Brokerages remain divided on EPC firm KEC International despite a healthy pipeline and expected growth in revenue and profitability. Debt seems to be the main concern for some while others are impressed by its robust order book and expectations of margin improvement going ahead.
KEC International is a global infrastructure engineering, procurement and construction (EPC) major. It has a presence in the verticals of power transmission and distribution, railways, civil, urban infrastructure, solar, smart infrastructure, oil & gas pipelines, and cables. Recently, the firm announced that it has secured new orders worth ₹1,123 crore across its various businesses.
However, marred by worries over higher commodity prices and working capital, the stock has underperformed the broader markets in the last one year. It has lost 3 percent in the last 1 year and around 10 percent in 2022 YTD. In comparison, the Nifty is up 2.5 percent YTD and 1 percent in the past 1 year.
However, the stock recovered a bit in September, rising 6 percent MTD after falling over 11 percent in August.
Domestic brokerage house HDFC Securities does not seem impressed by the recent recovery or order wins of the stock.
"Given rich valuation and a debt-heavy balance sheet, we maintain REDUCE rating on the stock, with a target price of ₹375 per share (14x Mar-24E EPS). Substantial debt reduction is key for rerating," it said.
The brokerage noted that the consolidated net debt, including acceptances ( ₹2150 crore), came at ₹4770 crore, as of March 2022 versus ₹4850 crore as of December 2021. As of June 2022, consolidated net debt, including acceptances ( ₹2670 crore), stood at ₹6080 crore. However, the management has guided that it will reduce net debt by ₹500 crore by Q4FY23, stated the brokerage.
Meanwhile, Bank of Baroda Capital (BoB Cap) has not rated the stock, even though it said the headwinds seem to be abating. The brokerage noted that the firm expects order inflows to grow at 15-20 percent YoY over the next few years, with civil and urban infrastructure forming the next growth engine, followed
by railways and transmission & distribution (T&D). Competitive intensity is reducing for large projects, especially in railways, due to the need for bid bonds, said, adding that mechanisation and digitisation to enhance engineering capabilities are likely to be the key themes.
"KEC management has also retained its 15 percent order growth estimate for FY23. EBITDA margin in Q2 is expected to hold at Q1 levels (5.1 percent), and expected to normalized (10 percent) by FY24. The pipeline remains healthy at ₹1.15 lakh crore," it pointed out.
Further, Axis Securities has a 'hold' call on the stock with a target price of ₹440, indicating an upside of just 3.5 percent.
"The company has a robust order book plus an L1 position, giving healthy revenue visibility for the next two years. Moreover, it stands well-diversified between T&D and Non-T&D segments and has a proven execution capability. India's infrastructure market is expected to remain bullish driven by various flagship schemes of the government, increased traction in domestic T&D, Railway and Civil businesses and the revival of private Capex. However, owing to elevated commodity prices and prevailing challenges in international operations, we await their normalization. Though commodity prices have softened, margins are expected to be under pressure and are expected to improve only from H2FY23 onwards. We, therefore, keep our HOLD rating on the company," explained the brokerage.
Finally, Prabhudas Lilladher has retained an 'accumulate' rating on the stock with a target price of ₹473, indicating an upside of 11 percent on the back of a healthy tender pipeline of ₹1.1 lakh crore, expected revenue growth, profitability and better working capital management.
"KEC International's tender pipeline remains healthy at 1.1 lakh crore (domestic around 50 percent), of which orders worth nearly ₹30,000 crore have already been tendered out. Margins are expected to improve from H2FY23 and are likely to reach double digits by FY24," said Prabhudas Lilladher.
It remains positive on KEC in the long run given its strong OB, healthy execution momentum, strong domestic & international T&D outlook and strong growth visibility from non-T&D segments like Civil, Railways, Oil & Gas, etc.
Given the healthy tender pipeline and reviving margin profile, it expects KEC to report a revenue CAGR of 15 percent and PAT CAGR of 59 percent from FY22 to FY24E. "The stock is trading at a PE of 20.3x/11.9x FY23/24E. We maintain an accumulate rating on the stock with a target price of ₹473, valuing it at PE of 13x FY24E,” Prabhudas Lilladher said.
In the June quarter, the firm's net profit fell 35 percent to ₹46.14 crore on a consolidated basis, compared to ₹70.80 crore in the year-ago period. The company's revenue from operations in the first quarter of the current fiscal, however, rose 15 percent to ₹2,540 crore, compared to ₹2,206.76 crore in the same quarter last year.
"The margins have been impacted by the adverse raw material prices and the continued challenging environment in Brazil. With the new orders announced today, our order book along with the current L1 pipeline stands at over ₹26,000 crore," said Vimal Kejriwal, MD & CEO, KEC International post the earnings.
