Our recent interaction with KEC International (KEC) management infuses us with optimism on the company’s overall profitability and growth potential of its various business segments. Balance sheet improvement post leveraged buyout of SAE Towers (US) and recent hike in promoter stake further cement our conviction on the stock. We upgrade our reco to ‘BUY’ and revise up our FY14E EPS 4% with a revised TP of INR77/share.
Improved sales, OPM visibility; diversified growth reiterated
KEC has a healthy order book of INR94bn (book to bill), 1.4x FY13E sales, which imparts sufficient visibility for the next 16-18 months. Also, cables, railways, and water divisions are expected to grow higher than T/L revenues with 30% CAGR over FY12-14E versus 13% CAGR for T/L revenue owing to low base and decent order inflow. While profitability of T/L is likely to remain stable, it is expected to improve for most new businesses (railway, cables, water) FY14 onwards on better operating leverage.
Robust balance sheet, cash flow; equipped for future growth
Improvement in the company’s financial leverage has been commendable—from 1.5x in FY11 to a reasonable 1.0x in March 2012, owing to optimum WC management and cash flow recovery. We believe KEC’s diversified growth target across verticals will be well supported by its efficient WC management, proven ability to manage businesses in new territories, which is superior to its peer set.
Outlook and valuations: Diversified growth; upgrade to ‘BUY’
KEC’s strategy of a diversified business model across geographies has augured well over the past five-six years; management targets to take most of the new businesses on a global scale, which provides greater flexibility to choose between markets and businesses. We revise up our FY14E EPS 4% building in superior margins and expect the company to continue its outperformance versus peers over the medium to long term. We also upgrade our recommendation/rating from ‘HOLD/SP’ to ‘BUY/Sector Outperformer’ with a revised target price of INR77/share (+40% upside) given attractive valuations (40% discount to 5 year avg. valuation) and limited downside.
Regards,
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