KEC International sees better H2, gradual pickup in margins

Nachiket Kelkar
moneycontrol.com

Engineering, procurement and construction firm KEC International expects second half will be better than first half of this year and sees margins, which hit record lows in the second quarter, recover gradually with new order wins.

The RPG-group company saw a strong 32 percent growth in net sales, last quarter. But its operating profit margin slumped to 5.2 percent, its lowest in five years.

"The newer sectors that we have entered into, our margins are lower. That is an investment that we are making in the new businesses, which we believe have a huge potential to grow as we move forward. Almost 25-30 percent of the current order book is coming from new businesses. Also since 2009-10-11, there was a fierce competition in the Indian market. That did have an impact on order book then," Vardhan Dharkar, executive director - finance, told moneycontrol.com in an interview.

KEC currently has order book of around Rs 9,400 crore, which includes around Rs 500 crore orders each in the new businesses of railways and water, it entered around 18 months ago. Dharkar says the new orders that it is taking today are at better margins than earlier and projects are being executed as per schedule.

"Margin improvement will happen gradually. Once the current orders in the newer businesses are executed, the newer orders will have slightly better margins and so that pressure will start easing as we move into FY14. Also the newer orders we have got in transmission business too have better margins than 18 months back. As we move forward into the future, margins will gradually stabilize and improve. In transmission business, for example, sustainable margins should be around 9-10 percent," he said.

Dharkar added that the company has improved its working capital management, which is visible in its fourth quarter and July-Sep results. The company will continue to focus on further improving working capital management and bringing down receivables in terms of number of days, which should help going ahead.

"Despite a huge order backlog, margins would continue to stay under pressure due to low margin bids & competitive pricing, until fresh orders at higher margins are won, which would be evident only from the end of next fiscal year," Jigisha Jaini, senior analyst at Way2Wealth Securities said in a research report earlier.

Chinmay Gandre of KRChoksey Institutional Research feels margins could improve in the second half in the 7-8 percent range. Further, its strong order backlog gives visibility for next 18 months, he says.

Meanwhile, KEC's Libya project which was impacted due to political turmoil there, also seems to be getting back on track. As of Sep-end, the net assets of the company relating to the contract were around Rs 70 crore. KEC has contacted the customer and the customer has made some payments for the dues, and released some of the bank guarantees, he said, adding things should normalise in the next one year.

EXPANSION AND ACQUISITIONS

KEC International continues with its strategy to expand its service offerings to new businesses and has begun scouting for orders from solar and wind energy companies. Dharkar feels renewable energy is the future and investments in the sector will pick up in the future.

He says, the company only started looking at this sector last month and so doesn't have any particular orders yet. However, he is expecting "some action" in the next 12-months.

KEC will also continue to seek acquisitions when ever and where ever there is an opportunity.

It had acquired Texas, US-based SAE Towers Holdings LLC for USD 95 million in 2010. The acquisition has helped KEC grow its presence in North America and Latin America.

"KEC had negligible presence before buying SAE two years ago. Today 15 percent plus order book comes from Americas, both KEC and SAE put together," Dharkar said.

The success of acquiring SAE gives it more confidence to look at more acquisitions, he added.

KEC International shares were down 0.2 percent at Rs 61.45 on NSE in morning trade on Friday. As of Thursday's close, the stock is down near 18 percent since it announced its second quarter earnings on Oct 30.

KRChoksey and Way2Wealth have a "hold" and "neutral" rating respectively on the stock.

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nachiket.kelkar@network18online.com