KEC International: Creating pillars of growth
KEC International continues to deliver strong growth backed by higher contribution from new businesses and initiatives. In Q1 FY19, sales grew 11 percent year-on-year to Rs 2,105 crore. This despite the 14 percent revenue decline in its core business of transmission and distribution, which accounts for 60 percent of total sales.
What is driving growth?
Revenue from railways has almost doubled to Rs 313 crore, which is a result of strong traction and order book of close to Rs 4,600 crore. Civil business has picked up quite strongly, recording a 690 percent jump in revenue to Rs 119 crore. In the civil segment, the company has bagged a few large projects in the past, which are now getting executed and reflecting prominently as a result of a low base. With execution picking up in the solar business, it recorded a revenue of Rs 160 crore, a 656 percent YoY growth in sales.Bigger scale drives profitability
Most of these businesses, including the cable business, had a minor contribution to overall sales. As they become bigger, their contribution is felt both in revenues as well as profitability. These businesses are capital intensive and have been operating at a low utilisation in the past due to lack of scale. However today, their contribution to overall profitability is increasing as a result of higher scale.
During Q1, the company reported a 23 percent growth in EBITDA to Rs 216 crore. Despite modest revenue growth, operating profit saw strong growth led by reduction in overall cost due to these other segments and business. It recorded a 100 basis points gain in operating margin to 10.3 percent.
Not just variable cost, KEC kept interest cost at 3.3 percent of sales. Due to an 80 percent growth in other income at Rs 18 crore, the company was able to post a strong 38 percent growth in net profit. By June-end, the company reported a significant reduction in net debt levels to Rs 2,212 crore as against Rs 3,054 crore in the corresponding quarter last year.
Outlook and valuation
During Q1, the company received orders worth Rs 2,748 crore, taking its overall order book to Rs 18,191 crore, or about 1.8 times consolidated revenue. Considering the strong order book and improving execution, traction in overall revenue should remain strong. Due to scale, margin should remain firm despite cost pressures.For FY19, the company is estimated to report a net profit of close to Rs 530-540 crore. At the current market price of Rs 309 per share, the stock is trading at less than 15 times its FY19 estimated earnings. This is quite reasonable considering the earnings growth, strong revenue visibility, stability in the business and improving return ratios.