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KEC International: Hit by forex losses
Nov 24, 2008

Performance summary
  • Net sales grow by 43% YoY in 2QFY09, 31% YoY in 1HFY09.

  • Operating margins contract by 6.2% YoY during the quarter on account of higher raw material costs (as percentage of sales) and forex losses of Rs 248 m.

  • Net profits drop by 48% YoY during the quarter, mainly on account of poor operating performance. Profits are lower by 27% YoY in 1HFY09.

  • Order book at the end of September 2008 stood at Rs 47 bn (nearly 1.6 times its FY08 sales).



Standalone financial snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net Sales 5,629 8,060 43.2% 10,745 14,062 30.9%
Expenditure 4,884 7,498 53.5% 9,361 12,885 37.6%
Operating profit (EBITDA) 745 562 -24.6% 1,384 1,177 -15.0%
Operating profit margin (%) 13.2% 7.0% 12.9% 8.4%
Depreciation 68 55 -19.3% 157 101 -35.6%
Interest 157 233 48.4% 319 413 29.3%
Profit before tax 520 274 -47.3% 908 663 -27.0%
Tax 181 96 -47.0% 316 230 -27.3%
Profit after tax/(loss) 339 178 -47.5% 592 433 -26.9%
Net profit margin (%) 6.0% 2.2% 5.5% 3.1%
No. of shares (m) 49.3
Diluted earnings per share (Rs)* 31.7
P/E ratio (x)* 3.9
* On a trailing 12-months basis

What has driven performance in 2QFY09?
  • KEC Internationalís (KEC) topline grew by a strong 43% YoY during 2QFY09. However, it should be noted that the company merged the erstwhile RPG Transmission and erstwhile National Information Technologies (NITEL) with itself in October last year, as such on a YoY basis the results are not comparable. In terms of revenue break up, the company earned nearly two-thirds of its revenues from the international markets, while the balance was earned from the domestic segment. During the quarter the company won three rural electrification orders valued at Rs 3 bn. It also received an order worth Rs 970 m from Power Grid Corporation of India (PGCIL). The company did not receive any international orders this quarter but is expecting to receive some in the current quarter.

  • During the quarter, KECís operating performance was hit by a mark to market loss of Rs 248 m on advance from customers. Also in the corresponding quarter last year, KEC had earned forex gains of about Rs 73 m. These adjustments have been included in the other expenditures. On excluding the same, KECís operating profits have dropped by 1% YoY only. During the quarter, it was also impacted by higher raw material costs, which were nearly 62% of sales in 2QFY09 as compared to 47% in 2QFY08. As per the companyís management, this sharp rise in raw material cost was attributed to a significant portion of their revenues being pure supply contracts (towers). As pure supply orders garner lower margins as compared to EPC contracts, there was a significant rise in raw material costs, and therefore a sharp drop in operating margins.

  • KECís net profits dropped by 48% YoY on the back of a poor operating performance. However, on the interest cost front, the company was not impacted significantly. During 2QFY09, KECís interest costs stood at 2.9% of sales as compared to 2.8% in the corresponding quarter last year. However, on an absolute basis, the costs increased by 48% YoY. The management stated that KEC is paying an interest rate of 10.5% on its borrowings. However, adjusting the same for rupee depreciation, it estimates the same to be approximately 13% to 13.5%. During 2QFY09, KECís net profit margins stood at a low 2.2% as compared to 6% in 2QFY08.

What to expect?
At the current price of Rs 124, the stock is trading at a multiple of 3.9 times its trailing twelve months earnings. The companyís management, in their conference call recently had mentioned that the impact of the slowdown has not really affected the company. The management feels that the outlook for the next six months is healthy as power segment projects are not really facing any deferments. However, the outlook for the longer duration remains unclear. The management expects to grow in line with the industry.

The company is banking on its Rs 47 bn order book to drive its growth over the next few quarters. The average execution time for this backlog is nearly 18 months. Nearly 60% of KECís order backlog is international contracts, of which Rs 25 bn are transmission projects and about Rs 10 bn are distribution contracts. From the domestic projects, nearly Rs 5 bn are distribution contracts with the balance being distributed between transmission, railways and telecom projects.

While Power Grid Corporation of India (PGCIL) forms only 20% of the companyís current order backlog, its investment plan can be considered as the base for the domestic sector. The management expects the tender for PGCIL contracts to arrive in the coming future. However, it did add that the investments largely depend on what generation projects PGCIL can close. If the financial closure for generation projects do not happen or get delayed, to that extent all the translational orders will get delayed.

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