KEC International

Capital Goods-Electrical Equipment
KEC International
India Research
INITIATION REPORT
Bloomberg: KECI IN
Global Reach to Boost Prospects
Recommendation
KEC International has 5 decades of experience in turnkey construction of
transmission lines with strong international presence across multiple
geographies. KEC has the capability to execute transmission line projects up
to 1200kV. With strong execution capabilities coupled with huge investments
in power T&D sector domestically & internationally, we believe KEC is well
placed to capitalize on this opportunity.
Diversified business model with global reach: After the acquisition of SAE
towers in 2010, KEC has expanded its presence in the US, Brazil, Mexico
other than Middle East, Africa & Central Asia. International markets such as
the Middle East, Africa and the Americas offer strong long-term growth
opportunities. Strong growth on the back of PGCIL Capex, transmission
capacity additions by State Transmission Utilities and also tightening of prequalifying requirements by PGCIL, would enable for large players like KEC
to win orders.
Margin improvement ahead; legacy orders nearing completion: With stable
margins from transmission tower business coupled with improving margins
from new businesses will lead to growth in overall margins of the company.
KEC has reported contraction in margins on account of new businesses
which were bid with the entry level pricing strategy. We expect transmission
margins to be at ~8.5-9% and new orders at better margins, this should
improve profitability in FY15-16E.
New business vertical to boost growth going forward: KEC has gradually
ventured into power systems,cables,railways,and water businesses signaling
a large potential for the company in these verticals. The sales contribution
from new business verticals has been growing consistently, increasing from
16.2% in FY09 to 27.6% in FY13.
Outlook & Valuation
At CMP of Rs 84, KEC trades at 8.1xFY16E earnings, valuations appear to be
attractive given the high revenue visibility, strong order flows, sustained
earnings momentum and likely improvement in return ratios in next two
years. We expect the strong order backlog of Rs 102 bn coupled with
improving margins to drive 59% CAGR in KEC’s earnings in FY13-16E. We
initiate coverage on KEC with “BUY” recommendation with target price of
Rs.108 per share based on the multiple of 10.4x (20% discount to its mean P/E
multiple of 12.9x).
Key Financials
FY12
FY13
FY14
FY15E
FY16E
58,147
69,795
79,018
89,627
99,914
EBITDA
Net Income
EPS
4,713
2,102
8.2
3,814
651
2.5
4,932
849
3.3
6,128
1,786
7.0
7,501
2,666
10.4
EPS growth
(1.8)
(69.0)
30.3
110.5
49.2
P/E (x)
10.3
33.1
25.4
12.1
8.1
RoE %
20.5
5.8
7.3
13.3
16.4
RoCE %
16.3
10.7
12.4
13.9
15.7
P/BV (x)
1.9
1.8
1.7
1.4
1.2
Revenue
Source: Company, Karvy Institutional Research,Indian GAAP,Consolidated
BUY
Reuters: KECL.BO
CMP:
Rs84
Target Price:
Rs108
Upside (%)
28%
Stock Information
Market Cap. (Rs bn / US$ mn)
22/364
52-week High/Low (Rs)
86/23
3m ADV (Rs mn /US$ mn)
34/0.6
Beta
1.4
Sensex/ Nifty
22,994/6,859
Share outstanding (mn)
257
Stock Performance (%)
Absolute
1M
20.9
3M
62.3
12M
77.8
YTD
48.4
Rel. to Sensex
19.3
43.8
54.2
36.6
Performance
23,500
21,500
19,500
17,500
15,500
100
80
60
40
20
May-13
Jun-13
Jul-13
Sep-13
Oct-13
Nov-13
Jan-14
Feb-14
Mar-14
May-14
Institutional Equities
Y/E Mar (Rs mn)
May 09, 2014
Sensex (LHS)
Source: Bloomberg
Analysts Contact
Rupesh Sankhe
022 6184 4315
[email protected]
KEC Inter.
May 09, 2014
KEC International
Exhibit 1: Company Financial Snapshot
Company Background
Profit & loss
KEC International Limited is a flagship company of RPG
Enterprises. KEC’s strength is its presence in the areas of
Design, Manufacture, Supply and Construction of Turnkey
Projects of Power Transmission lines of voltages up to 800
kV and in the execution of Railway Electrification projects,
setting up Sub-stations and Power Distribution Networks,
Optical Fibre Cable (OPGW) installations, Turnkey Telecom
Infrastructure Services and maintenance of Power
Transmission Lines.
Y/E Mar (Rs mn)
FY14
FY15E
FY16E
Net sales
79,018
89,627
99,914
EBIDTA
4,932
6,128
7,501
705
959
980
Interest Expense
2,633
2,504
2,553
PBT
1,732
2,881
4,166
Tax
883
1,515
1,500
Adj. PAT
849
1,786
2,666
EPS (Rs)
3.3
7.0
10.4
DPS (Rs)
0.4
1.6
1.2
EBIDTA Margin %
6.2
6.8
7.5
Adj Net Margin %
1.1
2.0
2.7
P/E (X)
25.4
12.1
8.1
P/BV (x)
1.7
1.4
1.2
Depreciation
Valuation Multiples
Exhibit 2: Balance Sheet
Y/E Mar (Rs mn)
The Company has powered infrastructure development in
48 countries across South Asia, The Middle East, Africa,
Central Asia, Americas and Southeast Asia. KEC has three
manufacturing plants at Jaipur, Nagpur and Jabalpur in
India. In these three plants, the Company can manufacture
1,10,000 tons of towers annually, Also KEC has two of Asia's
most sophisticated Tower Testing stations, capable of testing
towers of up to 1000 kV Transmission Line.
Exhibit 3: Cash Flow
FY14
FY15E
FY16E
Y/E Mar (Rs mn)
FY14E
FY15E
FY16E
60,196
63,911
68,261
Profit before taxes
1,732
2,881
4,166
Net fixed assets
9,921
11,117
11,670
Depreciation
705
959
980
Net intangible assets
3,778
3,778
3,778
Interest expense
2,633
2,504
2,553
Deferred tax asset, net
(514)
(514)
(514)
Other adjustments
(983)
-
-
Total assets
73,382
78,292
83,195
Change in working capital
(3,795)
2,575
(3,472)
Current liabilities
42,021
45,386
46,944
Direct taxes paid
(883)
(1,515)
(1,500)
1,251
1,301
1,351
Cashflow from operations
(591)
7,404
2,727
Long-term debt
18,195
16,581
17,485
Cashflow from investing
(342)
(54)
(1,533)
Shareholder's equity
11,915
15,024
17,415
Proceeds from borrowings
3,535
(1,614)
904
Total liabilities & equity
73,382
78,292
83,195
Cashflow from financing
816
(4,475)
(1,924)
7.3
13.3
16.4
Net cash generated during year
(116)
2,875
(730)
12.4
13.9
15.7
Cash at beginning of year
1,556
1,440
4,315
Cash at end of year
1,440
4,315
3,585
Current assets
Provisions
RoE %
RoCE %
Exhibit 4: Shareholding pattern (%) ‘Mar14
Exhibit 5: Segment Break up FY14
Railways
3.9
Cables
7.9
Others
14.8
Promoter
49.4
DII
33.2
Water
1.8
Power
systems
14
Transmiss
ion
70.2
FII
2.7
Source: Company
Telecom
2.2
Source: Company
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May 09, 2014
KEC International
Outlook & Valuation
Over the last 8 years, KEC has traded in the range of 6x-30x its 1-year rolling
forward PE multiple. We are assigning the multiple of 10.3x (20% discount to its
mean P/E multiple of 12.9x), due to robust order book, entry into high growth
areas will result in robust order inflow.
Our target price of Rs 108 is based on 10.4x FY16E earnings (6-30x range in the
past). At CMP, stock is trading at 8.1x FY16E earnings with an EPS of Rs. 10.4. We
initiate coverage on KEC International with a BUY rating and a target price of Rs
108, which implies around 28% upside from current levels.
We Prefer P/E Multiple as Valuation Tool: We value the capital goods companies
on P/E multiple in current scenario marked with weak order execution. The DCF
model was used in past to value these companies based on secular growth story
when PE multiples were high to justify the fundamentals. However, due to cyclical
nature of industry, we don’t find DCF appropriate.
Exhibit 6: 1 Year Forward P/E Band
200
(Rs)
Mean 13.9
150
17x
100
12x
7x
50
Feb-14
Nov-13
Aug-13
Feb-13
May-13
Nov-12
Aug-12
May-12
Feb-12
Nov-11
Aug-11
May-11
Feb-11
Nov-10
Aug-10
May-10
Feb-10
Nov-09
Aug-09
0
Exhibit 7: 1 Year Forward P/B Band
(Rs)
300
Mean 1.6
250
3x
200
150
2x
100
1x
50
Apr-14
Dec-13
Aug-13
Apr-13
Dec-12
Aug-12
Apr-12
Dec-11
Aug-11
Apr-11
Dec-10
Aug-10
Apr-10
Dec-09
Aug-09
0
Source: Karvy Institutional Research, Company
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May 09, 2014
KEC International
Rationale for “BUY” Recommendation
Our investment thesis and recommendation is based on the
following premises:
1. Diversified business model with global reach
2. Margin improvements ahead; legacy orders nearing completion
3. New initiatives – to supplement growth
4. Order inflow traction – remains intact
1. Diversified Business Model with Global Reach
KEC International provides EPC services for power transmission, substations and
distribution in the domestic and international markets. For YTD FY14, the
company earned 55% of its revenues from the international market and the rest
from domestic markets.
During FY08-11, strong growth on the back of PGCIL Capex, transmission capacity
additions by state transmission utilities, lowering of pre-qualifying requirements
by PGCIL, made it easier for small players to win orders which led to market share
erosion for KECI from 16% in FY09 to 8% in FY12 in PGCIL transmission tower
orders. In FY14, KECI has regained its market share (26%) partially by winning
765kV transmission line orders due to its competitive strength.
Higher Capex in Domestic T&D Biz to Benefit KEC: Strong presence in domestic
power business would boost KEC’s profitability going forward. Vendor restriction
by PGCIL could help KEC to garner further market share. Higher capitalization by
PGCIL in 12th FYP may improve visibility of order inflows for the company.
Strong International Presence
After the acquisition of SAE towers in 2010, KECI has expanded its presence in the
US, Brazil and Mexico. The Company already exists in Middle East, Africa &
Central Asia. International markets such as the Middle East, Africa and the
Americas offer strong long-term growth opportunities.
We expect the international order intake to pickup from the Middle East and also
expect the order intake to pick up from the American markets due to need to
replace ageing transmission networks.
Exhibit 8: Region wise Order Break up
Region-wise breakup
(Rs bn)
South Asia
43.9
India, Nepal, Sri Lanka and Banladesh
Americas
10.2
US, Mexico, Canada and Brazil
MENA
11.9
Oman, Saudi Arabia, UAE and Tunisia
Sub-Saharan Africa and Central Asia
5.8
Uganda, Kenya, Nigeria and Turkmenistan
Southeast Asia and Others
2.9
The Philippines, Malaysia and Indonesia
Total
74.8
Source: Karvy Institutional Research, Company
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May 09, 2014
KEC International
Exhibit 9: Power T & D Business Outlook (International)
Region
Key Countries
Key Demand Drivers
Africa
South Africa, Nigeria, Ethiopia, Kenya
SAARC
Bangladesh, Sri-Lanka, Nepal, Bhutan
Middle East
Saudi, UAE, Oman, Kuwait
North America
United States, Canada
South America
Brazil
Central Asia
Kazakhstan, Ukraine and Georgia
Various interconnections are being planned to improve power evacuation
infrastructure
India’s cross border electricity transmission interconnection with Bangladesh,
Nepal, Bhutan and Sri-Lanka is being expanded
Upcoming large power generating plants, Development of intercountry/regional interconnection lines
The American Reinvestment and Recovery Act 2009 –facilitating $11 bn
investment in T&D
Next 10 years plan –61 GW generation and 42,553 km stransmission
Several initiatives, supported and funded by multilateral institutions, are being
undertaken to expand and upgrade power infrastructure
Source: Karvy Institutional Research, Company
Exhibit 10: Investment needs in Power T & D 2010-20 (US$ Bn)
Region / Country
Generation
Transmission
Distribution
North America
585
169
363
Europe
694
110
332
Pacific
211
91
156
East Europe/Eurasia
252
43
144
Asia
1,526
472
975
The Middle East
129
29
59
Africa
109
28
57
Latin America
149
45
93
3,655
987
2,179
World Total
Source: Karvy Institutional Research, Company
Globally,Total
investment
needs
for
transmission and distribution from 2010 to
2020 is envisaged at US$ 1.0 Trillion and
US$ 2.2 Trillion, respectively
Power generation capacity investments should correspond to investments in
transmission and distribution (T&D) infrastructure. Therefore, the global power
T&D sector has strong growth prospects. Total investment needs for T&D from
2010 to 2020 is envisaged at US$ 1.0 trillion and US$ 2.2 trillion, respectively. Apart
from generation-based T&D, old existing network replacements, grid
strengthening and interconnections are also likely to drive demand. Many regions
have planned to interconnect their grids.
Global power shortage and increasing demand are driving substantial investments
in power generation. The global installed power generation capacity is predicted
to increase from about 4,900 GW in 2010 to 6,600 GW in 2020 [Source: International
Energy Agency (IEA)]. The estimated total investment required in the power
sector is US$ 6.8 trillion, out of which US$ 3.7 trillion is needed for power
generation capacity addition. Growing pressure to reduce carbon emission and
increase generation through renewable energy sources are also expected to drive
generation investment.
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May 09, 2014
KEC International
2. Margin Improvements ahead; Legacy Orders Nearing
Completion
KEC’s margins will improve going forward on
the back of execution of high-margin contracts
as the company executes legacy projects worth
~INR1.5bn, which are nearing completion.
KEC has diversified into other verticals like Water Management, Cables and
Railways. The company's profitability has been significantly impacted over the last
few years in order to acquire the necessary pre qualifications that KEC bids for
projects at low margins. KEC has executed large quantum of loss making orders in
the new business verticals.
The new businesses of Railways and Water are in a nascent stage leading to higher
developmental costs in turn leading to negative margins. In Power Systems,
profits were also impacted due to poor margins in the sector. All these factors
affected the company’s margins.
Though overall EBITDA margin in FY14 contracted to 6.2% (from 9.9% in FY12)
the margin of transmission business is still at 8.5%. The contraction in overall
margin was impacted by new business, which are very poor affecting overall
EBITDA margin. However, as the company executes legacy projects worth ~INR
1.5bn which are nearing completion, we expect margins improvements on
execution of healthy orders procured in FY13.
We expect transmission margins to be at 8.5-9% and new orders coming in at
better margins to improve profitability in FY15-16E.
Exhibit 11: EBITDA Margin (%)
12.0
9.9
10.0
8.0
6.6
6.2
FY13
FY14
6.8
7.5
6.0
4.0
2.0
FY12
FY15E
FY16E
EBITDA Margin (%)
Source: Karvy Institutional Research, Company
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May 09, 2014
KEC International
3. New Business Vertical to Supplement Growth Going
Forward…
The sales contribution from new business
verticals has been growing consistently increasing from 16.2% in FY 09 to 27.6% in
FY 13.
KEC has ventured into power systems, cables, railways, and water businesses
signaling a large potential for the company in these verticals. It acquired US-based
SAE Towers Holdings, a leading manufacturer of steel lattice transmission towers
in Americas in Sep‘10. This helped KEC foray into large markets of North and
South America, Canada, Mexico, Brazil, and other neighbouring countries.
KEC forayed into the international railway market by securing a railway
electrification order from Malaysia worth INR 300m.
It diversified into the water business in FY11 by winning its first order of INR
310m for construction of a canal in Madhya Pradesh.
Recently Company has bagged new orders which are at competitive margin and
do not have losses unlike earlier, where the company took orders at low margins
or at break even margins as entry strategy but it eventually ran into losses due to
cost overrun.
Exhibit 12: Sales contribution from new business verticals* (Rs bn)
25
19.28
20
13.59
15
10.63
10
5.56
7.24
5
0
FY09
FY10
FY11
FY12
FY13
Source: Karvy Institutional Research, Company, * Power Systems, Cables, Railways, Water
SAE TOWERS (100% Subsidiary)
KEC acquired 100% stake in SAE Towers Holdings LLC (SAE), USA in September
2010 at an enterprise value of USD95mn. SAE Towers is a leading manufacturer of
lattice transmission towers in the Americas. SAE Towers is a market leader in the
three key geographies – Brazil, US and Mexico – with a 40% market share in each
of these markets. SAE Towers has a manufacturing capacity of 100,000MT with
35,000MT in Mexico and 65,000MT in Brazil. It has a strong foothold in the
American markets, comprising of the United States, Canada, Mexico, Brazil and
other neighbouring countries.
SAE towers will provide access to the large and fast-growing markets of the US,
Brazil and Mexico. As per industry estimates, USD 11bn worth of investments are
expected in the US market for upgrading the Transmission & Distribution
infrastructure and to provide gird connectivity to the various renewable energy
projects over the next few years. In Brazil, investments worth USD 10.7bn are
expected over the next five years on the Transmission & Distribution
infrastructure. Spend on T&D lines in the aforementioned countries is rapidly
increasing and is likely to support sales growth going forward.
7
May 09, 2014
KEC International
The Company has continued to perform well since its acquisition by KEC in
September 2010 and contributes around 15% to the Company’s overall sales.
Key Highlights for the Company’s Various Businesses:
Power Transmission (70.2% of Sales) – Power Transmission continues to
be the Company’s largest business division with operations spanning across most
regions of the world. The division undertakes turnkey Engineering, Procurement
and Construction (EPC) projects involving design, manufacture, test, supply and
erection of transmission lines upto 1,200 kV. It has an in-house design and
engineering team, tower manufacturing and testing facilities spread in India and
the Americas.
In FY13, the Company completed many projects in India, Egypt, Georgia and
Nigeria which were successfully executed despite diverse and challenging terrains
and difficult climatic conditions.
Power systems (14% of Sales)– Power Systems division offers complete
turnkey solutions, from concept to commissioning, for air-insulated and gasinsulated substations and distribution lines. This business has expanded its
international presence by securing orders in Kenya, Uganda, The Philippines and
Nepal. The Company had earlier secured a large project in Kazakhstan and
achieved significant progress during the year. Further, it also secured first 765 kV
gas-insulated substation project in India.
Cables (7.9% of Sales)– The Company has commenced commercial
production of High Tension (upto 33 kV) and Extra High Voltage (upto 220 kV)
power cables at its Greenfield manufacturing facility in Vadodara, Gujarat. It is a
world class manufacturing facility with state-of-the-art equipments matching
global standards. Consequent upon the commencement of the new plant,
production at the Thane unit has been scaled down. The complete range of
products manufactured at Thane plant is now being manufactured at the
Vadodara plant.
Telecom (2.2% of Sales) – Installation of optical fiber networks and telecom
towers drive the Company’s telecom business. It receives majority of its business
from India. Telecom sector in the country continues to witness lower demand for
new telecom towers. However in FY13, the division secured projects for
establishing telecom cables networks in India.
Railways (3.9% of Sales) – Presently, the Company’s business comes mainly
from conventional railway projects. The Company is an integrated player that
undertakes projects related to civil and track works, electrification and signalling
works.
The Company marked its entry in Turkmenistan by securing an order worth Rs
1920 mn. This was the largest order ever in this business. Besides, it also secured
Rs 1620 mn order in India. Presently, two dedicated freight corridors are being
developed in India. The Company is pre-qualified in various portions of these
projects and is further looking to contribute in nation building by actively
participating in this opportunity.
Water (1.8% of Sales)– The Company focuses on opportunities in water
resource management and water and wastewater treatment areas. The division
secured its first sewage treatment project worth Rs 1940 mn in FY13. It is already
executing various projects related to canal construction.
8
May 09, 2014
KEC International
4. Order Inflow Traction – Remains Intact
KEC derives >75% of its standalone revenues from transmission projects and the
rest from small presence in pipeline infrastructure and biomass energy segments.
In domestic markets, KEC has been a key beneficiary of healthy order flows from
PGCIL.
Our View: With current order book in hand
and favorably placed bids, we estimate a decent
top-line growth in FY15-16E while improving
core margins.
The order book currently stands at Rs 102bn out of which 58.6% of revenues comes
from international business and remaining 41.4% of revenue comes from domestic
market.
KEC International has order book which is 1.3x of FY14 revenue. KEC’s order book
is mainly driven by Power Transmission business, accounting for 75% of total
order book which grew by 15% CAGR over 2009‐14.
We expect the Company to report robust order inflow in FY15-16E being the last
year of 12th plan, on the back of increased capex driven domestic orders from
PGCIL and other state utilities.
Exhibit 13: Segment wise Order Break up (%)
Water
5.6
Railways
4.4
Cables
2.4
SAE
8.4
TransmissionKEC
79.2
Source: Karvy Institutional Research, Company
Exhibit 14: Geography-wise (%)-Order Book
Americas
8.8
South Asia
(Excl India)
10.0
South East
Asia
4.0
India
44.5
Africa &
Central Asia
12.8
MENA
19.9
Source: Karvy Institutional Research, Company
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May 09, 2014
KEC International
Book-to-Bill / EV-Order Book: The market tends to compare Book-to-Bill ratio as
benchmark to measure a company’s short-term growth. A higher Book-to-Bill ratio
indicates high growth in the near-term and vice versa. In terms of Book-to-Bill
ratio, KEC seems to be better placed. Though we believe that this argument can be
used for a company vs. its own history, it can’t be used to compare companies
operating in different industries / business segments within the same industry.On
valuation perspectives KEC is trading at lower P/E multiple with higher earnings
visibility and return ratios as compared to its peers.
Exhibit 15: Book / Bill Ratio
6.0
5.0
4.0
3.0
2.0
1.0
FY16E
FY15E
FY14E
FY13
FY12
FY11
FY10
FY09
FY08
FY07
FY06
FY05
FY03
FY04
-
BHEL
ABB
BGR Energy Sys.
Crompton Graeves
Kalpataru Power
KEC
Source: Karvy Institutional Research, Company
Exhibit 16: P/E vs RoE
25
CG
FY16E P/E (x)
20
BHEL
15
10
BGR
KEC
KPL
5
0
5
10
FY16E RoE (%)
15
20
25
Source: Karvy Institutional Research, Company
10
May 09, 2014
KEC International
Business Assumption
Exhibit 17: Order Inflow/ Sales Assumption
(Rs mn)
FY12
FY13
FY14
FY15E
FY16E
Opening orderBook
78,000
85,720
94,700
104,182
112,735
Order Inflow
66,897
80,167
88,504
100,009
115,011
YoY growth (%)
-23%
19%
10%
13%
15%
Closing Order Book.
85,720
94,700
104,182
112,735
125,793
Execution ratio (%)
75.9%
83.0%
83.4%
87.8%
90.4%
Transmission
-
-
81,743
93,187
107,063
Power systems
-
-
8,783
7,790
12,429
Cables
-
-
1,129
1,849
2,187
Railways
-
-
4,824
5,777
6,836
Telecom+Water
-
-
6,158
6,932
8,203
Order book
-
-
102,638
115,535
136,718
Transmission
-
-
55,529
64,577
72,034
Power systems
-
-
5,644
6,208
6,829
Cables
-
-
6,310
7,572
8,329
Railways
-
-
1,690
1,944
2,254
Telecom+Water
-
-
1,310
1,572
1,965
SAE
-
-
8,540
9,583
10,542
Order book break up
Sales Break up
Source: Karvy Institutional Research, Company
Key Downside Risks




Slower-than-expected pick-up in international markets

Forex exchange variation risk, as KEC has strong presence overseas.
Rising competitive intensity in each of its businesses
Continued weakness on margin front especially in T&D segment
Major slowdown in T&D spending in key markets like India, Middle east &
Europe
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May 09, 2014
KEC International
Financial Overview
A. Net Sales growth to be maintain from FY14-16E
We expect KEC’s standalone revenue to grow 13.4% in FY15E & 11.5% in FY16E
driven by strong growth in revenue due to better execution of both domestic and
international orders.
Exhibit 18: Net Sales GrowthTrend (YoY)
120
35.0
(Rs. bn)
31.5
100
30.0
25.0
80
20.0
18.8
60
15.0
40
13.0
13.4
10.0
11.5
20
5.0
0
0.0
FY12
FY13
FY14
FY15
Revenues (LHS)
FY16
Growth %
Source: Company, Karvy Institutional Research
B. EBITDA Margins to improve
With execution of lower margin orders getting over, execution of higher and better
margin orders will come up in FY15. We expect KEC’s EBITDA margins to
improve from 6.8% in FY14 to 7.5% in FY16E.
Exhibit 19: EBITDA Margins Improvment
8.0
7.0
6.0
12.0
(Rs. bn)
10.0
9.9
6.6
5.0
6.8
6.2
7.5
4.0
8.0
6.0
3.0
4.0
2.0
2.0
1.0
0.0
0.0
FY12
FY13
EBITDA (LHS)
FY14
FY15
FY16
EBITDA Margins (%)
Source: Company, Karvy Institutional Research
12
May 09, 2014
KEC International
C. Net profits to increase by 59% CAGR FY13-16
We believe that KEC’s earnings would increase by 59% in FY13-16E due to
improvement in margins on account of better executions.
Exhibit 20: Exponential growth in Net Profit
3.0
4.0
(Rs. bn)
3.5
2.5
3.0
2.0
2.5
1.5
2.0
1.5
1.0
1.0
0.5
0.5
0.0
0.0
FY12
FY13
FY14
FY15
Net Profit (LHS)
FY16
NPM (%)
Source: Karvy Institutional Research
D. RoE to Increase from 5.8% in FY13 to 16.4% in FY16E
We expect improvement in KEC’s RoE from its low of 5.8% in FY13 to ~16.4% by
FY16E mainly on account of improvement in margins and better executions.
Exhibit 21: RoE/RoCE to Improve (%)
25.0
20.0
20.5
10.0
16.4
13.9
15.0
16.3
12.4
10.7
15.7
7.3
5.8
5.0
13.3
0.0
FY12
FY13
FY14
RoE
FY15
FY16
RoCE
Source: Karvy Institutional Research
13
May 09, 2014
KEC International
Financials
Exhibit 22: Income Statement
YE March (Rs mn)
FY12
FY13
FY14
FY15E
FY16E
58,147
69,795
79,018
89,627
99,914
30.0
20.0
13.2
13.4
11.5
4,713
3,814
4,932
6,128
7,501
Growth (%)
1.9
(19.1)
29.3
24.3
22.4
Depreciation & amortisation
479
561
705
959
980
4,234
3,253
4,227
5,169
6,521
0.4
(23.2)
29.9
22.3
26.2
1,597
1,944
2,633
2,504
2,553
616
160
138
216
197
EBT
3,252
1,469
1,732
2,881
4,166
Income taxes
1,150
818
883
1,515
1,500
Revenues
Growth (%)
EBITDA
EBIT
Growth (%)
Interest
Other income
Extra-ordinary items
(10)
(1)
(181)
2,100
-
Reported net income
2,093
650
668
3,466
2,666
(10)
(1)
(181)
1,680
-
Adjustments
Adj. net income
Growth (%)
2,102
651
849
1,786
2,666
(1.8)
(69.0)
30.3
110.5
49.2
8.2
2.5
3.3
7.0
10.4
(1.8)
(69.0)
30.3
110.5
49.2
FY13
FY14
FY15E
FY16E
Adj. EPS (Rs)
Growth (%)
Source: Company, Karvy Institutional Research
Exhibit 23: Balance Sheet
YE March, (Rs mn)
Inventories
FY12
4,401
3,960
5,052
5,487
5,798
25,063
28,870
38,078
35,605
39,692
Loans & advances
5,101
6,618
7,106
9,859
10,491
Other current assets
6,487
7,836
8,520
8,645
8,695
Sundry debtors
Cash & cash equivalents
2,029
1,556
1,440
4,315
3,585
43,081
48,840
60,196
63,911
68,261
Net fixed assets
7,548
8,500
9,921
11,117
11,670
Net intangible assets
4,880
5,007
3,778
3,778
3,778
Deferred tax asset, net
(513)
(621)
(514)
(514)
(514)
Total assets
54,995
61,726
73,382
78,292
83,195
Current liabilities
31,707
34,709
42,021
45,386
46,944
Current assets
Provisions
972
885
1,251
1,301
1,351
Long-term debt
11,237
14,660
18,195
16,581
17,485
Shareholder's equity
11,079
11,472
11,915
15,024
17,415
Total liabilities & equity
54,995
61,726
73,382
78,292
83,195
Source: Karvy Institutional Research, Company
14
May 09, 2014
KEC International
Exhibit 24: Cashflow Statement
FYE March, Rs mn
FY12
FY13
FY14E
FY15E
FY16E
PBT
3,252
1,469
1,732
2,881
4,166
479
561
705
959
980
1,597
1,944
2,633
2,504
2,553
Depreciation
Interest expense
Other adjustments
(819)
(597)
(983)
-
-
Change in debtors
(3,347)
(3,808)
(9,208)
2,473
(4,087)
Change in inventories
(1,042)
441
(1,092)
(434)
(311)
Change in loans & advances
(1,005)
(1,518)
(488)
(2,753)
(632)
Change in other current assets
Change in current liabilities
Change in provisions
Change in working capital
Direct taxes paid
Cashflow from Operations
Purchase of fixed assets
Sale of investments
(55)
(1,349)
(684)
(125)
(50)
7,770
3,002
7,312
3,365
1,558
628
(87)
366
49
50
2,949
(3,317)
(3,795)
2,575
(3,472)
(1,150)
(818)
(883)
(1,515)
(1,500)
6,309
(758)
(591)
7,404
2,727
(1,291)
(1,110)
(161)
(2,154)
(1,533)
-
-
(181)
2,100
-
(1,291)
(1,110)
(342)
(54)
(1,533)
0
0
0
0
0
Proceeds from borrowings
(2,352)
3,422
3,535
(1,614)
904
Interest paid
(1,597)
(1,944)
(2,633)
(2,504)
(2,553)
(578)
(84)
(86)
(357)
(275)
(4,528)
1,395
816
(4,475)
(1,924)
490
(473)
(116)
2,875
(730)
Cash at beginning
1,540
2,029
1,556
1,440
4,315
Cash at end of year
2,029
1,556
1,440
4,315
3,585
Cashflow from Investing
Issue of equity
Dividend paid, including taxes
Cashflow from Financing
Net cash generated
Source: Company, Karvy Institutional Research
Exhibit 25: Ratios
YE March
FY12
FY13
FY14
FY15E
FY16E
EBITDA margin
8.1
5.5
6.2
6.8
7.5
EBIT margin (%)
7.3
4.7
5.3
5.8
6.5
Net profit margin
3.6
0.9
1.1
2.0
2.7
ROE (%)
20.5
5.8
7.3
13.3
16.4
ROCE (%)
16.3
10.7
12.4
13.9
15.7
Receivables (days)
147
141
155
150
138
Inventory (days)
45
40
40
40
39
Payables (days)
215
210
249
255
239
EV/Sales (x)
0.6
0.5
0.4
0.4
0.3
EV/EBITDA (x)
P/E (x)
P/BV (x)
7.0
8.7
6.7
5.4
4.4
10.3
33.1
25.4
12.1
8.1
1.9
1.8
1.7
1.4
1.2
Source: Karvy Institutional Research, Company
15
Institutional Equities Team Rahul Sharma Head – Institutional Equities / Research / Pharma +91‐22 61844310 [email protected] Gurdarshan Singh Kharbanda Head ‐ Sales‐Trading +91‐22 61844368/69 [email protected] INSTITUTIONAL RESEARCH Analysts Industry / Sector Desk Phone Email ID Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected] Maruti Kadam Research Associate +91‐22 61844322 [email protected] Mitul Shah Automobiles/Auto Ancillary +91‐22 61844312 [email protected] Parikshit Kandpal Infra / Real Estate / Strategy/Consumer +91‐22 61844311 [email protected] Rahul Singh Textile/MidCap +91‐40‐44857911 [email protected] Rajesh Kumar Ravi Cement/ Logistics/ Paints +91‐22 61844313 [email protected] Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected] Varun Chakri Research Associate +91 22 61844326
[email protected]
Vinesh Vala Research Associate +91 22 61844325 [email protected] INSTITUTIONAL SALES Celine Dsouza Sales +91 22 61844341 [email protected] Edelbert Dcosta Sales +91 22 61844344 [email protected] INSTITUTIONAL SALES TRADING & DEALING Bhavesh Gandhi Institutional Sales/Trading +91‐22 61844361 [email protected] Prashant Oza Institutional Sales/Trading +91‐22 61844370 /71 [email protected] Pratik Sanghvi Institutional Dealing +91‐22 61844366 /67 [email protected] Stock Ratings
Buy
Hold
Sell
Absolute Returns
> 15%
5‐15%
< 5%
:
:
:
For further enquiries please contact: [email protected] Tel: +91‐22‐6184 4300 Disclosures Appendix Analyst certification The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report. Disclaimer The information and views presented in this report are prepared by Karvy Stock Broking Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Stock Broking nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies are required to disclose their individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Stock Broking Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures nor other derivatives related to such securities. Karvy Stock Broking Limited Institutional Equities Office No. 702, 7th Floor, Hallmark Business Plaza, Opp.‐Gurunanak Hospital, Mumbai 400 051 Regd Off : 46, Road No 4, Street No 1, Banjara Hills, Hyderabad – 500 034. Karvy Stock Broking Research is also available on: Bloomberg ‐ KRVY <GO>, Thomson Publisher & Reuters.