KEC International – 2QFY2011 Result Update Angel Broking

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 KEC International  – 2QFY2011 Result Update

Angel Broking maintains a Buy on KEC International with a Target Price of Rs648.

Results in line: 2QFY2011 results of KEC International (KEC) were broadly in line

with our estimates. Revenues grew 14% yoy to `1,001cr, while PAT was up 1.5%

yoy to `43cr. We had estimated revenues and PAT at `1,050cr and `44cr,

respectively. Consolidated order backlog at the end of the current quarter stood

at `7,025cr, including `580cr relating to the recently acquired SAE Towers.

Order intake during 2QFY2011 grew 43% yoy to `1,750cr. We maintain a Buy

on the stock.

Steady performance: Revenues reported steady growth of 14% yoy to `1,001cr,

while EBIDTA margins were a tad lower at 10.1%, down by 28bp on a yoy basis.

Consequently, EBIDTA rose by only 11.3% to `101cr despite the 14% increase in

revenues. Lower interest cost for the quarter enabled the company to report 22%

yoy increase in PAT to `51. Accounting for the exceptional items (VRS payments),

reported PAT came in at `43cr.

Outlook and Valuation: Transmission EPC companies are expected to benefit in

terms of increasing order inflows on the back of ongoing investments in the

domestic power sector. We expect PGCIL to accelerate its capex schedule over

the next two years, leading to higher order inflow for the transmission EPC

companies. Acquisition of the Texas-based SAE Towers would enable KEC

leverage the former’s customer base to develop relationship with the power

utilities to secure EPC contracts in the future. At the CMP of `492, the stock trades

at 11.7x and 9.9x FY2011E and FY2012E earnings, respectively. We maintain a

Buy on the stock, with a Target Price of `648.

Investment Arguments

Huge opportunity for transmission EPC players: The government has envisaged an

investment of `240,000cr in the transmission segment in the Twelfth Plan, an

increase of over 70% from the investments planned during the Eleventh Plan. As

per our estimates, this has opened up a substantial potential opportunity for

transmission EPC players such as JSL, KEC and Kalpataru Power Transmission.

American presence to boost revenues and profitability: KEC’s recent acquisition

of the Texas-based tower manufacturer SAE Towers for US $95mn makes it the

largest lattice tower manufacturer globally. Power utilities in the US generally

procure steel structures directly from tower manufacturing companies and

thereafter give it to transmission EPC companies for their subsequent erection and

commissioning. Also, there is a preference to source equipment and towers from

the local vendors within the NAFTA, which effectively creates a protected market.

With a dominant market share of over 40%, SAE Towers is a market leader in the

US and we expect KEC to leverage SAE Towers’ customer base to develop

relationships with the power utilities and secure EPC contracts in the future, while

ensuring that the equipment is supplied by SAE Towers.

Diversification into railways and telecom sectors a major positive: KEC has forayed

into the telecom and railway sectors. Although these divisions currently account for

a small portion of the company's total revenues, future prospects of the segments

are very bright. KEC also plans to enter tracking, signaling and platform

construction work in the railway segment.

Outlook and Valuation

Transmission EPC companies are expected to benefit in terms of increasing order

inflows on the back of the ongoing investments in the domestic power sector. We

expect PGCIL to accelerate its capex schedule over the next two years, leading to

higher order inflows for transmission EPC companies. The acquisition of Texasbased

SAE Towers would enable KEC leverage the former’s customer base to

develop relationship with the power utilities to secure EPC contracts in the future.

At the CMP of `492, the stock trades at 11.7x and 9.9x FY2011E and FY2012E,

earnings respectively. We maintain a Buy on the stock, with a Target Price of

`648.