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Spark Capital: KEC International 4QFY13 Results Review - New business loss dampen earnings, margins to improve gradually; Maintain Buy




Spark Capital Advisors(India) Private Limited


09 May 2013





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New business loss dampen earnings, margins to improve gradually; Maintain Buy KECI on a consolidated basis reported revenue growth of 3.9% yoy to Rs. 21.5bn with an EBITDA margin of 4.1% (yoy decrease of 406bps) and a loss of Rs. 138mn. Order book remained comfortable at Rs. 94.7bn (1.1x FY15E book-to-bill) inspite of a relatively muted order inflow of Rs. 17bn during the quarter. While execution in the domestic TLT segment was healthy at 25.4% yoy growth, muted pace of execution in the international division and power systems segment resulted in subdued overall revenue growth of 3.9% yoy. Also, cost overruns during project completion in the new segments (water, railways and cables), MTM losses (Rs. 120mn) and cost related to Thane cable manufacturing plant closure (Rs. 40mn) resulted in subdued EBITDA margin (~200 bps impact). The management aims to complete the low margin orders (from new segments) soon and is confident of maintaining margins in the transmission line segment at ~8%. While order inflow from domestic markets are expected to remain flat primarily on the back of expectation of weak ordering by PGCIL, we expect KECI’s increased focus in international markets to lead to ~10% growth in overseas order inflow over the next two years and sustain a robust order book. While near term execution and margin are a concern, strong order book position, robust execution track record and improved margin outlook (7.0-7.5%) provide a positive outlook over the next two years. We assign a multiple of 7x on FY15E earnings, resulting in a TP of Rs. 67. We maintain our Buy rating. Highlights of the quarter’s performance and outlook Domestic execution remains strong – After registering >20% revenue growth over past 7-8 quarters, KECI’s revenue (consolidated) grew by a muted 3.9% to Rs.21.5bn with strong execution in the domestic transmission business (25.4% growth yoy) compensating for the de-growth international segments. The management maintains that there were no major execution delays faced in the transmission biz. Considering an overall comfortable order book position of Rs.97.4bn & healthy order inflow expected, we expect KECI to grow by 11-12% yoy over the next two years Margins to recover going forward – While EBITDA margin has been muted due to cost over runs in the new segment, weak margins in SAE Towers (6.8% in 4Q) and costs incurred due to shifting of cable facility (from Thane to Vadodra), we expect tapering of losses in new segment, stable margins in domestic transmission segments and improved execution in international segment to gradually improve margins going forward International markets to sustain order inflow – While order inflow growth in the domestic markets is expected to be flat due to muted/flat PGCIL ordering going ahead, KECI’s increased international focus is expected to sustain overall order inflow to grow 4-7% yoy over a high base

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