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Last Updated : Feb 11, 2020 02:07 PM IST | Source: Moneycontrol.com

Quality play: Strong order book, growth outlook indicate upside in this smallcap

KEC clocked healthy revenue growth driven by strong execution in T&D (SAE) with stable operating profit margin.

Sunil Shankar Matkar
 
 
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Construction engineering company KEC International has rallied more than 26 percent in the last 3 months amid government's consistent thrust on infrastructure development.

Another factor that was supportive was the announcement of cut in corporate tax, which boosted the mid and smallcap stocks. As the smaller stocks started to recover, market participants rushed to pick up quality stocks like KEC.

All brokerages remained bullish on the stock given its healthy growth in quarterly as well as nine-month period earnings. They expect the stock to return 13-20 percent in the next one year.

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Sharekhan said they maintained a buy rating on KEC with a revised price target of Rs 415, given the healthy order backlog along with order inflow visibility in international T&D non-T&D business and KEC’s ability to ramp-up execution.

KEC clocked healthy revenue growth driven by strong execution in T&D (SAE) with stable operating profit margin. Stable operational performance along with lower tax outgo resulted in strong net earnings growth.

Its Q3FY20 profit increased 30.7 percent YoY, and revenue grew by 16.1 percent YoY to Rs 3,073.1 crore. Overall transmission and distribution (T&D) business registered robust growth of 21.5 percent on the back of 121 percent YoY growth in SAE while railway business grew 9 percent.

However, cable business de-grew 19.6 percent on the back of correction in commodity prices given that it operates on a cost-plus model, while civil & solar business also registered weak performance.

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EBITDA increased 13.3 percent, but margin dipped 20bps YoY to 10.4 percent in Q3FY20.

The management reiterated its guidance of 15 percent revenue growth with stable OPM for FY20 as it is expected to deliver strong growth on increased scalability in non-T&D business and stable execution in the T&D business.

Order book remained healthy providing 1.8x TTM revenue and order inflows for FY20 are expected to remain at similar levels as of FY19, said Sharekhan.

During Q3FY20, KEC's order inflow came in at Rs 6,054 crore while the YTD order book was at Rs 22,011 crore.

"The overall performance has been satisfactory across 9MFY20 barring order inflows, which was a result of a weak domestic market and muted industrial capex. Improved working capital and high execution should comfortably ensure 15.2 percent revenue CAGR in FY19-21. In light of the above factors, we value the stock at 14x FY21E EPS and maintain buy rating (target price of Rs 415) as the risk reward is favourable at this juncture," ICICI Securities said.

Anand Rathi also maintained its buy rating, with a revised target price of Rs 423.

In nine months period ended 2019, KEC's profit grew by 25 percent year-on-year to Rs 373 crore on revenue of Rs 8,294 crore which increased 16 percent YoY. EBITDA rose by 15 percent to Rs 864 crore, but margin dropped 10bps YoY to 10.4 percent.

While maintaining buy call on the stock with a target of Rs 390, HDFC Securities said Green Energy Corridor and SEB ordering are expected to drive T&D ordering with Power Grid capex and ordering not expected to significantly ramp-up over the medium term.

"KEC is trying to diversify beyond T&D segment through ramp-up in order inflows from Railways and Metro for both electrification and civil work. With MENA, far-east, Malaysia and Mexico are expected to drive international order, an uptick in inflow from these regions remains a key re-rating trigger," it added.

According to the brokerage, key risks could be (1) Adverse currency/commodity movement, (2) Further delays in capex recovery, (3) Slowdown in government T&D capex and (4) Further NWC deterioration.

CSEC Research feels the strong outlook for railways & civil segment coupled with healthy T&D order pipeline are expected to aid company post healthy revenues going forward. "We value the stock at 7.6X to its FY21 EV/EBITDA to arrive at our target price of Rs 405 and rate the stock a buy."

Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

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First Published on Feb 11, 2020 02:07 pm
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