Equity Research: KEC International
KEC International – a $1.8 Bn Engineering, Procurement, & Construction (EPC) major, is the flagship company of the RPG Group. It undertakes EPC projects across the country’s key infrastructure sectors such as Power Transmission & Distribution, Railways, Civil, Urban Infrastructure, Solar, Smart Infrastructure, Oil & Gas Pipelines, and Cables, among others.
ABOUT
KEC International – a $1.8 Bn Engineering, Procurement, & Construction (EPC) major, is the flagship company of the RPG Group. It undertakes EPC projects across the country’s key infrastructure sectors such as Power Transmission & Distribution, Railways, Civil, Urban Infrastructure, Solar, Smart Infrastructure, Oil & Gas Pipelines, and Cables, among others. The company’s robust and integrated capabilities span the entire EPC value chain from concept to commissioning. It has successfully executed complex projects across some of the world’s most difficult terrains and conditions, aided by robust engineering, procurement, execution, and project management capabilities. The company has a vast manufacturing footprint across India, Dubai, Brazil, and Mexico. At present, it has a global manufacturing capacity of 4,22,200 MTPA which includes 3,62,200 MTPA transmission towers, poles and hardware, 48,000 MTPA railway structures, and 12,000 MTPA solar structure capacity.
SEGMENTS
1. Transmission & Distribution
KEC is one of the largest Power Transmission & Distribution EPC companies in the world, with a well-diversified footprint in 70+ countries across the globe. KEC provides integrated solutions on a turnkey basis for Transmission Lines up to 1,200 kV and large size Substations – Air insulated up to 1,150 kV, Gas insulated up to 765 kV and Hybrid Substations up to 220 kV.
KEC continues to maintain leadership in the T&D sector in India and overseas markets. During the year, the Business witnessed significant traction in order intake and secured new orders of over ` 7,400 crore. The company is currently executing over 150 Transmission Line, Substation and Underground Cabling projects across 30+ countries.
FINANCIAL HIGHLIGHTS
- Strengthened presence in India with large orders of ~ ` 1,500 crore from PGCIL (under Tariff Based Competitive Bidding), private players, and state utilities, including Green Energy Corridor projects
- Enhanced presence in SAARC with our largest T&D orders to construct 400 kV Transmission Lines in Bangladesh from Power Grid Company of Bangladesh, funded by Exim Bank of India
- Achieved robust order intake and L1 of over ` 4,000 crore, including several large-sized orders in UAE and Saudi Arabia
- Successfully entered/re-entered over 20 countries in the last five years, including two new countries in FY22
- Strengthened substation portfolio with significant orders in UAE and Burundi; 20% of order book now consists of substations across regions Physically completed 18 transmission line and substation projects during the year in countries such as Senegal, Ghana, Jordan and Papua New Guinea, amongst others Recognised for superior execution and utmost focus on EHS and Quality by clients in Nicaragua, UAE, Thailand, Malaysia, Sierra Leone and Uganda, amongst others.
2. Railways
KEC continue to maintain leadership in the existing conventional areas of Railways which include, Overhead Electrification (OHE), doubling and tripling of tracks and new railway lines, civil infrastructure works such as road over bridge, bridges, tunnels, stations, and platforms, and establishing signalling & telecommunication systems and traction substations.
FINANCIAL HIGHLIGHTS
- Achieved revenue of 3,860 crore, a significant growth of 13% backed by robust execution across projects.
- Secured new orders of over 2,500 crore, robust growth of 46%.
- Deepened presence in technology-enabled areas of Urban Infrastructure with new orders in Metro electrification – OHE as well as Third Rail, power supply systems, and track laying.
- Widened presence in conventional segments such as speed upgradation, port connectivity, tunnel ventilation and railway siding.
- Seven projects commissioned ahead of contractual schedule during the year.
- Delivered 23% of India’s railway network electrified during the year, totalling to 1,441 RKM; Commissioned railway track laying of 131 RKM.
3. Civil
Civil business focusses on EPC for industrial factories & process plants, residential buildings, public spaces, water pipelines & water treatment plants, defence, data centres and warehouses. One of key growth drivers this year, the business has added over 20 new projects and 10 new clients in FY22 and is currently delivering world-class construction for over 40 projects across sectors.
FINANCIAL HIGHLIGHTS
- All-time high order intake of over 5,800 crore, with a well-diversified project portfolio.
- Forayed into the public spaces segment, with maiden orders to construct an airport and a High Court complex.
- Expanded client portfolio in the industrial sector with new orders in chemicals, minerals & mining and FMCG segments.
- Executed/executing close to 10 Cement Silos and Preheaters during the year, taking the total number of Silos, Preheaters and other critical structures to 35 till date.
- Building six water transmission and distribution pipeline projects as part of Government of India’s Jal Jeevan Mission, comprising 1,700+ km of water pipelines, 330+ elevated storage reservoirs and nine water treatment plants to touch the lives of 3.4 lakh households across rural India.
- Received several notable accolades including three awards by National Safety Council, India (NSCI) and three Construction HSE awards at 13th CIDC Vishwakarma Awards for various projects, in addition to a platinum award at CII National 3M Competition, for excellence in execution, quality and EHS.
4. Urban Infrastructure
Urban Infrastructure business focuses on EPC for viaducts, stations, track works and electrification & power supply systems for Metro Rail and Regional Rapid Transit System (RRTS) segments, across Railway and Civil businesses. In line with strategy to expand into adjacencies, KEC is currently executing 15 projects with a combined project value of 5,500 crore.
FINANCIAL HIGHLIGHTS
- Secured new orders to construct Metro viaduct and stations for Chennai Metro and depot cum workshop for Bhopal Metro.
- Successful trial run of KEC’s first elevated viaduct conducted by Kochi Metro, for which the Company had also executed ballastless track works.
- Constructing complex structures such as a 1.4 km double decker viaduct and a Balanced Cantilever bridge over River Yamuna for Delhi Metro.
- Demonstrated execution excellence in the Delhi Meerut RRTS project by completing the installation of a 73-metre, 850-tonne steel arch over four railway tracks; Project to be commissioned shortly.
- Expanded presence in technology-enabled areas of Metro Electrification – OHE & Third Rail, Power supply systems, and Ballast-less track work.
FINANCIAL PERFORMANCE
- Consolidated Highlights for FY22 v/s FY21
- Revenue of Rs. 13,742 Cr - Growth of 5%
- EBITDA Margin at 6.6% against 8.7%
- Interest cost as % to sales at 2.3% against 2.0%
- PBT Margin at 3.2% against 5.8% (Excludes exceptional item*)
- PAT Margin at 2.6% against 4.2% (Excludes exceptional item*)
*In Q2 FY22, there was an exceptional write-off of Rs 44 Cr against a legacy arbitration case in South Africa. Considering this impact, the PBT and PAT are as below:
- Encouraging revenue growth: On a consolidated basis, the company achieved a turnover of Rs 13,742 Cr in FY22 with a growth of 4.8% over FY21. This was attributed to the good performance of Civil, Railways, and Cable businesses. The company progressed well in deploying several mechanizations, automation, and digitalization initiatives across projects to improve productivity and quality of execution.
- The marginal decline in EBITDA: The company achieved an EBITDA margin of 6.6% in FY22, which was impacted due to the cost and time escalations in EPC projects in the Brazil subsidiary and significantly higher commodity prices during the year.
- Exceptional write-off impacts PAT: The net profit for FY22 was Rs 332 Cr as against Rs 553 Cr in FY21. During the year, the company made an exceptional write-off amounting to Rs 44 Cr towards a legacy arbitration in South Africa which impacted the profit. The company witnessed a slightly elevated level of working capital, owing to slower collections, losses in the company’s step-down subsidiary in Brazil, and an increase in inventories due to higher commodity prices. This has led to higher interest costs during the year.
- Gross Borrowings increased to Rs 2,875 Cr from Rs 1,928 Cr in FY21.
- Earnings per Share (EPS) stood at Rs 12.9 in FY22 against Rs 21.5 in FY21.
ORDER INTAKE & ORDER BOOK
Robust order book: The company secured the highest-ever orders of Rs 17,203 Cr, a robust growth of 45% YoY. The order book has been led by large contributions in the Civil and International T&D businesses. This has significantly enhanced the company’s closing order book to Rs 23,716 Cr, a growth of 24% YoY. The company’s order book is well diversified across businesses with an equal share in both T&D and Non-T&D businesses.
BUSINESS OUTLOOK
▪ India's infrastructure market is expected to remain bullish on the back of flagship schemes such as the National Infrastructure Plan, Gatishakti program, Sagarmala, Bharatmala, Jal Jeevan Mission, etc.
▪ Private capex picking up on the back of the PLI scheme; seeing large opportunities in Metals and Mining, Cement, Electronics, etc.
▪ Liquidity infusion in infrastructure (COVID recovery stimulus) - Significant opportunities in international markets for non-T&D businesses
▪ QCBS expected to limit competition
▪ Relapse of COVID-19 in many countries
▪ Unprecedented increase in Commodity costs - Significant impact on profitability and revenues
▪ Conflict between Russia and Ukraine is creating fresh uncertainties and another surge in the already elevated level of commodity prices
▪ Supply chain disruptions and rising logistics costs
▪ Increase in inflation creating pressure on interest rates
▪ Witnessing softening of commodity prices recently
▪ Robust Order Book and L1 Position of over Rs. 28,000 Cr – Revenue visibility for next 7 to 8 quarters
▪ Tenders under Evaluation & Tenders in Pipeline of over Rs. 125,000 Cr ▪ Significant focus on Digitalisation, Mechanisation & Automation
▪ Commenced execution of quite a few new projects which have been secured recently based on current commodity/ logistics costs
STRENGTH
DIVERSIFIED GLOBAL FOOTPRINT
- 110+ Footprint in no. of countries (Includes EPC, Supply of Towers & Cables)
- 35 Countries Executed/executing EPC projects in FY22
- 17,203 crore Order Intake (Growth of 45% in FY22)
- 4,22,200 MTPA Global manufacturing capacity (Includes Towers, Poles, Hardware, Structures for Railways & Solar
- 8 Manufacturing plants across India, Dubai, Brazil, and Mexico
- 3,27,918 Lives impacted through CSR (including COVID-19 Response beneficiaries)
STRENGTH
- Leading market position in the TLT business: KEC has been in the TLT business for over five decades and is among the largest manufacturers in the world, with capacity of 422,200 tonne per annum (tpa). In India, KEC is a leading player with reputed customers such as Power Grid Corporation of India Ltd (‘CRISIL AAA/Stable/CRISIL A1+’) and various state transmission utilities. Order intake was strong at over Rs 17,000 crore in fiscal 2022. The order book was Rs 23,716 crore as on March 31, 2022, which provides strong revenue visibility over the medium term. Leadership in the TLT segment, as well as healthy growth in the non-T&D space, should continue to support the business.
- Diversified revenue: While 50% of the unexecuted orders were in the T&D business as on March 31, 2022, KEC also has a healthy presence in engineering, procurement and construction (EPC) services for railways (accounting for 16% of orders in fiscal 2022), civil infrastructure (29%) and other segments (5%). Furthermore, the orders are from diverse geographies. About 37% of the total unexecuted orders as on March 31, 2022, were from overseas markets. Exports are primarily to countries in SAARC, Africa, the Middle East, East Asia Pacific and the Commonwealth of Independent States. The wholly owned subsidiary - SAE Towers, USA, has a combined production capacity of around 1 lakh tpa in Brazil and Mexico, and mainly caters to the Americas. Diversified revenue streams help reduce susceptibility to downturn in any one segment.
- Healthy financial flexibility: As the flagship company of the RPG group, KEC benefits from the group’s financial flexibility, strong reputation and longstanding relationships with key stakeholders. The group has a presence in diverse businesses such as tyres, pharmaceuticals, information technology and construction. KEC’s financial flexibility is also supported by cash and cash equivalent of around Rs 200 crore and bank limit of over Rs 2,400 crore as on March 31, 2022, which has been enhanced to Rs 3,000 crore in fiscal 2023.
WEAKNESSES
- Large working capital requirement: Operations are working capital intensive on account of the inherent nature of the EPC business and long project execution cycle of 2-3 years, which has resulted in high reliance on short-term debt. Receivables are high in this business due to sizable retention money blocked in projects till the end of the performance guarantee period as well as milestone billing in EPC projects of railways and civil businesses. As on March 31, 2022, receivables (including net unbilled revenue) were high at 315 days, against 283 days as on March 31, 2021. Payables are also high at over 340 days, with back-to-back payment clauses in most contracts allowing for passing on of any delay in realisations in receivables. The company plans to smoothen the billing cycle to reduce working capital requirement, particularly in the railways business. Improvement in the working capital cycle remains a key monitorable as the business grows.
- Modest debt protection metrics: Weak debt protection metrics deteriorated in fiscal 2022 because of lower profitability and higher reliance on working capital borrowings. Interest coverage ratio declined to 2.5 times in fiscal 2022, from 3.5 times in the previous fiscal. The total outside liabilities to tangible networth (TOLTNW) ratio remains high at 3.7 times as on March 31, 2022, against 3.4 times a year earlier. With improving profitability in fiscal 2023 and completion of legacy projects in Brazil, the financial metrics are expected to improve from current levels. Sustained growth in revenue and profitability, resulting in higher networth and better debt protection metrics is a key monitorable.
Liquidity: Strong
Cash accrual of Rs 500-800 crore annually over the medium term will sufficiently cover debt obligation of Rs 60-100 crore annually and moderate capital expenditure (capex). Working capital requirement, though expected to be lower than fiscal 2022 level, will remain high, constraining liquidity. Cash and cash equivalent stood at around Rs 200 crore as on March 31, 2022. Bank lines of Rs 2,400 crore were moderately utilised at 87% on average in fiscal 2022.
OBSERVATION
KEC International (KEC) posted revenue of Rs 13,742 Cr in FY22, reporting a growth of 4.8% amidst various challenges over FY21 driven by its strong performance in Civil, Railways, and Cable businesses. The Company’s dependence on the T&D segment reduced during the year as it diversified its project profile and won more non-T&D orders. Its total order intake (Rs 17,203 Cr) between T&D and Non-T&D stood at 43:57 for FY22. The weightage of the T&D order book reduced to 50% from 58% in FY21. The company’s Cables business delivered a strong performance, registering its highest-ever revenue and profitability in FY22. Moreover, the Civil business achieved an all-time high order intake of over Rs 5,800 Cr with a well diversified project portfolio across the Public sector, Chemicals, Minerals & Mining, and FMCG segments. The Railway business secured orders of over Rs 2,500 Cr, a growth of 46% over FY21. In line with its diversification journey, the company has deepened its presence in technologically-enabled areas of metros and has also widened its presence in the conventional segments.
