Broker's call: KEC International (Buy)

CMP: ₹299.6

Target: ₹367

Key takeaways: a) KEC order book has grown at a CAGR of 21 per cent over FY16-19 and currently stands at ₹18,085 crore (Q2FY20), additionally it has about ₹5,000 crore L1 order book. Green Energy corridor projects of ₹13,000+ crore have been awarded via TBCB (tariff-based competitive bidding) and these projects are targeted to be completed by December 2020; this will drive KECs order inflows in H2FY20.

b) KEC’s focus on execution and cost reduction incentives has led to significant improvement in margins. EBITDA margin has grown to 10.5 per cent in FY19 versus 7.9 per cent in FY16 while the PAT margin of 4.7 per cent in FY19 has improved from 1.7 per cent in FY16, primarily driven by internal efficiencies in T&D and pick up in railway businesses.

c) Revenue and PAT have grown significantly over the year which has helped KEC reduce its debt, thus improving RoCE from 27 per cent in FY16 to 35 per cent in FY19. Pick up in execution and order backlog of 1.9x FY19 revenue provides strong visibility. We estimate revenues/PAT to grow at 14 per cent/21 per cent CAGR over FY19-21E.