Stock Review: KEC International

Acquisition and consolidation in the tower business will help the company enhance footprint as well as profits

India's leading tower company, KEC International, has signed an agreement to acquire SAE Towers for $95 million, estimated to be 14 per cent of the company's (KEC) enterprise value. On the face of it, the deal looks like a win for the company, as it is well-priced at around seven times the net earnings. It is expected to contribute positively to the earnings of the parent company within the first year of acquisition, reckon analysts. And, of course, KEC gets an opportunity to expand operational footprint across North and Latin America.

The management has indicated that the capacity utilisation of SAE Towers is expected to increase from 60 per cent to 100 per cent in next three to four years on the back of strong demand in the US. Earnings before interest, tax, depreciation and amortisation (Ebitda) margins are expected to increase to 12-14 per cent from the 10 per cent levels after the integration. Though it sounds too good to be true, the acquisition is most likely to go through, as KEC had a closing cash balance of around 70 crore at the end of March, reckon analysts. The company might have to raise around `300-crore debt, but that should not be a concern.

The company had suffered losses on account of its merger with the loss-making RPG Cables. This move may help correct the situation. KEC's order backlog has grown at a compounded rate of around 15 per cent over the past two years. It may rise further, as the company builds more telecom towers and margins stabilise.

A good news for investors who can buy into a secondary-level business dependent on growth of power and telecom sector — the return-on-equity for the combined entity is expected to be around 20 per cent.