KEC International - Take-Off Ready After Repairs; Upgrade To 'Buy': Yes Securities

Yes Securities Report

We recently interacted with KEC International Ltd. The company is on the cusp of a major turnaround driven by stellar growth in its total addressable market, sequential margin recovery, and reduction of working capital to normalized levels.

KEC International is the market leader in the domestic transmission and distribution engineering, procurement and construction industry and is expected to be a major beneficiary of a stellar growth in TAM.

With execution of legacy projects largely behind, turnaround in SAE Brazil profitability and a stable commodity environment, the company has significant leverage in terms of margin improvement in the next two years.

Additionally, the working capital cycle is expected to improve led by improved collection efficiency and higher mix of civil business.

Valuation and view

• KEC is the market leader in the domestic T&D EPC industry with a market share of ~20-25% in the Power Grid Corporation of India Ltd. and private sector ordering.

• The company is well-placed to capitalise on the government’s thrust on capex across segments such as, power, water supply, metros, and healthy growth in residential real estate, which would translate into a healthy order pipeline.

• Given its strong order book, margin expansion levers (SAE Brazil turnaround, stable commodity environment, improving net working capital days) and robust revenue visibility, we believe KEC is poised to post revenue/profit after tax compound annual growth rate of 16%/157% over FY23- FY25E.

• At current market price, the stock trades at 30.6 times/14.8 times FY24E/FY25E earnings per share. We upgrade the stock to 'Buy' with a revised target price of Rs 816, valuing the company at 18 times FY25E earnings.

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