Q1FY19 reaffirmed the resilience of the KEC EPC business as it reported (i) steady margin despite sharp fall in T&D revenues and (ii) a steady interest cost to sales ratio despite a hit on interest rate, payables and inventory. We defer the benefits of deleveraging for KEC by a year and moderate growth assumptions for order inflows given a weak start to the year; cut TP to Rs 410 (from Rs 430). Buy Steady on operations and weak on order inflows: Adjusted for forex gains, Ebitda for KEC at `2 bn was in line with our estimate and grew in sync with 13% growth in topline. Ebitda margin at 9.4% was flat y-o-y despite the sharp decline in T&D revenues. Essentially KEC leveraged uptick in margin across segments and benefits of cost control. Higher other income (interest on tax refunds) and forex gains (`150-200 mn) more than compensated for the higher-than-expected interest cost, yielding a large outperformance versus our estimates. Adjusted for both these items, there was a modest 1/3/5% miss on revenues/Ebitda/PAT for Q1FY19.
Retains guidance on revenues and margin: KEC expects revenue growth to strengthen from expected improvement in T&D revenues and strong growth across other business segments. On margin, it retained guidance of 10% (conservative in our view) while suggesting limited cost pressures and potential benefit of recent commodity price correction.
Cut estimates by 4-8%: We align interest cost estimate in line with revised guidance of the flattish y-o-y share of sales, deferring recovery by a year. We also reduce order inflow growth estimate for FY2019 to 6% (7% cut) based on flattish Q1FY19 ordering. This yields a revised target price of `410 on roll-forward. Buy