Home >Markets >Mark To Market >KEC’s diversification ensures stable margins despite order flow worries
Graphic by Naveen Kumar Saini/Mint
Graphic by Naveen Kumar Saini/Mint

KEC’s diversification ensures stable margins despite order flow worries

  • Firm is striving to procure orders from Brazil, Africa and Middle East. This should offset sluggishness in domestic orders
  • Cables and power T&D sales (including SAE Tower), which comprised 97% of the total in FY15, fell to 76% in FY19

KEC International Ltd has been clocking decent revenue growth with stable margins in recent quarters, in spite of a slowdown in the domestic power transmission and distribution (T&D) segment. Its increased focus on railway electrification and civil construction sectors has helped.

Cables and power T&D sales (including SAE Tower), which comprised 97% of the total in FY15, fell to 76% in FY19. Last quarter’s revenue growth was also driven by the lumping up of three overseas projects, executed under its subsidiary SAE Towers.

Both overseas and railway order execution also helped sustain Ebitda (earnings before interest, tax, depreciation and amorti-zation) margin at 10.5% over the last few quarters. “Terminating loss-making legacy contracts in railways and water is one of the key initiatives resulting in the margin uptick. Furthermore, the cables business has turned around and the company has exited the last-mile distribution projects in T&D, which are difficult to execute," said a report by Nomura Financial Advisory and Securities (India) Pvt. Ltd.

To be sure, the firm is striving hard to procure orders from emerging markets such as Brazil, Africa and the Middle East. This should help offset the sluggishness in domestic order flow.

A report by Edelweiss Securities Ltd said KEC was the lowest bidder in projects worth 5,000 crore from power T&D, railways and defence sectors. But delays in finalizing orders are a concern. With weak order flows in the first half of FY20, analysts are sceptical about achieving the 15-20% growth in FY20 order flows.

To be sure, the order book of about 18,100 crore (as on Q2 FY20), which is 1.5 times its annual revenue, is no doubt a comforting factor. Recent news on order accretion of about 1,000 crore fired up the KEC stock. However, at 293.90, it trades at a seemingly inexpensive valuation of around 10 times one-year forward earnings per share. Its dependence on infrastructure orders, which are currently at risk due to the poor condition of state finances, is certainly an overhang on the stock.

Another concern is delayed payments from clients and the consequent need to support vendors to ensure timely completion of orders, strains working capital. These factors would weigh on the KEC stock unless there is a meaningful increase in order flows in the near term.

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