Brokerage house Prabhudas Lilladher is bullish on KEC International and has recommended 'Accumulate' rating on the stock with a target price of Rs 123, in its research report dated April 13, 2015.
EBITDA margins for KEC fell from 11% in FY09 to a low of 5.3% in FY15E; however, low margin orders in Railways and Water segment build PQ (pre-qualification) in this new business, while cost overruns in these projects led to margin erosion. Since the PQ has been successfully built in this business, KEC is taking fresh orders at a much higher margin. Reducing backlog of low margin legacy orders, improved margin profile in new orders and break even in SAE tower and cable business should help improve overall margin profile of the company. Out of the outstanding legacy order book of Rs1bn, KEC expects 50% to get booked in Q4FY15 and remaining by Q1FY16. However, the company expects to take most provisions related to legacy orders in Q4FY15. The company has also taken various corrective steps to bring Water/Railway/SAE business back on track. KEC has brought in new CEOs for the three mentioned businesses and also decided to limit the scope of bidding in water segment to waste water treatment jobs.
KEC has a current order book of Rs92bn and is L1 in orders worth Rs35bn. The company has seen healthy uptick in order booking in Q4FY15 and expects the same to continue based on strong L1 pipeline. The company has seen improved traction in T&D business both from domestic and international markets. In Domestic markets, the company is seeing increased activity from SEBs, (now 50% of KEC's domestic order book v/s 10-15% earlier). In the International market, KEC is seeing increased bid tenders in markets like KSA, Oman, Abu Dhabi and SAARC countries.
Outlook and Valuation: "The stock is trading at 10.4xFY17E earnings. We believe that a strong order book and improving margin profile will help company deliver 59% earnings CAGR over FY14-17E. We maintain our 'Accumulate' rating on the stock with a target price of Rs 123", says Prabhudas Lilladher research report.
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