Capital goods makers have seen lower than expected order inflows for the last six months. Against this backdrop, RPG group-owned KEC International Ltd seems to be on a strong wicket.
At the end of the March quarter, its order book at Rs 7,800 crore was up 42% from a year ago. This improves revenue prospects for the firm substantially for the next 18 months.
Revenue accretion on a consolidated basis during the March quarter was in line with estimates. It grew 15% year-on-year (y-o-y) and 46% quarter-on-quarter (q-o-q). However, what helped sustain operating margins when compared with peers such as Crompton Greaves Ltd is the higher profitability of its recently acquired US-based SAE Towers Holdings Llc.
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Consolidated operating margin improved y-o-y by around 80 basis points (bps) to 10.5% despite rising costs. The management in a conference call said that SAE’s operating margin was around 14%, and is sustainable around 12% going forward. Stand alone margin, however, was flattish around 9.8%. One basis point is one-hundredth of a percentage point. In an inflationary scenario, how well a company manages costs is a key concern. KEC’s consolidated interest expense during the March quarter rose 65% from a year ago and 12% from the preceding quarter.
Analysts reckon that orders in the power transmission segment, which account for nearly three-fourth of the firm’s consolidated order book, will entail higher working capital needs. A report by Religare Capital Markets Ltd says the rural power distribution contracts have stretched the firm’s working capital needs. KEC’s management, however, is confident of reducing this through advances received against orders.
The firm also increased borrowings to fund the acquisition of SAE Towers. The debt to equity at the end of the March quarter was around 1.5, higher than 1.1 a year ago.
Meanwhile, the contribution from its non-core businesses like cables and railway equipment has grown from around one-fifth to around one-fourth of revenue. But, improvement in the margins of these businesses is a concern and will determine future profitability. For example, the cable business has reportedly broke even during the March quarter.
For the near term, KEC’s order book assures revenue growth. The firm has nearly half its orders from abroad —from the US, Africa and South Asia—largely in the power transmission segment.
For the March quarter, KEC’s net profit rose 25% over a year ago. However, KEC shares have underperformed the benchmark Sensex index of the Bombay Stock Exchange and its capital goods index since January.
The current market price of Rs 80 discounts the fiscal 2012 earnings around eight times, leaving room for appreciation. Risks from macroeconomic headwinds such as rising material and interest costs remain, which could drag down net profits.
Graphic by Yogesh Kumar/Mint
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