Stock corner: Initiate with ‘Buy’ with TP of Rs 388 for KEC International

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Published: December 13, 2019 3:17:50 AM

Synergistic diversification into new verticals to drive growth in the near term: KEC has witnessed strong growth in Railways (sales doubling each year over FY16-19), and management expects a similar growth trajectory in the Civil space.

Stock corner, KEC International, KEC International share, KEC International share price, market news, market todayKey risks to our views are further slowdown in T&D ordering internationally and worsening working capital levels.

KEC International (KEC) has demonstrated strong EPS growth of ~32% (FY15-19) on improving EBITDA margins; however, the Street has lately been concerned about KEC’s flattish prospects in domestic power transmission & distribution (T&D) and the recent rise in its working capital levels.

However, we expect revenue growth for the company to be driven by the Railways and Civil divisions and revival in global T&D over  FY20-22F. Synergistic diversification into new verticals to drive growth in the near term: KEC has witnessed strong growth in Railways
(sales doubling each year over FY16-19), and management expects a similar growth trajectory in the Civil space.

The diversification away from slow-growth T&D space since FY12 has been reflecting in results, and we expect Rail and Civil growth to sustain. Liquidity stress has increased in the infra space with banks getting increasingly cautious when lending. However, the funding stress has also reduced competition, resulting in better pricing and margins. We think near-term payables compression seen at KEC in the rail segment will likely reverse as vendor ecosystems mature and the company’s vertical integration efforts bear fruits.

We estimate ~23% EPS CAGR (FY19-22F) with broadly stable EBITDA margins for KEC. We expect OCF to remain strong (~5% of sales) over FY19-22F, albeit lower than ~6% over FY15-19 on fewer creditor days. Trading at ~9.2x FY21F EPS of INR29.9; initiate at Buy. We
value KEC at 12.0x 1Y forward P/E based on our reverse DCF analysis to arrive at a TP of INR388, implying ~42% upside; we initiate at Buy.

Key risks to our views are further slowdown in T&D ordering internationally and worsening working capital levels.

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