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KEC International’s (KEC) 3QFY2011 results were broadly in line with our estimates.
Revenue grew 13% yoy to `1,071cr, while PAT was up 25% yoy to `58cr. We had
estimated revenues and PAT at `1,186cr and `59cr, respectively. Consolidated order
backlog at the end of the current quarter stood at `8,000cr, including `725cr relating
to the recently acquired SAE Towers. Order intake during the quarter grew 24% yoy to
`2,300cr. We maintain a Buy on the stock.
Acquisitions drive revenues and margins: Consolidated revenues reported steady
growth of 13% yoy to `1,071cr, while EBIDTA margins reported impressive gains of
139bp to 11.6%. It is pertinent to note that the corresponding year ago period did not
carry the numbers for SAE Towers and RPG cables. Similar treatment if followed
during the current quarter would reveal that adjusted revenue de-grew by 4%
indicating lower execution. Similarly, if the EBDITA margins of 19.8% reported by SAE
Tower were to be excluded, adjusted EBDITA margins marginally improved by only
7bp to 10.3%. Interest cost for the current increased by 28% to `29cr on the back of
incremental debt raised to finance the SAE acquisition.
Outlook and Valuation: Transmission EPC companies are expected to see an increase
in order inflow on the back of the ongoing investments in the domestic power sector.
Order inflow from PGCIL has been relatively low during 9MFY2011. Industry
commentary indicates that the ordering activity from PGCIL is likely to gather pace
from early part of FY2012. Apart from the transmission projects, KEC is also expected
to garner significant portion of orders from RAPDRP and RGGVY schemes. Acquisition
of Texas-based SAE Towers would enable KEC leverage the former’s customer base to
develop relationship with the power utilities to secure EPC contracts in the future. At
the CMP, the stock trades at 11x and 9x FY2011E and FY2012E EPS, respectively. We
maintain a Buy on the stock, with a revised Target Price of `115 (`130)
Strong order backlog: Order backlog at the end of 3QFY011 stood at `8,000cr,
split across transmission (63%), SAE (9%), substation and power systems (19%),
cables (2%) and railways (5%). Geographically, the order backlog was spread
across South Asia (46%), MENA (15%), Americas (18%) and Central Asia & Africa
(20%). Order backlog at the recently acquired SAE Towers stood at USD160mn.
During the quarter, the company received orders worth `2,300cr from the various
business verticals. In the transmission segment, the company secured 3 orders for
construction of 765kV transmission lines. The orders are from Rajasthan Rajya
Vidyut Prasaran Nigam (`313cr), PGCIL (`130cr) and Eskom (`97cr). KEC also
received two key orders worth `550cr from Kazakhstan Electricity Grid Operating
Company (KEGOC). The first order is for 21 substations with voltage levels of
1,150KV, 500KV and 220KV. The second order is for 17 substations with voltage
levels of 500KV, 220KV and 110KV.
During the current quarter, KEC also obtained its first order in the Balance of Plant
(BoP) segment from NMDC for `40cr. The scope of work includes construction
and commissioning of 132/33/6.6/0.433kV power supply system including civil
and structural work, ventilation and air conditioning system, fire fighting and fire
detection system, etc. on a turnkey basis.
SAE Towers also secured `246cr supply orders in the Americas. This included the
transmission tower orders in the US, Canada, Mexico, Brazil and Argentina worth
`208cr and transmission line related hardware orders in Brazil worth `38cr. In the
railway segment, the company has secured various orders for civil works from
Indian Railways worth `97cr. In the cable segment, the company secured supply
orders for telecom cables, low-tension, high tension and extra high voltage power
cables from various customers worth `135cr.
Capex guidance: KEC would be setting up a new cable manufacturing facility at
Vadodara at an estimated cost of `120cr. The company has acquired ~54 acres
of land for the purpose and placed orders for critical equipment. Management
expects the facility to commence production from December 2011 onwards. The
company does not have any capex programme for the US subsidiary i.e SAE
Towers. For the time being, KEC intends to increase its capacity utilisation from the
present 70% to 100% over a period of time, before mulling expanding capacities
Investment Arguments
Huge opportunity for transmission EPC players: The government has envisaged
investment of `240,000cr in the transmission segment in the Twelfth Plan, an
increase of over 70% from the investments planned during the Eleventh Plan. As
per our estimate, this has opened up a substantial potential opportunity for
transmission EPC players such as JSL, KEC and Kalpataru Power Transmission.
American presence to boost revenues and profitability: KEC’s recent acquisition of
SAE Towers for US $95mn makes it the largest lattice tower manufacturer globally.
Power utilities in the US generally procure steel structures directly from tower
manufacturing companies and thereafter give it to the transmission EPC
companies for subsequent erection and commissioning. Also, there is preference to
source equipment and towers from the local vendors within the NAFTA, which
effectively creates a protected market. With a dominant market share of over 40%,
SAE Towers is a market leader in the US and we expect KEC to leverage SAE
Towers’ customer base to develop relationships with the power utilities and secure
EPC contracts going ahead, while ensuring that the equipment is supplied by SAE
Towers.
Diversification into railways, telecom and e-BoP segments a major positive: KEC
has forayed into the telecom, railway and e-BoP segments and is in the process of
executing various contracts. Although these divisions currently account for a small
portion of its revenues, future prospects of the segments are very bright. KEC also
plans to enter tracking, signaling and platform construction work in the railway
segment.
Outlook and Valuation
Transmission EPC companies are expected to register an increase in order inflow
on the back of the ongoing investments in the domestic power sector. Order
inflows from PGCIL have been relatively lower during 9MFY2011. However,
industry commentary indicates that the ordering activity from PGCIL is likely to
gather pace from early FY2012. Apart from the transmission projects, KEC is also
expected to garner significant portion of orders from RAPDRP and RGGVY
schemes. Acquisition of the Texas-based SAE Towers would also enable KEC to
leverage the former’s customer base to develop relationship with the power utilities
to secure EPC contracts in the future. At the CMP, the stock trades at 11x and 9x
FY2011E and FY2012E earnings, respectively. We maintain a Buy on the stock,
with a revised Target Price of `115 (`130).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KEC International – 3QFY2011 Result Update
Angel Broking maintains a Buy on KEC International with a Target Price of Rs. 115.
KEC International’s (KEC) 3QFY2011 results were broadly in line with our estimates.
Revenue grew 13% yoy to `1,071cr, while PAT was up 25% yoy to `58cr. We had
estimated revenues and PAT at `1,186cr and `59cr, respectively. Consolidated order
backlog at the end of the current quarter stood at `8,000cr, including `725cr relating
to the recently acquired SAE Towers. Order intake during the quarter grew 24% yoy to
`2,300cr. We maintain a Buy on the stock.
Acquisitions drive revenues and margins: Consolidated revenues reported steady
growth of 13% yoy to `1,071cr, while EBIDTA margins reported impressive gains of
139bp to 11.6%. It is pertinent to note that the corresponding year ago period did not
carry the numbers for SAE Towers and RPG cables. Similar treatment if followed
during the current quarter would reveal that adjusted revenue de-grew by 4%
indicating lower execution. Similarly, if the EBDITA margins of 19.8% reported by SAE
Tower were to be excluded, adjusted EBDITA margins marginally improved by only
7bp to 10.3%. Interest cost for the current increased by 28% to `29cr on the back of
incremental debt raised to finance the SAE acquisition.
Outlook and Valuation: Transmission EPC companies are expected to see an increase
in order inflow on the back of the ongoing investments in the domestic power sector.
Order inflow from PGCIL has been relatively low during 9MFY2011. Industry
commentary indicates that the ordering activity from PGCIL is likely to gather pace
from early part of FY2012. Apart from the transmission projects, KEC is also expected
to garner significant portion of orders from RAPDRP and RGGVY schemes. Acquisition
of Texas-based SAE Towers would enable KEC leverage the former’s customer base to
develop relationship with the power utilities to secure EPC contracts in the future. At
the CMP, the stock trades at 11x and 9x FY2011E and FY2012E EPS, respectively. We
maintain a Buy on the stock, with a revised Target Price of `115 (`130)
Acquisition-led growth: Consolidated revenues for 3QFY2011 grew by 13% yoy to
`1,071cr, which also included turnover from the recently acquired RPG Cables
(`120cr) and SAE Towers (`149cr). Excluding revenues attributable to both RPG
Cables and SAE Towers, revenues for the current quarter declined 4% yoy,
indicating lower execution. Similarly, if the reported EBDITA margins of SAE i.e
19.8% were to be excluded, the adjusted EBDITA margins of 10.3% came in line
with management guidance. Interest cost for the current quarter rose 28% to `29cr
on the back of incremental debt raised to fiancé the SAE acquisition. The
consideration of US $95mn payable for the acquisition of SAE Towers has been
fully funded through debt at an average cost of 5.1% p.a. Headquartered in
Houston, Texas, SAE Towers services the American continent and has an annual
tower manufacturing capacity of 100,000 metric tonnes (MT) spread across two
countries, viz. Monterrey, Mexico, at 35,000MT and Belo Horizonte, Brazil, at
65,000MT. During the quarter, production at SAE facilities stood at 15,500tpa.
Going forward, management estimates capacity utilisation to increase substantially
from current 70% and expects EBIDTA margins to stabilise at ~14%.
Strong order backlog: Order backlog at the end of 3QFY011 stood at `8,000cr,
split across transmission (63%), SAE (9%), substation and power systems (19%),
cables (2%) and railways (5%). Geographically, the order backlog was spread
across South Asia (46%), MENA (15%), Americas (18%) and Central Asia & Africa
(20%). Order backlog at the recently acquired SAE Towers stood at USD160mn.
During the quarter, the company received orders worth `2,300cr from the various
business verticals. In the transmission segment, the company secured 3 orders for
construction of 765kV transmission lines. The orders are from Rajasthan Rajya
Vidyut Prasaran Nigam (`313cr), PGCIL (`130cr) and Eskom (`97cr). KEC also
received two key orders worth `550cr from Kazakhstan Electricity Grid Operating
Company (KEGOC). The first order is for 21 substations with voltage levels of
1,150KV, 500KV and 220KV. The second order is for 17 substations with voltage
levels of 500KV, 220KV and 110KV.
During the current quarter, KEC also obtained its first order in the Balance of Plant
(BoP) segment from NMDC for `40cr. The scope of work includes construction
and commissioning of 132/33/6.6/0.433kV power supply system including civil
and structural work, ventilation and air conditioning system, fire fighting and fire
detection system, etc. on a turnkey basis.
SAE Towers also secured `246cr supply orders in the Americas. This included the
transmission tower orders in the US, Canada, Mexico, Brazil and Argentina worth
`208cr and transmission line related hardware orders in Brazil worth `38cr. In the
railway segment, the company has secured various orders for civil works from
Indian Railways worth `97cr. In the cable segment, the company secured supply
orders for telecom cables, low-tension, high tension and extra high voltage power
cables from various customers worth `135cr.
Capex guidance: KEC would be setting up a new cable manufacturing facility at
Vadodara at an estimated cost of `120cr. The company has acquired ~54 acres
of land for the purpose and placed orders for critical equipment. Management
expects the facility to commence production from December 2011 onwards. The
company does not have any capex programme for the US subsidiary i.e SAE
Towers. For the time being, KEC intends to increase its capacity utilisation from the
present 70% to 100% over a period of time, before mulling expanding capacities
Investment Arguments
Huge opportunity for transmission EPC players: The government has envisaged
investment of `240,000cr in the transmission segment in the Twelfth Plan, an
increase of over 70% from the investments planned during the Eleventh Plan. As
per our estimate, this has opened up a substantial potential opportunity for
transmission EPC players such as JSL, KEC and Kalpataru Power Transmission.
American presence to boost revenues and profitability: KEC’s recent acquisition of
SAE Towers for US $95mn makes it the largest lattice tower manufacturer globally.
Power utilities in the US generally procure steel structures directly from tower
manufacturing companies and thereafter give it to the transmission EPC
companies for subsequent erection and commissioning. Also, there is preference to
source equipment and towers from the local vendors within the NAFTA, which
effectively creates a protected market. With a dominant market share of over 40%,
SAE Towers is a market leader in the US and we expect KEC to leverage SAE
Towers’ customer base to develop relationships with the power utilities and secure
EPC contracts going ahead, while ensuring that the equipment is supplied by SAE
Towers.
Diversification into railways, telecom and e-BoP segments a major positive: KEC
has forayed into the telecom, railway and e-BoP segments and is in the process of
executing various contracts. Although these divisions currently account for a small
portion of its revenues, future prospects of the segments are very bright. KEC also
plans to enter tracking, signaling and platform construction work in the railway
segment.
Outlook and Valuation
Transmission EPC companies are expected to register an increase in order inflow
on the back of the ongoing investments in the domestic power sector. Order
inflows from PGCIL have been relatively lower during 9MFY2011. However,
industry commentary indicates that the ordering activity from PGCIL is likely to
gather pace from early FY2012. Apart from the transmission projects, KEC is also
expected to garner significant portion of orders from RAPDRP and RGGVY
schemes. Acquisition of the Texas-based SAE Towers would also enable KEC to
leverage the former’s customer base to develop relationship with the power utilities
to secure EPC contracts in the future. At the CMP, the stock trades at 11x and 9x
FY2011E and FY2012E earnings, respectively. We maintain a Buy on the stock,
with a revised Target Price of `115 (`130).
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