KEC International - playing on infrastructure theme with a strong order book


(sumit680) #1

With its focus on infrastructure development and provision of electricity to each house hold, an ample headroom seems to be available for EPC companies like KEC intl…im invested in this stock at the moment and done a bit of research on the same. Since i couldnt find any thread on this stock, so im initiating a new one for further discussion on its prospects…

  1. brief overview
    KEC intl is part of prestigious Goenka group and HV goenka is its chairman.He is the eldest son of RP Goenka.
    Company is operating mainly in four segments-
    • Transmission and distribution They are among the largest global players in T&D
      buisness and operate in more than 20 countries incl middle east, africa and Saudi Arabia.

    • Railway electrification their order book has doubled this year from this segment.

    • Solar energy They intend to expand their wings in solar power projects also once tax
      structure is refined in the country…

    • Civ constr This is a small segment. Company is constr the factories and associated
      residential complexes…

  • In India they are the largest player and T&D sector. This is a sunrise sector as evident from their order book which has grown from 8000 cr c to 17000 cr by Mar 18…they are L1 bidder in projects worth 5000 Cr…

  • The company witnessed a change in management in 2014 with the launch of project eagle…this proj was aimed at improving the internal cost efficiencies to gain better margins…the company has seen improved cashflows since 2014…they have closed loss making legacy projects…Fy18 has seen excellent growth in revenue and net profits… the company has consistently improved their PAT margins from 1.9% in 2015 to 4.78% in 2018…they have been able to reduce their debt level to some extent too despite being in a capital intensive sector.

  1. Opportunities
    • Strong order book of almost 20000 cr plus incl L1 bids. half of the orders are domestic while others are mainly from SAARC countries and middle east…Brazil, afghanistan and saudi arabia also have their share of orders too.
  • strong heritage Company was est pre independence and took over by RP Goenka…it has one of the largest tower manufacturing facilities at three places in India…its test beds for power utilities meet the international standards…previous year they were able to innovate a lighter design of tower…they have a good database and market posn

  • infrastructure theme The govt push for complete electrification of house holds and railway electrification provide good growth opportunities…

  • In previous year AR, mgt highlighted their ability to complete projects within time in difficult and varied terrains…this can be viewed both as opportunity and risk…

  • Company has 04 tower testing facilities which can be used to design new products…

  1. Risks
  • The company operates in a capital intensive sector with a debt to equity of 0.8…previous year it was around 1.5…they have been able to reduce the debt with greater free cash flow last year…mgt has propose for raising 500 cr via NCD route…they seem to be moving towards cheaper debt route…

  • International security and political situation Recently few of their employees were abducted in Afghanistan which has stalled the ongoing projects. Afghanistan occupies 10-15% of their orderbook. however the mgt seems to be confident of iontime project execution despite all the hurdles…similarly their payments from a project in Saudi were stuck for some time due to slowdown in economy…in Africa and Brazil they may face few political unrest…however their presence in international mkt provides protection against a slowdown in domestic market…

  • Irregular FCF Company generated a good FCF of 900 cr previous yera on account of released payments from saudi…however before that FCF has been irregular…this current year it should be around 500 Cr…A good FCF is reqd to pay off the debts and reduce the interest costs…

  • State Electricity Board proj During this conference call, the management has told that SEB projects will incr in the coming times…the SEBs carry the associated risk of delayed payments…this will result in incr in receivables and decr in cash flows…however mgt has tols that they will adjust the payable accordingly…

  • Incr in inventory due to hedging against commodity volatility…

  • Incr in capex for capability augmentation in railway sector…this will force them to take further debt…


(sumit680) #2
  1. Valuation The stock seems to command a higher valuation due to a strong growth visibility…it is trading at a PE of 21.22…price to book value is around 5…the irregular cash flow does not allow use of DCF model…the dividend yield is just .41% as the company is expanding its capabilities…so the stock seems overvalued as per these figures…

The stock may be fairly valued on account of strong order book and good execution skills…as per the various brokerage reports the stock is trading at 15/16 PE of the EPS in FY 20E…so the stock may not witness a strong growth in near terms …however i feel it has a value for long term as the present order book extends till next three years…so holding time can be be a long one with a strategy to buy at dips…

Disc - this stock forms 15% of my portfolio at an entry price of 403…


(learning) #3

It will also be better if you highlight the risks, some of the ones that i could

  1. Valuation are high not cheap
  2. decrease in order in T&D segment via PGCIL, company is trying to compensate for the same via foreign orders
  3. Foreign currency risk as they have healthy mix of export
  4. Risk of any uncertainty in Brazil - where SAE tower business is.

Disc : recently entered.


(sumit680) #4

thanx for highlighting the foreign currency risk…i have posted other risks which came to my mind…reposting them for your comments…

Risks

  1. The company operates in a capital intensive sector with a debt to equity of 0.8…previous year it was around 1.5…they have been able to reduce the debt with greater free cash flow last year…mgt has propose for raising 500 cr via NCD route…they seem to be moving towards cheaper debt route…

  2. International security and political situation Recently few of their employees were abducted in Afghanistan which has stalled the ongoing projects. Afghanistan occupies 10-15% of their orderbook. however the mgt seems to be confident of iontime project execution despite all the hurdles…similarly their payments from a project in Saudi were stuck for some time due to slowdown in economy…in Africa and Brazil they may face few political unrest…however their presence in international mkt provides protection against a slowdown in domestic market…

  3. Irregular FCF Company generated a good FCF of 900 cr previous yera on account of released payments from saudi…however before that FCF has been irregular…this current year it should be around 500 Cr…A good FCF is reqd to pay off the debts and reduce the interest costs…

  4. State Electricity Board proj During this conference call, the management has told that SEB projects will incr in the coming times…the SEBs carry the associated risk of delayed payments…this will result in incr in receivables and decr in cash flows…however mgt has tols that they will adjust the payable accordingly…

  5. Incr in inventory due to hedging against commodity volatility…

  6. Incr in capex for capability augmentation in railway sector…this will force them to take further debt…


(learning) #5

KEC International hosted a conference call on May 15, 2018. In the conference call the company was represented by Vimal Kejriwal, MD & CEO of the company.
Key takeaways of the call
Order book as end of March 31, 2018 stood at Rs 17298 crore, a growth of 37%yoy and of the order book T&D (excluding SAE Towers) order 60%, SAE order 11%, railways 24%, civil 2%, cables 2% and solar 1%. Of the order book 55% is domestic and 45% is international
Order intake in FY2018 stood at Rs 15098 crore, a growth of 22%yoy. Of the order intake 67% domestic and 33% international. Interms of business verticals T&D (excluding SAE Towers) is 54%, SAE Towers 10%, 26% railways, 3% civil and 7% cables.
Fresh orders worth Rs 1392 crore won across various business verticals of the company so far in FY2019. Major junk of the fresh order so far in current fiscal has come from railway aggregate to Rs 928 crore for both overhead electrification as well as civil works. Civil works vertical of the company has bagged orders worth Rs 212 crore from leading tyre and cement manufacturing companies. While core T&D segment accounts for Rs 159 crore worth of orders across India and SAARC region, the balance was accounted by cables and solar.
L1 order book after considering the latest order intake of Rs 1392 crore is Rs 1500 crore. The L1 order book is largely from transmission sector.
Expect order book to grow by 20% for current fiscal i.e. FY2019.
Core T&D business has been the primary driver for FY18 Revenue growth. Railways and Civil businesses have also exceeded their targets. PBT and PAT have shown significant improvement on both growth and margin parameters.
The new order wins in Railways and civil will help the company to further consolidate its Railways and Civil order book. With these new order wins, the company is confident of its Railways and Civil business scaling up to be a significant part of the company’s overall business portfolio.
Strong 212% growth in revenue of Solar business in Q4FY18 to Rs 189 crore is due to execution of APGENCO project.
The new solar order intake from India remains muted on account of ambiguous tax rates
The company’s civil order book (including the civil order received in FY19) now stand over Rs 500 crore and that is good enough to double the revenue in FY19 as average execution period for civil order of the company is largely at about 6-12 months. The company’s Civil business revenue in FY18 stood at Rs 126 crore.
Net borrowing as end of March 31, 2018 stood at Rs 1538 crore down from Rs 1932 crore as end of March 31, 2017. Debt level as proportion of revenue will not increase.
Receivables as end of March 31, 2018 stand at Rs 5039 crore up from Rs 4200.36 crore as end of March 31, 2017. This is largely due to SEB orders. SEB order execution of the pie is increasing so there is an increase in receivables cycle given SEBs payment cycle is little bit longer. While quoting SEB tender the company is factoring in the higher interest cost knowing the typical longer payment cycle of the respective SEBs.
Domestic T&D orders inflow in FY18 is largely from SEBs and private players. Orders intake from PGCIL in FY18 stood almost similar/equal to that of FY17. The company bagged PGCIL transmission orders of about Rs 1900 crore in FY18 just Rs 100 crore lower than FY17. Private sector is not tender biz so margins are good.
Benefits of operational Leveraging are trickling in newer business verticals such as civil, railways etc where the revenue pie is growing. Margins not under pressure in T&D segment but there won’t be any growth. The commodity price hike will be passed on to the customers.
The company has put in bids for solar orders in MENA region and it expects one or two solar order in this fiscal from that region. The company is targeting SAARC and Africa region for Railways orders and hope to get at least one project this fiscal. But the ticket size of international railway orders will be bigger compared to domestic market.
In SAARc region the company bids for projects that are funded by multilateral agencies only.
The company has collection receivable of Rs 1400 crore including Rs 300 crore of retention money in Saudi Arabia operations/market. Further reduction is expected to happen in this fiscal. The retention money collectable/due will increase as projects are getting completed. The company has registered revenue of Rs 800 crore in Saudi Arabia in FY18.
T&D sector - State side tendering and order finalization should be going up. In Interstate transmission projects it is now PGCIL and private sector. So sometimes the order will be from PGCIL and sometimes it will be from private sector.
State Transmission - addressable pie is clearly increasing with investment coming from SEBs of UP, Orissa, Jharkhand and Bihar. Rajasthan will happen after elections got over.
The company has a historical bid to success rate of 1/6 or 1/7.


(sougataroy) #6

Reasons for 15-20% correction in share price post results?


(learning) #7

who knows about the price action. I don’t think business fundamentals have changed in last 10-15 days. Yes stock is little overvalued so may be market is trying to correct for that.


(sumit680) #8

I have not been able to find any information triggering this fall… However few reasons may be-

  1. Whole mid cap sector is taking a beating due to overvaluation…

  2. There is a likelihood of drop in margins due to inclusion of SEB orders and Capex on railway segment…

  3. A rise in price of commodities will also increase expenditure… But I’m not sure which specific commodities to be tracked for KEC and how to track them…

But overall I feel there is a growth visibility and they are correctly diversifying correctly into civil segment to exploit the infrastructure push by government…

We should keep searching for any relevant piece of information… There was a 3 lack penalty imposed on holding company by sebi recently… Need to check that news though…


(jainnitinp) #10

Fear of being included in the ASM list has pulled down a lot of good stocks like KEC, KEI etc.


(jainnitinp) #11

KEC seems to have a negative cash cycle meaning it is being paid by its customers long before it pays its suppliers. Is this correct? Also, does the company earn any interest etc. on this advance payment from customers?


(learning) #12

why do you say so? can you please substantiate the same?

Anyways the presence of the debt confirm that it can not have a negative cash cycle.


(jainnitinp) #13

Well, you can calculate cash cycle by the following formula:
= Days sales outstanding + days sales of inventory - days payable outstanding.
You will see that it comes to negative.


(jainnitinp) #14

promoters have been acquiring shares in the last few weeks


(jainnitinp) #15

Bags new orders worth 1357 cr mainly in T&D business