Buy KEC Intern; target of Rs 74: Nirmal Bang

“KEC International Ltd (KEC) reported strong topline growth. The bottomline was boosted by the sale of Vashi land.  Revenues for the quarter stood at Rs. 1459 cr, up 36%, YoY driven by robust execution of its strong order book. Transmission division delivered a strong 40% YoY growth, whereas Cables and Telecom delivered 30% & 24% YoY growth respectively. The Railways and Water divisions have also started contributing to the topline.  EBITDA for the quarter was Rs. 112 cr, down 10%, YoY. This was due to increase in Raw material prices and staff costs which increased 39% & 29% YoY. Erection expenses (increase of 50% YoY) also contributed to the decline in EBITDA. Subsequently EBITDA margin for the quarter was down to 7.6% as compared to 11.4% in Q3FY11, however it showed an improvement of 60 bps on QoQ basis. The management has cited increasing competition and entry into new business segments as a reason for lower EBITDA margins. We don’t expect the EBITDA margin to improve significantly in the coming quarters.”

“PAT for the quarter was Rs. 80.5 cr, up 39%, YoY. This was primarily due to sale of Vashi land which resulted in gains of Rs. 53 cr. Reported PAT margin for the quarter was 5.5%. Removing the onetime gain from the Vashi land PAT stands at Rs. 27.5 cr with a margin of 1.9%, which is significantly down on YoY basis. However, there is a slight improvement on QoQ basis.  The order book at the end of the quarter was Rs. 9200 cr (up 15%, YoY). The company registered its highest ever quarterly order inflow of Rs 2500 cr with a large chunk coming from international markets. The order book is well diversified across geographies.”

“At CMP, the stock trades at 5.2x its FY13E EPS. We continue to maintain our Buy rating on the stock with a target price of Rs. 74. The strong order book gives good revenue visibility, however we remain cautious on its operating margins as they will continue to remain under pressure due to competition and execution of its low margin orders in the new business segments. Expect KEC to continue its good run in order inflows on the back of geographical and business diversification,” says Nirmal Bang research report.      

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