We recommend ?BUY? on KEC INTERNATIONAL LTD for a target of INR 368 – valuing the company at P/E 15x of FY20E Earning.
CMP: INR 304
Target Price: INR 368
Investment Rationale:
- Largest manufacturing capacity spread across India & Americas.
- Expanding business across the world with a focus on high efficiency and continued value delivery.
- Domestic Railways business buoyant with international opportunities to be explored.
- Growth in revenue, improved margins, and reduced interest cost enhanced profitability.
- Largest globally operating tower production capacity of 3,12,200 MTs per annum.
- Use of latest technology of Aerial Lidar & Drones to conduct surveys.
- Equipped with latest design, detailing and profiling softwares.
- Only Company with 4 sophisticated tower testing stations, capable of testing towers up to 1,200 kV.
- Superior project management, execution expertise and technical prowess in handling large projects.
- Successful track record of executing projects in inhospitable terrains (seas, rivers, mountains, hills, deserts and forests).
Valuations And View:
KEC international is expanding their business across the world with a focus on high efficiency and continued value delivery. Over the years, it has significantly contributed to the global development story by building icons of growth, cutting across boundaries. We value the business at 15x FY20E EPS and recommend a BUY rating on the stock with a target price of INR 368 per share.
Risk & Concerns
- Commodity price variations and currency fluctuations: The Company deals with various commodities, such as aluminium, steel, zinc and copper. Fixed price contracts can have a negative impact on the Company?s profit if input costs rise without proper hedging mechanisms.
- Political unrest: Political unrest in countries and markets where the Company is operational can impact the progress of its projects.
- Delays in execution of projects: EPC projects could face delays due to issues relating to Right of Way, forest clearances, manpower shortage and so on. This could lead to payment postponements, thereby prolonging the working capital cycle and increasing overall project costs.
- Infrastructure investment slowdown: Infrastructure investment slowdown can lead to lower order intake and lower sales for the Company.
Company Background
KEC International Limited, the flagship company of RPG Group is a global infrastructure Engineering, Procurement and Construction (EPC) major. It has presence in the verticals of Power Transmission & Distribution, Cables, Railways, Civil, Smart Infrastructure and Solar. The Company has powered infrastructure development in 100 countries across Africa, Americas, Central Asia, Middle East, South Asia and South East Asia.
Established in 1979, the RPG Group is a diversified conglomerate with interests in the areas of infrastructure, tyres, information technology, pharmaceuticals, energy and plantations. Founded by Dr. R P Goenka, the group?s lineage dates back to the early 19th century. Today, the group has several companies in diverse sectors predominantly CEAT, Zensar Technologies, KEC International, and RPG Life Sciences. Built on a solid foundation of trust and tradition, the RPG name is synonymous with steady growth and high standards of transparency, ethics and governance.
Products:
- Power Transmission & Distribution
- Cables
- Railways
- Renewables (Solar)
- Civil
Industry Overview
With a generation of over 1,300 Billion Units (BU) during FY18, India is the 3rd largest producer and 4th largest consumer of electricity in the world (Source: Ministry of Power, GoI). The country has the 5th largest installed capacity globally, which stands at 340 GW (as of March 2018) (Source: CEA reports). The Indian power sector has witnessed significant growth in its energy demand, generation capacity and transmission & distribution networks in the last few years. In FY18, the sector witnessed a 5.3 percent growth in installed capacity with an addition of 17,170 MW, along with an addition of 23,119 ckm of transmission lines (growing ~6 percent from last year) and 86,193 MVA of substation capacity (growing ~12 percent from last year). Generation from renewable sources increased by 23 percent from last year (Source: CEA reports). The Indian Government continues to exert significant thrust and has embarked on numerous initiatives towards the objective of ?24×7 Power for All?, with special emphasis on rural electrification. Manufacturing has emerged as one of the high growth sectors in India. Backed by the ?Make in India? initiative, India is on the path to becoming the hub for hi-tech manufacturing, as global giants have either set up or are in the process of setting up manufacturing plants in India, attracted by a market of more than a billion consumers.
