Capital goods maker and RPG Group company KEC International Ltd announced last week that it won several orders together worth Rs801 crore in the transmission (domestic and international) and cables segments.
That’s good news for the company. The stock has risen by 4% to Rs84 since the news, against a 0.7% increase in the Sensex on the Bombay Stock Exchange (BSE).
KEC International had an order book of Rs8,000 crore when it announced its December quarter financials. As much as 47% of this comes from the South Asian market and the remaining from rest of the globe.
The stock has underperformed the BSE-500 and the BSE Capital Goods indices in FY11 and since the beginning of this calendar year. But then, its peers such as Jyoti Structures Ltd and Kalpataru Power Transmission Ltd, too, have underperformed.
A concern for KEC International is the increasing competition in the domestic market. Also, the company’s effective cost of debt is expected to increase further from about 8% currently, which would affect profitability.
Analysts from IIFL Research maintain that KEC International’s consolidated net debt increased to about Rs1,400 crore at the end of the December quarter to fund the $95 million (around Rs427.5 crore) acquisition of SAE Towers Holdings Llc and the increase in working capital needs.
“While debt to equity is high at 1.6 times, the company remains sanguine on balance sheet health as it does not see any further increase in gearing ratio,” IIFL analysts wrote in a note to clients last week.
SAE Towers’ margin is comparatively higher. For the December quarter, operating profit margin of SAE Towers stood at about 18% compared with about 10% of KEC International’s stand-alone business. But, SAE Towers’ margin is expected to be sustainable at about 14%, according to KEC International.
For the nine months ended December, KEC International’s consolidated revenue increased by 14.4% year-on-year to Rs2,920 crore, but net profit was flattish at Rs127 crore. That’s mainly because of higher depreciation cost, interest expense and tax outgo.
In sum, the company’s order book provides good revenue visibility, but profitability could under pressure on higher interest costs.
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