Nov 21, 2016

KEC International has the power with orders from Railways, SEBs

The Railways order is almost 10% of my order book: says Vimal Kejriwal, MD & CEO, KEC International. He further states that if one needs to look at the turnaround which has happened, one primary reason is SAE turnaround!

kec-international-railways
kec-international-railwaysHyderabad: At a time when several capital goods makers are facing challenges regarding financials or order inflows, power transmission equipment supplier KEC International is performing well due to diversification of its revenue stream and turnaround of its overseas subsidiary, SAE Towers.

Consequently, in the September quarter, it delivered on parameters ranging from revenue to margins and order inflow to order backlog.
KEC’s order inflows increased 106% to Rs 3,100 crore in the September quarter from a year ago. The main reason for robust inflows was orders from the state electricity boards (SEBs) for transmission and distribution (T&D) equipment and new order from Indian Railways. SEB orders offset the moderating pace of orders from Power Grid.
SEBs stepped up orders due to government reforms to reduce transmission losses. KEC is participating in orders of those SEBs which offer better payment terms. These include Rs 25,000-crore orders from states like Andhra Pradesh, West Bengal, Karnataka, Tamil Nadu, Rajasthan and Telangana.
The company is gradually increasing its presence in railways, which offers a tremendous opportunity to diversify its revenue stream. The order backlogs from railways increased to nearly Rs 1,000 crore in September from less than Rs 200 crore two years ago. Even the margins from railway segment are gradually moving closer to the T&D margins of 9-10%.
KEC’s overseas business, which accounts for nearly a third of its total order backlog, saw significant improvement during the quarter. SAE Towers, which caters to Brazil and Mexico, doubled its margins compared to a year ago.
On the other hand, receivable days from Saudi Arabia came down. It collected Rs 1,000 crore in H1FY17, and expects retention money worth Rs 500-600 crore in the next few months. KEC’s receivable dropped to 229 days in September from 246 days a year ago.
On Thursday, the stock traded at 10 times its FY18 projected earnings, which appears reasonable on strong earnings growth, healthy rise in return ratio and high scalability potential.
Vimal Kejriwal , MD & CEO, KEC International chats about the results of the previous quarter and also his outlook on the margins. Here are some excerpts from the interview.
Q: What have been the key highlights this quarter? What is the outlook on margins?
Vimal Kejriwal: I think we had a good quarter. For the first time PBT has crossed Rs 100 crores in a quarter, up almost 72% from the last quarter. PAT has been up almost 132%. Revenue, has been flattish, but we are still up by 3%. Along with this, we have also declared some orders of around 686 crores. So, on the whole we are happy with our performance.
Q: Do you think the reason your PAT numbers are looking slightly bloated is largely because of the base effect? The turnaround year for KEC has been FY17 and FY15-FY16 were very challenging years.
Vimal Kejriwal: If you look at the absolute numbers, our margins for the quarter are at 8.7% as against 7.3. So 8.7 by itself in this business is a good number to start with. And as far as your question on the PAT is concerned, the reason why the PAT looks higher than normal is because our tax rates are coming down to normal. We had been paying much higher tax rates on account of some of the foreign currency and foreign overseas assets, which has now come down. So this quarter our tax rate is down to 35% which is why the difference you see between the PBT and the PAT.
Q: How much of your current order book is private, how much government and what is your order book guidance for remaining year now?
Vimal Kejriwal: Complexion has not changed in that manner but what has changed is that my India order book is now close to 65% as against normally what used to be around 50-55%, primarily driven by the railway orders. This year we have got railway orders in India of almost 1000 crores which is almost 10% of my order book which is the swing factor. On the transmission side, yes we are seeing a little bit of movement from Power Grid into the private sector, all the TBCB players, all the bigger ones like Sterlite, Adani, etc, so there is a significant share which is going to these people now.
Q: In the T&D segment, fresh orders have been robust since January. What kind of growth can we see in order flows there?
Vimal Kejriwal: I think the order flow we are expecting a growth of around 10% to 15%.
Q: Do you think that you are hopeful of doubling the order book in railways from 900 crores by the end of FY17, is that the kind of target that you keeping internally?
Vimal Kejriwal: Our order book right now is around 1200 crores in the railways. It has already more than doubled, the number was around 600 crores last March. Also the revenue would be double. We did around 200 crores of revenue last year. This year we should end up anything between 425 to 500 crores of revenue on the railways.
Q: You have been saying that your margins have a lot of scope to expand because new orders are coming at higher rate, legacy orders are now becoming history. How much of your current order book is new order book and how much is your legacy business which is still left?
Vimal Kejriwal: Legacy business is probably less than 100 crores. I do not think legacy is critical for us. If you look at the turnaround which has happened, one primary reason is SAE turnaround. Last year we had a major loss in SAE. This year it has turned positive and is making as much of EBITDA as we make in our normal business. Second is last year we had negative margins in railways and water, so this year railways has already turned positive and water is almost coming to an end.