Debt weighs down KEC International

Market


KEC International Ltd’s shares rose 3.5% on Thursday, a day when the Nifty 50 index fell by 0.7%. The company’s management met analysts on Wednesday and shed light on various aspects such as order book, margin outlook, and debt.

KEC’s high debt has been a concern. As at June quarter (Q1FY23) end, consolidated net debt including acceptances stood at 6,076 crore, clocking nearly 28% rise from FY22-end. Accordingly, the interest cost as a percentage of revenue increased to 3% in Q1 from 2.2% in Q4FY22. This comes on the back of funding losses in the SAE Towers business through debt. Further, the company’s working capital cycle increased sequentially and headwinds from higher commodity prices did not help either.

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However, expectations of the SAE business clocking profits, softening input costs, and the anticipated drop in net working capital days augur well for investor sentiment. At the analyst meet, KEC said it expects debt levels to ease partly by FY23-end.

Reducing debt would be a key trigger for the KEC stock, which is 18% below its 52-week high seen in October, though valuations are undemanding. KEC’s shares trade at 14 times estimated earnings for FY24, Bloomberg data showed.

Margin performance has been another concern. However, this is expected to improve as the SAE order nears its end, along with favourable operating leverage. KEC aims to reach double digit Ebitda margin by FY24. In FY22, the measure was 6.6%, down from 10.3% in FY20.

On the brighter side, KEC’s order book is promising. The company expects Rs19,000-20,000 crore of order inflows in FY23. Of this, it has received orders worth 6,000 crore so far. The order book is currently at more than 30,000 crore, which provides revenue visibility for 7-8 quarters, the company said in its presentation. The order book as on FY22-end was 23,716 crore. “The order book can actually result in (revenue) growth much higher than the management’s guidance of 15%, but may be limited because of higher working capital,” said analysts at Kotak Institutional Equities.

Meanwhile, diversification into non transmission and distribution (T&D) areas has helped KEC’s order book. Further, as strong opportunities arise here, KEC expects revenue from the T&D segment to drop eventually. “We have been proponents of KEC’s successful diversification strategy, which is scalable and profitable. However, debt levels are worrying and we await sustainable improvement in that,” analysts at Edelweiss Securities said in a report on 14 September.

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