KEC International: Valuations reasonable, new businesses to sustain momentum

A timely diversification and acquisition of key capabilities over the last few years is helping KEC Internationalreap the benefits. The stock has returned two-fold gains in the last two years led by strong recovery in its core transmission and distribution (T&D) business and surge in other business verticals. During FY18, segments like railways witnessed an 89 percent year-on-year (YoY) growth in sales, followed by a 210 percent increase in the civil business and 81 percent growth in the solar business. Despite a marginal 11.2 percent growth in the T&D business, which accounts for majority of sales, the company was able to grow its overall sales by 15.3 percent in FY18. Despite slowdown in fresh orders from Power Grid Corporation of India (PGCIL), the company has been successful in migrating and tapping opportunities in the state utilities and state electricity boards (SEBs).

New verticals to drive growth

At its recently held analyst meet, the management reiterated that some of these past business initiatives have much more room for growth. The railways, which is sitting on an order book of close to Rs 5,000 crore on a sales turnover of Rs 844 crore, has potential to double revenue. In FY19, it expects the railway business to double its sales turnover to about Rs 1,600-1,800 crore.

The civil business too is going to be an interesting emerging business, where the company is also working on a smart solution to cater to smart city projects. In FY18, this business grew at 211 percent, registering a sales turnover of Rs 268 crore and an order book of about Rs 350 crore.

It is also making strides in the water division and hopes to scale it up with additional enquiries from existing customers. Some of these businesses, which were occupying part of the capital and had very little contribution to overall profitability, are expected to make a higher contribution with an improvement in margin. The management is expecting these businesses to earn an operating margin of about 10 percent similar to its core T&D business.

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The company has successfully reduced its dependence on Gulf Countries and is looking at growth in other markets and regions. It has already made significant progress in SAARC (South Asian Association for Regional Cooperation) countries and Brazil, where it now expects higher traction. Of its total order book of Rs 17,300 crore, 45 percent accrues from international markets.

SAE, its international wholly-owned subsidiary, is expected to benefit from traction in markets like Brazil and Central America. With firm crude oil prices, the management expects a revival in the Middle East, leading to overall growth in coming years.

While its core T&D business would remain in focus throughout international markets, the management is also looking to scale its railways business globally, particularly in SAARC countries, where it is able to identify opportunities.

Investment rationaleAt the current market price of Rs 360 per share, the stock is trading at 20 and 16 times FY19e and FY20e earnings, respectively. Valuations are reasonable in light of the strong order book (2 times its sales) and superior earnings visibility, with margins and return ratios improving further as a result of higher contribution from other businesses.
First Published on Jun 18, 2018 03:07 pm

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