KEC International beats margin estimate on strong domestic performance
For the June quarter, KEC International Ltd’s domestic business staged robust growth in spite of the macroeconomic challenges.
Although revenue growth was a subdued 4% from a year back, that from domestic business, especially from power transmission, railways and solar businesses, did well. The share of international revenue therefore ebbed from 49% in the year-ago period to 43% in the quarter under consideration.
Likewise, domestic order inflows powered ahead, accounting for 94% of the total order inflows of Rs2,790 crore. Although it did not improve from the year-ago level, investors are optimistic on this front because the firm is the lowest bidder in almost Rs4,500 crore worth orders. Besides, the firm has been steadily bagging orders from two segments in the recent past—state electricity boards (SEB) and tariff-based competitive bidding (TBCB)—taking the overall order book to Rs13,532 crore at the end of the June quarter.
Meanwhile, it is also gaining traction in Brazilian markets, in the engineering, procurement and construction projects. That said, there is concern on the Middle-eastern region following the crude oil linked slowdown in the region. This has not deterred KEC’s management in forecasting a 10-15% growth in order inflows in FY2018. The robust order book that promises visibility for the next 18-24 months is the key reason for the stock doubling since January.
Further, another feather in its cap was the operating margin of 9.3% that was 80 basis points (bps) higher than the average estimate by Bloomberg of 10 analysts and 90bps higher from a year back. One basis point is one hundredth of a percentage point.
According to Emkay Global Financial Services Ltd, lower conversion costs lifted operating profit that grew by 18% year-on-year.
However, analysts are worried about high interest costs that mirror high receivables in the business and the consequent need for higher working capital. June quarter interest cost was 3.3% of sales, although lower than a year back. KEC’s investor presentation also highlights the reduction in debtor days when compared to a year back.
The management told Mint the transition to goods and services tax may see a slowdown in supply of material for a couple of months ahead, as it did in the last 10 days of June. Amid such challenges, the 109% jump in the June quarter’s net profit was impressive, although it included a 96% rise in other income too.
The stock’s current price of Rs299 discounts the estimated earnings per share for FY2019 about 17 times, reasonable given its order flow, earnings growth and operating performance stability.
But analysts would remain cautious to see if the macroeconomic challenges impact revenue and profit accretion in the second and third quarter of FY2018.