The key points to take from KEC’s FY20 AR are as follows:
- a geographically highly diverse order book and a strong pipeline; International T&D (SAARC / MENA, former SAE) and Civil & Railways continue to grow in FY21E;
- Moderate profitability in FY20;
- Rising borrowing cost (current interest rate <7%) reduced (FY20 finance cost 2.8%; -20 bps YoY); ~ 55% of debt is in forex;
- A steady increase in WC intensity has led to a reduction in CFO / EBITDA over the past two years, but the NWC has remained stable. Our channel inspections for capital goods indicate that diversified companies are seeing a rapid recovery in execution because, although the international activity is largely unaffected, the labor situation is improving locally.
We have increased FY21/22E revenue/PAT by 8/10.3% and 22.9/17.2% respectively. We roll forward 12x P/E based valuation to Jun-22E and maintain BUY with an increased target price of RS.322.
The key risks to our call:
- adverse currency/commodity movement
- further delay in CAPEX recovery
- the slowdown in government T&D spend
- labor shortage
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