RPG group-owned KEC International Ltd is among the capital goods firms that are poised to recover a bit earlier than the rest of the pack.
The firm is well poised in the power transmission and distribution (T&D) segment, where fresh orders have been robust since January and it’s likely to see 10% growth in order inflows.
With this, its order book is likely to be a little over one year’s revenue. This is good news, given that KEC has been able to buck the slowdown. Most capital goods manufacturers are languishing because of a lack of orders, as industrial capex looks distant.
The management is hopeful of doubling its order book in railways from Rs900 crore now by FY17 end. Analysts are confident of the order book improving over the next two years on strong orders from Power Grid Corp. of India Ltd, state electricity boards and also international markets.
Meanwhile, its venture into solar projects, water projects, substations and railways will bring in benefits of diversification through new growth areas, thereby strengthening KEC’s stock valuation.
This is not all. The capital goods equipment maker’s consolidated profitability is likely to get a leg-up from its overseas subsidiary, SAE Towers, that has started generating cash profits after suffering losses for several quarters after it was acquired in 2010. This entity has helped KEC gain a footprint in North and South America, Canada, Brazil and Mexico.
Further, profitability will improve in the near term as earlier low-margin legacy projects are nearing completion.
Commodity costs are benign, too. The benefits of operating leverage will kick in with higher execution on the back of robust orders.
However, investors must be aware that any change in the T&D business prospects in India or overseas can affect the firm’s revenue model and, thereby, profit growth, too.
Also, high competition can gradually erode profit margins. In fact, the stock had reacted adversely a few months ago when the overseas business was a drag on KEC’s overall profitability.
Since then, the stock has been underperforming the BSE capital goods index, trading at about 12 times the FY17 earnings per share.
But now, the favourable winds of robust orders and execution are paving the way for a robust double-digit growth in earnings per share over the next two years. That should elevate investor sentiment.