Broker's call: KEC International (Buy)

CMP: ₹323.7

Target: ₹450

Key takeaways:

KEC International (KECI) electrified 1,576 rkm of Indian Railways (30 per cent of total electrified network), the highest-ever in FY19. Management expects railways revenue to rise by 20-25 per cent in FY20 on high base versus our estimates at 27 per cent, which exceeded Railways revenue target by 13 per cent in FY19. The company has an opportunity size of ₹30,000 crore, comprising ₹10,000 crore in electrification and ₹20,000 crore in doubling & tripling of lines and signalling & telecommunications out of ₹1.6 lakh crore budgeted for Indian Railways in FY20. It also is exploring station rebuilding, portion of civil work for metros and rapid regional transport & railway orders from international markets such as SAARC and the African continent. Order book stands at ₹5,300 crore (₹1,500 crore for electrification, ₹800 crore for signalling and ₹3,000 crore for civil works), giving 2-3 year visibility.

SAE Towers order book rises 7 per cent y-o-y to ₹2,000 crore as on March 2019. Revenue fell by 6 per cent y-o-y to ₹970 crore, owing to a delay in receiving environmental approvals for three large projects in Brazil. Currently, two of the projects have received approvals and work has started. KECI expects to receive approval for the remaining project by end-Q1FY20. Revenue from Mexico stands at $45 million in FY19. The US-China-Mexico tariff wars would have limited impact, as exposure to the US is at $10-15 million in FY19.

Valuation: We reiterate ‘buy’ with a target price of ₹450 based on 18x March 2021E P/E, implying 40 per cent potential upside from the current levels. Given strong order book in transmission and distribution (T&D) and continued execution in non-T&D, we expect an earnings CAGR of 13 per cent over FY19-22E versus 50 per cent over FY16-19 and an average ROE of 20 per cent & ROCE of 15 per cent over FY19-21E.