KEC International (Q1 FY19): Growth momentum remains intact - BUY

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Pee Vee
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KEC International (Q1 FY19): Growth momentum remains intact - BUY

Post by Pee Vee » Mon Aug 06, 2018 4:27 pm

CMP (Rs) 328, 12-mts Target (Rs) 429, Upside 30.8%

KEC’s Q1 performance was stronger than expected on the back of robust performance was non-T&D business. Topline growth of 13.4% yoy (18% adjusting for GST) was achieved even though its core T&D (exl SAE) registered 24.5% degrowth. Railways and civil business continued its growth momentum and was also boosted by a jump in solar segment (Rs.1.6bn vs Rs.210mn in Q1 FY18). Cable business too grew 17.7% yoy led by HT cables and export revenue. Decline in core T&D segment (excl. SAE) was due to delay in execution of the orders received in H2 FY18 on account of land availability and other finalizations. Also, segment witnessed labor shortages in some states due to elections. International T&D revenues was impacted owing to nationwide truck strike in Brazil. OPM expanded 78bps yoy to 10.3% in Q1, higher than expectation driven by increase in margin of non-T&D business and forex gain of ~Rs.150-200mn. Higher other income on account of interest on IT refund led to 37.9% yoy growth in PAT. KEC saw an order intake of Rs.27.5bn in Q1. Orderbook as of June’19 stood at Rs.182bn, higher by 34% yoy. The company is currently L1 in orders of Rs.32bn, which includes L1 with PGCIL worth Rs.10bn. Net debt increased significantly on account of structural changes in borrowings and working capital. Net working capital days increased to 123 in Q1 FY19 against 93 days in Q4 FY18.

Management has guided for double-digit revenue growth and similar margin for FY19. We believe this is conservative since the company has strong orderbook and opportunities remains high. Domestic T&D sector is expected to see continued ordering from TBCB, PGCIL and SEB’s. Internationally, management is hopeful to see orders from Africa, Bangladesh and Far East nations such as Malaysia and Thailand. Civil and railway business would be the key growth driver for the next two years backed by strong order book and bright outlook. With recent correction in stock price we upgrade our rating to Buy with target price of Rs.429.

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