Subsidiaries lift KEC’s performance

Subsidiaries lift KEC’s performance

Capital goods maker and flagship firm of the RPG group, KEC International Ltd, acquired and merged several companies during the last six months. Led by revenue accretions from these subsidiaries, KEC’s consolidated revenue for the December quarter grew 13% over the year-ago period to 1,071 crore. A quarter of this came from RPG Cables Ltd and SAE Towers Holdings Llc, without which revenue decelerated by around 7% year-on-year (y-o-y). In fact, standalone sales were down 7.3%, which analysts feel is on account of a delay in product despatches.

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Consolidated operating profit grew 28% y-o-y, although it contracted by around 8% for the standalone entity.

SAE’s performance boosted profitability. The subsidiary, which functioned at around 70% of its capacity (compared with 65% during its acquisition in September), registered a healthy 17-18% operating profit margin (OPM). So even though KEC’s standalone OPM was flat on a y-o-y basis at 9.8%, its consolidated OPM rose by around 120 basis points(bps). The KEC management believes it would sustain SAE margins at 14-15%.

KEC has a robust order book of Rs8,000 crore, twice its estimated fiscal 2011 revenue.

Its strong presence in the power transmission and substations segment augurs well as the 12th Plan period’s investment into this space is expected to be 70% higher than the previous Plan period.

Analysts expect a 20% compounded annual growth rate in net profit over the next 24 months.

For the December quarter, consolidated net profit rose by 38% over the year-ago period. Still, the moot question is whether the firm’s valuation will improve. Despite the above positives, the merger of loss-making group firm RPG Cables did not go down well with investors. Besides, the firm borrowed funds to acquire SAE, which, given the rising interest-rate scenario ahead, could add to interest costs.

This could be the reason for the underperformance of KEC’s shares when compared with peers.

At Rs87 apiece, it trades at around nine times the estimated fiscal 2012 valuation, which is almost half that of other mid-cap peers.

Graphic by Ahmed Raza Khan/Mint

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