45,382 44,830 44,888 44,946 47,335 51,917 57,332 - M. cap 26,994 26,994 26,994 26,994 26,994 26,994 26,994 - Add: debt 20,451 20,037 20,306 20,717 23,236 27,950 33,466 - Less: cash & cash equivalents (2,063) (2,202) (2,412) (2,765) (2,895) (3,027) (3,128) EV/EBITDA 7.9 6.6 5.8 4.9 4.3 3.8 3.3 BVPS 36.8 43.1 44.6 46.3 51.7 57.1 64.9 75.3 88.4 105.3 127.2 P/BV 2.0 1.8 1.6 1.4 1.2 1.0 0.8 Dividend payout - as % of PAT 17.4% 17.1% 23.4% 27.0% 16.9% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 5yr (F16-21E) 6

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