KEC International: strong order book, fair valuation in Sep quarter

KEC International: strong order book, fair valuation in Sep quarter

KEC International Ltd’s September quarter saw a robust order book build-up at 7,025 crore—25% higher than the June quarter. Of this, around 580 crore came through its recent acquisition of US-based SAE Towers Holdings Llc.

Given the disappointing level of order inflows in fiscal 2010, this is a positive for the firm at about 1.5 times its estimated current year’s revenue. Further, the management guided strong inflows during the next two quarters from the domestic power transmission market, driven by Power Grid Corp. of India Ltd and NTPC Ltd.

But, the 14.3% year-on-year (y-o-y) and 18.2% quarter-on-quarter(q-o-q) growth in revenue to 1,000.7 crore was just in line with consensus estimates. The firm’s operating profit too grew 11.4% y-o-y and 18.4% q-o-q to about 11 crore.

Operating profit margin (OPM) was steady at about 10% during the quarter, despite a 310 basis points and 280 basis points y-o-y increase in raw material costs and other expenses, respectively, offset by lower sub-contracting expenses. One basis point is one-hundredth of a percentage point.

“Typically, such contracting firms register increase in employee costs and other expenses when they execute jobs on their own and reduce sub-contracting," says John Perichery, analyst at Angel Securities Ltd.

KEC’s reported net profit grew marginally to 42.7 crore during the quarter. However, if one adjusts for the one-time write-off of a voluntary retirement scheme costing 8.5 crore, the firm’s net profit would be 21% higher over the year-ago period.

The negative surprise was a 51% y-o-y rise in its debt to about 1,500 crore. Some analysts believe this is due to the debt that was used to fund the SAE acquisition during the quarter. Still, with annual revenue of about 600 crore accruing from the acquisition with relatively higher OPM at 12-14% and KEC’s access to newer markets in the growing tower testing business, there would be earnings accretion going forward despite the higher debt.

Over the last six months, the firm’s shares have underperformed the Nifty Midcap index despite meaningful acquisitions and a good order book.

The stock trades at 492, discounting fiscal 2012 estimated earnings about 10 times. A pickup in order inflows in the second half of the current fiscal could provide upsides to the share price.