The Hindu Business Line : KEC International: Buy

KEC International's strong financial performance, superior execution skills in power transmission projects and diverse client base provides high visibility to its earnings growth. Investors can consider investing in small lots. Any weakness related to the broad markets can be used to increase exposure.

At the current market price, KEC International trades at about 14 times its expected FY08 earnings. Investments can be considered with a two to three year perspective.

KEC is an integrated player in the power transmission business. The company's current order book at Rs 3,000 crore is about 1.4 times its FY07 revenue. KEC has reported a decline in its project execution cycle from 24 months a couple of years ago to 18 months now. This is likely to lead to quicker translation of revenue to earnings thus lending higher visibility to earnings in the near term. KEC has chosen to focus on project management and outsource the low-margin tower manufacturing business, unlike a few other players in this space who manufacture in-house. We view KEC's focus on the high margin project management segment as a positive to maintain margins and prevent any disruption in execution, arising out of capacity constraints.

KEC has a diversified client base with a firm footing in West Asia and Africa. It has recently entered into a joint venture with US-based Power Engineers, a power transmission distribution consulting sector. With this the company has bagged an order in the country. Over 70 per cent of KEC's present order book comes from overseas projects. While the strengthening of the rupee against the dollar may pose concerns on foreign exchange, the company operates in different currencies as the projects are spread across the globe. This may provide some against any particular currency risk. KEC is also looking to enter the Build Own Operate (BOO) model in power transmission through a joint venture. While the company will see strong competition from bigger players, success in this space could improve the margins for the company. A good number of KEC's overseas projects are fixed price contracts. Any steep hike in raw material costs can affect margins and remains a principal risk.