KEC -Encouraging results reinforce growth story: Religare

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KEC International Ltd
Encouraging results reinforce growth story


KEC International (KECI) reported a strong set of numbers for Q2FY11 in line
with our estimates, marked by a 14% YoY growth in net sales to Rs 10bn.
EBITDA for the quarter stood at Rs 1bn which implies a margin of 10.1%,
slightly lower YoY. The company’s order book at Q2FY11-end leaped 26% over
last year’s levels to Rs 70bn. While this included a contribution of Rs 5.8bn
from its US-based subsidiary SAE Towers (SAE), growth was still strong at 16%
YoY even after excluding this number. The management is eyeing 20% YoY
revenue growth in the near future and believes that SAE’s high margins are
sustainable. The positive impact of SAE’s elevated margin levels is expected to
flow in during the coming quarters. We also expect KECI to benefit from robust
order inflows in the domestic market during H2FY11. Maintain BUY.



Orders from North America kick in: KECI secured an order of Rs 7.35bn from
SNC Lavalin Canada to supply 90,000MT of high-voltage transmission line
towers. This is a price escalation contract with an expected execution period of
45 months. The company expects to make 90% of the supplies from India and
the remaining from SAE.

Expect margin benefits from SAE: SAE is a high-margin business (~14% versus
10% for the consolidated group) due to its higher realisations. The management
believes that these margins are sustainable. Accordingly, we believe that KECI’s
margin profile will improve going ahead. The management also intends to
increase SAE’s capacity utilisation from 65% levels currently. In our view, SAE
will help KECI gain visibility in North America and bag orders in the region.

Strong domestic order inflow in coming quarters: Indian power and transmission
sector generally doles out order much stronger in H2. Hence we believe that the
domestic order inflow is likely to pick up in H2FY11E. The company’s cable
business clocked revenues of Rs 1.16bn in Q2FY11 compared to Rs 3.5bn in
FY09. Also new cable factory in Baroda will commence production in FY11.
Further management sounded confident about the prospects of cable business.
The management is also looking at growth in railway contracts, mostly triggered
by orders for the dedicated freight corridor project.

Valuation: At present, KECI trades at PE of 11.6x/9.6x for FY11E/FY12E. We
believe that there are convincing growth opportunities and benefits ahead, which
will be realised in the stock. We hence maintain a BUY on KECI with a target
price of Rs 625 for Mar ’12.