KEC: Maintain ‘buy’ with revised target price of Rs 275

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Published: June 2, 2020 12:15 AM

That KEC’s successful diversification over the past decade would help it navigate the crisis is unmissable too.

That KEC’s successful diversification over the past decade would help it navigate the crisis is unmissable too.

The flat Q4FY20 EPS growth reported by KEC International (KEC) meets consensus forecast and is encouraging against the backdrop of Covid-19 related challenges. Also consider, strong revenue visibility of 1.7x with Rs 50,000 crore worth of tenders in the pipeline. Order book exposure of 80% to sectors/geographies least impacted by Covid-19. The change in debt mix would cut interest cost. That said, we advise caution, anticipating headwinds to margins from fixed-price contracts.

That KEC’s successful diversification over the past decade would help it navigate the crisis is unmissable too. We are raising earnings by 10% each for FY21E and FY22E, building in higher revenues and lower interest cost. Maintain ‘buy’ with revised TP of Rs 275 (10x March 2022 EPS; earlier TP Rs 220).

Overall, revenue fell 4% y-o-y, impacted by the lockdown (revenue booking loss of Rs 500–600 crore). While the railways and civil business grew 36% and 5% y-o-y, respectively, T&D slid 10%. With a healthy civil business orderbook, the management expects a fourfold jump in the segment revenue in FY21 (we factor in 3.5x). Ebitda margin held steady at 10.1%. A 20% q-o-q slide in interest cost despite flat borrowing is mainly due to a higher proportion of foreign debt. PAT was flat at Rs 190 crore.

KEC’s current order book of Rs 21,000 crore implies reasonable revenue visibility of 1.7x. The management indicated good traction in tendering/order intake momentum in MENA, Saarc and domestic. It is targeting FY21 interest cost/ sales of 2.3% (our estimate 2.5%). KEC boasts a track record of diversification and financial discipline, not to mention its much improved skillset. The Covid-19 disruption provides an excellent opportunity to scale up non-T&D business. With 12% earnings CAGR (conservative) and a 20% RoE profile, KEC is trading at an attractive 8xFY22E EPS. Maintain ‘buy/SP’ with a TP of Rs 275.

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