Investment Summary

KEC International Ltd.

Independent Equity Research

April - 2019

Equentis Wealth Advisory Services (P) Ltd

Registered Office:
712, Raheja Chambers, Nariman Point,
Mumbai – 400021 India

Tel: +91 22 61013800

Email: info@researchandranking.com
 KEC INTERNATIONAL LIMITED

Quantitative Factors - Checklist

Required FY14-19 FY19-24E

Condition Condition
Sr. Criteria for Future
Aspect Actual Value Met? Met?
No. Equentis 5x5 Value
(Historical) (Y/N) (Y/N)
strategy (Forecasted)

15-20% CAGR
1 Top-line CAGR
over 5yr period
7% N 13% N

15-20% CAGR
2 EBITDA CAGR
over 5yr period
19% Y 13% N

15-20% CAGR
3 PAT CAGR
over 5yr period
50% Y 14% Y

At least 15%
4 ROCE with increasing Avg - 17%. Y Avg - 23%. Y
bias

Around 1-1.5xs Avg – 0.82-xs

5 D/E Ratio with declining Avg -1.5-xs Y with a declining Y
bias bias

Working Less than 25-

Avg –26 %;
6 Capital 30% Avg – 24.0% Y stable
Y
Intensity of net sales

Dividend Avg - 15%;

7
Payout
15-20% Avg – 16% Y stable Y

Note- KEC being an EPC player we have taken conservative estimates on growth parameters. Thus, growth in
profits can be higher than projected over the long-term. Over the next three years, we expect PAT to grow at a
CAGR of ~14-15%. With improvement in margin and sustained high capital efficiency parameters, along with
continued reduction in leverage is expected to translate in the return ratios to expand. Overall therefore, KEC
should attract better valuations going ahead, making it one of the best investment opportunities in the space.

2
Qualitative Factors - Checklist

Required
Sr.No. Aspect Comment Criteria for Equentis
5x5 strategy-Met?
• Part of the RPG Group, one of India’s leading business houses

Management pedigree, • Successfully grown business through a balanced diversification strategy

1 track record and Y
integrity • Established a large global enterprise through acquisitions and partnerships

• Maintains regular interactions within external stake holders ensuring

consistent information flow with adequate disclosures
• Promoters have consistently increased their stake in the company to over
50%.

• None of promoter holding is pledged.

2 Ownership Profile Y
• Significant institutional holding of 30%+, credible names like HDFC Trustee
Co., Reliance Trustee Co., Aditya Birla Sunlife Mutual Fund, Kotak Mutual
Fund, etc.

• Strong capability in executing EPC projects with over 7 decades of track

record.

• KEC is the largest power T&D EPC player in India having ~25-30% market
share in PGCIL orders.

Business USP & • A prominent player in the international markets as well, where it enjoys strong
3
Market Leadership local presence in some of the key growth regions such as Americas and Y
Africa.

• Flexible business model backed by balanced revenue flows from international

and domestic operations.

• New levers for growth in place with entry in other infra EPC space including
railways and civil.
• Strong management focus on capital efficiency improvement- consistently
stayed ahead of peers in working capital management. Minor blip observed
Past strategies towards in FY19 due to liquidity issues is the market is expected to correct in due
acquisitions, capital course.
allocation, fiscal
prudence, capital
• Average capex has been maintained at around 1-2% of sales during the past
4 spends, cash flow
5 years Y
mgmt, dividend
payouts, bonus,
concern for minority • Company has rewarded investors with average dividend payouts averaging
s/hs 15-20%. Due to consistent requirement of investments in the business,
company is preserving its internal accruals.

• KEC is part of a large group with 3rd generation entrepreneurs involved in

operations of the Group’s other ventures.
5 Succession Planning Y
• A professionally managed company with Mr. Vimal Kejriwal, a veteran in the
industry having over 3 decades of experience, at the helm of operations.

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Investment Summary
1) Robust sector opportunity-
Government’s thrust on developing Indian infrastructure is opening new growth opportunities for EPC and
construction players. Two such infrastructure verticals, where growth outlook looks very promising are – Power
T&D and Railways. Despite medium term challenges, growth in the power T&D sector is expected to remain
strong. Total size of the opportunity and key enablers for the segments are listed below: -
❖ Power T&D- The power Transmission and Distribution infrastructure needs a total investment of
around USD 2.9 trillion for 2016-2025, of which India forms ~10% (291 bn USD). India witnessed
a massive generation capex over the past decade. However, transmission capabilities lag
significantly as AT&C losses in India stand at ~19% against a global average of ~8.5%. In order to
plug the gap, Presently, India has 340 GW of installed generation capacity; 3,90,970 ckm of installed
transmission line length and 8,26,958 MVA of substation transformation capacity, as on 31st March
2018. The Government envisages an addition of over 1,00,000 ckm of transmission lines and over
2,90,000 MVA of transformation capacity between 2017-2022. This would necessitate an enormous
investment to the tune of Rs. 2.6 tn, which is expected to unfold tremendous opportunities. Majority
of these investments are expected to come from SEBs/Discoms and private players, with PGCIL
taking more of a project manager role.
Over the past 1 year, there has been a deferment of capex from PGCIL due to ongoing projects and
impending general elections. However, both PGCIL and industry players are confident that ordering
will pick up post elections.
❖ Railways- In the past few years, even the Railways sector is gathering momentum with renewed
thrust from the government. Sector outlook is positive in view of substantial opportunity size. In
FY18-19 budget, the government allocated Rs. 1.48 tn for the railways. In the interim budget
presented in February 2019, the outlay increased to Rs. 1.58 tn. The government has plans for
network expansion and upgradation and modernization of existing infrastructure. Under the
proposed outlay, Rs.72.5 bn had been allocated for construction of new lines, Rs.4.1 bn for road
safety works (building road over/under bridges), Rs. 101.2 bn for track renewal, Rs.34.2 bn for
passenger amenities, Rs. 61.1 bn for rolling stock, Rs. 17.5 bn for signaling and telecom and Rs.22
bn for gauge conversion. It targets 100% electrification of broad-gauge network by FY22. In terms
of distance, it is targeting 38,000km electrification over the next 5 years. These targets indicate
significant growth potential in the railways sector over the next 3-5 years.
2) KEC is best placed to capture growth in the sector –
We believe that KEC being the industry leader is at the forefront to benefit from the growth opportunities available
in the T&D and Railways sectors. Listed below are the key differentiators that make KEC preferable over its peers
in the sector:

Parameters Details

➢ KEC has 7 decades of experience in the sector and today commands a leadership
position. Basis absolute revenue reported in 9MFY19, it is ~1.6-x the size of its closest
i. Market Leadership competitor Kalpataru Transmission Power, 5-xs Skipper and 9-xs Techno Electric.
➢ We expect this lead to sustain going forward as well given strong execution capabilities
and overall experience in the sector.

➢ KEC is the only pure play EPC player compared to its listed peers. It derives ~80%
revenue from EPC orders in varied sectors such as T&D, Railways, Solar, etc.
➢ Kalpataru besides being present in the EPC segment through its subsidiaries is also
present in construction and Logistics sector. In FY18, EPC contributed 84% to the
standalone revenue.
ii. Focused EPC
player ➢ Techno Electric besides being present in the power T&D EPC also executes industrial
EPC orders. Overall EPC revenue contributed ~90% to its total topline. Further it also
owns assets on BOOT/BOOM basis in Wind Power generation and transmission
segments.
➢ Skipper is primarily a tower manufacturer and thus an equipment provider, with very
limited presence in the EPC segment. Engineering segment constituted ~86% of its
4
 Parameters Details
revenue in FY18, EPC formed only 4% of revenue and the balance was contributed by the
Polymer business.

➢ KEC and KTPL reported strong increase in Order Book (OB) supported by
consistently strong inflows over the past 7-8 quarters. 9MFY19 YoY growth in the
iii. High revenue order book across players is as follows: -
visibility o KEC 20% YoY growth in OB to Rs.206 bn. (OB/Sales 2.2-xs)
supported by
strong growth in o Kalpataru 35% YoY growth in OB to Rs.141 bn. (OB/Sales 2.3-xs)
order book
o Techno electric 25% decline in OB to Rs. 18 bn. (OB/Sales 1.7-xs)
o Skipper 6% YoY jump in engineering OB to Rs26 bn. (OB/Sales 1.4-xs)

➢ KEC, predominantly a power T&D EPC player, has diversified into multiple
segments (e.g. solar, cables, railways and civil construction) to leverage its
execution capabilities and intensify growth. EPC Order Book break up by segment
and geography of peer set companies in 9MFY19 is as follows: -
iv. Diversified o KEC - Domestic: International ~48:52; T&D and Non-T&D 73:27 with
revenue and OB increasing bias towards growing Non-T&D segment.
mix
o Kalpataru - Domestic: International ~63:36; T&D and Non-T&D 57:43
o Techno Electric- Domestic: International 100:0; T&D and Non-T&D 100:0
o Skipper- Domestic: International 87:13; Entire order book consists of T&D as
there is no order book for polymer segment.

➢ Having tight control on working capital is a critical factor differentiating one EPC company
v. Best-in-class from the other. Till FY18, KEC enjoyed one of the best cash conversion days (measured
Working Capital as Creditor Days minus Debtor Days minus Inventory) amongst listed EPC players. In
efficiency FY19, working capital days increased. This is mainly due to decline in creditor payable
parameters days and increase in short term debt for KEC. FY19E working capital days for KEC stand
at 107 vs 70 in FY18, while for KPTL it stands at 105 days as against 102 days in FY18.

3) International T&D and domestic Non-T&D to lead growth going forward –

Over the years, KEC has been able to enhance its presence in power T&D by increasing geographical presence
and scaling up new business verticals such as railways, solar and civil. This has helped it to 1) expand market for
its T&D business beyond domestic geography; and 2) develop new markets in related segments, where
government spending is envisaged in the medium term. Overall, we expect KEC’s revenue to grow at a healthy
pace of 13-14% CAGR over the next five years. Growth in coming years would be supported by conversion of its
existing order book of Rs.206 billion (9MFY19 20% YoY jump), to sales over the next 18-24 months period. We
believe key growth drivers for revenue are as follows:
❖ Railways a strong growth opportunity – Scaling up of its railway vertical has reaped benefits with
order book contribution increasing to 23% at the end of 9MFY19 from 6% in FY16. Railway orders
have grown at a CAGR of 102% over the past 3 years from Rs. 5.4 bn in FY16 to current Rs. 47 bn.
Consequently, contribution from this segment in overall revenue also stands increased at 17.9% in
9MFY19 compared to 2.4% in FY16. Revenue from Railways is expected to grow further given the
large unexecuted pipeline of orders in this segment. Also, since margins are higher in the railway
segment and due to shorter term projects, requires lower working capital investment, increase in
railway contribution will improve the consolidated financial performance of the company.
❖ Strong International T&D traction- KEC’s international order book at Rs. 107 bn surpassed
domestic orders of Rs. 98 bn. At the end of Q2FY19, for the first time in the company’s history,
international orderbook is higher than domestic book. Strong order traction from international
markets is on account of management’s stated strategy of entering newer geographies. KEC has
increased its foot print from 61 countries in FY16 to 100 countries in FY18. In the past 2-3 years,
KEC has ventured into newer geographies, largely in the African region, which has enhanced order
inflow. T&D ordering from SAARC nations continues to remain strong. In FY19, KEC received its

5
 largest ever single order of Rs. 14.9 bn from Bangladesh. We expect international markets to provide
a good hedge for KEC operations going forward.
❖ Domestic T&D is expected to make a recovery post-election– Of the total power T&D outlay of
Rs.2.6tn in the 13th plan period, SEBs are expected to be a major contributor. With SEB capex
estimated to surpass PGCIL capex in coming years and given stringent pre-qualification criteria for
winning large contracts in the EPC space, we expect KEC to be the key beneficiary of the emerging
opportunity. Ordering had slowed down over the past 2-3 quarters due to impending elections, which
is expected to recover by Q2 of FY20. As stated by the management, KEC would focus primarily
on financially sound SEBs such as Tamil Nadu, Karnataka, West Bengal and Rajasthan, which have
a strong pipeline of projects that are funded by multilateral agencies.
4) Broad based growth and strong traction in order book to spur healthy growth in revenue –
KEC has strong order back log of Rs.206 bn at the end of 9MFY19, a YoY growth 20.1%. Order Book to Sales
ratio currently stands at 2.0-xs on FY18 revenue, thus providing visibility for sales growth over the next 2 years.
We expect the orders in hand to be executed over the next 12-24-month period, translating to ~15% revenue
CAGR over FY19 to FY22. Order inflows for 9MFY19 was up 2.0% YoY to Rs.115 bn mainly due to slowdown
in the domestic T&D segment. Ordering activity in railways segment continues to remain strong with YoY growth
of 165% in 9MFY19. Due to the ongoing poll season and implementation of model code of conduct, domestic
ordering is expected to remain muted in the near term. Once the new government settles, domestic T&D ordering
from PGCIL and SEBs is expected to pick up.
In the international market, KEC continues to see order and tender traction. Management is especially positive on
SAARC, South East Asia and selected African regions. It also expected SAE ordering to pick up in the medium
term.
5) Margins expected to remain stable at current levels-
KEC over the past 3 years has consistently improved its operating (EBDITA) margins from 8.1% reported in
FY16 to 10.0% in FY18. This trajectory is very impressive when compared to its past performance. KEC’s
operating performance had suffered greatly post FY11 as the company had to endure the double whammy of
slowdown in domestic orders and global recession taking a hit on SAE operations. Further, in this period the
company was investing heavily to diversify into new revenue streams of cables, waters, solar and Railway EPC.
Resultantly, its margins dipped from 10-11% recorded in FY10-FY11 and lingered at sub 6-7% level for over 5
years. It is only in FY17 that operating margins started climbing back to plus 9% level to now touch 10.6% in
Q3FY19. Over the past 4-5 years, KEC has sharpened focus on execution and cost reduction initiatives. The
company has pruned execution delays, which has led to EBITDA margin improvement in FY17 and 9MFY19.
Management has guided for margins to largely remain at current levels. We have taken a conservative view and
built in a margin expectation of 10.5%. The factors that are expected to remain current margins levels are as
follows: -
❖ Higher contribution from high margin new segments: Non-T&D segment contributed 36.4% to
the revenue in 9MFY19 and 32% to the order book. With Non-T&D segment, Railways and civil
projects are relatively short-term projects of <12 months as against T&D projects of 18-24 months.
This ensures faster cash cycle and lower working capital investment. As per management, railway
projects’ working capital cycle stands at ~60 days as against 90-100 days for T&D segment. This
translates to lower interest cost and higher profitability.
❖ Increasing contribution from international orders with higher PBT margins- While EBITDA
margins in domestic and international projects are similar, PBT margins are higher in international
markets due to lower cost of debt. Also, international markets generally entail lower retention money
period, enabling higher project cash flows. Hence, as contribution from international orders pick up
due to KEC’s strategy to expand into newer geographies, we expect higher overall profitability.
❖ Operating leverage to support margins- Order Book in 9MFY19, both from domestic and
international geographies, has shown a strong jump. As these orders convert to sales, operating
leverage benefits would flow in. We expect operating leverage benefits in new verticals to be the
key contributor of growth in profitability in coming years.
6) Healthy growth in profits aided by revenue growth and reduction in interest outgo –
Continued growth in sales, sustained profitability aided by newer segments and internal projects, low
depreciation and interest costs as a proportion to sales should enable the company to improve PAT margins from

6
current 4.5% to 4.8% in FY24. Resultantly, we expect PAT to grow at a CAGR of 14-15% over FY19-24 to Rs
9.9bn.

VALUATION AND RECOMMENDATION

Increase in cash flows from operations, limited capex and rationalization of capital structure should translate in
continued growth in net profit of the company. Overall, we project EPS of the Company to increase from Rs 19.7
per share in FY19E, to Rs 23.9 in FY20 (YoY growth 21%) and further to Rs 38.5 by FY24, implying an EPS
CAGR of 14.3% over FY19-24.
KEC currently trades at a PE of 15.4-xs on the consolidated TTM EPS of Rs 19.19. Over the next 4-5 years we
expect the stock price to give 2.2-2.5-xs returns with target price ranging from Rs. 623 to Rs, 706. 5-year
target price has been arrived by considering EPS CAGR growth in the range 14-18% on the base of FY19 EPS of
Rs. 19.7.
Valuation reflects our confidence in the management capability in capturing high growth opportunities both
in India and in the overseas market. Our outlook also finds strength from its leadership position in the power
T&D segment and its superiority in managing working capital requirement as compared to its peers. We
therefore believe that KEC is best placed in the sector to benefit from the expected growth in order flows.
➢ Valuation -- 5-year:
The table below details the sensitivity of FY24 target price to different levels of EPS estimates and PE
multiples.
FY24 Attach PE Multiple (xs) Upside (xs)
FY19 EPS
EPS
EPS (Rs.) CaGR 5 10 15 17 22 27 5 10 15 17 22 27
(Rs.)
19.74 10.0% 31.78 159 318 477 540 699 858 0.6 1.1 1.7 1.9 2.4 3.0
19.74 14.0% 38.00 190 380 570 646 836 1,026 0.7 1.3 2.0 2.2 2.9 3.6
19.74 16.0% 41.45 207 415 622 705 912 1,119 0.7 1.4 2.2 2.4 3.2 3.9
19.74 18.0% 45.15 226 451 677 768 993 1,219 0.8 1.6 2.4 2.7 3.4 4.2
19.74 23% 55.56 278 556 833 945 1,222 1,500 1.0 1.9 2.9 3.3 4.2 5.2
19.74 28% 67.81 339 678 1,017 1,153 1,492 1,831 1.2 2.4 3.5 4.0 5.2 6.4
low high
5 year 623 706
2.2 2.5
Note – shaded cells indicate fair value of equity range
Disclaimer - “Our 5yr. Target prices are rolling estimates; hence they may be different on the dashboard,
from the ones published at the time of initiation. Disclaimer for same is also updated in our Initiation reports
for your reference”

7
Consolidated Profit & Loss Summary

3yr CAGR 5yr CAGR 3yr CAGR 5yr CAGR

Consolidated (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E
(FY16-19) (FY14-19) (FY19-22E) (FY19-24E)
Gross Revenues 80,927 86,573 87,096 87,550 1,00,964 1,14,952 1,35,645 1,55,992 1,74,711 1,92,182 2,11,401 9.7% 7.3% 15.0% 13.0%
YoY 13.7% 7.0% 0.6% 0.5% 15.3% 13.9% 18.0% 15.0% 12.0% 10.0% 10.0%
Net Revenues 79,018 84,678 85,178 85,844 1,00,561 1,12,754 1,33,052 1,53,010 1,71,371 1,88,508 2,07,359 9.8% 7.4% 15.0% 13.0%
YoY 13.2% 7.2% 0.6% 0.8% 17.1% 12.1% 18.0% 15.0% 12.0% 10.0% 10.0%
EBITDA 4,933 5,118 6,923 8,179 10,060 11,829 13,970 16,066 17,994 19,793 21,773 19.5% 19.1% 15.0% 13.0%
YoY 37.5% 3.8% 35.3% 18.1% 23.0% 17.6% 18.1% 15.0% 12.0% 10.0% 10.0%
EBITDA margins 6.2% 6.0% 8.1% 9.5% 10.0% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Avg- 10.0% Avg- 8.8% Avg- 10.5% Avg- 10.5%
Reported PAT 667 1,610 1,476 3,041 4,604 5,074 6,138 7,302 8,244 9,057 9,905 50.9% 50.0% 17.6% 14.3%
YoY 2.6% 141.2% -8.3% 106.0% 51.4% 10.2% 21.0% 19.0% 12.9% 9.9% 9.4%
PAT margins 0.8% 1.9% 1.7% 3.5% 4.6% 4.5% 4.6% 4.8% 4.8% 4.8% 4.8% Avg- 4.2% Avg-3.3% Avg- 4.6% Avg- 4.7%
EPS (Rs.) 2.6 6.3 5.7 11.8 17.9 19.7 23.9 28.4 32.1 35.2 38.5 50.9% 50.0% 17.6% 14.3%

Balance Sheet
3yr 5yr 3yr 5yr
CAGR CAGR CAGR CAGR
Consolidated (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E
(FY16- (FY14- (FY19- (FY19-
19) 19) 22E) 24E)
LIABILITIES
Share Capital 514 514 514 514 514 514 514 514 514 514 514
Reserves and Surplus 11,402 12,784 12,390 15,349 19,460 23,638 28,693 34,706 41,495 48,954 57,110
Net worth 11,916 13,298 12,904 15,864 19,975 24,153 29,207 35,220 42,009 49,468 57,624 23.2% 15.2% 20.3% 19.0%
Debt Funds 21,296 22,141 32,212 21,057 17,663 28,459 28,784 26,758 27,284 26,574 26,954 -4.0% 6.0% -1.4% -1.1%
Current Liabilities & Provisions 39,971 41,094 42,387 48,841 66,303 58,470 68,996 79,345 88,866 97,753 1,07,528 11.3% 7.9% 15.0% 13.0%
Total 73,897 77,272 88,740 87,148 1,05,125 1,12,266 1,28,171 1,42,507 1,59,343 1,74,979 1,93,290
ASSETS
Net Fixed Assets 13,520 12,589 11,977 11,488 11,122 11,901 12,501 13,017 14,455 15,719 18,222 -0.2% -2.5% 6.7% 8.9%
Current Assets 56,908 59,469 71,577 70,542 88,388 94,164 1,08,493 1,21,354 1,35,870 1,49,418 1,64,320 9.6% 10.6% 13.0% 11.8%

8
 3yr 5yr 3yr 5yr
CAGR CAGR CAGR CAGR
Consolidated (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E
(FY16- (FY14- (FY19- (FY19-
19) 19) 22E) 24E)
Total 73,897 77,272 88,740 87,148 1,05,125 1,12,266 1,28,171 1,42,507 1,59,343 1,74,979 1,93,290 8.2% 8.7% 12.4% 11.5%

3yr Avg 5yr Avg 3yr Avg 5yr Avg

RATIOS: FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E
(FY17-19) (FY15-19) (FY19-21E) (FY19-23E)
Debt:Equity 1.79 1.66 2.50 1.33 0.88 1.18 0.99 0.76 0.65 0.54 0.47 1.13 1.51 0.97 0.82
Asset turns 2.33 2.34 1.84 2.24 2.59 2.10 2.25 2.42 2.43 2.44 2.42 2.31 2.22 2.26 2.33
Net working capital/Gross sales 19.6% 19.3% 33.0% 21.3% 19.3% 29.3% 27.4% 25.2% 25.2% 25.2% 25.2% 23.3% 24.4% 27.3% 26.5%
Capex/Gross sales 1.2% -0.6% -0.6% 0.6% 1.2% 1.7% 1.5% 1.3% 1.7% 1.6% 2.1% 1.2% 0.5% 1.5% 1.6%
ROCE 12.9% 12.0% 12.3% 18.7% 23.8% 20.3% 21.9% 23.8% 24.0% 24.1% 23.8% 21.0% 17.4% 22.0% 22.8%
RoE 5.6% 12.1% 11.4% 19.2% 23.1% 21.0% 21.0% 20.7% 19.6% 18.3% 17.2% 21.1% 17.4% 20.9% 20.1%
Dividend payout - as % of PAT 27.0% 16.9% 14.7% 16.3% 16.1% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.8% 15.8% 15.0% 15.0%
BVPS (Rs.) 46.3 51.7 50.2 61.7 77.7 93.9 113.6 137.0 163.4 192.4 224.1 Cagr- 23.2% Cagr- 15.2% Cagr- 20.3% Cagr- 19.0%

9
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None of EWASPL, Research Analyst(s), or their relatives had any known direct /indirect material conflict of interest including
any long/short position(s) in any specific security on which views/opinions have been made in this Report, during its preparation.
EWASPL, the Research Analyst(s), or their relatives do not have financial interest in the issuer company(ies) of the said
securities nor have ownership of 1% or more individually or jointly till the date of this Report. EWASPL, the Research Analyst(s),
or their relatives have not received any compensation or other benefits from the said issuer company(ies) in last 12 months in
any respect whatsoever.

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