Investors have been enamoured by this infrastructure engineering, procurement and construction (EPC) company whose shares have ballooned more than 15-fold in the past decade.
KEC International shares have shot up 20 percent in the past month and 46 percent in the past year. From Rs 36 in June 2013, the scrip has climbed to Rs 568 today.
An investment of Rs 1 lakh in KEC shares a year ago would have risen to Rs 1.46 lakh today. Similarly, an investment of Rs 1 lakh a decade ago would have yielded Rs 15.5 lakh today.
Foreign institutional investors increased their shareholding in the stock to about 13 percent in March 2023 from 6 percent in March 2017.
The stock jumped more than 5 percent on June 12.
Trigger for today’s gain
Nomura retained its target price for KEC shares at Rs 598 and maintained its ‘buy’ recommendation. It valued KEC at 13 times its FY25 EPS of Rs 46.
The foreign brokerage hosted KEC’s executives at its Nomura Investment Forum Asia conference in Singapore on June 8-9. The executives reposed confidence in better margins, working capital, along with a robust order inflow, top-line growth and reduction in costs.
Management outlook
With projects in Brazil completed, the management does not see more EBITDA losses in the region from FY24. It said legacy projects secured in India and Oman in FY21 will be completed in the first half of FY24, improving profitability.
Additionally, the company is targeting an operating margin of 6 percent for the first half of FY24 and 8 percent in the second half, with about 9 percent in 4Q of FY24. From FY25, the company is positive about maintaining an EBITDA margin of more than 9 percent, Nomura noted.
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Besides, KEC has targeted working capital levels at below 100 days of sales. Nomura said KEC had delivered on working capital improvement in FY23, and it targets reducing it by 10 percent to 108 days in FY24 from 118 days.
This will likely be driven by a reduction in collections from Afghanistan at about Rs 150 crore, which the company is confident will be realised within 1Q of FY24, and improved cash collections from railway orders considering project milestones have been completed.
Moreover, reduction of GST balances and inventory will further drive improvement in working capital, the investment banking firm pointed out.
Meanwhile, the management expects strong growth in order inflows.
KEC has engaged a global consultant to improve profitability of the cables business to 8-9 percent from a 6 percent operating margin. Nomura said the earlier round of working with global consultants led to the EBITDA margin improving to 6 percent from 3.5 percent.
For FY24, the management has targeted at least 15 percent top-line growth and reduction in interest costs with a focus on refinancing its Brazil debt and keeping overall debt in check.
Recently, KEC got two orders for train collision-avoidance systems, or Kavach systems, worth Rs 600 crore, MD Vimal Kejriwal told CNBC-TV18. He said while they haven’t seen many tenders, there is “tremendous scope for more.”
He said KEC has formed a strategic partnership with Hyderabad-based Kernex Microsystems to “enhance expertise and expand reach.” It aims to leverage the combined strengths of both companies to provide cutting-edge Kavach systems.
Analyst views
Prabhudas Lilladher is bullish on KEC’s long-term prospects because of the company’s strong order book, healthy execution momentum, strong transmission & distribution (T&D) outlook, and revenue visibility from non-T&D segments such as civil works, railways, and oil and gas.
Order intake rose 50 percent YoY to Rs 7,000 crore in Q4 of FY23, driven by T&D and civil works. FY23 order intake was up 30 percent to Rs 22,378 crore.
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Meanwhile, the order book rose 29 percent YoY to Rs 30,553 crore as of March 31, which is 1.8 times FY23 revenue, Prabhudas Lilladher pointed out. It also said the tender pipeline remains healthy at more than Rs 1 lakh crore from domestic and international markets, driving order inflows.
On the flip side, Sharekhan said margin recovery was below expectations in the second half of FY23 and it is awaiting more concrete and consistent margin expansion and improvement in the net working capital cycle. This prompted the brokerage to downgrade the KEC stock to a ‘hold’ from ‘buy’ with a target price of Rs 555 as it sees limited gains from current valuations.
The brokerage said profitability could have been better as high-margin orders get executed and legacy orders in Brazil are closed.
KEC has grappled with margin pressures and lower profitability due to legacy orders despite strong revenue growth, led by a healthy order book.
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