Analyst Corner: ‘Buy’ on KEC International with target price of Rs 450

Commodity price inflation may pose risk to margins. Order inflow environment improving. The momentum of order wins has continued in this quarter, with KECI winning ~Rs 25b worth of orders, including the recently won order worth ~Rs 10b. Notably, order inflows have commenced in the Railways segment and are likely to pick up hereafter. 9MFY21 order wins (to date) amount to ~Rs 68b. Although this is below INR98b worth of orders won in 9MFY20, we attribute the wins to large first- time orders in the Civil segment in the base year –as the company had forayed into metros (Kochi and Delhi metro orders). The order inflow momentum is picking up – as we enter a busy season in terms of construction activity and work commences to fulfil the orders bunched up due to the pandemic. As a result, we expect KECI to surpass FY20 order inflows in FY21 (+11% YoY) v/s our earlier assumption of flat order inflows.

Business diversification strategy playing out well. We expect the Railways and Civil segments to dominate order inflows. On the other hand, contribution from the Power T&D segment would come off due to the slowdown in Power Grid’s capex. Within Railways, recent order wins have been broad-based as KECI has won orders in the emerging growth areas of metro, DFCC (Dedicated Freight Corridor), and high-speed trains.We believe the company has in place all the ingredients for growth over the next 3– 5 years. A strong promoter parentage and focus on the balance sheet should help KECI emerge stronger from the COVID-19 crisis v/s peers. End-1HFY21, KECI had a strong order book of INR195b + L1 orders, implying OB/rev of 1.6x the TTM revenue. At CMP, the stock is trading at 13.2x/11.7x on FY22/FY23E EPS. We maintain Buy, with TP of INR450 (15x FY23E EPS, marginally below the long- term one-year forward multiple of 15.5x).