Maintain buy with TP raised to Rs 412, implying 18% upside in KEC’s 3QFY20 sales at Rs 30.7bn (+16% y-o-y), marginally (~2%) below our estimates but in line with consensus.
KEC is on track to record ~16% top-line growth in FY20F; order inflows will be the key catalyst to 1HFY21F; easing working capital level and reduction in net debt levels vs 2QFY20 are positives. Maintain buy with TP raised to Rs 412, implying 18% upside in KEC’s 3QFY20 sales at Rs 30.7bn (+16% y-o-y), marginally (~2%) below our estimates but in line with consensus. Other key parameters like Ebitda margins, interest to sales and PBT/PAT margins were also in line with our estimates. The key positive, in our view, has been acceleration in order inflows (3QFY20 at Rs 60.5bn vs Rs 36.0bn in 3QFY19) and the improvement in working capital and debt levels.
The rise in working capital levels in 1HFY20 due to a decline in the payable levels in the rail segment had been a cause of investor concern. However, improved WC levels in 3QFY20 and receipt of Rs 6.8bn of Saudi receivables over 9MFY20 are key positives. This has led to net debt + trade acceptance levels dropping by ~Rs 1.4bn from 1HFY20 levels and we expect a further fall of Rs 1.0bn in Q4 on higher collections.
We expect continued order inflows in rail and acceleration of awards in metro. Further, with the revival in Middle East tendering and Indian orders likely to be of higher value packages, we are optimistic on the outlook. We estimate that Rs 135-140bn of order inflows may be achievable in FY20F. Management has stated that newly-secured metro orders are not significantly margin-dilutive (management expects-high-single digit Ebitda margin). Further, we expect Ebitda margin improvement in the cables segment to continue into FY21-22F.
We marginally change our revenue and EPS estimates for FY20-22F. We value KEC at 12.0x FY22F EPS of Rs 34.4 (based on reverse DCF analysis with sustainable ROE of 22%, 12% medium term and 6% terminal growth) to arrive at a higher TP of Rs 412, implying ~18% upside. Key downside risks are further slowdown in T&D ordering internationally and worsening working capital levels.