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KEC International (KECI)
Industrials
Towering over peers. We initiate coverage on KEC with a BUY rating (TP: `65) on a
strong order backlog, diversified business across segments and geographies, capital
allocation discipline, potential for margin expansion and attractive valuations (5X
FY2013E P/E and 0.8X P/B with 18% RoE). We build relatively conservative estimates
(7% revenue CAGR over FY2012-14E, EBITDA margin of 9-9.5%) with potential upside
from easing interest rates and Rupee depreciation. Keys risks relate to stiffer
competition, capex slowdown, volatile global markets and volatile commodity prices.
Leading transmission line player with business and geographical diversification
KEC is a leading global transmission and distribution EPC contractor. While the transmission lines
division is KEC’s largest division (about 72% of the order backlog at the end of 1HFY12), KEC is
also present in several other sectors such as power systems, cables, railways, telecom and water.
KEC is geographically diversified and is present in 45 countries in South Asia, the Middle East,
Africa, Central Asia and the Americas.
Cautious near-term estimates with potential upsides from easing commodity prices, interest rates
We build in relatively conservative estimates for KEC with revenue CAGR of 6-7% over FY2012-
14E. We expect margins to remain subdued at sub-10% over the next few years. However, we
note some avenues of upside to estimates related to an easing interest rate environment, Rupee
depreciation (on translation benefits and net exports), eventual improvement in the investment
cycle and easing commodity prices.
Initiate coverage with a BUY rating and a target price of `65
We initiate coverage on KEC with a BUY rating and a TP of `65 (8X FY2013E EPS) due to
(1) strong order backlog of `84.5 bn, well-diversified across segments (transmission, power
systems, railways, water, cables) and geographies, (2) sound capital allocation discipline (no forays
into BOT/ real estate), (3) potential for margin expansion (on easing raw material costs) and benefit
from Rupee depreciation (net export company + overseas project execution), (4) entering new
business segments with reasonable acquisitions (SAE Towers, Jay Railway Signaling), and
(5) attractive valuations (it trades at 5X FY2013E P/E, 4.7X FY2013E EV/ EBITDA and 0.8X FY2013E
P/B).
Key risks: Competition, capex slowdown, volatile international markets
Key risks relate to (1) potential margin pressure from rising competition, (2) volatile overseas
geographies leading to slower-than-expected execution, (3) commodity price volatility, (4) broad
economic slowdown, (5) continued high interest rates, and (6) slowdown in generation investment
activity, eventually affecting transmission-related capex as well.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
KEC International (KECI)
Industrials
Towering over peers. We initiate coverage on KEC with a BUY rating (TP: `65) on a
strong order backlog, diversified business across segments and geographies, capital
allocation discipline, potential for margin expansion and attractive valuations (5X
FY2013E P/E and 0.8X P/B with 18% RoE). We build relatively conservative estimates
(7% revenue CAGR over FY2012-14E, EBITDA margin of 9-9.5%) with potential upside
from easing interest rates and Rupee depreciation. Keys risks relate to stiffer
competition, capex slowdown, volatile global markets and volatile commodity prices.
Leading transmission line player with business and geographical diversification
KEC is a leading global transmission and distribution EPC contractor. While the transmission lines
division is KEC’s largest division (about 72% of the order backlog at the end of 1HFY12), KEC is
also present in several other sectors such as power systems, cables, railways, telecom and water.
KEC is geographically diversified and is present in 45 countries in South Asia, the Middle East,
Africa, Central Asia and the Americas.
Cautious near-term estimates with potential upsides from easing commodity prices, interest rates
We build in relatively conservative estimates for KEC with revenue CAGR of 6-7% over FY2012-
14E. We expect margins to remain subdued at sub-10% over the next few years. However, we
note some avenues of upside to estimates related to an easing interest rate environment, Rupee
depreciation (on translation benefits and net exports), eventual improvement in the investment
cycle and easing commodity prices.
Initiate coverage with a BUY rating and a target price of `65
We initiate coverage on KEC with a BUY rating and a TP of `65 (8X FY2013E EPS) due to
(1) strong order backlog of `84.5 bn, well-diversified across segments (transmission, power
systems, railways, water, cables) and geographies, (2) sound capital allocation discipline (no forays
into BOT/ real estate), (3) potential for margin expansion (on easing raw material costs) and benefit
from Rupee depreciation (net export company + overseas project execution), (4) entering new
business segments with reasonable acquisitions (SAE Towers, Jay Railway Signaling), and
(5) attractive valuations (it trades at 5X FY2013E P/E, 4.7X FY2013E EV/ EBITDA and 0.8X FY2013E
P/B).
Key risks: Competition, capex slowdown, volatile international markets
Key risks relate to (1) potential margin pressure from rising competition, (2) volatile overseas
geographies leading to slower-than-expected execution, (3) commodity price volatility, (4) broad
economic slowdown, (5) continued high interest rates, and (6) slowdown in generation investment
activity, eventually affecting transmission-related capex as well.
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