KEC International - encouraging outlook; Buy:Edelweiss

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KEC International - core performance intact; encouraging outlook; Buy





KEC International’s (KEC) Q2FY11 numbers (consolidated) were largely in line with
our estimates, with revenues and adjusted PAT growing 14% and 22%, respectively.
For H1FY11, however, revenues grew 15% Y-o-Y while PAT was up 8.3%, adjusting
for VRS cost of INR 85 mn in Q2FY11 and INR 96 mn on account of prior period tax
during year.



�� New orders up 39% for Q2 and 37% for H1, Y-o-Y
KEC reported healthy new order growth during Q2, to INR 17.5 bn, led by a
large INR 7.4 bn order from Canada for tower supplies, INR 1.6 bn from Nigeria,
and INR 1.4 bn from PGCIL. For H1FY11, new orders for the company stood at
INR 27.2 bn, up 37% Y-o-Y. KEC is hopeful of good orders in H2FY11, both in
the domestic and international markets.


�� Consolidated order book stands at INR 70 bn
KEC currently has an outstanding order book (consolidated) of INR 70 bn (+26%
Y-o-Y and +16% Y-o-Y, adjusted for SAE), of which, INR 30 bn is from export
transmission line projects, while INR 18 bn is from domestic transmission. Order
book from SAE stands at INR 5.8 bn, while power system is at INR 10.7 bn, and
railways at INR 3.5 bn; the balance is largely contributed by cables.


�� Vadodara plant to be operational from December 2011
KEC targets to commission its cables plant in Vadodara spread across 54 acres of
land from December next year and has ~INR 1.2 bn as capex for the same. The
company has ~7 acres of land at Vashi, which it plans to dispose over the next
few months, as it is shifting its tower testing facility from Vashi to Nagpur, where
the company has more than 17 acres of land adequate for tower testing up to
1,200 kv range.


�� Outlook and valuations: Positive; maintain ‘BUY’
With its global presence, especially post the SAE acquisition, we see KEC further
equipped to tap the global markets in a much better way. We expect SAE to
majorly contribute to the bottom-line over the coming years, which augurs well
for KEC’s overall earnings growth. The company expects to improve its utilization
levels for SAE Tower from 60% currently to around 80%+ by FY12E, which
should lead to a healthy 15-20% growth in SAEs profitability over the next two
years. We maintain ‘BUY/Sector Outperformer’ on KEC and expect it to
outperform its peers in the transmission EPC space.