KEC

TAT International (KECIN)

CMP: | 340 Target: | 410 (21%) Target Period: 12-15 months BUY
November 5, 2020

All-round performance…
KEC reported a decent set of Q2FY21 numbers that were better than our
estimates on the revenue front led by better execution in the non-T&D
segment while T&D segment stayed flat. However, margins saw some

Result Update
impact on the back of higher than expected operating cost. KEC’s YTD order Particulars
inflow came in at | 4366 crore, up 16%, YoY. Recognition of Covid expenses, Par ticu lar Am o u n t
higher contracting expenses and forex loss in Brazilian projects led EBIDTA Ma rke t C a pita liz a tion 8,741.0
margins to come in a tad below expectations. With strong backlog and Tota l De bt (FY 20) |2061.1 c rore
tendering pipeline, we believe KEC will perform strongly in H2FY21-FY22E C a s h a nd Inv . (FY 20) |152.7 c rore
across all parameters. EV 10,650.1
52 w e e k H/L |359/ 155
Non-T&D business drives execution while order inflows strong
Equity c a pita l |51.4 C rore
Topline came in at | 3257.7 crore, up 16% YoY (above our estimate of Fa c e v a lue |2
| 2875.8 crore). During Q2FY21, the overall T&D business (including SAE Price graph
Tower) revenue remained flat YoY at | 1977 crore. While non-T&D business
(railways, civil, cables, other) registered robust growth of 52% to | 1349 500 12000

crore, YoY led by better execution. The railways business revenue came in 400 10000
8000
at | 821 crore, up 45% while civil business segment revenue grew 3x to 300
6000
| 212 crore. The company has bagged orders to the tune of | 4366 crore. 200
4000
KEC has submitted tenders to the tune of | 30000 crore with more worth 100 2000
| 25000 crore set to come up for bidding in the next two months. The 0 0

Mar-18

Mar-19

Mar-20
management was pretty bullish on international T&D markets, railways and

Jul-18

Jul-19

Jul-20
Nov-17

Nov-18

Nov-19

Nov-20

ICICI Securities – Retail Equity Research

civil segment for new orders. We expect order inflows to be at | 12200 crore,
| 15500 crore for FY21E, FY22E, respectively. However, the management KEC (L.H.S) NSE500 Index
sounded cautious in bidding in markets like Brazil wherein risk of commodity
and exchange volatility has made them choosy while they are pretty upbeat Key Highlights
on Middle East, Saarc and African region in the international markets.  Order backlog for Q2FY21 at
No deterioration in b/s despite rise in execution, Covid | 19515 crore (while it has L1 position
of | 3000 crore plus)
Average borrowing level continues to be in line with target of ~| 2500 crore.
KEC’s net debt (excluding acceptances) has remained at | 2425 vs. | 2459  In H1FY21, order inflow at | 4366
crore YoY. As per the management, working capital is in a manageable crore mainly in T&D segment
position with no stress yet. The management expects interest cost as  Railway business grew 45% YoY
percentage of sales to fall below 2% in H2FY21 despite increase in execution while civil segment revenue was up
in the same period. The average net working capital days were at 132 days. 3x. T&D revenues was flat for Q2FY21
Valuation & Outlook  Maintain BUY rating with revised
Hardly any company apart from KEC will deliver growth in FY21 in terms of target price of | 410
order inflows, revenue execution and maintaining balance sheet discipline. Research Analyst
Also, with a backlog of | 19515 crore, strong profitable traction in railways,
Chirag Shah
civil business will further derisk its business model in the medium term. We Shah.chirag@icicisecurities.com
expect KEC to deliver 11.1%, 15.7% revenue, PAT CAGR, respectively, in
FY20-22E. Hence, it exhibits best growth parameters in the midcap capital Amit Anwani
amit.anwani@icicisecurities.com
goods space. Better performance and visibility call for multiple upgrades at
14x FY22E, which gives us a target price of | 410/share. We maintain BUY.

Key Financial Summary

Par ticu lar s (| cr o r e ) FY 18 FY 19 FY 20 FY 21E FY 22E C A G R (FY 20-FY 22E)
Net S ales 10,058.0 11,000.9 11,965.4 12,995.2 14,772.6 11.1%
EBITDA 1,006.3 1,149.7 1,234.7 1,133.9 1,531.4 11.4%
EBITDA Margin (% ) 10.0 10.5 10.3 8.7 10.4
Net Prof it 460.5 494.2 565.9 511.7 757.0 15.7%
EPS (|) 17.9 19.2 22.0 19.9 29.4
P/ E (x ) 19.0 17.7 15.4 17.1 11.5
RoNW (% ) 23.1 20.1 20.2 16.2 19.9
RoC E (% ) 24.9 24.8 22.3 18.2 22.3
Source: Company, ICICI Direct Research
 Result Update | KEC International ICICI Direct Research

As
Exhibit 1: Variance Analysis
Q2FY21 Q2FY21E Q2FY20 YoY (Chg %) Q1FY21 QoQ (Chg %) Comments
Revenues above our estimates on
Revenue 3257.7 2,875.8 2,808.8 16.0 2,206.8 47.6 account of better execution across
segments
Other Income 6.8 6.0 3.6 88.6 6.9 -2.0

Employee Expenses 270.4 276.1 274.7 -1.5 252.5 7.1

Raw Material Expenses 1520.5 1,371.7 1,390.3 9.4 1,025.3 48.3
Other Operating Expenses 338.8 284.7 296.2 14.4 234.1 44.7
Erecting and Contracting
834.9 667.2 553.5 50.8 500.0 67.0
Expenses

EBITDA 293.1 276.1 294.2 -0.4 194.9 50.4

One-off Covid expenses, higher
EBITDA Margin (%) 9.0 9.6 10.5 -148 bps 8.8 17 bps contracting expenses and forex loss
imapcted margins
Depreciation 37.4 39.3 34.7 7.7 39.1 -4.3
Interest 67.4 68.1 82.2 -17.9 66.3 1.8
PBT 195.0 174.7 180.9 7.8 96.5 102.2
Total Tax 52.5 47.5 41.4 26.8 25.7 NM
PAT 142.6 127.2 139.5 2.2 70.8 101.3

Key Metrics
Decent inflows despite economic
Order inflows 2,435 2,434 2,651 -8.1 1,931.0 26.1
slowdown
Backlog and execution cycle ensures
Order backlog 19515 18188 18085 7.9 18630 4.7
reasonable visibility in FY21E-22E
Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates

FY21E FY22E Comments
(| Crore) Old New % Change Old New % Change
Backlog visibility to drive revenue CAGR of 11.1% in FY20-
Revenue 12,563.9 12,995.2 3.4 14,378.1 14,772.6 2.7
22E
EBITDA 1,228.6 1,133.9 -7.7 1,492.0 1,531.4 2.6
EBITDA Margin (%) 9.8 8.7 -105 bps 10.4 10.4 -1 bps
PAT 574.5 511.7 -10.9 728.4 757.0 3.9
EPS (|) 22.3 19.9 -10.8 28.3 29.4 4.0
Source: Company, ICICI Direct Research

Exhibit 3: Assumptions
Current Earlier Comments
FY20 FY21E FY22E FY21E FY22E
Order Inflow growth -19.5 8.3 26.4 3.5 32.1 Order inflow estimates revised considering bunching up of tendering activities
Order Backlog growth -6.9 -3.9 4.0 -4.4 6.2
Strong revenue growth in railways likely to continue amid expected recovery in
Revenue growth 8.8 8.6 13.7 5 14.4
domestic T&D
EBITDA Margins 10.3 8.7 10.4 9.8 10.4 Margins expected to sustain near current levels
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2

 Result Update | KEC International ICICI Direct Research

Conference Call Highlights

 KEC’s business recovered across all segments barring a few minor
localised issues. Execution improved on the back of increasing
labour strength, mechanisation, digitisation and automation
 During the quarter, margins were impacted as costs escalated on
account of continued extra costs being incurred for Covid-19, steep
depreciation of the Brazilian riyal and relatively faster execution in
railways and civil
 YTD order inflow is at | 4366 crore, up 16% YoY. Order inflow from
core T&D witnessed a substantial improvement largely from the
international market
 L1 position of | 3500 crore is largely from international T&D business
 Brazil is seeing improved conditions as the pandemic is now under
control while volatility in metal prices is now becoming relatively
stable. Execution of the three ongoing EPC projects has been
ramped up while one project is slated to be complete by this quarter.
KEC has also commenced on a new EPC project in Brazil
 The railway business witnessed robust growth of 45%. In line with
diversification in railways, KEC has secured its first order for metro
electrification. The company will continue to bid in non-civil areas in
metros such as power supply, ballastless tracks, SNP etc
 The cables business is on track for commercialisation of new
products in H2. We expect reasonable growth in cables business,
going ahead
 Net debt is at | 2424 crore as on September 30, 2020. Interest cost
for the quarter was 2.1% as a percentage of sales, reduction of 80
bps over last year. The company is confident of staying well within
the target of | 2500 crore net debt, going ahead
 Revised bidding of green energy corridor phase II tenders is in an
advanced stage. Proposals are expected to be submitted this month
 KEC has quoted ~ | 30000 crore worth of tenders in the last few
months and would be quoting ~ | 25000 crore worth of tenders in
the next two months. However, given the current scenario, order
awards have been slightly low
 Currently, KEC is L1 for four orders in SAE. These are under
negotiation and can get finalised by January. Execution of these
orders, if awarded, would commence from Q1FY22. KEC has been
cautious in taking new orders in Brazil owing to huge volatility in
metals and other raw material prices
 Given the lower rupee cost of borrowing in India, KEC is switching
towards rupee loans and has started selling more foreign currency.
Thus, next quarter may witness some forex gains

ICICI Securities | Retail Research 3

 Result Update | KEC International ICICI Direct Research

Financial story in charts

Exhibit 4: KEC exhibits strong order inflow trend… Exhibit 5: Order backlog trend and visibility

18000 15500 50 25000 50

15098 20,313
16000 14084 40 18,90618,17718,904 40
14000 12350 12266 20000 17,298
11331 30 30
12000 20
(| crore)

(| crore)
10000 8482 8204 8714 15000 12,631 20
10 10,20010,300 9,449
8000

(%)
10000 10
6000 0
-10 0
4000 5000
2000 -20 -10
0 -30 0 -20
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21EFY22E FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21EFY22E

Order Inflow YoY growth (%) [R.H.S.] Order backlog YoY growth (%) [R.H.S.]

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 6: Revenue trend in FY14-22E Exhibit 7: PAT to rise sharply on strong margin recovery

16000 14773 20 800

14000 12995 700
11965
11001 15
12000 10058 600
10000 7902 8468 8516 8584
(| crore)

10
8000 500
(| crore)

6000 5 400 757

4000 300
0 566 512
2000 461 494
200
0 -5 304
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E 100 152 192
0 67

Re ven ues YoY growth (%) [R.H.S.]

FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E FY22E

Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company

Exhibit 8: Return ratios Exhibit 9: Interest/EBITDA ratio to improve, going ahead

30 30
25 25
20
20
15
(%)

15
(%)

10 27.5
24.5 24.9 24.8
10 20.6
5
0 5
FY16 FY17 FY18 FY19 FY20 FY21E FY22E
0
ROE (%) ROCE(%)
FY18 FY19 FY20 FY21E FY22E

Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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 Result Update | KEC International ICICI Direct Research

Exhibit 10: Recommendation History vs. Consensus

450 100.0
400 95.0
350 90.0
85.0
300
80.0
250
(|)

(%)
75.0
200
70.0
150
65.0
100 60.0
50 55.0
0 50.0
May-18
Jan-18

May-18
Jun-18

May-19
Jun-19

May-20
Jun-20
Jan-18

Jan-19

Jan-20
Mar-18

Mar-19

Mar-20
Feb-19

Feb-20
Oct-18

Apr-19

Oct-19

Apr-20

Oct-20
Apr-18

Jul-18

Jul-19

Jul-20
Nov-17

Dec-18

Dec-19
Dec-17

Nov-18

Nov-19

Nov-20
Aug-18

Aug-19

Aug-20
Sep-18

Sep-19

Sep-20
Price Idirect target Consensus Target Mean % Consensus with BUY
Source: Bloomberg, Company, ICICI Direct Research

Exhibit 11: Top 10 Shareholders

Ran k In ve s to r Nam e Filin g Date % O /SPo s itio n (%) C h an g e
1 S w a llow A s s oc ia te s L 30-Jun-20 26.4 67.76m 0.00m
2 S ummit S e c uritie s L t 19-A ug-20 10.9 28.10m 0.03m
3 Hdf c Trus te e C o L td/ 30-Jun-20 9.3 23.77m 0.00m
4 Hdf c A s s e t Ma na ge me n 30-S e p-20 9.2 23.68m 0.00m
5 Ins ta nt Holdings L td 28-A ug-20 8.6 22.16m 0.05m
6 K ota k Ma hindra A s s e t 30-S e p-20 3.2 8.20m 0.00m
7 L if e Ins ura nc e C orp 30-Jun-20 2.7 7.03m 0.00m
8 A ditya Birla S un L if 30-S e p-20 2.5 6.34m (0.52)m
9 Idf c Mutua l Fund 30-S e p-20 2.2 5.51m (0.09)m
10 S te l Holdings L td 30-Jun-20 2.0 5.01m 0.00m
Source: Reuters, ICICI Direct Research

Exhibit 12: Shareholding Pattern

(in %) Se p -19 De c-19 Mar -20 Ju n -20 Se p -20
Promoter 51.6 51.6 51.7 51.7 51.8
FII 7.6 7.6 8.7 8.8 9.7
DII 27.1 27.8 27.5 27.8 26.8
O thers 13.7 13.0 12.1 11.7 11.7
Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5

 Result Update | KEC International ICICI Direct Research

Financial summary

Exhibit 13: Profit and loss statement | crore Exhibit 14: Cash flow statement | crore
(Y e ar -e n d Mar ch ) FY 19 FY 20 FY 21E FY 22E (Y e ar -e n d Mar ch ) FY 19 FY 20 FY 21E FY 22E
T o tal o p e r atin g In co m e 11,000.9 11,965.4 12,995.2 14,772.6 Prof it a f te r Ta x 494.2 565.9 511.7 757.0
G row th (% ) 9.4 8.8 8.6 13.7 A dd: De pre c ia tion 117.1 147.2 171.2 199.6
R a w Ma te ria l Ex pe ns e s 5,409.7 5,591.6 6,187.6 7,161.5 (Inc )/de c in C urre nt A s s e ts -1,293.5 -973.3 -1,299.1 -983.8
Employe e Ex pe ns e s 832.2 1,104.4 1,077.4 1,224.6 Inc /(de c ) in C L a nd Prov is ions 641.7 415.6 929.1 230.1
Ere c ting & C ontra c ting Ex p. 2,713.8 2,826.3 3,259.3 3,476.6 O the rs 3.3 3.0 5.0 5.0
A dminis tra tiv e Ex pe ns e s 895.5 1,208.4 1,412.1 1,510.5 C F fr o m o p e r atin g activitie s -40.5 155.4 312.9 202.8
Tota l O pe ra ting Ex pe nditure 9,851.2 10,730.7 11,936.3 13,373.2 (Inc )/de c in Inv e s tments -36.6 80.7 0.0 -35.0
EBIT DA 1,149.7 1,234.7 1,133.9 1,531.4 (Inc )/de c in Fix e d A s s e ts -116.6 -393.3 -70.0 -180.0
G row th (% ) 14.3 7.4 -8.2 35.1 O the rs 0.0 0.0 0.0 0.0
De pre c ia tion 117.1 147.2 171.2 199.6 C F fr o m in ve s tin g activitie s 21.8 -339.5 -167.0 -247.6
Inte re s t 316.2 308.0 280.7 315.1 Is s ue /(Buy ba c k) of Equity 0.0 0.0 0.0 0.0
O the r Inc ome 29.1 11.1 21.7 29.5 Inc /(de c ) in loa n f unds 57.4 365.0 100.0 30.0
Ex c e ptiona l Ite m -6.3 0.0 0.0 0.0 Div ide nd pa id & div ide nd ta x -74.3 -188.9 -86.5 -98.8
PBT 751.8 790.6 703.6 1,046.3 Inc /(de c ) in S e c . pre mium 0.0 0.0 0.0 0.0
Tota l Ta x 257.7 224.7 191.9 289.3 O the rs 0.0 7.6 0.0 0.0
PA T 494.2 565.9 511.7 757.0 C F fr o m fin an cin g activitie s 0.9 161.5 -54.1 -68.8
A djus te d PA T 494.2 565.9 511.7 757.0 Ne t C a s h f low -17.8 -22.6 91.9 -113.5
G row th (% ) 7.3 14.5 -9.6 47.9 O pe ning C a s h 193.0 175.2 152.7 244.5
EPS (|) 19.2 22.0 19.9 29.4 C lo s in g C as h 175.2 152.7 244.5 131.0
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

Exhibit 15: Balance sheet | crore Exhibit 16: Key ratios | crore
(Y e ar -e n d Mar ch ) FY 19 FY 20 FY 21E FY 22E (Y e ar -e n d Mar ch ) FY 19 FY 20 FY 21E FY 22E
L ia bilitie s Pe r s ha re da ta (|)
Equity C a pita l 51.4 51.4 51.4 51.4 EPS 19.2 22.0 19.9 29.4
R e s e rv e a nd S urplus 2,383.7 2,746.2 3,103.8 3,762.0 C a s h EPS 23.8 27.7 26.6 37.2
Tota l S ha re holde rs f unds 2,435.1 2,797.6 3,155.2 3,813.4 BV 94.7 108.8 122.7 148.3
Tota l De bt 1,696.8 2,061.8 2,161.8 2,191.8 DPS 2.4 6.1 2.8 3.2
De f e rre d Ta x L ia bility 149.7 75.1 85.1 90.1 C a s h Pe r S ha re 6.8 5.9 9.5 5.1
Minority Inte re s t / O the rs 0.0 0.0 0.0 0.0 O p e r atin g Ratio s (%)
T o tal L iab ilitie s 4,295.5 5,062.4 5,529.0 6,221.2 EBITDA Ma rgin 10.5 10.3 8.7 10.4
PBT / Tota l O pe ra ting inc ome 6.8 6.6 5.4 7.1
A s s e ts PA T Ma rgin 4.5 4.7 3.9 5.1
G ros s Bloc k 1,427.3 1,695.5 1,839.4 1,999.4 Inv e ntory da ys 21.3 23.7 25.0 21.0
L e s s : A c c De pre c ia tion 560.8 654.2 790.5 953.8 De btor da ys 161.8 165.5 170.0 170.0
Ne t Bloc k 866.5 1,041.2 1,049.0 1,045.6 C re ditor da ys 159.3 152.7 150.0 140.0
C a pita l WIP 7.3 84.0 10.0 30.0 Re tu r n Ratio s (%)
Tota l Fix e d A s s e ts 873.8 1,125.2 1,059.0 1,075.6 R oE 20.1 20.2 16.2 19.9
Inv e s tments 114.2 33.4 33.4 68.4 R oC E 24.8 22.3 18.2 22.3
Inv e ntory 641.0 775.8 890.4 849.9 R oIC 30.0 26.6 21.5 25.3
De btors 4,875.3 5,425.9 6,052.5 6,880.4 V alu atio n Ratio s (x)
L oa ns a nd A dv a nc e s 33.6 102.0 27.9 91.7 P/E 17.7 15.4 17.1 11.5
O the r C urre nt A s s e ts 4,311.9 4,531.3 5,163.1 5,295.9 EV / EBITDA 8.9 8.6 9.4 7.1
Cash 175.2 152.7 244.5 131.0 EV / Ne t S a le s 0.9 0.9 0.8 0.7
Tota l C urre nt A s s e ts 10,036.9 10,987.6 12,378.6 13,248.9 Ma rke t C a p / S a le s 0.8 0.7 0.7 0.6
C re ditors 4,800.9 5,007.3 5,340.5 5,666.2 Pric e to Book V a lue 3.6 3.1 2.8 2.3
Prov is ions 50.3 59.3 69.4 82.2 So lve n cy Ratio s
Tota l C urre nt L ia bilitie s 7,398.9 7,814.5 8,743.6 8,973.7 De bt/EBITDA 1.5 1.7 1.9 1.4
Ne t C urre nt A s s e ts 2,638.0 3,173.1 3,635.0 4,275.2 De bt / Equity 0.7 0.7 0.7 0.6
O the rs A s s e ts 0.0 0.0 0.0 0.0 C urre nt R a tio 1.3 1.4 1.4 1.5
T o tal A s s e ts 4,295.5 5,062.4 5,529.0 6,221.2 Q u ick Ratio 1.2 1.3 1.3 1.4
Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 6

 Result Update | KEC International ICICI Direct Research

RATING RATIONALE
ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its
stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,
Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined
as the analysts' valuation for a stock

Buy: >15%
Hold: -5% to 15%;
Reduce: -15% to -5%;
Sell: <-15%

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com

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 Result Update | KEC International ICICI Direct Research

ANALYST CERTIFICATION
I/We, Chirag Shah, PGDBM and Amit Anwani, MBA (Finance) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that
above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies
mentioned in the report.

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ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-
managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction.

ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its associates or its analysts did not receive any compensation or other
benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts and their relatives have any material conflict of
interest at the time of publication of this report.

Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions.

ICICI Securities or its subsidiaries collectively or Research Analysts or their relatives do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of
the research report.

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report.

ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report.

Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report.

We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities.

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ICICI Securities | Retail Research 8