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KEC International (KECI IN): Recent order flows and management meeting reinforce our positive view
Target price: Rs120.00
What has changed?
• We met KEC International’s (KEC) management recently and came away positive.
With the Rs10bn order announcement, the company has displayed its ability to
increase orders despite strong industry competition domestically.
Impact
• Order inflow year-to-date represents 80% of our FY11 forecast. With the
recent orders, the company’s order inflow year-to-date stands at Rs43bn,
compared with our full-year forecast of Rs54bn.
• Absence of PGCIL orders not felt as other domestic clients contribute. PGCIL
orders contribute only about 15% of KEC’s Rs74bn order book. The company has
increased its orders from its international operations (60% of its order inflow yearto-
date), and from other domestic customers such as State Electricity Boards and
Indian Railways. Management also mentioned that it continues to expect high
competitive intensity at the forthcoming PGCIL tenders.
• Our forecasts include SAE Towers’s (SAE) (Not listed) financials. KEC
acquired SAE in September 2010 and 3Q FY11 will be the company’s first
quarter of consolidation. We believe the SAE acquisition should be mildly
earnings-accretive for KEC for FY11.
Valuation
• We have revised down our net-profit forecasts for FY11 and FY12 by 9% and
7%, respectively, to factor in mainly lower execution than we expected
previously, and increases in raw-material and interest costs. However, we
maintain our six-month target price of Rs120 (adjusted for the recent 1:5 stock
split) based on a target 12x PER on our FY12 EPS forecast. (Our revised EPS
forecasts reflect our net-profit forecast revisions and the stock split.)
Catalysts and action
• We maintain our 1 (Buy) rating on KEC. KEC is our preferred play in the
transmission and distribution (T&D) space, as it continues to demonstrate its
ability to win orders, given its strong international operations, diversified
domestic client base and opportunities in newer segments such as cables and
railways. We forecast rev
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