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Key highlights
Consolidated performance
• KEC’s Q2FY11 consolidated PAT before exceptional items at Rs502m (+13% yoy) was ahead of our estimates of
Rs415m mainly due to lower than estimated interest expenses during the quarter.
• Revenues grew by 14% yoy to Rs10bn in Q2FY11 (in line with our estimates of Rs10bn) led by execution of orders in
hand as also revenues of Rs1.2bn on merger of RPG cables.
• KEC has an order backlog of Rs70.3bn at end of the quarter, while order booking was at Rs17.5bn driven by both
international and domestic order booking during the quarter. KEC has won several orders from the railways,
transmission, as also cables segment in the quarter.
• KEC signed an agreement with SNC Lavalin, Canada for supply of high voltage transmission line towers for their
various projects in Canada. The value of the contract is Rs7.4bn (included in order inflow of Rs17.5bn for the quarter)
and the order has to be execution over 4 years starting October 2011. The order has a PVC built in to protect the
company from changes in raw material prices. ~90% of the order value of the project is likely to be executed in India
and the balance ~10% would be executed overseas.
• Of the total order backlog, the transmission segment accounted for 77%, power systems - 15%, railways - 5%, cables –
2% and telecom -1%.
• EBIDTA margins were lower by 80bps at 10% in Q2FY11 and were marginally higher than our estimates of 9.9%. RPG
cables witnessed improved profitability during the quarter led by higher revenues and reported revenue of Rs1.2bn,
EBIDTA of Rs51m and PAT of Rs26m.
• Consequently, EBITDA grew by 6% yoy to Rs1bn, exactly in line with our estimates.
• Interest expenses declined by 11%yoy to Rs204m due to favorable change in mix of high cost vis-à-vis lower cost
working capital debt (depending on geographies where execution has gone up). Further, the interest cost on
acquisition debt for SAE towers was provided for only ~8 days during the quarter since SAE has been consolidated
only wef September 22nd 2010. Consolidated debt stood at Rs15.1bn as on September 30th 2010.
• Depreciation increased by 30% yoy to Rs90m led mainly by merger of RPG cables. Further, KEC expects to incur
capex of Rs1.2bn towards a new cable testing facility in Vadodara (Gujarat) over FY11-12 as also regular capex of
Rs800-900m.
• KEC’s provided tax at 29.8% (adjusted) in Q2FY11 against 30.8% in Q2FY10.
• Consequently, consolidated profit before exceptional items and prior period tax grew by 13% yoy to Rs502m.
• The reported consolidated PAT post exceptional item (VRS provision of Rs85m) and prior period tax of Rs15m grew
by 2%yoy to Rs427m. The VRS provision was on account of close down of its tower testing facility in Vashi (near
Mumbai) after the company shift this activity to a new facility in Nagpur (Maharashtra).
Maintain Outperformer
KEC’s Q2FY11 operating performance was in line with estimates while earnings were ahead of estimates led by lower
interest expenses. KEC has maintained the traction in order booking during the quarter and we expect this traction to
further pick-up led by improved ordering from PGCIL and SEBs during H2FY11. Resultant, we maintain our
consolidated earnings estimates for FY11 and FY12 and estimate EPS of Rs43.4 in FY11 and Rs52.3 in FY12. We believe
the strong pipeline of domestic orders from PGCIL’s grid expansion is likely to accelerate over the next 2 years
considering huge orders in the bidding pipeline. Further, the traction of tendering activity has picked up in international
markets, which will drive KEC’s order backlog. We believe KEC’s consolidated order backlog of Rs70.3bn (1.8x FY10
revenues), would drive KEC's earnings at 18% CAGR over FY10-12E. The stock currently trades at 11.4x FY11E earnings
and 9.4x FY12E earnings. Given the strong pipeline of orders, earnings growth visibility over the next two years and
strong return ratios, we believe valuations are attractive. We maintain Outperformer rating on the stock with a 12 month
target price of Rs670/share.
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