Looks like capital goods manufacturer KEC International Ltd, an RPG group company, is down but not out. After a 35% erosion in its price since April, the stock is slowly inching up on the back of strong tailwinds from its rising order book that hit an all-time high of ₹ 20,000 crore in end-September.
That apart, the company is well poised on tenders that could materialize into orders. But why did the stock underperform, losing nearly one-third of its value in the last six months?
The power transmission and distribution (T&D) segment’s revenue, comprising 63% of the company’s revenue, fell by 11% in the September quarter. For the six-month period, T&D revenue was down 12%, indicating a slowdown in its mainstream business.
There is some hope among analysts that execution and order completion was deferred to the second half of FY19. However, it remains to be seen if the second half will be materially better.
Meanwhile, considering the erratic orders from the T&D segment, wherein focus has shifted to state electricity boards, KEC International’s diversification into railways and renewables brings in more stability to its revenues. The results of the last two quarters demonstrated this with strong sales accretion from the segments, aiding overall revenue.
An Emkay Global Financial Services Ltd report highlights that steady order flows from the international T&D business, especially the Saarc (South Asian Association for Regional Cooperation) nations, along with rising contribution from non-T&D segments, have supported the ups and downs in domestic order flows.
The subsequent quarters are expected to witness improved cash flows, as working capital and borrowings reduce. The 45% jump in year-on-year interest cost in the September quarter was due to the support given to vendors on account of the prevailing liquidity crisis. Higher inventory-carrying cost due to volatile commodity prices also added to its burden.
Above all, the sizeable order book is expected to boost KEC International’s revenue growth, aiding profits. Needless to say, execution is key; the stock’s continued underperformance suggests investors aren’t yet convinced.