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 14 13 13 13 14 13 13 14 13 13 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 1 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 2 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. 3 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. 4 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.