KEC International, 1Q FY 14

7/27/2019 KEC International, 1Q FY 14

1/11

Please refer to important disclosures at the end of this report 1

Quarterly Highlights (Consolidated)` cr 1QFY14 1QFY13 % chg (yoy) 4QFY13 % chg (qoq)Revenue 1,746 1,364 28.0 2,150 (18.8)EBITDA 88 103 (14.7) 89 (0.9)

EBITDA margin (%) 5.0 7.6 (252) 4.1 91

Reported PAT (9) 33 (126.7) (14) (36.5)Source: Company, Angel Research

For 1QFY2014, KEC International (KEC) reported a strong top-line performance,recording a 28.0% yoy growth in the top-line to`1,746cr, beating our estimates.The upbeat performance came mainly on back of a 72.5% yoy growth in the

South Asian transmission business to`535cr. On the EBITDA front, the company'smargin contracted by 252bp yoy to 5.0% on account of execution of low marginorders in relatively new business segments and mark-to-market loss of `6.7cr,which although is expected to reverse in the coming quarters. Further, KEC alsoincurred a one off VRS expense (VRS offered to workers at Thane cable facility) of`18cr. Consequently, KEC reported a loss of `9cr for the quarter compared to anet profit of`33cr in 1QFY2013.

Margin pressure expected to ease: Although transmission segment marginscontinue to be strong (9.9% in 1QFY2014), power systems, cable segment, andrelatively new segments of railway and water are currently operating atlow/negative margins which is exerting pressure on the companys operatingmargin. The company had aggressively bid for some of these low margin projectsto get a foothold in new segments. Currently, the companys order book consists

of`350-`400cr of low margin orders in the power system and railway segmentwhich are expected to be executed by 2QFY2014. Hence, we expect margins toimprove post 2QFY2014.

Robust order book: The order intake during the quarter grew by 8.2% yoy to`2,185cr, aided by a large order worth`770cr from Tanzania. The strong orderaccretion over the last few quarters has led to a robust order backlog of`10,056cr (1.4x trailing 4 quarter revenues).

Outlook and valuation: KEC has a geographically diversified business modelwhich insulates it from slowdown in any particular region. Further, the companyhas also ventured in new businesses of railway and water, which have fared wellwith order inflows and revenues picking up at measurable pace. The only concernis continued margin pressure. However, considering the Managements assurance

that new orders are being booked at higher margins and attractive valuations(stock is trading at 3.0x FY2015E EPS), we maintain our Buy rating on the stockwith a revised target price of `36.Key financials (Consolidated)Y/E March (` cr) FY2012 FY2013E FY2014E FY2015ENet sales 5,815 6,979 7,709 8,399% chg 29.9 20.0 10.4 9.0

Adj. PAT 209 65 132 207% chg 1.8 (68.9) 103.5 56.4

EBITDA (%) 8.1 5.5 6.2 6.9

EPS (`) 8.1 2.5 5.1 8.1P/E (x) 3.0 9.7 4.8 3.0

P/BV (x) 0.6 0.6 0.5 0.4RoE (%) 33.6 9.4 16.6 21.5

RoCE (%) 21.1 15.4 17.5 20.1

EV/Sales (x) 0.3 0.3 0.3 0.2

EV/EBITDA (x) 3.5 5.1 4.1 3.2

Source: Company, Angel Research, Note : CMP as of August 6,2013

BUYCMP `25

Target Price `36

Investment Period 12 Months

Stock Info

Sector

Net Debt (` cr) 1,320

Bloomberg Code KECI@IN

Shareholding Pattern (%)

Promoters 45.4

MF / Banks / Indian Fls 33.8

FII / NRIs / OCBs 2.9Indian Public / Others 17.9

Abs. (%) 3m 1yr 3yr

Sensex (4.8) 8.9 3.2

KEC (52.9) (56.6) (74.2)

Reuters Code KECL.BO

BSE Sensex 18,733

Nifty 5,542

Avg. Daily Volume 67,670

Face Value (`) 2

Beta 1.2

52 Week High / Low 81/24

Capital Goods

Market Cap (` cr) 631

Amit Patil022-39357800 Ext: 6839

[email protected]

KEC InternationalPerformance highlights

1QFY2014 Result Update | Capital Goods

August 7, 2013


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KEC International | 1QFY2014 Result Update

August 7, 2013 2

Exhibit 1:Quarterly performance (Consolidated)

(` cr) 1QFY14 1QFY13 % chg (yoy) 4QFY13 % chg (qoq) FY2013 FY2012 % chg (yoy)Net Sales 1,718 1,337 28.5 2,105 (18.4) 6,854 5,703 20.2Other operating income 28 27 - 45 - 125 112 -Total income 1,746 1,364 28.0 2,150 (18.8) 6,979 5,815 20.0Stock adjustments (16) (61) 52 1 (9)

Raw Material 883 715 23.4 1,182 (25.3) 3,835 3,159 21.4

(% of total income) 49.7 48.0 57.4 55.0 54.2

Erection and sub cont.exp. 446 321 39.1 489 (8.7) 1,494 1,167 28.0

(% of total income) 25.6 23.5 22.7 21.4 20.1

Employee Cost 131 115 14.4 118 11.5 483 427 13.0

(% of total income) 7.5 8.4 5.5 6.9 7.3

Other Expenses 213 170 25.2 220 (3.1) 785 599 31.1

(% of total income) 12.2 12.5 10.2 11.2 10.3

Total Expenditure 1,658 1,261 31.5 2,061 6,598 5,343 23.5EBITDA 88 103 (14.7) 89 (0.9) 381 470 (18.9)(EBITDA %) 5.0 7.6 4.1 5.5 8.1

Interest 59 40 46.8 57 3.2 194 160 21.7

Depreciation 17 12 35.2 16 7.0 56 48 17.0

Other Income 6 3 5 16 62 -

PBT 18 54 (65.8) 21 (14.1) 147 324 (54.7)(% of total income) 1.1 3.9 1.0 2.1 5.6

Total Tax 9 20 (55.9) 35 (74.3) 82 115 (28.9)

(% of PBT) 49.2 38.2 164.6 55.7 35.5

Adj. PAT 9 33 (71.9) (14) (167.6) 65 209 (68.9)PAT Margin (%) 0.5 2.4 0.0 0.9 3.6

Extra ordinary (exp)/inc 18 0 0 0 1

Reported PAT (9) 33 (126.7) (14) (36.5) 65 208 (68.8)Adj EPS (`) (0.3) 1.3 (126.7) (0.5) (35.9) 2.5 6.8 (62.7)

Source: Company, Angel Research

Robust top-line growth, although margin pressure remains

For 1QFY2014, KEC reported a strong top-line performance by recording a 28.0%

yoy growth to `1,746cr, beating our estimates, mainly on back of 72.5% yoy

growth in South Asian transmission business to `535cr. On the EBITDA front, the

company's margin contracted by 252bp yoy to 5.0% on account of execution of

low margin orders in relatively new business segments and mark-to-market loss of

`6.7cr, which although is expected to reverse in the coming quarters. Further, KEC

also incurred a one off VRS expense (VRS offered to workers at Thane cable facility)

of`18cr. Consequently, KEC reported a loss of`9cr for 1QFY2014 compared to a

net profit of`33cr in 1QFY2013.


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August 7, 2013 3

Exhibit 2:Top-line trend


Exhibit 3:EBITDA and EBITDAM


Margin pressure expected to ease

Although transmission segment margins continue to be strong (9.9% in

1QFY2014), power systems, cable segment, and relatively new segments of

railway and water are currently operating at low/negative margins which is

exerting pressure on the companys operating margin. The company had

aggressively bid for some of these low margin projects to get a foothold in new

segments. Currently, the companys order book consists of `350-`400cr of low

margin orders in the power system and railway businesses which are expected to

be executed by 2QFY2014. Hence, we expect margins to improve going forward.

Exhibit 4:Trend in PAT (Consolidated)


1,0

23

1,2

63

1,4

60

2,0

69

1,3

64

1,6

68

1,7

97

2,1

50

1,7

46

20.9

26.2

36.332.7 33.4 32.1

23.1

3.9

28.0

0

5

10

15

20

25

30

35

40

0

500

1000

1500

2000

2500

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

Sales (` cr, LHS) Growth (yoy %, RHS)

96

92

113

170

103

86

103

89

88

9.4

7.27.8

8.2

7.6

5.15.8

4.15.0

0

1

2

3

4

5

67

8

9

10

0

20

40

60

80

100

120

140

160

180

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

EBITDA (` cr, LHS) EBITDAM (%, RHS)

33

21

45

74

33

16

29

(14) (9)

(1.0)(0.5)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

(30)

(15)

0

15

30

45

60

75

90

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

Adj. PAT (` cr, LHS) PATM (%, RHS)


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August 7, 2013 4

Exhibit 5:Order inflow (` cr)


Exhibit 6:Order backlog (` cr)


Healthy order book

The order intake during the quarter grew by 8.2% yoy to `2,185cr, aided by a

large order worth`770cr from Tanzania. The strong order accretion over the last

few quarters has led to a robust order backlog of `10,056cr (1.4x trailing 4

quarter revenues). KECs strong order book with transmission orders, constituting

78% of the total order book, provide assurance of revenue visibility as well as

margin improvement (since transmission orders have relatively high margins).

Exhibit 7:Geographically diversified Order Book


Exhibit 8:Business Segment wise Order book


1,1

54

855

2,3

83

1,8

47

2,0

20

1,4

70

2,2

90

1,7

04

2,1

85

0

500

1,000

1,500

2,000

2,500

3,000

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

8,6

11

8,4

50

9,2

00

8,5

72

9,4

62

9,3

86

10,1

50

9,4

70

10,0

56

52.4

20.315.0

9.99.9 11.1

10.3 10.5 6.3

0

10

20

30

40

50

60

0

2,000

4,000

6,000

8,000

10,000

12,000

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

4QFY13

1QFY14

Order Backlog (` cr , LHS) Growth (yoy %, RHS)

India, 47

MENA, 15

America, 9

South Asia, 3

Africa andCentral Asia,

22

South EastAsia, 4

Transmission ,78

Cables, 2Railways, 3

Power Systems,

10

Telecom, 2Water, 5


5/11


August 7, 2013 5

Investment arguments

Growth opportunity on cards: Globally the thumb rule entails that for every rupeeinvested in generation, an equivalent amount is to be invested in T&D; however,

India has spent only 50% on T&D, thus creating a huge opportunity for players in

the T&D space. PGCIL envisages a T&D capex of ~`1lakh cr for the 12th plan,

55% of which is estimated to be transmission and sub-station capex, thus providing

a number of opportunities to KEC, given its strong presence in the domestic T&D

market.

Outlook and valuation: KEC has a geographically diversified business modelwhich insulates it from slowdown in any particular region. Further, the company

has also ventured in new businesses of railway and water, which have fared well

with order inflows and revenues picking up at measurable pace. The only concern

is continued margin pressure. However, considering the Managements assurance

that new orders are being booked at higher margins and attractive valuations

(stock is trading at 3.0x FY2015E EPS), we maintain our Buy rating on the stockwith a revised target price of `36.Exhibit 9:One year forward PE Band


0

50

100

150

200

Apr-07

Aug-07

Dec-07

Apr-08

Aug-08

Dec-08

Apr-09

Aug-09

Dec-09

Apr-10

Aug-10

Dec-10

Apr-11

Aug-11

Dec-11

Apr-12

Aug-12

Dec-12

Apr-13

Aug-13

Share Price (`) 4x 8x 12x 16x


6/11


August 7, 2013 6

Exhibit 10:Peer comparison

Company Reco. CMP Tgt. price Upside P/BV(x) P/E(x) FY2013-15E RoE (%)(`) (`) (%) FY14E FY15E FY14E FY15E EPS CAGR FY14E FY15E

ABB* Neutral 468 - - 3.7 3.5 40.6 27.6 61.6 9.3 13.1BHEL Neutral 113 - - 1.2 1.1 5.6 6.6 (20.9) 23.1 17.2

BGR Energy Neutral 81 - - 0.4 0.4 3.7 3.3 3.6 22.3 20.3

Crompton Greaves Buy 84 103 22.0 1.4 1.3 12.7 9.5 - 11.4 14.0

Jyoti Structures Neutral 16 - - 0.2 0.2 3.5 2.4 17.7 5.5 7.4

KEC International Buy 25 36 47.6 0.5 0.4 4.8 3.0 78.4 16.6 21.5Thermax Neutral 564 - - 3.2 2.8 19.6 17.1 10.7 17.2 17.3


Company Background

KEC International (KEC) is the flagship company of the RPG Group. The companyis a global player in the T&D space and has presence across 45 countries (~59%

of FY2013 revenue contributed by international operations). The company

acquired US-based SAE Tower Holdings LLC (SAE) in FY2011. KEC has also

forayed into new business verticals such as railway and water resource

management, though currently these businesses are at a nascent stage.


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August 7, 2013 7

Profit & Loss Statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013 FY2014E FY2015EOperating income 3,907 4,477 5,815 6,979 7,709 8,399% chg 13.9 14.6 29.9 20.0 10.4 9.0Total Expenditure 3,501 4,000 5,343 6,598 7,231 7,820Raw Materials 2,013 2,255 3,150 3,836 4,201 4,544

Mfg costs 958 981 1,167 1,494 1,642 1,781

Personnel Costs 169 275 427 483 555 605

Other Costs 362 489 599 785 833 890

EBITDA 406 477 471 381 478 580% chg 34.6 17.4 (1.1) (19.1) 25.3 21.3

(% of Net Sales) 10.4 10.7 8.1 5.5 6.2 6.9

Depreciation& Amortisation 27 41 48 56 60 63

EBIT 379 436 423 325 418 517% chg 36.0 15.0 (2.9) (23.2) 28.5 23.7

(% of Net Sales) 9.7 9.7 7.3 4.7 5.4 6.2

Interest & other Charges 86 126 161 195 229 226

Other Income 2 7 62 16 7 16

(% of PBT) 0.6 2.2 19.0 10.9 3.6 5.2

Recurring PBT 294 317 324 147 196 307% chg 62.9 7.6 2.4 (54.7) 33.5 56.4

Extraordinary Expense/(Inc.) 0 0 0 0 0 0

PBT (reported) 294 317 324 147 196 307Tax 104 111 115 82 64 100

(% of PBT) 35.2 35.1 35.5 55.7 32.5 32.5

PAT (reported) 191 206 209 65 132 207Add: Share of earnings of asso. 0 0 0 0 0 0

Less: Minority interest (MI) 0 0 0 0 0 0

Prior period items 0 0 0 0 0 0

PAT after MI (reported) 191 206 209 65 132 207ADJ. PAT 191 206 209 65 132 207% chg 60.3 7.8 1.8 (68.9) 103.5 56.4

(% of Net Sales) 4.9 4.6 3.6 0.9 1.7 2.5

Basic EPS (`) 7.7 8.0 8.1 2.5 5.1 8.1Fully Diluted EPS ( ) 7.7 8.0 8.1 2.5 5.1 8.1% chg 60.3 3.5 1.8 (68.9) 103.5 56.4

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

previous year numbers


8/11


August 7, 2013 8

Balance Sheet (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E FY2015ESOURCES OF FUNDSEquity Share Capital 49 51 51 51 51 51Preference Capital 0 0 0 0 0 0

Reserves & Surplus 736 895 1,056 1,096 1,213 1,384

Shareholders Funds 785 947 1,108 1,147 1,265 1,436Minority Interest 0 0 0 0 0 0

Total Loans 787 1,432 1,239 1,476 1,596 1,501

Deferred Tax Liability 46 50 51 62 62 62

Total Liabilities 1,620 2,428 2,398 2,685 2,922 2,998APPLICATION OF FUNDSGross Block 836 1,038 1,095 1,333 1,463 1,588

Less: Acc. Depreciation 157 237 285 352 412 475

Net Block 679 802 810 981 1,051 1,114Capital Work-in-Progress 38 28 112 30 30 30

Goodwill 0 281 321 342 360 382

Investments 0 0 0 0 0 0

Deferred Tax Asset 0 0 0 0 0 0

Current Assets 2,680 3,645 4,235 4,789 5,290 5,867Cash 73 154 203 156 276 269

Loans & Advances 396 410 510 662 662 532

Inventories 250 336 440 396 463 504

Debtors 1,962 2,172 2,506 2,887 3,379 3,941

Others 0 574 576 689 510 620

Current liabilities 1,778 2,396 3,153 3,550 3,809 4,395

Net Current Assets 903 1,249 1,083 1,240 1,481 1,472Other Non CA 0 69 73 92 0 0

Total Assets 1,620 2,428 2,398 2,685 2,922 2,998Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with



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August 7, 2013 9

Cash flow statement (Consolidated)

Y/E March (` cr) FY2010 FY2011 FY2012 FY2013E FY2014E FY2015EProfit before tax 294 317 324 147 196 307Depreciation 27 41 48 56 60 63(Inc)/Dec in Working Capital (323) (265) 215 (204) (120) 1

Less: Other income (2) (7) (62) (16) (7) (16)

Direct taxes paid (104) (111) (115) (82) (64) (100)

Cash Flow from Operations (107) (25) 410 (99) 65 255(Inc.)/Dec.in Fixed Assets (201) (480) (181) (178) (130) (125)

(Inc.)/Dec. in Investments - - - - - -

Other income 2 7 62 16 7 16

Cash Flow from Investing (199) (474) (119) (162) (123) (109)Issue of Equity 0.0 2.1 - - - -

Inc./(Dec.) in loans 165 645 -193 237 120 (95)

Dividend Paid (Incl. Tax) (36) (36) (36) (15) (15) (36)

Others 106 (32) (14) (8) 74 (22)

Cash Flow from Financing 129 611 (229) 221 105 (131)Inc./(Dec.) in Cash (71) 81 49 (47) 121 (7)

Opening Cash balance 144 73 154 203 156 276Closing cash balance 73 154 203 156 276 269




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August 7, 2013 10

Key Ratios

Y/E March FY2010 FY2011 FY2012 FY2013E FY2014E FY2015EValuation Ratio (x)P/E (on FDEPS) 3.2 3.1 3.0 9.7 4.8 3.0P/CEPS 2.8 2.6 2.5 5.2 3.3 2.3

P/BV 0.8 0.7 0.6 0.6 0.5 0.4

Dividend yield (%) 4.9 4.9 4.9 2.0 2.0 4.9

EV/Sales 0.3 0.4 0.3 0.3 0.3 0.2

EV/EBITDA 3.3 4.0 3.5 5.1 4.1 3.2

EV / Total Assets 1.0 0.9 0.8 0.9 0.8 0.7

OB/Sales 1.4 1.7 1.5 1.4 1.3 1.2

Per Share Data (`)EPS (Basic) 7.7 8.0 8.1 2.5 5.1 8.1

EPS (fully diluted) 7.7 8.0 8.1 2.5 5.1 8.1

Cash EPS 8.8 9.6 10.0 4.7 7.5 10.5

DPS 1.2 1.2 1.2 0.5 0.5 1.2

Book Value 29.8 35.4 42.1 44.1 48.7 55.3

DuPont Analysis (%)EBIT margin 9.7 9.7 7.3 4.7 5.4 6.2

Tax retention ratio (%) 64.8 64.9 64.5 44.3 67.5 67.5

Asset turnover (x) 3.5 2.7 3.1 3.6 3.5 3.6

RoIC (Pre-tax) 33.8 26.5 22.7 16.7 19.1 22.3

RoIC (Post-tax) 21.9 17.2 14.7 7.4 12.9 15.1

Cost of Debt (Post Tax) 8.0 7.4 7.8 6.3 10.1 9.9

Leverage (x) 1.4 1.8 1.9 1.7 1.7 1.3

Operating ROE 41.3 34.8 27.5 9.2 17.6 21.9

Returns (%)RoCE (Pre-tax) 32.3 25.4 21.1 15.4 17.5 20.1

Angel RoIC (Pre-tax) 35.2 27.0 23.6 17.3 19.3 22.6

RoE 44.4 36.9 33.6 9.4 16.6 21.5

Turnover ratios (x)Asset Turnover (Gross Block) (X) 5.3 5.6 7.6 7.9 7.4 7.3

Inventory / Sales (days) 22 24 24 22 20 21

Receivables (days) 179 169 147 141 148 159

Payables (days) 186 156 132 129 130 138WC cycle (ex-cash) (days) 62 78 62 51 54 52

Solvency ratios (x)Net debt to Equity 1.3 2.3 1.5 1.9 1.5 1.2

Net debt to EBITDA 1.8 2.7 2.2 3.5 2.8 2.1

Interest Coverage 4.4 3.5 2.6 1.7 1.8 2.3




11/11


August 7, 2013 11

Research Team Tel: 022 3935 7800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement KEC International

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns): Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

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