Result Update on KEC International for 4QFY2011

KEC International’s (KEC) 4QFY2011 results were broadly in line with our estimates. Revenue grew by 14.9% yoy to `1,559cr and PAT grew by 25% yoy to `79cr. We had estimated revenue and PAT at `1,570cr and `72cr, respectively. Consolidated order backlog at the end of the current quarter stood at `7,800cr. Order intake during the quarter totaled `1,300cr. We maintain our Buy recommendation on the stock.

Acquisitions aid growth and margins: Consolidated revenue reported steady growth of 14.9% yoy to `1,559cr. EBIDTA margin improved by 71bp yoy to 10.5%. However, it is pertinent to note that the corresponding year-ago period did not carry the numbers for RPG Cables and the owned subsidiary SAE Towers. A similar treatment, if followed, during the current quarter would reveal that adjusted revenue declined by 10.3%, indicating lower execution. Margin expansion was largely aided by lower raw-material cost during the quarter. Interest cost increased by 65.3% yoy to `32cr (`19cr) for 4QFY2011, reflecting incremental debt raised to finance the acquisition of SAE Towers. The high interest cost was partially offset by margin improvement. Accordingly, PAT grew by 25% yoy to `79cr (`63cr) during the quarter.

Outlook and valuation: Transmission EPC companies are expected to register increased order inflow on the back of ongoing investments in the domestic power sector. Order inflow from PGCIL has been relatively low during FY2011. However, industry commentary indicates that ordering activity from PGCIL is likely to gather pace after 1HFY2012. Additionally, acquisition of Texas-based
SAE Towers is yielding promising results so far. Further, this would enable KEC to leverage the former’s customer base to foster relationship with power utilities to secure EPC contracts in the future. At the CMP, the stock trades at 8.4x and 6.2x FY2012E and FY2013E EPS, respectively. We maintain our Buy recommendation on the stock with a target price of `115.