FY20-22F EPS up 2-6% due to tax cut; rollover to Sept’20 behind TP rising to Rs 643
The cut in corporate tax rate to 25.17% from 34% leads to higher EPS estimates but operationally the situation remains challenging. With subdued infra ordering till date and weak exports, we expect 1HFY21 to be weak. Our decadal annual report analysis reveals interesting insights.
*KKC has been proactive in product launches: KKC has been at the forefront of innovation with timely product launches that have enabled it to address opportunities in growing areas like rail, data centre and marine, among others. This has led KKC to retain or gain market share despite competitive pressures. However, overall markets did not seem to have evolved as per management expectations as softness continued in areas like mining and pricing pressure increased after emission norms changes.
*Pricing pressure has continued since FY15 and we expect it to persist at least into FY21: Our analysis of 10 years of annual reports highlight that competition and pricing pressure has intensified since FY15. With new emission norms and a rise in costs in the low HP ranges, we expect margin pressure in LHP as the demand environment remains weak.
* Current share price factors in RoE of 20% and 15% EPS CAGR, in our view: Thus, the stock appears to be fairly valued.
Valuation: Trading at ~21x FY21F EPS of Rs 28; maintain Neutral – We value KKC at an unchanged P/E of 21.5x rolled-forward to Sep-20F to arrive at a higher TP of Rs 643, implying ~12% upside; maintain Neutral. Improved exports is a key upside risk, while further margin decline is a key downside risk. We prefer L&T (LT IN, Buy) over KKC.