Buy KEC International, target price Rs 267: Yes Securities

Yes Securities has given a buy rating to KEC International with a target price of Rs 267 based on 12 times FY22 EPS.

KECI reported in-line results as sales/EBITDA de-grew 4 per cent/7 per cent yoy while adjusted PAT remained flat year on year. sales were robust in SAE Tower (+39 per cent yoy) & Railway (+36 per cent year on year) divisions while domestic T&D execution dropped by 17 per cent year on year as KECI lost revenues of Rs 5-6 billion due to Covid-19 disruptions. Order books (including L1 of ~Rs 40 billion) stood at Rs 240 billion (+1 per cent year on year). Order inflow was Rs 27.6 billion in the fourth quarter of FY20 (+8 per cent year on year).

Investment Rationale

Though the management has refrained from giving any guidance, the brokerage is estimating ~8 per cent sales decline with ~100 bps margin reduction in FY21 owing to short term headwinds like i) domestic lockdown, ii) unavailability of workforce, iii) supply disruptions and iv) increased costs & negative operating leverage.

The brokerage expects a strong recovery in FY22 earnings (+35 per cent growth year on year) led by diversified and healthy order backlog, ability to bag orders in tough times & proven execution track record.

Valuations are attractive as KECI is trading at 9 times FY22 EPS, nearing bottom cycle multiple vs long term average 1-year forward P/E of 14 times.

Risk to the call : Delay in order inflow/execution due to COVID-19 disruptions Deterioration in NWC to increase leverage.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 3671.00 crore, up 19.46 per cent from last quarter sales of Rs 3073.11 crore and down -4.43 per cent from last year's same quarter sales of Rs 3841.17 crore. The company reported net profit after tax of Rs 192.88 crore in the latest quarter.


Promoter/FII Holdings

Promoters held 51.66 per cent stake in the company as of March 31, 2020, while FIIs held 8.71 per cent, DIIs 27.36 per cent and public and others 12.18 per cent.