Supported by a strong order backlog, pick-up in execution and softening commodity prices, earnings of KEC International are likely to grow at a CAGR of 47% over FY22-FY24E. However, any further increase in commodity prices and incremental challenges at SAE Towers are among risks. We maintain ‘buy’ rating on the stock, assigning a multiple of 18x on FY24E EPS and arrive at a target price of Rs 566.
There are are important takeaways from our interaction with the senior management – contribution of transmission and distribution (T&D) business is likely to reduce to 20-25% in the long term from 50% in FY22; profitability of SAE Towers is likely to return from Q1FY24 onwards with Rs 1,000 crore in revenue and 7-8% EBITDA margin in FY24; and net working capital days are likely to improve Q4FY23 onwards.
The management reiterated a strong order pipeline at Rs 1.1 trillion across the businesses, of which the company has already participated in tenders worth Rs 35,000 crore. FY23-YTD order inflow stands at Rs 6,000 crore with major orders coming from PGCIL. The current consolidated order book stands at Rs 30,000 crore.
T&D contribution may reduce to 20-25% in the long term: Over the past six years (FY16-FY22), revenue contribution of KEC’s non-T&D business increased from 17% in FY16 to 50% in FY22. This was led by a strong revenue growth in the non-T&D business, mainly civil and railways, which grew at 63% and 62% CAGRs respectively, over FY16-FY22.
SAE Towers profitability to improve from Q1FY24: The execution of legacy orders is likely to be completed by October-November 2022. The company said it will focus on execution of tower supply orders and would be selective in taking up EPC orders.
Strong order pipeline: For FY23, the management guided for an order inflow growth of 15%. On the FY23-YTD basis, the company has received Rs 6,000 crore worth of orders across businesses.