KEC International Ltd (KEC) Sector: Power Transmission/Midcap

3 April 2014 Initiating Coverage Sensex Nifty Price: INR 70 Target Price: INR 81 BUY 22,551 6,752 Background : KEC International (KEC), the flagship company of the RPG (Harsh Goenka) group, is a leading EPC player in T&D Space. KEC has over six decades of experience with presence across 50 countries globally and strong execution capabilities . KEC, the global leader in Power Transmission EPC has also ventured into Power Systems, Cables, Telecom, Railways and Water. KEC has 7 manufacturing facilities spread across India, Brazil & Mexico. The company acquired US-based SAE Tower Holdings LLC (SAE) in FY2011. . 52 Week High/Low INR 70/23 Robust order book growth despite intense competition Bloomberg code KECI IN KEC’s order book grew at a CAGR of 17.3% over FY09-FY14. Existing order bac k log of INR 114.5bn, 1.4X Reuters code KECL.BO FY14E sales, provides strong revenue visibility over the next couple of years. KEC has recently w on orders in Issued Equity 257.09 Afghanistan, A mericas, India and Abu Dhabi w orth INR 12bn. Despite intense competition KEC’s main (shares in mn) business continues to gain traction; KEC’s pow er transmission order book has grow n at a CAGR of 10.5% Mkt. Cap in mn INR 17226 over FY11-14E as KEC’s market share in pow er grid orders has increased over the last 2 years, from 6.2% in Mkt. Cap in mn USD $ 291.9 FY12 to 16.9% in FY14. We expect order flow to KEC remain healthy as Pow er Grid is expected to increase Avg. Daily Vol. (‘000) 445 its focus on HVDC and 800kV plus segment w hich is dominated by KEC and Kalpataru Pow er Transmission. Avg. Daily Vol. (mn) INR 29.8/$0.51 Pow er Trans mission also offers better margins ~9%. We estimate KEC’s pow er transmission revenues to grow at a CAGR of 11% over FY13-16E Shareholding Dec12 Sep13 Dec13 Margin recovery underway; legacy orders nearing completion Promoters(%) 44.51 47.71 48.16 KEC diversified into other verticals namely Water management, Cables and Railw ays in a bid to reduce the FII (%) 2.22 2.34 2.45 business ris k. In order to acquire the necessary pre qualifications KEC bid for projects in a consortium w ith DII (%) 36.44 32.73 33.33 other players w hich meant these new orders w ere margin dilutive. This along w ith increase in costs meant Others (%) 16.83 17.22 16.06 KEC’s margins started trending low er from the historical levels of ~10% to ~ 5%. How ever in the recent Pledge (% of quarters KEC’s EBITDA margins have recovered and have expanded by 230bps since FY12 to 6. 4% in promoter 0.00 0.00 0.00 3QFY14. In our recent interaction, management indicated the legacy orders are nearing completion and that holding) KEC has stopped bidding for low er margin orders. Recent orders, w hich are estimated to have better margins would start reflecting over the next few quarters. We estimate the EBITDA margins to increase 100bps over

Performance% 1M 3M 12M FY13-16E to reach 7.2% in FY16.

KEC 26.5 24.5 30.3 Business diversification augurs well

Sensex 5.7 4.8 18.1 Order book in the new verticals have grow n at a CAGR of 30% over FY11-14 led by a CAGR of 105% in w ater treatment and a CAGR of 66% in telecom over the same period. New business verticals (excluding pow er

80 120 trans mission & distribution) contributed 14.5% of the total order book in 9MFY FY14 as compared to 7.4% in FY2011. We estimate the order book of new verticals to grow at a CAGR of 15% over FY2014-16E. 70 100 60 80 Valuation: At the current market price KEC is trading at a P/E of 7.8X and 5.6X its FY15E and FY16E 50 earnings respectively. We assign a target P/E of 6.5X to its FY16E EPS to arrive at a target price of INR81 40 60 and recommend a BUY. We believe the valuation is justified given the strong order book grow th diversified 30 revenue streams and significance global presence. 40 20 Risks: Delay in project executions, slow dow n in infrastructure spending by the Government, political unrests 20 in foreign markets and adverse raw material price movements. 10 Valuation Summary

0 0

13 14

13 13

13 Y/E March ( INR mn) FY13 FY14E FY15E FY16E

- -

- - -

Jul Revenue 69,795 80,741 92,020 102,048

Jan

Oct

Jun

Apr

Feb

Mar Mar

Dec

Sep

Aug Nov May EBIDTA 4 ,307 5 ,167 6 ,441 7 ,347 KEC Relative Sensex (RHS) Adj.PAT 650 1 ,309 2 ,298 3 ,211

Adj.EPS 2 .53 5 .09 8 .94 12.49 -69 101 76 40 Adj. EPS growth (%) Analyst: FCF / Share -8 .11 3 .17 17.43 17.76 PE ` 27.67 13.75 7 .83 5 .6 Murugesa S +91-44-30007363 P/ BV 1 .57 1 .44 1 .26 1 .07 [email protected]. com EV / Sales 0 .4 0 .4 0 .3 0 .3 EV / EBIDTA 7 .1 6 .3 4 .9 4 .1 Dividend Yield (%) 0 .8 1 .3 2 .3 3 .1 ROCE (%) 7 8 9 10 ROE (%) 6 10 16 19 Debt / Equity 1 .3 1 .3 1 .1 0 .8

Company Profile:

KEC International (KEC), the flagship company of the RPG (Harsh Goenka) group, is India’s second largest manufacturer of EPC towers and leading player in the T&D space. KEC has a global presence with foot print in 50 countries. The company has over six decades of experience. KEC, the global leader in Power Transmission EPC has also ventured into Power Systems, Cables, Telecom, Railways and Water. KEC has 7 manufacturing facilities across India, Brazil & Mexico. The company acquired US-based SAE Tower Holdings LLC (SAE) in FY2011.

Corporate-History:

•Supplied structures for Bhakra Nangal Project, India 1950

1959 •First 220 kV turnkey transmission line project in India.

1960 •First export tower supply export order from New Zealand.

•First Indian company to get a Railway Electrification order. 1961

•First international turnkey transmission project in Sudan. 1968

•Taken over by RPG Group 1994

•RPG Transmission and NITEL merged. Telecom, Distribution SBU started. 2007

•Railway SBU Started. 2009

•Acquires SAE towers in the Americas.Acquired and merged RPG Cables. 2010 World’s Highest capacity (1,200kV) tower testing station started at Nagpur, India

•Forays into Water business 2011

Busine ss snapshot: Business Top line share in Services offered Competitors Divisions FY13 % Design, manufacture, test, supply and Kalpataru Power erect transmission lines on turnkey Transmission, Jyoti Power 78.8 Transmission basis up to 1,200 kV. Structures, EMCO, Tata Projects Substations, Distribution Networks ABB, Alstom T&D, Jyoti Power System 10.6 and Rural Electrification Structures HT & EHV power cables; XLPE Power & Telecom 6.1 Cables and Optic Fiber Cables for Tercab India, Paramount Cables Telecom cables Complete turnkey solution provider such as civil infrastructure; Earthwork, track laying, rehabilitation of existing tracks; Sterling & Wilson, Kalpataru Railways 1.6 Railway electrification & power Power Transmission, L&T systems; and Signaling & telecommunication system) Provides telecom towers on turnkey basis; Laying of OFC and OPGW cables; Telecom 1.6 Installation and commencement of Icomm, Mahindra, Infrastructure GSM/CDMA equipments; and Installations of Microwave & BTS installations) Water Waste water treatment and Water 1.3 IVRCL, VA Tech Wabag Infrastructure Resource Management

SAE TOWERS HOLDINGS (100% Subsidiary) KEC acquired 100% stake in SAE Towers Holdings LLC (SAE), USA in September 2010 at an enterprise value of USD 95 mn. SAE is the leading manufacturer of lattice transmission line towers in the Americas. SAE Towers Holdings also manufactures steel poles for electrical transmission and related hardware. Annual production capacity of SAE is 100,000 MTPA spread across two locations viz Monterrey, Mexico (35,000 MTPA) and Belo Horizonte, Brazil (65,000 MTPA). Mexico facility caters to the North American markets whereas Brazil facility caters to Latin American Markets. This acquisition has enabled KEC to strengthen its leadership position in tower manufacturing in the large, advanced and growing markets of North America and South America (including USA, Canada, Mexico, Brazil and other neighboring countries). Spend on transmission and distribution lines in the aforementioned countries are rapidly increasing and is likely to support sales growth going forward. SAE Towers contributed ~15% to KEC’s sales in FY13.

Manufacturing & Testing facilities PARTICULARS LOCATION CAPACITY Other details 1. Butibori, Nagpur Largest globally operated 2. Jaipur, Rajasthan lattice tower manufacturing Tower Manufacturing 311,200 MTs p.a 3. Jabalpur, Madhya Pradesh company 4. Betim, Brazil 1. Vadodara, Gujarat Manufactures power, 2. Silvassa, Dadar & Nagar telecom, instrumentation and Cables Manufacturing Haveli 4000Kms p.a optical fiber cables. 3. Mysore, Karnataka Can manufacture 132kv cables 1. Butibori, Nagpur Nagpur-Upto The tower testing station at 2. Jaipur, Rajasthan 1200kV Brazil is Americas largest. 3. Jabalpur, Madhya Pradesh Rajasthan- upto All the testing stations are 4. Betim, Brazil 400kV strategically located near Tower Testing Jabalpur- upto manufacturing facilities. 800kV They are capable of testing Betim- upto all types of towers – Lattice 765kV Towers, Guyed Towers, Tubular and Mono Poles.

Management Team

H V Goenka - Chairman, RPG Group

• Mr. Goenka serves as the Chairman of Management Board at RPG Enterprises. Mr Goenka serves as the Chairman of Raychem

RPG Limited; CEAT Limited; RPG Life Sciences Limited; Zensar Technologies Limited and KEC International Limited. Mr. Goenka

also serves as a Director at Baja Electricals Ltd, Spencer International Hotels, Bayer (india) Ltd, Raychem RPG Ltd, ROG Cables

Ltd, Spentex Industries Ltd and International Institute for Management Development (IMD). A Fellow Member of the Institute of

Chartered Accountants of India, he graduated in Economics and an MBA from IIMD, Switzerland.

Ramesh Chandak – MD & Chief Executive Officer (CEO)

• Mr. Chandak is the MD & CEO of KEC International Ltd. He is a member on the Management Board of the RPG group and serves

on the Board of Raychem RPG Ltd, Global Procurement Consultants Ltd and a host of other companies. He is presently the

Chairman of the Transmission Line Division of Confederation of Indian Industry (CII) and Federation of Indian Chambers of

Commerce and Industry ( FICCI). Mr. Chandak is a Chartered Accountant and has done Advanced Management Program at

Harvard Business School.

Vardhan Dharkar - Executive Director- Finance of KEC International Ltd

• Mr. Vardhan is a Chartered Accountant with rich experience in various areas of finance. He commenced his long tenure with

Wockhardt Limited (1988-2006) as an Officer in Finance and progressed to become the Vice President Finance in 2002.

Subsequently, he was the Chief Financial Officer at Dabur Pharma Limited. He has been associated with KEC International since

2007

Randeep Narang – Executive Director- South Asia

• A Commerce graduate and an MBA from Narsee Monjee Institute. He has over 25 years of experience in the Tyre and

Telecommunications sector. He was the Managaing Director and CEO of CEAT, Kelani, Sri Lanka. Prior to that he was Vice

President in Reliance Communication.

Porter’s Five Force Model

Source: CSEC Research

Industry overview Notwithstanding an installed power generation capacity of 237 GW (as of January 2014), India faced a peak power deficit of 4.3% (39.3 GW) . Power shortages have adversely affected the country's economy. In the period between FY2008-13 last 5 years, power generation capacity in India grew by ~50%, whilst transmission capacity increased only by ~30%. As per the 12th Five Year Plan, the future expansion in power generation capacity in India is planned around 88GW. In order to meet this capacity, investment in the transmission sector needs to be increased. Overall, an addition of 90,000 km of 765-220 kV lines, 154,000 MVA of substation capacity and 27,350 MW of national grid capacity is required in order to meet the 12th Five Year Plan . Against this background, an investment of USD 35bn is planned in the power transmission sector. Of this, about USD 19bn is likely to come from Power Grid Corporation of India Limited. The remaining USD 16 bn~46% of the total investments need to be secured from private players. Power evacuation has emerged as a bigger problem than power generation for the country. Plants supplying electricity to state electricity boards (SEBs) under long term power purchase agreements (PPA), lost 1.93bn units of generation due to transmission capacity bottlenecks. The concept to commissioning period of a transmission With a typical transmission project requiring ~4-5 years to get commissioned & inordinate delays expected in securing forest clearance in the region, it seems that the number of projects running below capacity, owing to transmission bottlenecks, will only increase in the near future.

Investment in power transmission and distribution in 11th & 12th FY Plans (INR bn) Type 11th FY Plan Actuals 12th FY Plan- Addition HVDC Lines 3,560 7,440 765 kV 3546 27000 400 kV 37,645 38,000 220/230 kV 25,176 35,000 TOTAL 69,927 107,440 Source: Planning commission

Private participation increasing: The 12th Five Year Plan envisages the investment required in the power transmission sector at USD 35bn , out of which about USD 19bn is planned to come from Power Grid Corporation of India Limited. The remaining USD 16bn (~46% of the total investments) would have to be secured from private players. Over and above these planned numbers for the 12th Five Year Plan, in order to ensure true open access in the future, the investment required may increase manifold. Private sector participation in the transmission sector has been increasing. Till FY 13, nine transmission projects have been awarded through competitive bidding processes (BOO/BOOT/BOOM). The Government is encouraging more private participation, even at the state level.

Open Acce ss In a bid to help large consumers particularly the sick textile, cement and steel industrial units by ensuring regular supply of electricity at competitive rates and to support manufacturing growth Government has proposed the concept of Open access. Open access allows large users of power — typically having connected load of 1 megawatt (Mw) and above — to buy cheaper power from the open market. The idea is that the customers should be able to choose among a large number of competing power companies–instead of being forced to buy electricity from their existing electric utility monopoly. Open

Access on Transmission and Distribution on payment of charges to the Utility would enable number of players utilizing these capacities and transmit power from generation to the load centre. This would mean utilization of existing infrastructure and easing of power shortage. Power Trading, now a licensed activity and regulated would also help in innovative pricing and thereby increased competition resulting in lower tariffs. Open access will allow every end-user of electricity in the country to choose from all available transmission lines, thereby increasing transm ission load across the country. This would require strengthening of the existing network which would translate into opportunities for power transmission players.

Focus on HVDC to address ROW delays: With the aim to mitigate and address delays due to Right-of-Way (RoW) issues and minimize impact on natural resources and to coordinate development of cost effective transmission corridor, Power Grid has increased its focus in up gradation of transfer capacity of lines. Power Grid has begun work on higher transmission voltages of -+800kV HVDC & 1200kV 1200kV UHVAC. Moreover about 2,000km long -+800kV, 6000 MW HVDC Bi-pole connecting Biswanath Chariali in Assam to Agra in Uttar Pradesh is under implementation. Similarly, 1200 kV UHVAC Single Circuit (S/c) and Double Circuit (D/c) test lines were successfully test charged along with one 1200 kV Bay at 1200kV UHVAC National Test Station at Bina, Madhya Pradesh and field tests are currently undergoing. Going forward we expect more HVDC orders from Power Grid, as it helps optimize the transmission capacity amidst ROW concerns.

Global scenario: Investment needs in Power Transmission and Distribution during 2010 to 2020 (US$ Bn):/

Region Transmission Distribution

North America 169 363 Europe 110 332 Pacific 91 156 East Europe/Asia 43 144 Asia 472 975 The Middle East 29 59 Africa 28 57 Latin America 45 93

Total 987 2179

Source: IEA, World Energy Outlook 2010

Investment rationale: Robust order book growth despite competition KEC’s order book grew at a CAGR of 17.3% over FY09-FY14. Existing order back log of INR 114.5bn (1.4X FY14E sales), provides strong revenue visibility over the next couple of years. KEC has recently won orders in Afghanistan, Americas, India and Abu Dhabi worth INR 12bn.

Chart 1: Order book growth

140 4.0 114.5 120 3.4 3.5 94.7 3.0 100 85.7 78 2.5 80 55 1.7 2.0 60 51.6 1.5 42 1.4 1.5 1.4 40 1.0 1.5 1.4 20 0.5 0 0.0 2008 2009 2010 2011 2012 2013 2014

Order Back log Order book to Sales

Source: Company, CSEC Research

KEC –a dominant player in Power Transmission : Despite intense competition KEC’s anchor business continues to gain traction; KEC’s power transmission order book grew at a CAGR of 10.5% over FY11-14E. KEC’s market share in power grid orders has increased mainly due to Power Grid rejecting bids from the likes of Tata Projects, EMCO etc. Though both the companies have begun to win orders in the recent months, we expect order flow to KEC remain healthy as Power Grid is increasing its focus on HVDC and 800kV plus segment which is dominated by KEC and Kalpataru Power Transmission. We estimate KEC’s power transmission revenues to grow at a CAGR of 11% over FY13-16E.

Chart 2: Market share of KEC in Power Grid orders

35.0 30.0 31.0 25.0 20.0 16.9 15.0 15.7 10.0 10.7 5.0 6.2 1.6 0.0 FY 09 FY 10 FY 11 FY 12 FY 13 FY 14

Source: Power Grid, CSEC Research

Busine ss and geographical diversification to reduce risk Busine ss diversification: Over the last few years KEC has successfully diversified both geographically and business wise. KEC leveraged its expertise and experience and successfully forayed into: 1) water treatment, 2) cables, 3) railways and 4) telecom verticals. Order book in the new verticals have grown at a CAGR of 30% over FY11-14 led by a CAGR of 105% in water treatment and a CAGR of 66% in telecom over the same period. New business verticals (excluding power transmission & distribution) contributed 14.5% of the total order book in 9MFY14 as compared to 7.4% in FY2011. We estimate the order book of new verticals to grow at a CAGR of 15% over FY2014-16E.

New geographies: KEC has presence in about 50 countries. KEC expanded its geographical presence in Railway business by securing a railway electrification order from Malaysia worth INR300m. The company acquired US-based, SAE Towers Holdings LLC, a leading manufacturer of steel lattice transmission towers in Americas in September 2010, which helped KEC foray into large markets of North and South America - United States, Canada, Mexico, Brazil and other neighboring countries. KEC’s overseas revenue accounted for 66% in 9MFY14 as against 49% in FY11. MENA has been the fastest growing market at a CAGR of 29.5% over FY11-9MFY14.

Chart 3: Order book split – Power transmission & new Chart 4: Order book Geographical split verticals

140 140

16.58 120 120 8.2

11.75 100 100 2.83 15.38 10.447 2.4 16.29 9.65 80 5.78 80 0.39 20.91 15.6 10.42 26.3 60 60 14.02 16.3 13.8 40 40 9.36 10.72

51.14 54.97 20 20 36.34 37.88 72.22 75.25 82.97 97.93 0 0 FY 2011 FY 2012 FY 2013 FY2014 FY 2011 FY 2012 FY 2013 FY 2014

South Asia MENA Americas Africa/Central Asia Others Power transmission New Verticals

Source: Company, CSEC Research Source: Company, CSEC Research

Chart 5: New businesses order book split up

40 30

35 25 7.72 30 6.65 20 25 5.54 3.12 3.26 6.24 5.54 3.9 3.43 4.5 4.95 20 3.15 15 2.31 2.72 3.12 4.36 2.37 1.46 4.81 15 1.25 4.22 1.89 3.73 10 1.05 10 14.58 15.34 12.4 13.03 5 5 11.74 11.93

0 0 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E

Power Stations Cables Telecom Railways Water Net revenues- New businesses

Source: Company, CSEC Research

Margin recovery underway; legacy orders nearing completion KEC diversified into other verticals namely Water, Cables and Railways in a bid to reduce the business risk. In order to acquire the necessary pre qualifications KEC bid for projects in a consortium with other players which meant these new orders were margin dilutive. This along with increase in costs resulted in KEC’s margins trending lower from the historical levels of ~10% to ~ 5% in FY12. However in the recent quarters KEC’s EBITDA margins have recovered and have improved by 230bps since FY12 to 6.4% in 3QFY14. Furthermore, the management indicated the legacy orders are nearing completion and that KEC has stopped bidding for lower margin orders. Recent orders which are estimated to have better margins would start reflecting over the next few quarters. We estimate EBITDA margins to increase 100bps over FY13-16E to reach 7.2% in FY16E.

Chart 6: EBITDA Margins vs Non Power Transmission revenues

40 36 12 35 31 29 30 10 30 10.5 27 27 27 26 26 23 8 25 22 8.2 20 7.7 20 7.2 7.6 6 6.30 6.40 15 5.80 5.1 5.00 4 10 4.10 2 5 0 0 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14

Revenues ex-power transmission % OPM %

Source: Company, CSEC Research

Well poised to cater to the high growth industries Amongst the recent diversifications we estimate railways and water treatment verticals to grow faster as evidenced by the focus of the government on these two sectors . KEC is well placed to cater to the demand in these verticals with the necessary pre qualifications. We estimate the revenues from Railways and Water treatment to grow at a CAGR of 15% and 24% respectively over FY13-16E; revenues from these two verticals would contribute 10% in FY16E as against 7.5% in FY2013

Railways: KEC’s railway business mainly comes from conventional railway projects. The Company undertakes projects related to civil and track works, electrification and signaling works. The 12th Five year Plan envisages a total investment of INR 6434bn in railway infrastructure activities. This would augur well for KEC as they are prequalified for all types of railway projects including the dedicated freight corridors.

Unit Kms. 11th Five Year Plan Actual 12th Five Year Plan Target Increase (%) New Lines 2,205 4,000 81% Dedicated Freight Corridor - 3,338 NA Gauge Conversion 5,290 5,500 4% Doubling 2,756 7,653 178% Railway Electrification 4,501 6,500 44% Source: Planning commission

Water-Treatment: An Ernst & Young (E&Y) study indicated that the Indian water sector would require investment of around $130 bn between 2011 and 2030. Wastewater management, in particular, is emerging as a key thrust area. Currently, only 60% industrial and 26% of domestic wastewater is treated in India. Metros and large cities are treating only about 30% while smaller cities treat a minuscule 3.7% of their wastewater. To improve the situation, the 12th Five year Plan envisages INR 7596.9bn total investment across various water infrastructure projects .

Actual(Latest Estimate) Target 12th Five INR bn Increase % 11th Five Year Plan Year Plan Irrigation (incl. watershed) 1,957 5,044 157

9,74 2,553 162 Water Supply and Sanitation

Total 2,931 7,597 159 Source: Planning commission

Peer comparison Kalpataru Power Particulars KEC International Jyoti Structure s Emco Transmission Business verticals Power Transmission Power Transmission & Power Transmission Power Power Systems Distribution & Distribution Transmission & Cables Oil & Gas Distribution Water Railways Metering Railways Buidings & Factories services Telecom Roads & Bridges Logistics & Warehouse Maximum capacity in transmission orders 1200kV 1200kV 800kV 800kV

Order book growth – 5 years CAGR 17.3 9.54 4.15 NA

Revenue growth- 5 years CAGR 19.45 17.8 17 -4.5

EBITDA Margin-9MFY14 6.2 8.9 11.0 9.6

Debt Equity Ratio-9MFY14 1.45 0.94 1.65 1.06

ROCE- FY13 16.4 12.10 16.9 8.32

Average FCF/share-5 years 1.39 -13.25 -6.0 1.64

AverageCCC-5years 56 615 120 187

Financials & Valuation: KEC is expected to benefit from the huge potential in power transmission both domestically and internationally. Also, domestic order flow could increase post elections in 2HFY2015. We have estimated revenue CAGR of 13.5% over FY 13 - 16E with new verticals also gaining traction.

Chart 7: Revenue growth

120000 4.0 3.6 3.5 100000 3.2 3.0 80000 2.5 2.5 60000 2.0 1.6 1.5 40000 0.9 1.0 20000 0.5 0 0.0 FY2012 FY2013 FY2014E FY2015E FY 2016E

Net Revenues PAT Margin

Source: CSEC Research

Valuation: At the current market price KEC is trading at a P/E of 7.8X and 5.6X its FY15E and FY16E earnings respectively. We assign a target P/E of 6.5X to its FY16E EPS to arrive at a target price of INR81 and recommend a BUY. We believe the valuation is justified given the strong order book growth diversified revenue streams and significance global presence.

Peer Valuations (FY16E)

Company OPM NPM P/E P/BV EV/EBITDA ROE Div Yield

KEC 7.2 3.15 5.6 1.1 4.1 19 3.1 Kalpataru Power Transmission* 9.1 2.7 6.4 0.6 4.4 10.1 2.5 Jyoti Structures* 9.6 2.4 3.4 0.3 3.2 9.2 3.4

Source: Bloomberg

Risks:  Delay in project executions would lead to delay in revenue flow and increase in costs

 Slow down in infrastructure spending by the Government :

Actual power generation capacity addition during the 11th five year plan was only around 66% of the targeted

capacity (78,700 MW).

 Political unrests in foreign markets:

KEC businesses are spread across various countries and regions. Political unrests in the Company’s existing

markets could delay project executions.

FINANCIALS

Income Statement (Abstract) Per Share Ratios INR(million) Particulars FY13 FY14E FY15E FY16E Particulars FY13 FY14E FY15E FY16E Adjusted EPS (INR) 2.53 5.09 8.94 12.49 Cash EPS - 3.38 4.42 17.12 20.8 Net Revenue 69,795 80,741 92,020 102,048 BV/Share (INR) 44.62 48.6 55.71 65.67 Growth (%) 20 16 14 11 FCF/Share(INR) -8.11 3.17 17.43 17.76 Operating Expenditure 65,488 75,574 85,579 94,700

EBIDTA 4,307 5,167 6,441 7,347 DPS (INR) 0.50 0.89 1.56 2.19 Growth (%) -15 20 25 14 Depreciation 561 604 608 606 Key Ratios Other Income 321 180 200 215 Particulars FY13 FY14E FY15E FY16E Interest 2,598 2,730 2,497 2,016 Dividend Payout Exceptional Items 0 0 0 0 (%) 19.8 17.5 17.5 17.5 Tax Paid 818 905 1,238 1,729 EBIDTA Margin (%) 6.17 6.40 7.00 7.20 Reported PAT 650 2,849 2,298 3,211 PBT Margin (%) 2.10 2.49 3.84 4.84 Adjusted PAT 650 1,309 2,298 3,211 RoCE (%) 7 8 9 10 RoE (%) 6 10 16 19 Growth (%) -69 101 76 40 Current Ratio 1.08 1.12 1.14 1.16 Debt Equity ratio 1.29 1.28 1.09 0.77 Inventory Days 35 37 37 37

Balance Sheet (Abstract) Debtor days 154 149 147 144 INR(million) Creditor days 152 153 153 153 Particulars FY13 FY14E FY15E FY16E Interest Cover Ratio 1.78 1.96 2.66 3.76 Share Capital 514 514 514 514 Reserves & Surplus 10,958 11,997 13,820 16,368 DuPont Analysis Networth 11,472 12,511 14,334 16,882 Particulars FY13 FY14E FY15E FY16E Minority Interest - - - - Net Profit Margin Current Liabilities 42,977 45,028 49,238 51,059 (%) 0.93 1.6 2.5 3.15 Non-Current Asset Turnover 1.12 1.22 1.29 1.36 Liabilities 7,898 8,698 7,998 7,098 Leverage factor 5.14 5.14 4.8 4.34 Total Liabilities 62,437 66,236 71,751 75,040 RoE (%) 6 10 16 19 Net Fixed Assets 13,237 13,133 12,645 13,039 Other Non-Current Assets 2,639 2,736 2,736 2,736 Cash & marketable Valuation Ratios securities 1,556 575 1,634 920 Particulars FY13 FY14E FY15E FY16E Other Current Assets 44,915 49,792 54,555 58,345 P/E 27.67 13.75 7.83 5.60 Total Assets 62,437 66,236 71,751 75,040 P/BV 1.57 1.44 1.26 1.07

EV/Sales 0.4 0.4 0.3 0.3 Cash Flow statement (Abstract) EV/EBITDA 7.24 6.48 4.96 4.1 INR(million) Div Yield (%) 0.75 1.27 2.23 3.12 Particulars FY13 FY14E FY15E FY16E Cash flow from operations -868 1,136 4,401 5,350 Cash flow from investing -1217 -320 80 -785 Cash flow from financing 1605 -1700 -3422 -5280 Free cash flow -2,085 816 4,481 4,565 Net change in cash 1,939 1,459 575 1,634

Cholamandalam Securities Limited Member: BSE,NSE,MSE Regd. Office: Dare House,2 (Old) # 234) N.S.C Bose Road, Chennai – 600 001. Website : www.cholawealthdirect.com Email id – [email protected] CIN U65993TN1994PLC028674

Chola Securities is a leading southern India based Stock broker. Our focus area of coverage within the Indian market is Mid and small caps with a focus on companies from southern India.

Our Institutional Equities services are carried out in partnership with RCCR, a boutique Investment research and Corporate Advisory firm founded by a team with extensive experience in the Asset management industry.

RESEARCH Singaravelu K P Head of Research* +91-44 - 4505 6003 [email protected] Sathyanarayanan M Consumption +91-44 - 3000 7361 [email protected] Murugesa S Engineering & Cement +91-44 - 3000 7363 [email protected] Michel Charles C Technicals +91-44 - 3000 7353 [email protected] Rajasekhar R IT & Auto Ancillary +91-44 - 3000 7360 [email protected] Karthikeyan P Macro & Financial Services +91-44 - 3000 7344 [email protected] Sreedevi K Associate +91-44 - 3000 7266 [email protected]

INSTITUTIONAL SALES Venkat Chidambaram Head of FII Business & Corporate Finance* +91-44 - 24473310 [email protected] Lakshmanan T S P Chennai +91 - 9840019701 [email protected] Santosh Kumar Sharma Mumbai +022 - 22617210 [email protected]

RETAIL SALES Nikesh AHMEDABAD 079 – 30002968 / 69 [email protected] Sathyanarayana N BANGLORE 080 - 41503340 / 44 [email protected] Muthiah A N CHENNAI - HO 044 – 3000 7371 [email protected] Baskaran S CHENNAI - Nungambakkam 044 – 28240052 / 54 [email protected] Saravanan CHENNAI - Adyar 044 - 2452 2111 / 2333 [email protected] V Kumar COIMBATORE 0422 - 4292041 / 4204620 [email protected] Maneesh Gupta DELHI 011 - 30461161 / 62 / 63 [email protected] Srinivasa Reddy D V HYDERABAD 040 - 40126821 / 22 [email protected] Sudipta Bhaumik KOLKATA 033 - 44103638 / 39 [email protected] Riken B Mehta MUMBAI 022 - 22617210 / 7203 [email protected] Pravin S MADURAI 0452 - 2601195 / 96 [email protected] Deepak V Kshirsagar PUNE 020 - 30225432 / 33 /34 [email protected] Sivaraman G SALEM 0427-2313226/4040226 [email protected] M N Chandra Sekhar VIZAG 0891 - 6642718 [email protected]

COMPLIANCE Balaji H Compliance +91-44 - 3000 7370 [email protected] *Employees of Business Partner - RCCR DISCLAIMER:

This report is for private circulation and for the personal information of the authorized recipient only, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not provide individually tailor-made investment advice and has been prepared without regard to any specific investment objectives, financial situation, or any particular needs of any of the persons who receive it.

The research analyst who is primarily responsible for this report certifies that: (1) all of the views expressed in this report accurately reflect his or her personal opinions about any and all of the subject securities or issuers; and (2) no part of any of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this report. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of Cholamandalam Securities Limited makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete.

The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein Cholamandalam Securities Limited reserves the right to make modifications and alterations to this statements as may be required from time to time without any prior approval. Cholamandalam Securities Limited, its affiliates, directors and employees may from time to time, effect or have effect an own account transaction in or deal as agent in or for the securities mentioned in this report. The recipient should take this into account before interpreting the report.

All investors may not find the securities discussed in this report to be suitable. Cholamandalam Securities Limited recommends that investors independently evaluate particular investments and strategies. Investors should seek the advice of a financial advisor with regard to the appropriateness of investing in any securities / investment strategies recommended in this report. The appropriateness of a particular investment or strategy will depend on an investor’s individual preference. Past performance is not necessary a guide to future performance. Estimates of future prospects are based on assumptions that may not be realized. Re-publication or redistribution in any form, in whole or in part, is prohibited.

No part of this material may be duplicated in any form and/or redistributed without Cholamandalam Securities Limited prior written consent.

The news items appearing in this are collected from various media sources and we make no representations that it is complete or accurate