KEC REPORTED WEAK SET OF Q2FY23 NUMBERS GIVEN THE MARGIN MISS

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   The topline came in at Rs 4064 crore which grew by 13.3% on YoY basis, (above our estimate of Rs 3946.4 crore). During Q2FY23, the overall T&D business (including SAE tower) revenue grew by 7% on YoY basis to Rs 2091 crore. While Non-T&D business (Railways, Civil, Cables, other) registered growth of 16% to Rs 2093 crore, on YoY basis led by better execution. The railways business revenue came in at Rs 858 crore, de-grew 13% while civil business segment revenue registering a significant growth of 65% on YoY to Rs 740 crore. Cables business grew by 9% to Rs 390 crore, YoY and Smart Infra business revenue came at Rs 25 crores and grew by 51% YoY, Oil & Gas pipeline revenue came at Rs 81 crores. Overall, T&D contributed 51% followed by railways (21.1%), Civil (18.2%) and Cable (9.59%) to revenues

·         KEC’s YTDFY23 order inflows came strong at Rs 10465 crore. The unexecuted order book as on YTDFY23 stood at Rs 27569 crore, while the company is L1 in orders worth more than Rs 6500 crore. T&D business contributed 44% to order book while non- T&D contributed 56% to order book. On order inflow front, T&D contributed 36% followed by Civil (30%), Railways (24%), Cables (6),  and Oil & Gas (4%). Geographically, International order inflows contributes 20% and domestic contributed 80%

·         EBITDA margins came in at 4.4% (below our estimate of 6.5%), down by 267 bps on a YoY basis while declined by 70 bps on QoQ basis mainly impacted due to the elevated logistics costs, execution of legacy projects with adverse commodity prices and SAE Brazil performance. Absolute EBIDTA came in at Rs 178 crore, which de-grew by 29.7% on YoY basis. Generally, in a rising input environment, fixed price contracts in the international markets puts the company is a weak spot given input price inflation cannot be passed and the same has a negative bearing on the respective project level margins

·         Interest cost increased by 74.2% YoY to Rs 127.7 crore. In Q2FY23 KEC’s Net Debt (including acceptances) has reduced by Rs 156 crore QoQ to Rs 5919 crore, targeting further reduction in H2FY23. Net working capital day stands at 148 days (Vs. 148 days in Q1FY23) which is expected to normalize further in owing to judicious monitoring of cash flows, focus on collections specially retention receivables and focus on expediting commercial closure of projects

·         Adjusted PAT came in at Rs 55.2 crore (below our estimate of Rs 89 crore) which declined by 52% on YoY basis, impacted by continued headwinds on account of elevated logistic costs, SAE Brazil performance

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 As per management guidance this was the last quarter for subdued margins. Even though KEC has a strong visibility in terms of backlog and has exhibited strong pick up in non T&D revenues, short to medium term performance will hinge on the commodity outlook which will dictate the recovery in margin trajectory and overall profitability.

Impact:

Neutral