Stock Reivew: KEC INTERNATIONAL

 

KEC International is one of the leading players in the power transmission EPC business. The RPG Group company also has a presence in other infrastructure-related businesses such as power systems, cables, railways, telecom and water. The company's business is diversified not only across these commercial segments, but also across various geographies including the Middle East Nations (MENA), Africa, Central Asia, South Asia and America. Despite this, its reliance on its core power transmission business is significantly high. The segment accounts for more than 72% of the company's total revenue and is one of its most profitable ones.

FINANCIALS

KEC has made a decent start to the financial year, with a 21% growth in revenues and a 25% rise in net profit in the first quarter. It is likely to do well this fiscal given its strong unexecuted order book of over 8,100 crore. The current order backlog gives the company revenue visibility for about two years subject to timely execution.

Even as the top line posted a healthy growth, pressure on margins was clearly visible during the quarter. The company's EBITDA margins fell by about 60 basis points as the share of some of its upcoming, low-margin businesses has been increasing steadily. These businesses include railways, cable and telecom where margins are expected to improve only by next fiscal.

Another concern for the company in the near term is its strong presence in the Midde East. Some MENA countries have been facing political turbulence for a prolonged period. These nations account for about 8% of the company's total order book and a slow execution of the orders could dent KEC's top line in the near term.

OUTLOOK

The recent acquisition of USbased SAE Towers — one of the leading manufacturers of lattice transmission towers with a strong presence in Brazil and Mexico — is expected to give KEC a stronghold in the West and provide exposure to new territories.

At home, the company is gradually expanding its footprint in the railways, cable and telecom businesses. A new plant for manufacturing cables is coming up in Baroda and is likely to commence trial production in the first quarter of the next fiscal. This plant is expected to boost margins in the cables segment.

VALUATION

KEC's stock currently trades at around 63- 70. At these levels, the stock is quoting at near its 52-week low, commanding a trailing 12-month price-earnings multiple (P/E) of about 8. Given its strong order backlog and global business presence, the stock is an attractive buy at these levels.