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KEC International 4QFY2014 performance highlights and results update

May 5, 2014, Monday, 12:50 GMT | 08:50 EST | 17:20 IST | 19:50 SGT
Contributed by Angel Broking

For 4QFY2014, KEC International (KEC)’s top-line and bottom-line performance were below our expectations. The company reported a flat yoy growth in its top-line to Rs.2,176cr (below our estimate of Rs.2,301cr), primarily due to lower-than-estimated growth in the transmission and distribution business. However, the company's operating margin expanded by 282bp yoy to 7.0% as most of the low-margin legacy orders have already been executed. Consequently, the company posted a profit of Rs.34cr for the quarter compared to a loss of Rs.14cr in 4QFY2013 (but still lower than our estimate on account of higher tax outgo).

Margin pressure expected to ease further in FY2015: Although transmission segment margins continue to be good (between 9.2% to 9.5%), power systems, cables, and relatively new segments of railway and water are currently operating at low/negative margins which is exerting pressure on the company’s operating margin. However, most of the low margin legacy orders have already been executed, while a few of such remaining orders are in final stages and expected to achieve closure in the next 3 to 4 months. Hence, we expect overall margins to improve further in FY2015.

Robust order book: The order intake during the quarter grew by 16.3% yoy to Rs.1,982cr, aided by good ordering from international markets which now contribute almost 57.9% to the company’s total order inflow. The strong order accretion over the last few quarters has led to a robust order backlog of Rs.10,200cr (implying an order book coverage of 1.3x its trailing 4 quarter revenues).

Outlook and valuation: KEC has a geographically diversified business model which insulates it from slowdown in any particular region. Further, the company has also ventured in new businesses of railway and water, which have fared well with order inflows and revenues picking up at measurable pace. Considering the attractive valuations (stock trading at 7.6x FY2016E EPS) and improvement in margins, we recommend ACCUMULATE rating on the stock with a target price of Rs.85.