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KEC International: a promising play on infrastructure sector

LiveMint logoLiveMint 19-05-2014 Vatsala Kamat

Acquisitions aid a company’s growth if timed and managed well. KEC International Ltd’s business expansion in overseas markets justifies the acquisition of SAE Towers Holdings Llc in 2010. The company, which has since expanded its presence in Brazil, Mexico and the US, also has a presence in markets such as the Middle East and Africa that hold promise for power sector services.

More importantly, KEC International’s 17% increase in new order intake during the March quarter and good order book has set the stage for stable revenue growth. A new pro-reform government may well kick-start ordering out in infrastructure sectors like power and railways, where KEC International has had a presence for about five decades. This is good news given that net revenue in the last quarter was subdued because of weak execution and delayed payments from customers.

Revenue growth, in turn, should drive profit margins, too. Note that operating margin has consistently risen in the past four quarters in spite of challenging times in infrastructure. The March quarter’s operating margin widened by almost 282 basis points from a year earlier to 7%, boosting full-year profitability to 6.2% from about 5.5% a year ago.

Analysts say margins could improve further in the next two years for two reasons. One is the growth in overseas orders where profit margins are better. The second is the lower incidence of legacy orders where profitability was low. According to a report by Karvy Stock Broking Ltd, contribution from new business segments like railways, water, cables and power systems has steadily risen in the last four years, and will push up profitability.

The only concern is rise in debtors and working capital, which implies higher borrowing. Going by a report from Prabhudas Lilladher Pvt. Ltd that the firm is likely to trim its rising debt through proceeds from land sale, one may see a healthier balance sheet too with lower interest cost pressures in coming quarters.

KEC International’s prospects on earnings growth hold promise, which is why the stock has beaten benchmark indices in the last six months. Further, the stock’s current price of `101 discounts its one-year forward earnings by around seven times, which leaves room for appreciation. Also, given that analysts’ consensus points to a 40-50% compounded earnings growth in the next two years, the stock would be a good play on the expected turnaround in the infrastructure sector.

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