Analyst Research Report Snapshot

Title:

Spark Capital: KEC International 3QFY13 Results Review - Near term margin pressure exists, but long term growth remains intact; Maintain Buy

Price:

$46.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

31 Jan 2013

Pages:

5

Type:

AcrobatPDF

Companies referenced:

KECL.NS

Available for Immediate Download
Summary:

Near term margin pressure exists, but long term growth remains intact; Maintain Buy KECI on a consolidated basis reported revenue growth of 23.1% yoy to Rs. 18.0bn with an EBITDA margin of 5.8% (yoy decrease of 201bps) and a PAT of Rs. 293mn. Order book continued to remain strong at Rs. 101.5bn (1.2x FY14E book-to-bill) with a healthy order inflow of Rs. 23bn during the quarter. Revenue growth was ahead of expectation, but EBITDA margin was relatively weak due to execution of low margin entry strategy orders in the new segments – power systems, railways and cable – and also certain low margin projects in the TLT segment. The management aims at completing these orders soon and expects margins to improve going forward with transmission segment’s EBITDA margin stabilizing at ~9% and blended margins of new segments improving on the back of new orders with relatively better margins. Growth in SAE Towers, moderated to 6.2% yoy and EBITDA margin was also relatively weak at 8.8% during this quarter. But, the management expects execution pace in SAE to improve and margins to stabilize at ~10% over the long term While margins are expected to fall considerably to 6.3% in FY13E resulting in a muted EPS of Rs. 5.6, robust order inflow, strong execution and relatively better margins (7.5-8%) provide a positive outlook for FY14E. We assign a multiple of 8x on FY14E earnings, resulting in a TP of Rs. 77 (Rs. 84). We maintain our Buy rating. Highlights of the quarter’s performance and outlook Domestic execution keeps revenue growth robust – KECI’s revenue (consolidated) grew by 23.1% to Rs.18.0bn driven by strong execution in the domestic transmission business (18.7% growth yoy) and sharp revenue increase in the new segments (especially power systems segment). While pace of execution in international segment moderated during the quarter due to client side delays, it is expected to bounce back going forward. Considering an overall comfortable order book position of Rs.101.5bn (1.2x FY14E book-to-bill) and strong order inflow expected, we have increased our revenue estimates by 2.1% and 4.2% for FY13E and FY14E respectively resulting in revenue growth of 24% and 13% respectively Margins to improve in FY14E – Higher contribution from new segments (31% in 9MFY13 from 25% in FY12) and execution of low margin TLT orders has resulted in subdued margins (6.1%) in 9MFY13. But given the high contribution of better margin PGCIL order won over the past few quarters and execution of improved margin orders in new segments, we expect margins to improve to 7.6% in FY14E Order inflow pace to remain upbeat – Order inflow during the quarter was healthy at Rs. 23bn, with KECI securing sizeable orders (~Rs. 9.3bn) from PGCIL in 3QFY13.The management expects ordering from PGCIL to remain robust and expects order inflow to be upbeat going forward

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