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All Businesses performing well, Ex-T&D business will drive the Growth

Stock Updates | August 06, 2019
15% Revenue growth over next two years supported by robust order book of Rs 20000 Cr

Current order book of Rs 20000 Cr with Rs 3500 Cr of L1 orders provides strong revenue visibilities over the next 2 years. Domestic projects execution is expected to pick up after the election. International power T&D business was impacted last quarter on account of delay in environmental approvals, which is expected to receive in Q1FY20 and execution will kick off. Much delayed projects in Brazil is also expected to start. Railway continues to be growth engine of the company. Indian Railway has planned to do 100% electrification of Broad Gauge railway network by 2023 in order to reduce the country’s import bill. Government has planned to do electrification of 10000 Rkm of network every year for next 3 years. Hence, Railway continues to drive the growth. Entry into affordable housing business will further enhance the growth scenario of the company. For the next two years (FY20/21) we have model in 15% revenue CAGR growth.

Exhibit 1: Order Book and Book to Bill



Management’s Business/Geography Diversification strategy will ensure sustainable growth in long run

Over the years KEC has continuously diversifying its business segment. In last two decade company has successfully diversified its business from Power T&D to Railway, Cables, Tower Supply, Substation, Solar, Civil and the latest diversification into Smart Infra. Company has not only diversified its business segment but also able to scale up the new business. Currently Non T&D business contributes around 35% of in the revenue compared to 14% four years back. The timely diversification into other segment is yielding better result. As the last year Company’s largest Power T&D business was down by 7% but despite that overall revenue was up by 9%. Non T&D business has reported growth of 62% YoY led by the Railway (up by 127% YoY) and Civil (up by 86% YoY).
Last year company has enter into new segment, Smart Infra with robust opportunities(Rs 2tr investment required in Smart City). Going forward we expect the dependency on Power T&D business will further reduce as the non T&D business growing at robust pace. This will help KEC to grow sustainably going forward.

Exhibit 2: Revenue Mix (%)


Improving borrowing mix (Foreign and Indian rupee debt) along with the sustainable debt level at 0.7x will improve PAT margin by 40 bps over FY19-21.

RBI banned roll over facilities and buyer’s credit in June 2018, which led to structural change in borrowings mix. Large part of debt was in foreign currency which converted into rupee loan. Additionally, squeeze in credit availability resulted into reduction in payables days. At the same time availability of Steel and Copper was also short. Closure of Sterlite copper plant in Tamil Nadu has led to the short in supply. All these led to the higher working capital requirement and in order to fund it company had to borrow money in Indian rupee and overall debt has gone up to Rs 3251 Cr from 1639 Cr, mix also changes from 73:27 (foreign : India) to 40:60.
But towards the year end debt has come down to Rs 1697 Cr on account of 1) advances on International projects 2) Release of retention money of Rs 450 Cr from Saudi 3) Sale of BooT asset (Rs 277 Cr) and mix is also improve from 40:60 to 43:57. Further, retention of Rs250-300 Cr is likely to release in H1FY20. Management is confident to maintain debt below Rs 2500 Cr and interest cost at 2.5% of the sales going ahead.

Exhibit 3: Borrowing Mix (%)



Attractive Valuation with Strong Fundamental

In the last 5-6 years, growth was uneven (only 6.2% CAGR growth) due to variety of the reasons (mainly
due to Demonetization, GST and soft commodity prices) though the margin has improved from low of
5.9% to 10.5%. But the current growth scenario is looking bright with sustained margin. The Revenue
growth is likely to sustained at 15% CAGR over next 2 years led by the government strong spending on
Infrastructure (Railway, affordable housing, Water) and recovery in power T&D business. RoE will
sustain at 20% level.
The current valuation of the stock is quiet attractive considering the future growth prospectus.
Currently, the stock is trading at 11x FY21E EPS which is lower than long term (last 10 years) average
multiple of 16x.

Exhibit 4: RoE and Valuation




Narnolia Financial Advisors Ltd. is a SEBI registered Research Analyst having SEBI Registration No. INH300006500. The Company/Analyst (s) does/do not have any holding in the stocks discussed but these stocks may have been recommended to clients in the past. Clients of Narnolia Financial Advisors Ltd. may be holding aforesaid stocks.

The stocks recommended are based on our analysis which is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed.

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Disclosure of Interest Statement-




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*The name of the Company has been changed from “Microsec Capital Limited” to “Narnolia Financial Advisors Limited” pursuant to change of control. The change in name has been duly effected in the records of the Registrar of Companies (ROC). The application for fresh registration in the new name of “Narnolia Financial Advisors Limited” pursuant to change of control is under process with SEBI.

Correspondence Office Address: Arch Waterfront, 5th Floor, Block GP, Saltlake, Sector 5, Kolkata 700 091; Tel No.: 033-40541700; www.narnolia.com. Registered Office Address: Marble Arch, Office 201, 2nd Floor, 236B, AJC Bose Road, Kolkata 700 020; Tel No.: 033-4050 1500; www.narnolia.com

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Registration details of Company: Narnolia Financial Advisors Ltd. (NFAL): SEBI Stock Broker Registration: INZ000166737 (NSE/BSE/MSEI); NSDL/CDSL: IN-DP-380-2018; Research Analyst: INH300002407, Merchant Banking: (Registration No.: INM000010791), PMS: (Registration No.: INP000002304), AMFIRegistered Mutual Fund distributor: ARN 3087

Registration Details of Group entities: G. Raj & Company Consultants Ltd (G RAJ)-BSE Broker INZ260010731; NSDL DP: IN-DP-NSDL-371-2014 || Narnolia Commerze Limited-MCX/NCDEX Commodities Broker: INZ000051636 || Narnolia Velox Advisory Ltd.- SEBI Registered PMS: INP000005109 || Eastwind Capital Advisors Pvt Ltd. (EASTWIND)-SEBI Registered Investment Adviser: INA300005439 || Narnolia Insurance Brokers Limited-IRDA Licensed Direct Insurance Broker (Life & Non-Life) License No.134 || Narnolia Securities Ltd. (NSL)-AMFI Registered Mutual Fund distributor: ARN 20558, PFRDA NPS POP: 27092018 || Narnolia Capital Advisors Pvt. Ltd. - RBI Registered NBFC:B.05.02568.

Disclaimer: This report has been prepared by Narnolia Financial Advisors Ltd. (NFAL)and is meant for sole use by the recipient and not for public circulation. The report and information contained herein is strictly confidential and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of NFAL. The report is based on the facts, figures and information that are considered true, correct, reliable and accurate. The intent of this report is not recommendatory in nature. The information is obtained from publicly available media or other sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. The report is prepared solely for informational purpose and does not constitute an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments for the clients. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances.The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. Certain transactions -including those involving futures, options, another derivative products as well as non-investment grade securities - involve substantial risk and are not suitable for all investors.Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his/her/its own advisors to determine the merits and risks of such an investment. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. NFAL will not treat recipients as customers by virtue of their receiving this report. Neither the Company, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits or lost opportunities that may arise from or in connection with the use of the information/report. The person accessing this information specifically agrees to exempt NFAL or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold NFAL or any of its affiliates or employees responsible for any such misuse and further agrees to hold NFAL or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays.

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject NFAL & its group companies to registration or licensing requirements within such jurisdictions.


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ABOUT THE BLOGGER
Sandip JabuaniFundamental research analystsandip.jabuani@narnolia.com

Sandip Jabuani is a fundamental research analyst at Narnolia Research, responsible for covering Industrial sector. He excels in Financial Modeling and is well read on Accounting Rules and other Laws governing sector. He has done a post graduate in Fi..

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