Broker’s call: KEC Intl (Reduce)

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Target: 433 rupees

CMP: INR 550.65

We attended KEC International (KEC) Annual Investors Conference for the fiscal year 23 which was held on 16th June 2023 in Mumbai.

We noted the following key points from the call: KEC has guided order inflow (OI) of Rs.25,000 crore for FY24, of which FYTD24 OI is Rs.25,900 crore (about 10.3 per cent of FY24 guidance); With substantially all legacy (loss-losing) EPC projects completed by H2FY24, SAE projects are expected to generate positive PBT margin from H2FY24;

Guided by FY24 revenue of Rs.20,000 crore+ with EBITDA margins of 6/8 per cent in H1/H2 FY24. This results in an EBITDA margin for FY24 of approximately 7 per cent. KEC has directed FY24 debt to be at similar levels, i.e. Rs. 5,000 crore, as of March 23. Further, interest cost for FY24 will be 2.5 – 2.6 per cent of FY24 revenue. Management has directed that it will reduce days NWC to 110 by the end of fiscal year ’24.

Due to a rich valuation, highly leveraged balance sheet, high working capital and weak profitability, we maintain our downgrade rating on the stock, with our price target increased to ₹433/share (13x Mar-24E EPS). Substantial debt reduction and margin recovery are key to reissuing.