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KEC ------------------------------------------------------------------------------- Maintain OUTPERFORM
4Q results beat estimates – valuations appear attractive
● KEC reported strong 4Q results with revenue up 15% YoY and
PAT up 25% YoY. Margins increased on low-priced RM inventory.
(especially at SAE towers). Margins are expected to be in a
similar range in FY12. The post-results stock price decline was
attributed to increased leverage and higher working capital
requirements (both were known and modelled events).
● Order inflows for KEC increased ~50% YoY in FY11 with order
book up 42% YoY, largely supported by strength in international
orders, acquisition of SAE towers and market share gains in
powergrid orders. Given the orderbook strength, earnings growth
should accelerate in FY12E.
● Given the gearing to multiple segments, order inflows should
continue to grow in FY12E despite a high base. Ordering in
railways, substation and EPC could be the key drivers in FY12.
● KEC trades at 8x FY12, which is inexpensive relative to the sector
and its own history. A rebound in domestic sales growth is the key
stock price driver. We maintain OUTPERFORM.
Management conference call takeaways
● Order inflows: Management highlighted that the strong tendering
pipeline (pick up in Powergrid orders expected in 2HFY12,
increase in ordering seen by some state SEBs) will help order
inflow growth again in FY11 (even after the 50% increase in
FY11). Revenue growth in SAE Towers is seen at 10-12% led by
a recovery in transmission activity in the US.
● Margins: Management reiterated that EBITDA margins will be
maintained at the 9-11% range. Margins at SAE towers will
contract to 12-13% from the current 14-15% (higher margins were
due to low-value RM inventory, which has now been phased out;
adopted hedging policy vs spot purchase policy earlier). PAT
margins may get affected near term on the rising interest costs.
● Domestic sales: Management highlighted that standalone sales
decline of 2% YoY was due to disruptions in North Africa. Egypt
(Rs280 mn orderbook left) and Libya (Rs220 mn) now comprise a
very small portion of the orderbook. Tunisia still has Rs2.8 bn of
orders left to be executed. While operations in Libya are still on
hold, others are expected to get executed. Note that KEC’s assets
in Libya are safe and insured.
● Cables business: The cables business (~11% of sales) is running at
over 100% capacity utilisation; this is expected to ease after the new
factory at Baroda comes up by Apr 2012. Management expects the
facility to contribute an additional Rs3 bn of sales by FY13 (Rs4.8 bn
in FY11). Margins should improve (2% EBITDA margin in FY11) as
bulk of the manufacturing will then take place at Baroda (existing
facility at Thane operates at comparatively high costs).
● Working capital to improve: Working capital cycle for FY11
increased because of the distribution contracts undertaken in India
and abroad. Management hoped that as the order mix changes,
the working capital cycle will decrease. Debtor days were up on
some large dispatches at the end of March and should be back at
normalised levels.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KEC ------------------------------------------------------------------------------- Maintain OUTPERFORM
4Q results beat estimates – valuations appear attractive
● KEC reported strong 4Q results with revenue up 15% YoY and
PAT up 25% YoY. Margins increased on low-priced RM inventory.
(especially at SAE towers). Margins are expected to be in a
similar range in FY12. The post-results stock price decline was
attributed to increased leverage and higher working capital
requirements (both were known and modelled events).
● Order inflows for KEC increased ~50% YoY in FY11 with order
book up 42% YoY, largely supported by strength in international
orders, acquisition of SAE towers and market share gains in
powergrid orders. Given the orderbook strength, earnings growth
should accelerate in FY12E.
● Given the gearing to multiple segments, order inflows should
continue to grow in FY12E despite a high base. Ordering in
railways, substation and EPC could be the key drivers in FY12.
● KEC trades at 8x FY12, which is inexpensive relative to the sector
and its own history. A rebound in domestic sales growth is the key
stock price driver. We maintain OUTPERFORM.
Management conference call takeaways
● Order inflows: Management highlighted that the strong tendering
pipeline (pick up in Powergrid orders expected in 2HFY12,
increase in ordering seen by some state SEBs) will help order
inflow growth again in FY11 (even after the 50% increase in
FY11). Revenue growth in SAE Towers is seen at 10-12% led by
a recovery in transmission activity in the US.
● Margins: Management reiterated that EBITDA margins will be
maintained at the 9-11% range. Margins at SAE towers will
contract to 12-13% from the current 14-15% (higher margins were
due to low-value RM inventory, which has now been phased out;
adopted hedging policy vs spot purchase policy earlier). PAT
margins may get affected near term on the rising interest costs.
● Domestic sales: Management highlighted that standalone sales
decline of 2% YoY was due to disruptions in North Africa. Egypt
(Rs280 mn orderbook left) and Libya (Rs220 mn) now comprise a
very small portion of the orderbook. Tunisia still has Rs2.8 bn of
orders left to be executed. While operations in Libya are still on
hold, others are expected to get executed. Note that KEC’s assets
in Libya are safe and insured.
● Cables business: The cables business (~11% of sales) is running at
over 100% capacity utilisation; this is expected to ease after the new
factory at Baroda comes up by Apr 2012. Management expects the
facility to contribute an additional Rs3 bn of sales by FY13 (Rs4.8 bn
in FY11). Margins should improve (2% EBITDA margin in FY11) as
bulk of the manufacturing will then take place at Baroda (existing
facility at Thane operates at comparatively high costs).
● Working capital to improve: Working capital cycle for FY11
increased because of the distribution contracts undertaken in India
and abroad. Management hoped that as the order mix changes,
the working capital cycle will decrease. Debtor days were up on
some large dispatches at the end of March and should be back at
normalised levels.
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