Showing in Q2 was healthy; earnings revised with a downgrade to ‘Add’; TP cut to Rs 309 from Rs 367.
KEC International (KECI) reported 13% y-o-y revenue growth to Rs 29 bn led by 254% y-o-y growth in the railway segment to `4.2 bn and strong execution in civil and solar segments. Supported by Rs 150 mn in forex gain under ‘other expenditure’, margins improved 40bps y-o-y to 10.5%; adjusted for this, the margins work out to 9.9%. Management maintains its revenue growth guidance at 15-20% while raising Ebitda margin guidance to 10.5%.
Execution on transmission & distribution (T&D) under both domestic and SAE has been slow, but is expected to gain traction in H2FY19. Borrowing has doubled vs Q4FY18 to `26.6 bn, impacted by 25% reduction in payables due to Rs 4 bn reduction in acceptances and higher proportion of railway-related jobs. Receipt of certain advances pertaining to the recently won overseas orders including Rs 10-12 bn of receivables from Saudi is expected to reduce the working capital strain.
Order intake grew 12% y-o-y during H1FY19 to Rs 64 bn (excluding Rs 15 bn of Oct’18 orders). Including the Bangladesh order, the orderbook stood at `201 bn (2x TTM sales) providing growth visibility. Civil and railways are emerging as promising segments, which are expected to fuel growth. We factor in a revenue CAGR of 16% and earnings CAGR of 15% over FY18-FY20e.
Downgrade to Add: Stress on working capital leading to higher debt will depress RoE and increase interest payment; hence we downgrade the stock from Buy to Add with a revised target price of `309, valuing it at 13x FY20e earnings.