2QFY2011 Results Update Capital Goods November 3, 2010 KEC International Performance Highlights (` cr) 2QFY11 2QFY10 % chg (yoy) 1QFY11 % chg (qoq) Revenues 1,001 875 14.3 846 18.3 EBITDA 101 91 11.3 84 19.4 EBITDA margin (%) 10.1 10.4 (28)bp 10.0 9.6bp Reported PAT 43 42 1.5 26 62 Results in line: 2QFY2011 results of KEC International (KEC) were broadly in line with our estimates. Revenues grew 14% yoy to `1,001cr, while PAT was up 1.5% yoy to `43cr. We had estimated revenues and PAT at `1,050cr and `44cr, respectively. Consolidated order backlog at the end of the current quarter stood at `7,025cr, including `580cr relating to the recently acquired SAE Towers. Order intake during 2QFY2011 grew 43% yoy to `1,750cr. We maintain a Buy on the stock. BUY CMP Target Price Investment Period Stock Info Sector Market Cap (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code `492 `648 12 Months Capital Goods 2,532 0.4 640/450 14,624 10 20,466 6,161 KECL.BO KECI@IN Steady performance: Revenues reported steady growth of 14% yoy to `1,001cr, while EBIDTA margins were a tad lower at 10.1%, down by 28bp on a yoy basis. Consequently, EBIDTA rose by only 11.3% to `101cr despite the 14% increase in revenues. Lower interest cost for the quarter enabled the company to report 22% yoy increase in PAT to `51. Accounting for the exceptional items (VRS payments), reported PAT came in at `43cr. Outlook and Valuation: Transmission EPC companies are expected to benefit in terms of increasing order inflows on the back of ongoing investments in the domestic power sector. We expect PGCIL to accelerate its capex schedule over the next two years, leading to higher order inflow for the transmission EPC companies. Acquisition of the Texas-based SAE Towers would enable KEC leverage the former s customer base to develop relationship with the power utilities to secure EPC contracts in the future. At the CMP of `492, the stock trades at 11.7x and 9.9x FY2011E and FY2012E earnings, respectively. We maintain a Buy on the stock, with a Target Price of `648. Key Financials (Consolidated) Y/E March (` cr) FY2009 FY2010 FY2011E FY2012E Net Sales 3,427 3,877 4,563 5,223 % chg 21.8 13.1 17.7 14.5 Net Profit 116 171 216 256 % chg (32.5) 47.0 26.1 18.8 EBITDA (%) 8.8 9.9 10.0 10.0 EPS (Rs) 22.6 33.3 41.9 49.8 P/E (x) 21.8 14.8 11.7 9.9 P/BV (x) 4.5 3.6 2.9 2.3 RoE (%) 22.3 27.3 27.6 26.2 RoCE (%) 16.1 17.0 18.5 18.9 EV/Sales (x) 0.9 0.8 0.7 0.6 EV/EBITDA (x) 10.0 8.4 7.0 6.0 Shareholding Pattern (%) Promoters 41.7 MF / Banks / Indian Fls 41.5 FII / NRIs / OCBs 5.7 Indian Public / Others 11.2 Abs. (%) 3m 1yr 3yr Sensex 13.0 32.9 2.5 KEC 0.4 (6.9) (31.1) John Perinchery 91 22 40403800; Extn: 347 John.Perinchery@angelbroking.com Hemang Thaker 91 22 40403800; Extn: 342 Hemang.Thaker@angelbroking.com Please refer to important disclosures at the end of this report 1
Exhibit 1: 2QFY2011 Performance (Consolidated) (` cr) 2QFY11 2QFYFY10 % chg (yoy) 1QFY11 % chg qoq 1HFY11 1HFY10 % chg yoy Net Sales 1,000 875 14.3 846 18.2 1,846 1,602 15.2 Other operating income 0.6 0.07 0.08 0.7 0.3 Total income 1,001 875 14.3 846 18.3 1,847 1,602 15.3 Stock adjustments (77) (2) (29) (106) (1) Raw Material 597 431 38.6 443 34.9 1,040 754 37.9 (%of net sales) 59.7 49.2 52.3 56.3 47.1 Erection & Sub contracting 189 226 (16.1) 209 (9.6) 399 448 (11.0) (% of Net Sales 18.9 25.8 24.7 21.6 28.0 Employee Cost 58 40 45.1 48 21.6 106 79 34.8 (% of Net Sales) 5.8 4.6 5.7 5.8 4.9 Other Expenses 131 90 46.5 90 45.4 222 145 53.0 (% of Net Sales) 13.1 10.3 10.7 12.0 9.1 Total Expenditure 900 785 14.7 762 18.1 1,661 1,425 16.6 EBITDA 101 91 11.3 84 19.4 185 177 4.5 (EBITDA %) 10.1 10.4 10.0 10.0 11.0 Interest 20 23 (11.2) 26 (22.9) 47 45 4.7 Depreciation 9 7 30.5 9 4.2 18 13 35.0 Other Income 0 0 0 0 0 PBT 71 61 17.6 49 44.7 120.9 119 1.6 (% of Net Sales) 7.1 6.9 0.0 5.8 6.5 7.4 Total Tax 20 19 8.3 23 (12.0) 43 39 12.4 (% of PBT) 28.4 30.8 46.6 35.8 32.4 Reported PAT 43 42 1.5 26 62.0 69 80 (14.2) (% of net sales) 4.3 4.8 3.1 3.7 5.0 Add Extra. Ordinary item 8.5-8.5 - Adjusted PAT 51 42 21.7 26.4 94.2 78 80 (3.6) Exhibit 2: Actual v/s Estimates (` cr) Actual Estimates Var (%) Revenue 1,001 1,050 (4.7) EBITDA 101 105 (4.0) PAT (Adj) 51 44 16.9 EPS (`) 8.3 8.5 (2.4) November 3, 2010 2
Acquisition-led growth: KEC s 2QFY2011 revenue grew 14% yoy to `1,001cr, which also included the turnover from the recently acquired RPG cables (`116cr) and SAE Towers (`20crs). Excluding these, revenues declined 1.1% to `865cr. EBDITA margins for the quarter came at 10.1% in line with management guidance. Interest expenses were at 2% of total revenues compared to 2.6% in the year ago period. The company ended the quarter with PAT of `43cr, an increase of 1.5% yoy. Revenues reported in the cables division stood at `116cr with EBIDTA of `5.1cr and PBT of `2.6cr. Numbers for SAE Towers were accounted for a limited period from September 22, 2010 to September 30, 2010. Revenues, EBIDTA and PAT for SAE Towers came in at `20cr, `3.8cr and `2.4cr, respectively. During the quarter, KEC had to write off `8.5cr as VRS expenditure incurred at the Vashi testing station. The facility at Vashi was located on a seven acre plot and was incapable of testing the 1,200kv transmission towers. Hence, the company had to set up a new testing facility on a 17 acre plot at Nagpur post which the Vashi facility had become non-operational. Management informs that no decision has been taken on the end use of the idle land at Vashi. Interest cost from the next quarter is likely to increase on account of the incremental debt in KEC s books. The consideration of US $95mn payable for acquisition of SAE Towers has been fully funded through debt at an average cost of 5.1% p.a. Management expects SAE Towers to report revenues of US $135mn for CY2010 with EBIDTA margin of 14% and PAT of US $11mn. Going forward, management estimates capacity utilisation to increase substantially from the current 65% and expects EBIDTA to stabilise at ~12%. November 3, 2010 3
Robust Order Backlog: Order backlog at the end of 2QFY011 stood at `7,025cr, split across transmission (69%), power systems (15%) and others (16%). Geographically, the order backlog was spread across South Asia (45%), Middle East (15%), Americas (19%), Africa (13%) and Central Asia (8%). Order backlog at the recently acquired cables divisions and SAE Towers were at Rs164cr and `580cr respectively. KEC recently obtained a `735cr order from SNC Lavalin, Canada for supply of high voltage transmission line towers for their various projects in Canada. The SNC Lavalin order has a price escalation clause and is to be executed over the next five years. Revenue booking from this order would commence from December 2011 onwards. Orders worth `158cr was also received from Nigeria for laying transmission lines on a turnkey basis. Orders from PGCIL were at `135cr and are expected to gather momentum from 2HFY2011. In addition, the company received a `95cr order from Parbati Koldam Transmission Company, a joint venture between Reliance Infrastructure and Power Grid Corporation of India. During the current quarter, the cable division received orders from various customers totaling to `176cr. KEC had also obtained a `112cr order from the Indian Railways for civil infrastructure works on a turnkey basis. Exhibit 3: Order book Geographical break up Exhibit 4: Order book split (` cr) 13% 15% 8% 45% South Asia Americas Middle east Asia 1,054 1,124 4,847 Transmission Power systems Others 19% Central Asia Capex guidance: KEC would be setting a new cable manufacturing facility at Vadodara at an estimated cost of `120cr. The company has acquired ~54 acres of land for the purpose and the facility is likely to commence production from December 2011 onwards. Post commissioning of the Vadodara facility, turnover of the cable division is expected to increase to `700cr from the present `400cr. November 3, 2010 4
Investment Arguments Huge opportunity for transmission EPC players: The government has envisaged an investment of `240,000cr in the transmission segment in the Twelfth Plan, an increase of over 70% from the investments planned during the Eleventh Plan. As per our estimates, this has opened up a substantial potential opportunity for transmission EPC players such as JSL, KEC and Kalpataru Power Transmission. American presence to boost revenues and profitability: KEC s recent acquisition of the Texas-based tower manufacturer SAE Towers for US $95mn makes it the largest lattice tower manufacturer globally. Power utilities in the US generally procure steel structures directly from tower manufacturing companies and thereafter give it to transmission EPC companies for their subsequent erection and commissioning. Also, there is a preference to source equipment and towers from the local vendors within the NAFTA, which effectively creates a protected market. With a dominant market share of over 40%, SAE Towers is a market leader in the US and we expect KEC to leverage SAE Towers customer base to develop relationships with the power utilities and secure EPC contracts in the future, while ensuring that the equipment is supplied by SAE Towers. Diversification into railways and telecom sectors a major positive: KEC has forayed into the telecom and railway sectors. Although these divisions currently account for a small portion of the company's total revenues, future prospects of the segments are very bright. KEC also plans to enter tracking, signaling and platform construction work in the railway segment. Outlook and Valuation Transmission EPC companies are expected to benefit in terms of increasing order inflows on the back of the ongoing investments in the domestic power sector. We expect PGCIL to accelerate its capex schedule over the next two years, leading to higher order inflows for transmission EPC companies. The acquisition of Texasbased SAE Towers would enable KEC leverage the former s customer base to develop relationship with the power utilities to secure EPC contracts in the future. At the CMP of `492, the stock trades at 11.7x and 9.9x FY2011E and FY2012E, earnings respectively. We maintain a Buy on the stock, with a Target Price of `648. November 3, 2010 5
Exhibit 5: Key Assumptions Particulars FY2011E FY2012E Order Inflow (` cr) 5,112 5,878 Order Inflow Growth (%) 20 15 Order Backlog (` cr) 6,250 6,750 Order Backlog Growth (%) 9.0 10.0 Order Book to Sales* (%) 43.50 44.50 (*combined order book) Exhibit 6: Angel EPS forecast (`) Angel forecast Bloomberg consensus Variation (%) FY2011E 41.9 41.5 0.9 FY2012E 49.8 51.6 (3.5) Exhibit 7: One-year forward P/E 900 720 540 360 180 0 Apr-06 Oct-06 Apr-07 (`) Oct-07 Apr-08 Oct-08 Apr-09 Oct-09 Apr-10 Oct-10 Share Price (`) 6x 10x 14x 18x November 3, 2010 6
Exhibit 8: Peer Valuation Company Reco CMP (`) Tgt Price Upside P/BV(x) P/E(x) FY2010-12E RoCE (%) RoE (%) (`) (%) FY11E FY12E FY11E FY12E EPS CAGR FY11E FY12E FY11E FY12E ABB* Neutral 861 - - 6.4 5.3 37.3 28.1 35.4 20.3 22.3 18.6 20.8 Areva T&D* Sell 294 218-7.2 6.1 52.5 29.7 11.2 11.7 17.6 14.7 22.2 BHEL Neutral 2,485 - - 6.1 4.9 22.7 19.1 21.4 31.8 30.4 30 28.6 BGR Energy Neutral 798 - - 6.4 4.9 20.6 16.6 31.1 18.2 17.7 34.7 33.6 Crompton Greaves Buy 327 375 14.6 6.5 5.2 23.4 20.2 10.0 38.5 36.9 31.4 28.4 Jyoti Structures Buy 136 215 58.0 1.9 1.6 10.1 8.2 21.4 18.8 19.3 20.2 20.6 KEC International Buy 492 648 31.6 2.9 2.3 11.7 9.9 22.3 18.5 18.9 27.6 26.2 Thermax Neutral 885 - - 7.9 6.3 29.8 23.7 31.0 30.9 31 29.3 29.5 November 3, 2010 7
Profit and Loss statement (Consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Net Sales 2,041 2,814 3,427 3,877 4,563 5,223 Other operating income - - - - - - Total operating income 2,041 2,814 3,427 3,877 4,563 5,223 % chg 18.1 37.9 21.8 13.1 17.7 14.5 Total Expenditure 1,789 2,460 3,127 3,492 4,109 4,703 Net Raw Materials 929 1,415 1,976 2,011 2,389 2,734 Other Mfg costs 764 924 1,010 1,312 1,528 1,750 Personnel 95 121 142 168 192 219 Other - - - - - - EBITDA 252 354 300 386 454 520 % chg 55.2 40.7 (15.2) 28.5 17.7 14.5 (% of Net Sales) 12.3 12.6 8.8 9.9 10.0 10.0 Depreciation& Amortisation 33 25 23 26 31 34 EBIT 218 329 278 359 423 486 % chg 61.4 50.7 (15.7) 29.5 17.7 14.9 (% of Net Sales) 10.7 11.7 8.1 9.3 9.3 9.3 Interest & other Charges 59 68 100 87 103 105 Other Income 1 0 0 1 1 2 (% of PBT) 0.4 0.1 0.2 0.4 0.4 0.4 Others - - - - - - Recurring PBT 160 262 178 274 322 382 % chg 89.4 63.8 (32.1) 54.0 17.5 18.8 Extraordinary Expense/(Inc.) - - - - - - PBT (reported) 160 262 178 274 322 382 Tax 55.2 89.7 61.5 103.0 106.2 126.2 (% of PBT) 34.5 34.3 34.6 37.6 33.0 33.0 PAT (reported) 105 172 116 171 216 256 Add: Share of earnings of asso. - - - - - - Less: Minority interest (MI) - - - - - - Prior period items - - - - - - PAT after MI (reported) 105 172 116 171 216 256 ADJ. PAT 105 172 116 171 216 256 % chg 112.3 64.5 (32.5) 47.0 26.1 18.8 (% of Net Sales) 5.1 6.1 3.4 4.4 4.7 4.9 Basic EPS (`) 28 35 24 33 42 50 Fully Diluted EPS (`) 20 33 23 33 42 50 % chg 112.3 64.5 (32.5) 47.0 26.1 18.8 November 3, 2010 8
Balance Sheet (consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E SOURCES OF FUNDS Equity Share Capital 38 49 49 51 51 51 Preference Capital 13 10 - - - - Reserves& Surplus 221 435 509 644 818 1,032 Shareholders Funds 272 495 559 696 869 1,083 Minority Interest - - - - - - Total Loans 386 592 622 772 752 752 Deferred Tax Liability 29 20 30 30 30 30 Total Liabilities 687 1,107 1,210 1,497 1,651 1,865 APPLICATION OF FUNDS Gross Block 464 518 622 729 801 871 Less: Acc. Depreciation 60 90 122 148 179 213 Net Block 404 428 500 581 622 658 Capital Work-in-Progress 2 19 51 19 18 18 Goodwill 4 4 4 4 4 4 Investments 21 0 2 2 2 2 Current Assets 1,248 1,973 2,540 2,648 3,246 3,449 Cash 21 68 137 65 102 140 Loans & Advances 172 270 327 368 433 496 Other - - - - - - Current liabilities 991 1,317 1,886 1,756 2,240 2,265 Net Current Assets 257 656 654 892 1,006 1,184 Mis. Exp. not written off - - - - - - Total Assets 687 1,107 1,210 1,497 1,651 1,865 November 3, 2010 9
Cash Flow statement (Consolidated) Y/E March (` cr) FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Profit before tax 160 262 178 274 322 382 Depreciation 33 25 23 26 31 34 (Inc)/Dec in Working Capital (209) (353) 71 (310) (77) (140) Less: Other income 1 0 0 1 1 2 Direct taxes paid 46 83 52 103 106 126 Cash Flow from Operations (62) (149) 219 (114) 168 148 (Inc.)/Dec.in Fixed Assets (14) (70) (137) (75) (70) (70) (Inc.)/Dec. in Investments (0) 20 (1) - - - Other income 1 0 0 1 1 2 Cash Flow from Investing (13) (50) (138) (74) (69) (68) Issue of Equity - (4) (15) - - - Inc./(Dec.) in loans 54 205 30 150 (20) - Dividend Paid (Incl. Tax) 20 29 29 36 42 42 Others (0) 73 0 2 - - Cash Flow from Financing 34 173 (14) 114 (62) (42) Inc./(Dec.) in Cash (42) 47 69 (72) 37 38 Opening Cash balances 64 21 68 137 65 102 Closing Cash balances 21 68 137 65 102 140 November 3, 2010 10
Key Ratios Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E Valuation Ratio (x) P/E (on FDEPS) 24.2 14.7 21.8 14.8 11.7 9.9 P/CEPS 18.3 12.8 18.2 12.8 10.3 8.7 P/BV 9.8 5.2 4.5 3.6 2.9 2.3 Dividend yield (%) 0.9 1.0 1.0 1.2 1.4 1.4 EV/Sales 1.4 1.1 0.9 0.8 0.7 0.6 EV/EBITDA 11.5 8.6 10.0 8.4 7.0 6.0 EV/Total Assets 4.2 2.8 2.5 2.2 1.9 1.7 Per Share Data (`) EPS (Basic) 27.8 34.9 23.6 33.3 41.9 49.8 EPS (fully diluted) 20.4 33.5 22.6 33.3 41.9 49.8 Cash EPS 26.9 38.4 27.0 38.4 47.9 56.4 DPS 4.5 5.0 5.0 6.0 7.0 7.0 Book Value 50.4 94.3 108.6 135.3 169.0 210.6 Dupont Analysis EBIT margin (%) 10.7 11.7 8.1 9.3 9.3 9.3 Tax retention ratio 0.7 0.7 0.7 0.6 0.7 0.7 Asset turnover (x) 3.6 3.3 3.2 3.1 3.1 3.2 ROIC (Post-tax) (%) 25.0 25.4 17.2 17.9 19.0 19.9 Cost of Debt (Post Tax) (%) 10.8 9.1 10.8 7.8 9.0 9.4 Leverage (x) 1.4 1.1 0.9 1.0 0.7 0.6 Operating RoE (%) 45.1 43.0 22.7 28.2 26.5 25.8 Returns (%) RoCE (Pre-tax) 35.6 36.7 24.0 26.6 26.9 27.7 Angel RoIC (Pre-tax) 38.8 39.3 27.3 29.6 28.8 30.1 RoE 48.3 46.3 22.3 27.3 27.6 26.2 Turnover ratios (x) Asset Turnover (Gross Block) 4.5 5.7 6.0 5.7 6.0 6.2 Inventory / Sales (days) 25 23 23 24 22 21 Receivables (days) 142 151 175 178 175 172 Payables (days) 71 74 92 86 83 81 WC cycle (ex-cash) (days) 42 76 55 78 72 73 Solvency ratios (x) Net debt to equity 1.4 1.1 0.9 1.0 0.7 0.6 Net debt to EBITDA 1.4 1.5 1.6 1.8 1.4 1.2 Interest Coverage (EBIT / Int.) 3.7 4.9 2.8 4.2 4.1 4.6 November 3, 2010 11
Research Team Tel: 022-4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com DISCLAIMER This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report. Disclosure of Interest Statement KEC International 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies' Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors. Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%) Reduce (-5% to 15%) Sell (< -15%) November 3, 2010 12