Motilal Oswal Securities Reports on KEC International

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Results disappoint; New business verticals / SAE slip into

losses

Strong revenue pick-up led by execution improvement in overseas business:

KEC International's (KECI) 2QFY15 consolidated revenue stood at INR21.7b (up

22.2% YoY), largely led by strong uptick in transmission business (excluding

SAE), cables and water segment. SAE sales remained flat YoY at INR1.8b and

were impacted by delayed pick-up of orders by customers; management stated

that a pick-up has been witnessed in Oct 2014. Transmission business' (excluding

SAE) sales stood at INR16.9b (up 22% YoY), driven by strong revenue booking in

KECI's JV with Al Sharif in Saudi Arabia. Cables business' sales stood at INR2.37b

(up 72% YoY), led by a strong demand improvement / commencement of 220kv

cables sales.

Consolidated margins decline 70bp YoY, impacted by legacy projects / SAE:

Consolidated EBITDA margins were down 70bp to 5.6% in 2QFY15, impacted by

legacy projects and SAE performance; management still expects margins to

improve 100bp YoY in FY15 to 7%. Decline in standalone EBITDA margin (-307bp

YoY at 2% in 2QFY15) was led by losses in new business verticals (cables, railways,

water and power systems) of INR200m due to cost overruns. However,

management stated that incremental orders are at improved margin levels of

~8%+. SAE booked a loss of INR240m at PBT level, led by delayed up-tick by

customers in Brazil and low margin orders getting executed; FY15 margins are

expected to remain at ~5% as product deliveries pick up in 2H; FY16 margins

likely to improve to 8-9%. T&D project margins remained stable at ~8% during

2QFY15. EBITDA margin in Cables business saw a strong improvement to 6% in

2QFY15; expect PAT breakeven in FY15.

Current order book provides decent medium term revenue visibility: Order

book stood at INR93.2b, down 8.6% YoY, BTB of 1.1x. Order intake at INR11b

declined by 37.4% YoY as overall ordering activity remains sluggish, led by a

delay in finalization of orders. However, order pipeline remains healthy (L1

orders worth INR20b+) and KECI expects order finalization in 2HFY15. In the

international market, improved ordering is expected from MENA region, South

East Asia and selected African regions like Tanzania, Uganda, Kenya etc. Low

margin legacy orders stand at INR800m and are coming to a closure.

Valuation and view: The stock looks attractive given i) company's position to

capitalize on the increased domestic spending in Power T&D, Railways and Water,

ii) margin improvement led by stabilization in new verticals and iii) balance

sheet improvement, with debt repayment from Thane land deal (INR1.6-1.7b).

We are cutting estimates for FY15/FY16 by 18/7% respectively. The stock trades

at 18/11x its FY15E/16E EPS of INR5.4/9.2 respectively.