KEC International:Macro push to provide new growth opportunities

4 July 2014

KEC International

spotlight

The Idea Junction

Stock Info

Bloomberg

CMP (INR)

Equity Shares (m)

M.Cap. (INR b)/(USD b)

52-Week Range (INR)

1,6,12 Rel. Perf. (%)

KECI IN

132

257.1

33.9/0.6

134/23

9/117/280

Margins to expand as new businesses stabilize

Macro push to provide new growth opportunities

Financials & Valuation (INR b)

Y/E March

2014

79.0

4.9

0.7

2.9

14.8

46.3

6.4

15.0

45.5

2.8

0.6

2015E 2016E

88.5

6.4

1.7

6.6

126.3

52.3

13.3

18.9

20.1

2.5

8.0

0.6

101.8

7.5

2.4

9.4

42.4

61.1

16.5

21.2

14.1

2.2

6.8

0.5

Sales

EBITDA

EPS (INR)

EPS Gr. (%)

BV/Sh. (INR)

RoE (%)

RoCE (%)

Valuations

P/E (x)

P/BV (x)

EV/Sales (x)

Operating margins to expand as new businesses stabilize

During FY08/FY09 onwards, KECI diversified into new business verticals of

Power Systems, Railways, Cables and Water to leverage upon its project

management skills. New businesses contributed 25% of FY14 revenues (FY09-

14 CAGR of 29%). Given the initial learning curve and the need to build pre-

qualifications, these businesses impacted the EBIDTA margins in the interim

period (FY14 EBIDTA margins at 6.2%, vs ~12% in FY11/12).



During FY14, there had been a gradual improvement in the quarterly margins,

largely led by stabilization in the performance of these businesses. The

management stated that the incremental orders even in these segments are

being taken at margins of 8-9%, and thus as the legacy projects are executed,

we expect margins to improve to normative levels. We model FY15/FY16

EBIDTA margins at 7.2% / 7.4% largely led by expectations of stabilization in

new businesses.



Of the INR102b order book as at end FY14, new business segments contributed

to just INR20.2b (20% of the order book, down 30% YoY). KECI has become

selective in terms of intake; with increased thrust towards infrastructure

(including Power, Railways, Water, etc), we expect these segments to

contribute ~25% of the order book in FY16.



EV/EBITDA (x) 10.3

Shareholding pattern (%)

As on

Mar-14 Dec-13 Mar-13

Promoter

49.4

48.2

44.6

Dom. Inst 33.2

33.3

34.5

Foreign

3.1

2.9

Others

14.4

15.7

18.0

Consistent Performance from the transmission business to continue

KECI's transmission business has been a consistent performer; with FY12-14

revenue CAGR at ~15% and operating profit margins of ~8-9%. Order intake

has also increased at CAGR of 15% from ~INR60b in FY12 to ~INR80b in FY14.



Growth drivers will be led by increased push for power T&D capex in India,

including the Renewable Energy Corridors. KECI has increased its geographical

reach with acquisition of SAE towers which has helped to establish its

presence in Americas. Globally, transmission capex is expected to remain

robust especially in Africa, Middle East, United states and North American

markets led by replacement demand emanating from aged networks,



Stock performance (1 year)

Spotlight

is a new offering from the Research team at Motilal Oswal. While our Coverage Universe

is a wide representation of investment opportunities in India, there are many emerging names in the

Mid Cap Universe that are not under coverage. Spotlight is an attempt to feature such mid cap stocks

by visiting such companies. We are not including these stocks under our active coverage at this point

in time. Motilal Oswal Research may or may not follow up on stocks under Spotlight.

Satyam Agarwal

(Satyam.Agarwal@MotilalOswal.com); +91 22 3982 5410

Amit Shah

(Amit.Shah@MotilalOswal.com) /

Nirav Vasa

(Nirav.Vasa@MotilalOswal.com)

Investors are advised to refer through disclosures made at the end of the Research Report.

RED: Caution

AMBER: In transition

GREEN: Interesting

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| Monsanto India

investment in interconnection grid and increasing investments in the power

generation sector.

Improvement in net working capital



Even in the challenging business environment KECI has been able to improve

its working capital cycle at 56 days at the end of 4QFY14, down from a peak of 72

days at the end of 2QFY13. Improvement in NWC was supported by increase in

creditor days from 102 days at the end of 2QFY13 to 148 days at the end of

4QFY14.

Valuations reasonable, RoE's to expand



The extension of core skill sets in related diversifications provides an exciting

balance to KECI growth prospects. The stock currently trades at 20/14x FY15/16E

earnings of INR6.6/INR9.4 respectively. Earnings CAGR of 85% during FY14-16E

is being supported by margin expansion and normalization in tax rates. RoEs

had declined from peak levels of 23% in FY11 to 6.4% in FY14, and we expect

the same to improve meaningfully to 17% in FY16E.

KECI’s Business segments

Source: Company, MOSL

New business verticals report 29% revenue CAGR (FY09-14)

Revenue composition

Source: Company, MOSL

4 July 2014

Spotlight

| KEC International

EBITDA margins to expand as new businesses stabilize



KECI’s new business verticals comprise of Power Systems, Railways and Water.

Over FY09-13, new business revenues grew at a CAGR of 36% and accounted for

28% of revenues in FY13. For FY14, new business vertical accounted for 12% of

revenues and brought in INR 9.3b revenues.

However, revenues from new business verticals failed to support margins, as

KECI was in the process of building up pre-qualifications and faced a strong

learning curve. With new businesses stabilizing, the management expects

incremental orders across new business verticals to be margin accretive.

In the Water business, KECI is executing multiple orders related to canal

irrigation in Madhya Pradesh. Successful execution of these projects could give

it the required pre-qualifications for undertaking river interlinking projects being

conceived by the new government.

Additionally, in Water, KECI is also executing a 75m liters/day sewage treatment

project in Maharashtra. In July 2013, it had bagged an order worth INR1b for

construction of a concrete dam in the Chhindwara district of Madhya Pradesh.

In Power Systems, KECI has undertaken several 400kV substation orders and has

received mandatory pre-qualifications.

KECI entered the Railway segment after acquiring Jay Signaling in September

2010. It has gradually ramped-up this business and it accounted for INR1.7b of

revenues in FY14. KECI awaits increased tendering activity in the segment, once

ordering activity for the Dedicated Freight Corridor picks up.

Margin expansion would also be supported by improvement in the Cable

business, which was impacted by slower pace of project execution, leading to

suppressed demand.

Improvement in EBITDA as new businesses stabilize

Source: Company, MOSL

Distribution segment to provide new growth levers



Unlike Transmission, which is dominated in India by PWGR, ordering activity

across Distribution is undertaken by state electricity boards (SEBs). With

increase in funding availability from agencies like World Bank, ADB, JICA and the

central government, we expect increased opportunities in Distribution.

With increase in funding from unilateral/bilateral agencies, tendering norms

followed by SEBs are expected to be in line with globally accepted norms. The

proposed macro change can result in increased business opportunities arising

from SEBs for KECI, which has a pan India presence.

4 July 2014

Spotlight

| KEC International



Incrementally, several SEBs have hired PWGR as their project consultant for

lowering their transmission losses. The impact of this would also be witnessed in

improved tendering terms. Additionally, PWGR guarantees payments for certain

contracts, which would also be a major macro change in KECI’s favor.

Transmission line additions (CKM)

11th Plan (Target)

Transmission Lines (ckm)

Substation (MVA)

Power generation (MW)

88,515

157,691

78,700

11th Plan (Actual)

69,926

150,362

54,964

12th Plan (Target)

107,440

270,000

88,537

Source: Company, MOSL

Order book of INR102b provides strong revenue visibility



KECI’s order book at the end of FY14 was INR102b against INR95b at the end of

FY13. Order inflows for FY14 increased 9% to INR84.8b.

The Transmission business accounted for 88% of the closing order book at

INR89.4b. New business segments accounted for the remaining INR12.6b.

India accounts for 45% of the order book, followed by MENA (20% of order

book) and Africa / Central Asia (13% of order book).

Increase in order inflows under the constrained environment is an outcome of

stabilizing new business verticals and presence across 50 countries.

Order inflows for FY14 increased 9%

Closing order book at the end of 4QFY14 at INR102b

Source: Company, MOSL

Power segment accounts for 88% of closing order book

India accounts for 45% of closing order book

Source: Company, MOSL

4 July 2014

Spotlight

| KEC International

Improvement in net working capital



KECI’s net working capital (NWC) was at 56 days at the end of 4QFY14, down

from a peak of 72 days at the end of 2QFY13. Improvement in NWC was

supported by increase in creditor days from 102 days at the end of 2QFY13 to

148 days at the end of 4QFY14.

Net debt to equity ratio stood at 1.4x at the end of 4QFY14, with an outstanding

debt of INR18.2b.

Net Working Capital (TTM basis)

4QFY12

Inventories

Trade Receivables

Loans and Advances

Other Current Assets

Trade Payables

Current and Non Current Liabilities

Provisions

Net Working Capital

157

137

2QFY13

145

102

4QFY13

151

129

2QFY14

168

141

4QFY14

176

148

Source: Company, MOSL

Net debt to equity ratio at 1.4x

Net Debt to Equity (x)

1.6

1.1

1.4

0.8

1.4

4QFY12

2QFY13

4QFY13

2QFY14

4QFY14

Source: Company, MOSL

Risks and concerns

KECI is executing projects worth INR637.8m in Libya, which are in limbo because of

the ongoing political turmoil. We await more clarity on the status of these projects.

20% of the KEC’s order book comes from the MENA region (Libya, Egypt, Iraq, Iran).

The region has seen political tensions in recent times. KEC is thus exposed to risks

arising from political tensions which may affect the timely project execution and

hurt its financials.

4 July 2014

Spotlight

| KEC International

Company description



KEC International (KECI) is an RPG group company, which specializes in

undertaking EPC contracts across segments like Power Transmission &

Distribution, Railways, Telecom and Water.

It also has three in-house power and telecom cable manufacturing units at

Vadodara, Mysore and Silvassa. KECI entered cable manufacturing by acquiring

RPG Cables in 2010. It can manufacture HT and EHV cables up to 220kV.

KECI has over five decades of experience in designing, manufacturing, testing,

supply and erection of transmission lines up to 1,200kV on turnkey basis.

KECI also acquired SAE Towers Holdings LLC (USA), having manufacturing units

across Mexico, USA and Brazil. By FY13, KECL had increased its pole

manufacturing capacity from 5,000m tons to 12,000m tons.

Key manufacturing facilities

Segments

Transmission towers facility

SAE towers facility

Cables

Manufacturing Facilities

Jabalpur, Nagpur, Jaipur

Brazil, Mexico

Thane, Silvassa, Mysore

Installed Capacity

151,000 MT

100,000 MT

25,780 kms

Source: Company, MOSL

KECI: Recent orders Wins

Period

1QFY15

4QFY14

1QFY15

4QFY14

Particulars

Region

INR b

Supply and construction of 230kv and 380 kv transmission line

Saudi Arabia

7.4

Supply and installation of 220kv transmission line

Uganda

1.2

Supply and construction of 800KV HVDC Biswanath Chariyali Agra transmission line

India

0.6

Supply of lattice towers monopoles and hardwares

Americas

2.1

Modification of 220kv and construction of 400kv DC transmission line

UAE

2.7

Supply and construction of 132/133kv transmission line

Oman

0.5

Supply and

construction

of 220 Kv transmission line and bay

Kenya

0.1

Supply of lattice towers monopoles and hardwares

Americas

0.5

Construction of 220KV transmission line between Agrhandi and Ghazni

Afghanistan

3.1

Construction of 220kv substation between Sayadabad and Ghazni

Afghanistan

2.8

Supply of lattice towers monopoles and hardwares

Americas

7.3

400kv Transmission line order related to eastern grid strengthening

India

2.1

220kv Transmission line modification work at Samkha

Abu Dhabhi

0.2

Construction of 380kv double circuit overhead transmission lines

Saudi Arabia

7.1

Supply of lattice towers monopoles and hardwares

Americas

2.0

Supply and construction of 400kv double circuit transmission line in Wandue to Jamling

Bhutan

1.8

Supply and construction of 132kv transmission line in Lamhl

Nepal

0.3

Supply and erection of 400kv double circuit transmission line between Sagardighi and Behrampore

India

0.3

Cables

Supply of power and telecom cables

India

0.8

Supply of power and telecom cables

India

0.6

Supply of power and telecom cables

India

0.9

Supply of power and telecom cables

India

0.3

Railways

Order from Rail Vikas Nigam Limited for electrification, civil works, signaling and telecommunication works India

2.3

Source: Company, MOSL

4 July 2014

Spotlight

| KEC International

Story in charts

Outstanding order book has grown 3x in seven years (INR b)

Order Book

85.7

94.7

102

58.2

20.4

28.1

34.3

39.1

44.7

69.8

Revenues grew at 21% CAGR in last seven years

Revenues (INR - B)

79.0

30.9

43.2

51.6

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

EBITDA margins under pressure, as KECI started expanding PAT impacted due to steep learning curve associated with

across new business segments

new business verticals

EBITDA (%)

12.3

12.6

8.8

10.4

8.1

5.5

7.0

5.1

3.4

6.1

4.9

4.6

3.6

0.9

0.8

PAT (%)

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

Source: Company, MOSL

4 July 2014

Spotlight

| KEC International

Financials and Valuations

4 July 2014

Spotlight

| KEC International

Financials and Valuations

4 July 2014

Disclosures

Spotlight

| KEC International

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KEC INTERNATIONAL

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