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Kec International
1. 1QFY2011 Result Update | Capital Goods
August 4, 2010
KEC International BUY
CMP Rs488
Performance Highlights Target Price Rs648
Y/E March (Rs cr) 1QFY11 1QFY10 %chg (yoy) 4QFY10 %chg (qoq) Investment Period 12 Months
Net Sales 846 727 16.4 1,356 (37.6)
Stock Info
EBITDA 85 87 (2.2) 140 (39.7)
EBITDA (%) 10.0 11.9 (190bp) 10.3 (30bp) Sector Capital Goods
PAT 26 39 (32.6) 67 (61.0) Market Cap (Rs cr) 2,510
Source: Company, Angel Research Beta 0.5
52 Week High / Low 640/416
KECโs 1QFY2011 performance was significantly impacted by the inclusion of
erstwhile RPG Cables operations. Notably, the numbers are not directly Avg. Daily Volume 12,895
comparable on account of the merger of RPG cables with KEC during March Face Value (Rs) 10
2010. Post the merger, the company reported 16.4% yoy increase in revenues,
BSE Sensex 18,217
while EBDITA margins dipped to 10% and PAT dropped by 32.6% for 1QFY2011.
We maintain a Buy on the stock. Nifty 5,468
Merger hangover impacts profitability: Revenue growth of 16.4% yoy to Rs 846cr Reuters Code KECL.BO
(Rs727cr) during 1QFY2011 was in line with our expectations. It may be noted Bloomberg Code KECI@IN
that 1QFY2011 revenues also include Rs88cr from the erstwhile RPG Cables. The
company reported the 190bp dip in EBDITA margins due to of inclusion of the
low-margin cable business. Interest cost increased by 21.4% yoy to Rs26cr Shareholding Pattern (%)
(Rs22cr) for 1QFY2011, reflecting the takeover of debts related to RPG Cables.
Similar reasons may also be attributed to the increase in depreciation by 47.5% Promoters 41.7
yoy to ~Rs9cr (Rs6cr). Tax expenses also included Rs8.1cr relating to the prior MF / Banks / Indian Fls 41.3
period tax liabilities on the international projects. The cumulative impact of the FII / NRIs / OCBs 6.0
above led to PAT dropping by 32.6% yoy to Rs26cr (Rs39cr) for 1QFY2011.
Excluding the impact of the additional tax expense, PAT fell 12.5% yoy to Rs34cr. Indian Public / Others 11.0
Outlook and Valuation: The transmission EPC companies have been riding high
on back of the ongoing investments in the domestic power sector. As on date,
Indiaโs largest power transmission utility, PGCIL, has spent ~ 46% of its planned Abs. (%) 3m 1yr 3yr
capex of Rs55,000cr during the first three years of the Eleventh Plan. We expect Sensex 6.3 15.1 20.3
PGCIL to accelerate its capex schedule over the next two years, leading to higher
KEC (8.4) 2.4 (20.0)
order inflows for transmission EPC companies like KEC. Improving order visibility
from PGCIL and other state utilities is expected to help KEC boost its existing
Rs5,650cr order book. At the CMP, the stock trades at 11.6x and 9.8x FY2011E
and FY2012E EPS, respectively. We maintain a Buy on the stock, with a Target
Price of Rs648.
Key financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net Sales 3,427 3,877 4,563 5,223
% chg 21.8 13.1 17.7 14.5
Net Profit 116 171 216 256
% chg (32.5) 47.0 26.1 18.8
EBITDA (%) 8.8 9.9 10.0 10.0
EPS (Rs) 22.6 33.3 41.9 49.8
P/E (x) 21.8 14.8 11.6 9.8
P/BV (x) 4.5 3.6 2.9 2.3
RoE (%) 22.3 27.3 27.6 26.2
RoCE (%) 16.1 17.0 18.5 18.9
Hemang Thaker
EV/Sales (x) 1.0 0.9 0.8 0.7 022-40403800 Ext: 342
EV/EBITDA (x) 11.2 9.3 7.8 6.7 hemang.thaker@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report 1
2. KEC International | 1QFY2011 Result Update
Exhibit 1: 1QFY2011 Performance (Consolidated)
Y/E March (Rs cr) 1QFY2011 1QFY2010 yoy (%) 4QFY2010 qoq (%) FY2010 FY2009 yoy (%)
Net Sales 846 727 16.4 1,356 (37.6) 3,907 3,429 14.0
Raw Material 414 325 27.4 781 (47.0) 2,013 1,976 1.9
(% of Net Sales) 48.9 44.7 57.6 51.5 57.6
Erection & Sub contracting 209 222 (5.9) 284 (26.4) 958 575 66.6
(% of Net Sales) 24.7 30.5 20.9 24.5 16.8
Employee Cost 48 38 26.3 45 6.4 169 142 18.9
(% of Net Sales) 5.7 5.2 3.3 4.3 4.1
Other Expenses 90 55 63.8 106 (14.4) 371 341 8.7
(% of Net Sales) 10.7 7.6 7.8 9.5 10.0
Total Expenditure 761 640 18.9 1,216 (37.4) 3,511 3,034 15.7
EBITDA 85 87 (2.2) 140 (39.7) 396 395 0.4
EBITDA (%) 10.0 11.9 10.3 10.1 11.5
Interest 26 22 21.4 19 36.2 87 100 (13.5)
Depreciation 9 6 47.5 7 28.6 27 23 17.4
Other Income 0 0.0 0.6 1 1 66.7
Profit before Tax 49 59 (16.1) 114 (56.8) 284 272 4.3
(% of Net Sales) 5.8 8.1 8.4 7.3 7.9
Total Tax 23 20 16.2 47 (50.9) 100 94 6.4
(% of PBT) 46.8 33.8 41.1 35.2 34.5
Adjusted PAT 26 39 (32.6) 67 (61.0) 184 178 3.1
(% of Net Sales) 3.1 5.3 4.9 4.7 5.2
Extraordinary items - - (5) 6 (61) (109.8)
Reported PAT 26 39 (32.6) 72 (63.6) 190 117 62.3
Source: Company, Angel Research
Order backlog: The companyโs order intake for the quarter was ~Rs1,000cr.
Order backlog at the end of 1QFY2011 stood at Rs5,650cr equally split across the
reporting geographies of International and South Asia. Of the total order backlog,
transmission accounted for 76%, distribution & substation 18%, railways 4% and
cables 2%.
Exhibit 2: Order book (Rs cr)
Particulars International South Asia Total
Transmission 2,461 1,811 4,272
Distribution 316 699 1,015
Railway 30 217 247
Cable - 113 113
Telecom - 3 3
Total 2,807 2,843 5,650
Source: Company, Angel Research
Capex guidance: KEC intends to spend ~ Rs100cr on its tower business in the
current fiscal. Capex planned for the cable plant at Vadodara is ~Rs120cr over
the next two years. Management expects the Vadodara facility to commence
production from FY2012E generating ~Rs400cr in revenues with EBDITA margins
of ~7-8%
August 4, 2010 2
3. KEC International | 1QFY2011 Result Update
Investment Arguments
Huge opportunity for transmission EPC players: The government has envisaged
investment of Rs140,000cr in the transmission segment during the Eleventh plan,
an increase of over two times from the investments made in the Tenth Plan. The
scale gets even bigger for the Twelfth Plan, with planned investment of around
Rs240,000cr. As per our estimates, this had opened up a potential US $14-15bn
opportunity for the transmission EPC players during the Eleventh Plan period
alone. Besides, Power Grid Corporation of India (PGCIL), India's largest
transmission utility, having spent only ~46% of its planned capex of Rs 55,000cr
during the first three years of the Eleventh Plan, is all set to accelerate its capex
during the remaining two years, which in turn, would translate into higher order
inflows for the transmission EPC sector.
Overseas orders to improve: KEC has a Strong international presence across
geographies compared to its domestic peers who have generally restricted
themselves to local operations. Notably, the company has executed large number
of T&D projects in over forty countries. With its footprint spread across continents,
KEC is adequately hedged against slow-down in any particular region. On the
other hand, any delay or deferment in the release of domestic T&D orders would
adversely impact the revenue projections of many domestic EPC companies.
Amidst such a scenario, we believe that KEC would be the least impacted owing to
its high exposure to international orders.
Diversification into railways and telecom sectors a major positive: KEC has forayed
into the telecom and railway sectors. Although these divisions currently account for
small portion of the company's total revenues, future prospects of the segments are
very bright. KEC also plans to enter tracking, signaling and platform construction
works in the railway segment.
Outlook and Valuation: The transmission EPC companies have been riding high
on back of the ongoing investments in the domestic power sector. As on date,
Indiaโs largest power transmission utility, PGCIL, has spent ~ 46% of its planned
capex of Rs55,000cr during the first three years of the Eleventh Plan. We expect
PGCIL to accelerate its capex schedule over the next two years, leading to higher
order inflows for transmission EPC companies like KEC. Improving order visibility
from PGCIL and other state utilities is expected to help KEC boost its existing
Rs5,650cr order book. At the CMP, the stock trades at 11.6x and 9.8x FY2011E
and FY2012 EPS, respectively. We maintain a Buy on the stock, with a Target Price
of Rs648.
Exhibit 3: Actual v/s Angel estimates โ 1QFY2011
Particulars (Rs cr) Actual Estimates Var (%)
Revenues 846 844 0.2
Operating Profit 85 85 -
PAT 26 35 (25.7)
EPS (Rs) 5.1 6.9 (26.1)
Source: Company, Angel Research
August 4, 2010 3
4. KEC International | 1QFY2011 Result Update
Exhibit 4: Angel EPS Forecast v/s Consensus
Year Angel forecast (Rs) Bloomberg consensus (Rs) Var (%)
FY2011E 41.9 40.1 4.4
FY2012E 49.8 49.6 0.4
Source: Bloomberg, Angel Research
Exhibit 5: Key assumptions
Particulars FY2011E FY2012E
Order Inflow (Rs cr) 5,111 5,878
Order Inflow Growth (%) 20.0 15.0
Order Backlog (Rs cr) 5,995 6,589
Order Backlog Growth (%) 9.0 10.0
Order Book to Sales (%) 43.5 44.5
Source: Company, Angel Research
Exhibit 6: One-year forward P/E band
1,000
800
600
400
200
0
Jan-09
Jul-10
Apr-06
Aug-07
Dec-06
May-08
Oct-09
Share Price (Rs) 6x 10x 14x 18x
Source: Company, Angel Research
August 4, 2010 4
10. KEC International | 1QFY2011 Result Update
Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.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 Rs 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%)
August 4, 2010 10
