KEC International: Powerful connection

This electrical equipment maker should benefit from the growth opportunity in the power space

The Centre’s push to improve power connectivity across India and the gradual acceptance of the UDAY scheme across many States is translating into more projects for private players. The increased focus on power transmission and distribution by Power Grid Corporation of India (PGCIL), State electricity boards (SEBs) and private players should offer opportunities for companies such as KEC International, a major manufacturer of electrical towers and cables. Besides, impetus by the Railways to quicken the pace of building its own transmission lines and the Centre’s focus on building solar parks (solar electricity) will be an advantage.

With its expertise in design, manufacture, engineering, procurement and construction of power transmission and distribution towers and industrial cables, KEC International is well placed to make most of the opportunity in the power space.

The company with its own tower manufacturing and cable manufacturing facilities, strong domestic and international presence and a healthy order book should see healthy revenue and profit growth over the next couple of years.

The stock’s current valuation (price to trailing 12-month earnings) is about 19 times, lower than its historical three year average of 25 times. With margins improving and strong order inflow visibility, long-term investors can buy the stock.

Strong demand outlook

For KEC, the revenue contribution predominantly comes from the transmission and distribution (T&D) segment (nearly 85 per cent) with railways, cabling, solar and water projects also pitching in.

Contribution from the total domestic and international order book is about 60 and 40 per cent respectively. Domestic and international projects both contributed about 50 per cent of revenue in FY16.

While most of the group’s international market orders are executed by KEC, a small portion is carried out by SAE Towers (SAE), a fully-owned US based subsidiary, that caters to the North and South American markets.

As at the end of September, the order book stands at ₹10,785 crore, with T&D (excluding SAE) contributing 69 per cent, railways accounting for 11 per cent, and SAE 14 per cent.

Besides, in around ₹3,800 crore worth of projects, KEC is the L1 bidder (indicating that it has a high chance of winning these projects).

Besides Power Grid, the market leader in T&D capex in India, and some SEBs, private players such as Adani and Sterlite are increasing their presence in the T&D business.

Also, the Centre’s thrust to electrify railway lines and its intent to add close to 10 Gigawatt of solar power in the next year should see increasing order flow from these two segments also.

Some notable projects handled by KEC include the Indo-Bangladesh 400 KV circuit twin line, the Indo-Nepal 400 KV double circuit line with 220 KV bay extensions, 765/400 KV GIS substation in Thiruvalam, Tamil Nadu and 400 KV GIS substation at Kishanganj, Bihar.

KEC’s management has indicated that Saudi Arabia has a huge tender pipeline to execute close to ₹10,000 crore in the power segment.

The company’s ability to decrease account receivable and gross debt in the first half of FY17, SAE’s turnaround to report profit before tax for year ending FY16 and improvement in the company’s operating efficiency are reflected in KEC’s recent rating upgrade (from A1 to A1+ by “India Rating”). Besides, improving working capital cycle and drop in interest cost should aid financial performance.

Improving financials

KEC’s revenue grew at an annualised rate of 10 per cent between FY12 and FY16 to ₹8,516 crore. The revenue growth in the first six months of FY17 decreased by 2 per cent year-on-year to ₹3,906 crore due to the slowdown in construction because of the extended monsoon. Despite a fall in revenue for the first half of the fiscal, the management expects FY17 revenue to grow around 10 per cent year-on-year.

KEC’s operating profit grew at an annualised rate of 9.6 per cent between FY12 and FY16 to ₹679 crore. The operating margin in FY16 was 8 per cent.

The operating profit for half yearly period ending September FY17 stands at ₹335 crore, a 14.7 per cent increase compared to the same period an year earlier .

The operating margin for H1-FY17 stands at 8.6 per cent compared to 7.3 per cent for the same period a year earlier. With order execution time for T&D contractsgetting shortened and improving execution efficiency, KEC’s operating margin should sustain.

Between FY12 and FY16, the net profit decreased at annualized rate of 2.8 per cent. But, due to drop in raw material cost and improvement in execution efficiency between FY15 and FY16, the net profit increased nearly three times to ₹187 crore.

The interest coverage ratio improved from 1.7 times in FY15 to 2.4 times in FY16.

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