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Strong visibility on revenue growth. KEC today announced new orders totalling
INR12.5bn, taking the total order book to INR90bn (c2x FY11 sales). The order book is
likely to drive strong revenue growth of 20-25% in FY12-13e, as the majority of these
orders are scheduled for delivery over the next 18-24 months. In addition, management
noted that the tender pipeline remains strong, both in domestic and international markets.
Other sector players have made similar comments and believe that there is strong
visibility on at least domestic transmission orders, as Power Grid is likely to ramp up its
ordering activity. In addition to transmission, KEC is likely to continue to witness strong
order growth in its new businesses (i.e., power systems, water, cables and telecoms) as the
company ramps up from the current low base. Overall, KEC now appears likely to
outperform our sales growth forecasts of 23% for FY12 and 19% for FY13.
FY13 profitability likely to beat estimates. Management estimates the overall margin on
the new orders announced today at c10%. While the margin on the transmission business
is likely to remain stable, the margin on new businesses is expected to continue improving
(as the new orders demonstrate). Our current estimates are for the overall margin to
contract from 10.8% for FY11e to 9% in FY12e due to mark-to-market losses booked in
Q2 before expanding slightly to c9.7% in FY13 (versus the consensus estimate of c9.6%).
The new orders, however, suggest that KEC may beat these estimates, registering a
margin of c10% in FY13. Overall, we see potential upside to our estimates going into
FY13, with the biggest, albeit unlikely, risk being a further depreciation in INR.
Attractive value. Our current forecasts call for EPS to surge c43% in FY13e and 38% in
FY14e after a decline of c8% in FY12e, driven by the normalisation of margins due to a
reversal of mark-to-market losses, the risk to which remains low. With such strong,
resilient growth and a large order book, the stock’s valuation looks attractive at a c3.5x
FY13e PE; therefore, we reiterate our OW rating and target price of INR80. Our target
price is derived from our preferred EVA valuation methodology and implies a 12-month
forward target multiple of c6.4x PE on a 24-month forward PE of INR12.5. We believe
that the quarterly growth in earnings, continued order announcements and peaking of the
interest rate cycle could act as key catalysts for a stock re-rating.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Strong visibility on revenue growth. KEC today announced new orders totalling
INR12.5bn, taking the total order book to INR90bn (c2x FY11 sales). The order book is
likely to drive strong revenue growth of 20-25% in FY12-13e, as the majority of these
orders are scheduled for delivery over the next 18-24 months. In addition, management
noted that the tender pipeline remains strong, both in domestic and international markets.
Other sector players have made similar comments and believe that there is strong
visibility on at least domestic transmission orders, as Power Grid is likely to ramp up its
ordering activity. In addition to transmission, KEC is likely to continue to witness strong
order growth in its new businesses (i.e., power systems, water, cables and telecoms) as the
company ramps up from the current low base. Overall, KEC now appears likely to
outperform our sales growth forecasts of 23% for FY12 and 19% for FY13.
FY13 profitability likely to beat estimates. Management estimates the overall margin on
the new orders announced today at c10%. While the margin on the transmission business
is likely to remain stable, the margin on new businesses is expected to continue improving
(as the new orders demonstrate). Our current estimates are for the overall margin to
contract from 10.8% for FY11e to 9% in FY12e due to mark-to-market losses booked in
Q2 before expanding slightly to c9.7% in FY13 (versus the consensus estimate of c9.6%).
The new orders, however, suggest that KEC may beat these estimates, registering a
margin of c10% in FY13. Overall, we see potential upside to our estimates going into
FY13, with the biggest, albeit unlikely, risk being a further depreciation in INR.
Attractive value. Our current forecasts call for EPS to surge c43% in FY13e and 38% in
FY14e after a decline of c8% in FY12e, driven by the normalisation of margins due to a
reversal of mark-to-market losses, the risk to which remains low. With such strong,
resilient growth and a large order book, the stock’s valuation looks attractive at a c3.5x
FY13e PE; therefore, we reiterate our OW rating and target price of INR80. Our target
price is derived from our preferred EVA valuation methodology and implies a 12-month
forward target multiple of c6.4x PE on a 24-month forward PE of INR12.5. We believe
that the quarterly growth in earnings, continued order announcements and peaking of the
interest rate cycle could act as key catalysts for a stock re-rating.
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