Stock Review: KEC International

THE acquisition of SAE Towers, a US-based tower manufacturing company, is an important step for the growth and consolidation for KEC International. The buy provides the RPG Group company with an alternative manufacturing facility for supplying to about 40 countries where the company is doing or has done projects. The acquisition will also help the company increase its foothold in the American markets. The enterprise value of the acquisition is nearly 440 crore ($95 million). The company will have to pay around 370 crore and take over the debt of 70 crore.

   SAE Towers is a profitable company owned by a US private equity firm, Acon Investments, which had bought the company from ABB in 2006-07. Last year, SAE Towers registered sales of 650 crore with about 8-9% profit margin, making it an attractive deal for KEC. While the company is based in the US, its manufacturing facilities are located in Brazil and Mexico. Brazil is planning to add 40 GW of power generation capacity over a period of five years at an investment of about 1.5 lakh crore to set up a network of transmission towers.

   The acquisition will solve the problem of capacity constraint for KEC. SAE Towers has a manufacturing capacity of 1 lakh tonne. Post-acquisition, the consolidated capacity of KEC will be increased by nearly twothirds of it current capacity. KEC itself has been working at more than 90% capacity utilisation during FY09-FY10, despite almost tripling the capacity over FY06-09. Since SAE has been working at just around 60% capacity utilisation, KEC can utilise the facility to meet its overseas project requirement. KEC has a current order book of 5,600 crore, about half of which is from outside the South Asia market.

   Apart from the increase in total capacity, the acquisition also provides significant gains in terms of aggregating raw material procurement, which forms a large chunk of cost. It will also be able to plan the logistics in a more efficient manner, as the cost of transportation is quite high in the business. Further, the existing network in the North and South American markets would also aid in the marketing KEC's other products such as cables and engineering services.

   However, the key challenge before KEC is financing of the deal, which involves raising nearly Rs 400 crore. It had loans of about 800 crore on its consolidated books, with debt-equity ratio of 1:1 as at the send of FY10 and raising 400 crore may not be an easy task. However, it does have a support of other RPG Group companies, which should be able to provide some cushion, in case of any difficulty in raising funds.

   The deal is certainly a good buy for the company, adding to its earnings as the capacity utilisation level goes up in the next 12-18 months.