Stock Review: KEC International

KEC International has taken several measures in the recent times to grow beyond its portfolio of power transmission, including foray into emerging segments. While this strategy should pay dividends in the long run, higher demand in international markets and strong project pipeline in the domestic market (largely led by robust capex plans of Power Grid) should help KEC post healthy growth in the medium term. In fact, the company has recently bagged some big orders in the power transmission segment, taking its order book to over 8,800 crore or two times 200910 revenues, thereby enhancing visibility. Along with increasing contribution from high margin businesses, KEC's earnings are expected to grow at about 20 per cent annually over the next two years. Most analysts have a buy rating on the stock, which, at 83.65, trades at 8.5 times the 2012-13 estimated earnings.

PILLARS OF GROWTH

The company is developing new business verticals in emerging segments to sustain long-term growth and deal with the increasing competition in its core transmission business. Among new verticals are railway projects, cable manufacturing, balance of plant (BoP) work for power generation plants, tower manufacturing and, recently, water-based projects. Each of these businesses is expected to contribute meaningfully to growth in the coming years.

"Every division must contribute at least 10 per cent to the total revenue. So, if we achieve a turnover of `8,000 crore (200910 revenue `3,906 crore) over the next two years, the water segment should give us `800 crore," says Ramesh Chandak, MD & CEO, KEC International.

KEC recently bagged its first order for the water division, worth 31 crore, and is expected to win more, says the company management. Similarly in BoP, it has made a start by winning a `40crore order. But analysts are cautiously positive. They say, the gains from these moves should be felt in the long run, but achieving high revenue targets from the new segments needs to be monitored, given the lack of prior experience.

REVENUE MIX

Water and BoP business might take time to show significant revenues, but the company's efforts to expand its cable business should yield results soon. Besides, with the help of its acquisition of Jay Signaling, KEC has been able to strengthen its railway vertical, adding to its overall capabilities. In fact, after the deal last year, the order book of the railways division has gone up from `20 crore to about `420 crore currently.

Additionally, KEC also acquired US-based SAE Tower (0.7 times its sales) last year. This will add to the consolidated financials, (especially profits, given SAE's higher operating margins of 13-14) from the current financial year. "The flow of order is improving at SAE Tower due to higher demand in its markets along with the advantage of KEC International in terms of technical capabilities and ability to bid competitively," says Tushar Das, analyst with ULJK Financial.

KEC, too, will benefit from SAE as it will have access to some of the fast growing markets like Mexico and Brazil and the US in addition to its existing markets like Africa, West Asia and Central Asia. The company has become the second-largest tower manufacturer in the world, with atotal capacity of 300,000 tonnes.

Overall, contribution from existing and new segments should drive KEC's growth. For instance, core business revenues are estimated to grow 14 per cent annually over the next two years to `5,500 crore, while new verticals are expected to contribute 1,800-2,000 crore (or 25 per cent of total revenue).