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Main Research Report

KEC International Limited

Independent Equity Research

April - 2019

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KEC INTERNATIONAL LIMITED (KEC)

Disclaimer: This note has been prepared in the month of April 2019 and is refreshed as and

when deemed necessary. Our recommended companies are tracked regularly (quarterly) and for

latest information on the company and latest 15-18 months and 5-year targets, please visit the

quarterly result report section on our website. Detailed quarterly results are uploaded every

quarter in this section. Additionally, clients are also updated on any major events as and when

they occur.

BACKGROUND AND BUSINESS:

a) Business Overview –

KEC International Limited (KEC) is the flagship arm of the RPG group. It is a global EPC player in the Power

Transmission and Distribution (T&D) space. The company has over 7 decades of experience in executing power

T&D projects on turnkey basis and has the ability to provide end-to-end solutions encompassing designing,

manufacturing, supply and construction of power transmission lines. Over the years, KEC has evolved into a

diversified infrastructure play with interests across Power T&D, Railways, Cables, Telecom, Water and Solar sectors. In

FY18 Power T&D (including India and overseas ops) contributed 77.5% to sales (9MFY19 contribution: 63.6%),

followed by railways at 8.4% (9MFY19: 19.9%), cables at 10.0% (9MFY19: 11.6%) and Civil & Solar together

contributing 5.5% (9MFY19: 9.0%). The company’s current market capitalization stands at Rs. 75.2 bn.

KEC Service Offering and Verticals:

Sr No

Business segment Service offering

Revenue mix Revenue mix

Years of Experience (FY18 Rs.100 bn)

(9MFY19 Rs.71.6 bn)

1 Power T&D (standalone)

End-to-end solutions in power transmission, EPC of Substations, Distribution network, Electrical-Balance of Plant, Industrial Electrification and Cabling.

67.3% 54.5% Experience of over 7 decades

2 Power T&D (The US subsidiary-SAE)

Tower designing, engineering and manufacturing.

10.2% 9.1% Acquired SAE USA in FY11 which is in operation since 1926

3 Railways Track work, Line electrification and signalling. 8.4% 17.9%

Starting in 2009, company now has over a decade of experience in the segment

4 Cables Manufacturing power and telecom cables (optic as well as jelly filled).

10.0% 11.6%

Acquired RPG cables in 2010, which has been in operation since the last 5 decades)

5 Water Water Resource Management and Water and Waste Water Treatment.

2.7% 4.7% Entered the segment in 2011

6 Solar

Design & Engineering, Project Execution, Project Management, Bid Management, Project Feasibility Analysis across large-scale Solar Photovoltaic Power Plants for both land-mounted as well as roof-top Solar PV projects.

2.9% 4.3% Entered the segment in 2015

Total 100.0% 100.0%

b) Operating structure-

Being an international EPC player, local presence is essential for project management mainly to carry out civil

construction work, for sourcing material and for contracting labour. KEC has therefore set up subsidiaries and entered

into joint ventures with local partners in the key overseas markets such as Americas, Africa and Middle East. As

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on 31st March 2019, KEC has been executing projects in 29 countries through various subsidiaries and JVs. It has footprint

in over 100 countries through its EPC, solar, cables and railway projects.

c) Past Acquisitions –

In a bid to consolidate its overseas presence, KEC acquired 100% stake in SAE Towers Holdings LLC (SAE Towers)

in September 2010 at an enterprise value of $ 95 million. Headquartered in Houston, Texas, United States, SAE Towers

is the leading manufacturer of lattice transmission towers in the Americas. It has two manufacturing facilities located in

Brazil and Mexico with a combined capacity of 102,000 MTPA.

d) Manufacturing facility-

KEC operates 5 tower manufacturing facilities spread across India, Mexico and Brazil with a total capacity of

312,200 metric tons, of this 210,200 mt is spread across three locations in India- viz. Jaipur, Jabalpur and Nagpur. Other

two manufacturing facilities are located overseas in Brazil (67,000 mtpa) and Mexico (35,000mtpa). It is the only

company in the world to have four tower testing stations, of which three are in India and one in Brazil. KEC also owns 2

cable manufacturing facilities set across Vadodara and Mysore in India, where it manufactures a range of power and

telecom cables. It has a 3rd cable plant in Silvassa, which got merged with the Vadodara plant in FY19.

Segment Capacity Locations

T&D- Tower manufacturing • Total Capacity of 312,200 MTPA:

o 213,200 MTPA in India o 102,000 MTPA capacity in Brazil and Mexico.

India: Jaipur, Jabalpur, Nagpur. Overseas: Brazil, Mexico

Cables

• Cables manufacturing capacity: 40,000 km P.A

• Instrumentation cables: 3600 km P.A

• Optical fibre cables: 0.6 mn fibre P.A

• Copper telecom cables: 0.6 mn fibre km P. A

India: Vadodara and Mysore

Railway Structures • Total Capacity of 30,000 MTPA -

Solar • Total Capacity of 12,000 MTPA -

e) Management effectiveness –

KEC became a part of the Rama Prasad Goenka promoted RPG Group in 1982. The group has consolidated turnover of

~ $3 billion and its operations span sectors like Power T&D, Tyre manufacturing, IT/software services, Life sciences/

pharma, capital goods and rubber plantation. KEC operations are headed by Mr. Vimal Kejriwal; Managing Director &

CEO of the company and he brings over 32 years of experience in the engineering sector. With the support of RPG

Group, KEC has established itself as a leading global T&D EPC player with its operations spanning 64 countries.

The management has aggressively pursued topline growth through geographical expansion and diversification

into other infra EPC sectors. Reflecting superior leadership, KEC has stayed ahead of its peers in terms of market

share growth, capacity expansion and diversification outside India.

f) Promoter shareholding –

The current promoter holding, held by the Goenka family stands at 51.35% (as on 31st March 2019). This stake is

distributed between various individuals in the family and promoter group entities. None of the promoter holding is

pledged. Promoters have consistently increased their stake from 44.6% in FY13 to 51.35% currently. Total

institutional holding stands at 31.1% for quarter ended March 2019. Some of the marquee investors in KEC include HDFC

Trustees Company Ltd. (8.97%), Reliance Capital Trustee Company (2.96%), Aditya Birla Sun Life (3.52%), Kotak

Select Focus Fund (2.65%), IDFC Sterling Value Fund (1.94%) and LIC of India (1.70%).

KEC is currently trading at Rs. 292.0/- (Face value Re. 1/-). Over the past 3 and 5 years, the company has generated

health returns for shareholders. The stock has compounded at a CAGR of 43.9% (2.9-x) and 31.0% (3.9x) over the past

3 years and 5 years, respectively.

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INVESTMENT THESIS

Recommendation – Strong BUY Internal Rating Score –4.3 out of 5.0

ISIN INE389H01022

CMP Rs.292

5yr Review Price - Rs.623 to Rs. 706 Upside – 2.5-xs to 3.0-xs

Investment Summary

1) Robust sector opportunity-

Government’s thrust on developing Indian infrastructure is opening new growth opportunities for EPC and construction

players. Two such infrastructure verticals, where growth outlook looks very promising are – Power T&D and Railways.

Despite medium term challenges, growth in the power T&D sector is expected to remain strong. Total size of the

opportunity and key enablers for the segments are listed below: -

❖ Power T&D- The power Transmission and Distribution infrastructure needs a total investment of around

USD 2.9 trillion for 2016-2025, of which India forms ~10% (291 bn USD). India witnessed a massive

generation capex over the past decade. However, transmission capabilities lag significantly as AT&C losses

in India stand at ~19% against a global average of ~8.5%. In order to plug the gap, Presently, India has 340

GW of installed generation capacity; 3,90,970 ckm of installed transmission line length and 8,26,958 MVA

of substation transformation capacity, as on 31st March 2018. The Government envisages an addition of

over 1,00,000 ckm of transmission lines and over 2,90,000 MVA of transformation capacity between 2017-

2022. This would necessitate an enormous investment to the tune of Rs. 2.6 tn, which is expected to unfold

tremendous opportunities. Majority of these investments are expected to come from SEBs/Discoms and

private players, with PGCIL taking more of a project manager role.

Over the past 1 year, there has been a deferment of capex from PGCIL due to ongoing projects and

impending general elections. However, both PGCIL and industry players are confident that ordering will

pick up post elections.

❖ Railways- In the past few years, even the Railways sector is gathering momentum with renewed thrust from

the government. Sector outlook is positive in view of substantial opportunity size. In FY18-19 budget, the

government allocated Rs. 1.48 tn for the railways. In the interim budget presented in February 2019, the

outlay increased to Rs. 1.58 tn. The government has plans for network expansion and upgradation and

modernization of existing infrastructure. Under the proposed outlay, Rs.72.5 bn had been allocated for

construction of new lines, Rs.4.1 bn for road safety works (building road over/under bridges), Rs. 101.2 bn

for track renewal, Rs.34.2 bn for passenger amenities, Rs. 61.1 bn for rolling stock, Rs. 17.5 bn for signaling

and telecom and Rs.22 bn for gauge conversion. It targets 100% electrification of broad-gauge network by

FY22. In terms of distance, it is targeting 38,000km electrification over the next 5 years. These targets

indicate significant growth potential in the railways sector over the next 3-5 years.

2) KEC is best placed to capture growth in the sector –

We believe that KEC being the industry leader is at the forefront to benefit from the growth opportunities available in the

T&D and Railways sectors. Listed below are the key differentiators that make KEC preferable over its peers in the sector:

Parameters Details

i. Market Leadership

➢ KEC has 7 decades of experience in the sector and today commands a leadership position. Basis absolute revenue reported in 9MFY19, it is ~1.6-x the size of its closest competitor Kalpataru Transmission Power, 5-xs Skipper and 9-xs Techno Electric.

➢ We expect this lead to sustain going forward as well given strong execution capabilities and overall experience in the sector.

ii. Focused EPC player

➢ KEC is the only pure play EPC player compared to its listed peers. It derives ~80% revenue from EPC orders in varied sectors such as T&D, Railways, Solar, etc.

➢ Kalpataru besides being present in the EPC segment through its subsidiaries is also present in construction and Logistics sector. In FY18, EPC contributed 84% to the standalone revenue.

➢ Techno Electric besides being present in the power T&D EPC also executes industrial EPC orders. Overall EPC revenue contributed ~90% to its total topline. Further it also owns assets on BOOT/BOOM basis in Wind Power generation and transmission segments.

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Parameters Details

➢ Skipper is primarily a tower manufacturer and thus an equipment provider, with very limited presence in the EPC segment. Engineering segment constituted ~86% of its revenue in FY18, EPC formed only 4% of revenue and the balance was contributed by the Polymer business.

iii. High revenue visibility supported by strong growth in order book

➢ KEC and KTPL reported strong increase in Order Book (OB) supported by consistently strong inflows over the past 7-8 quarters. 9MFY19 YoY growth in the order book across players is as follows: -

o KEC 20% YoY growth in OB to Rs.206 bn. (OB/Sales 2.2-xs)

o Kalpataru 35% YoY growth in OB to Rs.141 bn. (OB/Sales 2.3-xs)

o Techno electric 25% decline in OB to Rs. 18 bn. (OB/Sales 1.7-xs)

o Skipper 6% YoY jump in engineering OB to Rs26 bn. (OB/Sales 1.4-xs)

iv. Diversified revenue and OB mix

➢ KEC, predominantly a power T&D EPC player, has diversified into multiple segments (e.g. solar, cables, railways and civil construction) to leverage its execution capabilities and intensify growth. EPC Order Book break up by segment and geography of peer set companies in 9MFY19 is as follows: -

o KEC - Domestic: International ~48:52; T&D and Non-T&D 73:27 with increasing bias towards growing Non-T&D segment.

o Kalpataru - Domestic: International ~63:36; T&D and Non-T&D 57:43

o Techno Electric- Domestic: International 100:0; T&D and Non-T&D 100:0

o Skipper- Domestic: International 87:13; Entire order book consists of T&D as there is no order book for polymer segment.

v. Best-in-class Working Capital efficiency parameters

➢ Having tight control on working capital is a critical factor differentiating one EPC company from the other. Till FY18, KEC enjoyed one of the best cash conversion days (measured as Creditor Days minus Debtor Days minus Inventory) amongst listed EPC players. In FY19, working capital days increased. This is mainly due to decline in creditor payable days and increase in short term debt for KEC. FY19E working capital days for KEC stand at 107 vs 70 in FY18, while for KPTL it stands at 105 days as against 102 days in FY18.

3) International T&D and domestic Non-T&D to lead growth going forward –

Over the years, KEC has been able to enhance its presence in power T&D by increasing geographical presence and scaling

up new business verticals such as railways, solar and civil. This has helped it to 1) expand market for its T&D business

beyond domestic geography; and 2) develop new markets in related segments, where government spending is envisaged

in the medium term. Overall, we expect KEC’s revenue to grow at a healthy pace of 13-14% CAGR over the next five

years. Growth in coming years would be supported by conversion of its existing order book of Rs.206 billion (9MFY19

20% YoY jump), to sales over the next 18-24 months period. We believe key growth drivers for revenue are as follows:

❖ Railways a strong growth opportunity – Scaling up of its railway vertical has reaped benefits with order

book contribution increasing to 23% at the end of 9MFY19 from 6% in FY16. Railway orders have grown

at a CAGR of 102% over the past 3 years from Rs. 5.4 bn in FY16 to current Rs. 47 bn. Consequently,

contribution from this segment in overall revenue also stands increased at 17.9% in 9MFY19 compared to

2.4% in FY16. Revenue from Railways is expected to grow further given the large unexecuted pipeline of

orders in this segment. Also, since margins are higher in the railway segment and due to shorter term

projects, requires lower working capital investment, increase in railway contribution will improve the

consolidated financial performance of the company.

❖ Strong International T&D traction- KEC’s international order book at Rs. 107 bn surpassed domestic

orders of Rs. 98 bn. At the end of Q2FY19, for the first time in the company’s history, international

orderbook is higher than domestic book. Strong order traction from international markets is on account of

management’s stated strategy of entering newer geographies. KEC has increased its foot print from 61

countries in FY16 to 100 countries in FY18. In the past 2-3 years, KEC has ventured into newer geographies,

largely in the African region, which has enhanced order inflow. T&D ordering from SAARC nations

continues to remain strong. In FY19, KEC received its largest ever single order of Rs. 14.9 bn from

Bangladesh. We expect international markets to provide a good hedge for KEC operations going forward.

❖ Domestic T&D is expected to make a recovery post-election– Of the total power T&D outlay of Rs.2.6tn

in the 13th plan period, SEBs are expected to be a major contributor. With SEB capex estimated to surpass

PGCIL capex in coming years and given stringent pre-qualification criteria for winning large contracts in

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the EPC space, we expect KEC to be the key beneficiary of the emerging opportunity. Ordering had slowed

down over the past 2-3 quarters due to impending elections, which is expected to recover by Q2 of FY20.

As stated by the management, KEC would focus primarily on financially sound SEBs such as Tamil Nadu,

Karnataka, West Bengal and Rajasthan, which have a strong pipeline of projects that are funded by

multilateral agencies.

4) Broad based growth and strong traction in order book to spur healthy growth in revenue –

KEC has strong order back log of Rs.206 bn at the end of 9MFY19, a YoY growth 20.1%. Order Book to Sales ratio

currently stands at 2.0-xs on FY18 revenue, thus providing visibility for sales growth over the next 2 years. We expect

the orders in hand to be executed over the next 12-24-month period, translating to ~15% revenue CAGR over FY19 to

FY22. Order inflows for 9MFY19 was up 2.0% YoY to Rs.115 bn mainly due to slowdown in the domestic T&D segment.

Ordering activity in railways segment continues to remain strong with YoY growth of 165% in 9MFY19. Due to the

ongoing poll season and implementation of model code of conduct, domestic ordering is expected to remain muted in the

near term. Once the new government settles, domestic T&D ordering from PGCIL and SEBs is expected to pick up.

In the international market, KEC continues to see order and tender traction. Management is especially positive on

SAARC, South East Asia and selected African regions. It also expected SAE ordering to pick up in the medium term.

5) Margins expected to remain stable at current levels-

KEC over the past 3 years has consistently improved its operating (EBDITA) margins from 8.1% reported in FY16 to

10.0% in FY18. This trajectory is very impressive when compared to its past performance. KEC’s operating performance

had suffered greatly post FY11 as the company had to endure the double whammy of slowdown in domestic orders and

global recession taking a hit on SAE operations. Further, in this period the company was investing heavily to diversify

into new revenue streams of cables, waters, solar and Railway EPC. Resultantly, its margins dipped from 10-11% recorded

in FY10-FY11 and lingered at sub 6-7% level for over 5 years. It is only in FY17 that operating margins started climbing

back to plus 9% level to now touch 10.6% in Q3FY19. Over the past 4-5 years, KEC has sharpened focus on execution

and cost reduction initiatives. The company has pruned execution delays, which has led to EBITDA margin improvement

in FY17 and 9MFY19. Management has guided for margins to largely remain at current levels. We have taken a

conservative view and built in a margin expectation of 10.5%. The factors that are expected to remain current margins

levels are as follows: -

❖ Higher contribution from high margin new segments: Non-T&D segment contributed 36.4% to the

revenue in 9MFY19 and 32% to the order book. With Non-T&D segment, Railways and civil projects are

relatively short-term projects of <12 months as against T&D projects of 18-24 months. This ensures faster

cash cycle and lower working capital investment. As per management, railway projects’ working capital

cycle stands at ~60 days as against 90-100 days for T&D segment. This translates to lower interest cost and

higher profitability.

❖ Increasing contribution from international orders with higher PBT margins- While EBITDA margins in

domestic and international projects are similar, PBT margins are higher in international markets due to lower

cost of debt. Also, international markets generally entail lower retention money period, enabling higher

project cash flows. Hence, as contribution from international orders pick up due to KEC’s strategy to expand

into newer geographies, we expect higher overall profitability.

❖ Operating leverage to support margins- Order Book in 9MFY19, both from domestic and international

geographies, has shown a strong jump. As these orders convert to sales, operating leverage benefits would

flow in. We expect operating leverage benefits in new verticals to be the key contributor of growth in

profitability in coming years.

6) Healthy growth in profits aided by revenue growth and reduction in interest outgo –

Continued growth in sales, sustained profitability aided by newer segments and internal projects, low depreciation and

interest costs as a proportion to sales should enable the company to improve PAT margins from current 4.5% to 4.8% in

FY24. Resultantly, we expect PAT to grow at a CAGR of 14-15% over FY19-24 to Rs 9.9bn.

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KEY ASSUMPTIONS

Particulars (Rs.mn) FY18 FY19E FY20E FY21E FY22E FY23E FY24E 5 yr CAGR

FY14-19 5 yr CAGR FY19-24E

Revenue 1,00,561 1,12,754 1,33,052 1,53,010 1,71,371 1,88,508 2,07,359 7.4% 13.0%

YoY% 17.1% 12.1% 18.0% 15.0% 12.0% 10.0% 10.0%

EBDITA 10,060 11,829 13,970 16,066 17,994 19,793 21,773 19.1% 13.0%

YoY% 23.0% 17.6% 18.1% 15.0% 12.0% 10.0% 10.0%

EBDITA Margin % 10.0% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% 8.8% 10.5%

Interest 2,376 3,216 3,600 3,978 4,456 4,901 5,391 4.1% 10.9%

% to sales 2.4% 2.9% 2.7% 2.6% 2.6% 2.6% 2.6%

PAT 4,604 5,074 6,138 7,302 8,244 9,057 9,905 50.0% 14.3%

YoY% 51.4% 10.2% 21.0% 19.0% 12.9% 9.9% 9.4%

PAT Margin % 4.6% 4.5% 4.6% 4.8% 4.8% 4.8% 4.8% 3.3% 4.7%

EPS- (Rs.) 17.9 19.7 23.9 28.4 32.1 35.2 38.5 50.0% 14.3%

Book Value (Rs.) 77.7 93.9 113.6 137.0 163.4 192.4 224.1 15.2% 19.0%

RATIOS 5 yr Avg FY15-19

5 yr Avg FY19-23E

Dividend payout % 16.1% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.8% 15.0%

Debt/equity 0.88 1.18 0.99 0.76 0.65 0.54 0.47 151.0% 82.2%

Networking Capital/Sales % 19.3% 29.3% 27.4% 25.2% 25.2% 25.2% 25.2% 24.4% 26.5%

ROCE % 23.8% 20.3% 21.9% 23.8% 24.0% 24.1% 23.8% 17.4% 22.8%

ROE % 23.1% 21.0% 21.0% 20.7% 19.6% 18.3% 17.2% 17.4% 20.1%

We are positive on the growth prospects of KEC in the coming years. Our outlook on the company finds strength from

its leadership position in the power T&D segment in India coupled with its strong presence in the international

geographies. We believe that the company is best placed in the sector to benefit from the expected growth in order

flows. Overall, we project revenue of the company to grow at a compounded rate of 13% to ~ Rs 207 billion by FY24.

Healthy growth in sales, improvement in profitability and reduction in financing cost is likely to result in a much

higher growth in net profit for the company. We project company’s PAT to grow at an impressive CAGR of 17.6%

over FY19 to FY22 and by 14.3% CAGR over the 5-year period of FY19 to FY24.

Revenue – Given the strong traction in order inflows specifically in the railways and international segments, we expect

revenue to remain strong. Current order book of Rs. 206 bn provides ample revenue visibility going forward as typical

project cycle is usually 18-24 months. We estimate revenue to grow at a CAGR of 13% over FY19-24E.

EBDITA – KEC has been continuously improving margins from 6.2% in FY14 to current 10.5% mainly due to operating

leverage. Management has guided that it aims to maintain the margins at current levels going forward. We expect margins

to be around 10.5% going ahead.

Interest cost – KEC’s Debt/Equity peaked out in FY16 at 2.5-x. Since then, company has focused on reducing debt

resulting in lower interest cost as a % to sales. From 3.3% in FY16, the ratio stood at 2.4% in FY18. Due to increase in

higher borrowing costs and decrease in creditor cycle, interest cost increased to 3.2% in 9MFY19. However, management

is confident of declining it going ahead. Compared to 9MFY19 levels, we expect interest costs as % to sales to trend down

to 2.6% by FY22 and then remain stable going forward.

PAT –Strong revenue growth supported by operating efficiency and lower interest costs will help PAT to show a healthy

growth of ~14-15% on a higher base.

Working capital – KEC has been managing its working capital efficiently. We expect the temporary spike in FY19 to

correct itself back to pre FY18 levels and remain stable going forward.

Capital structure – Management is focused towards reducing debt and we expect it to reduce to sub 1-xs from FY20

onwards.

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Return matrices -We expect RoCE and RoE to improve to 23.8% and 17.2%, respectively by FY24, aided by profitability

and capital efficiency improvement, compared to 12.9% and 5.6% reported in FY14.

VALUATION AND RECOMMENDATION

Increase in cash flows from operations, limited capex and rationalization of capital structure should translate in continued

growth in net profit of the company. Overall, we project EPS of the Company to increase from Rs 19.7 per share in

FY19E, to Rs 23.9 in FY20 (YoY growth 21%) and further to Rs 38.5 by FY24, implying an EPS CAGR of 14.3% over

FY19-24.

KEC currently trades at a PE of 15.4-xs on the consolidated TTM EPS of Rs 19.19. Over the next 4-5 years we expect

the stock price to give 2.2-2.5-xs returns with target price ranging from Rs. 623 to Rs, 706. 5-year target price has

been arrived by considering EPS CAGR growth in the range 14-18% on the base of FY19 EPS of Rs. 19.7.

Valuation reflects our confidence in the management capability in capturing high growth opportunities both in India

and in the overseas market. Our outlook also finds strength from its leadership position in the power T&D segment

and its superiority in managing working capital requirement as compared to its peers. We therefore believe that

KEC is best placed in the sector to benefit from the expected growth in order flows.

➢ Valuation -- 5-year:

The table below details the sensitivity of FY24 target price to different levels of EPS estimates and PE multiples.

FY19 EPS (Rs.)

EPS CaGR

FY24 EPS (Rs.)

Attach PE Multiple (xs) Upside (xs)

5 10 15 17 22 27 5 10 15 17 22 27

19.74 10.0% 31.78 159 318 477 540 699 858 0.6 1.1 1.7 1.9 2.4 3.0

19.74 14.0% 38.00 190 380 570 646 836 1,026 0.7 1.3 2.0 2.2 2.9 3.6

19.74 16.0% 41.45 207 415 622 705 912 1,119 0.7 1.4 2.2 2.4 3.2 3.9

19.74 18.0% 45.15 226 451 677 768 993 1,219 0.8 1.6 2.4 2.7 3.4 4.2

19.74 23% 55.56 278 556 833 945 1,222 1,500 1.0 1.9 2.9 3.3 4.2 5.2

19.74 28% 67.81 339 678 1,017 1,153 1,492 1,831 1.2 2.4 3.5 4.0 5.2 6.4

low high

5 year 623 706

2.2 2.5

Note – shaded cells indicate fair value of equity range

Disclaimer - “Our 5yr. Target prices are rolling estimates; hence they may be different on the dashboard, from the

ones published at the time of initiation. Disclaimer for same is also updated in our Initiation reports for your

reference”

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BEYOND NUMBERS – FROM THE FUND MANAGER’S DESK

In our quest to ensure that our clients stay course on the path of ‘Wealth Creation” and not get unduly guided by near-

term stock price swings (positive or negative), we have incorporated this section, through which we summarize the

essence of our investment thought process; which in real world is mostly driven beyond numbers.

While in our reports and analysis, forecasting of earnings and valuation framework, form integral part of the investment

process; however, every day and all over, we have seen that a stock could give the forecasted one- year return, in say a

few trading sessions and thereafter test one’s patience, or the converse, that a stock corrects significantly with prolonged

period of under-performance and then in a matter of say a quarter makes up for all this.

In a nutshell, if one’s investing decisions are routinely guided by stock price behavior, then one will surely end up in a

vicious cycle of making some gains and some losses, which mostly even out. This is certainly not the path for steady

long-term wealth creation.

This leads us to the next question, that – “What is really needed for long-term wealth creation”?

In our opinion, the answer simply is “CONVICTION”; with respect to the size of the business opportunity, the capability

of the management team and top leadership to successfully innovate, scale-up and keep building sustainable competitive

advantages, their philosophy of balancing growth and risks, level of transparency and overall approach towards all

stakeholders.

Hence, while investing, if one keeps in mind, all these points and remains steadfast, then, as long as the underlying

investment thesis is not broken, irrespective of certain periods of underperformance and outperformance; over the

medium to long-term, wealth creation through compounding will be the end-product.

OUR HUNCH ON KEC INTERNATIONAL LIMITED NEAR-TERM STOCK PULSE

➢ To put it in perspective, we have given the estimated 15-18M as well as 5-year target based on our assumptions

and financial projections explained in the note above. However, the stock may take a beating in the near-term, if

the following must happen, which cannot be covered in the financial projections today, despite our best efforts.

Stock price Dampeners –

Negative Factors Probability Reasons

Working Capital deterioration Moderate

Co. business is highly Working capital dependent due to the nature of the business. Efficient WC management had enabled the co to reduce WC days to 70 in FY18. However, the same increased to 107 days in FY19E due to tighter liquidity in the market resulting in lower creditor days. Continued deterioration in the same will have a significant increase the company’s dependence on leverage, impacting profitability. We believe, this factor alone can result in significant valuation derating.

Input cost fluctuation Moderate

KEC derives sizable revenue from international operations, which are usually fixed price in nature and therefore are vulnerable to adverse input cost movements. The company tries to mitigate this risk by hedging the exposure to the extent possible but there are always some uncovered positions in its order book.

Currency Risk Moderate

In FY18, ~37% of revenue was generated from outside India. With more than 50% of the order book comprised of international orders, this is expected to increase going forward. This exposes company to currency risk. Although the company hedges currency exposure, wild swing can impact revenue due to regulatory requirement of booking MTM losses and gains.

Slowdown in order intake Low Rising competitive intensity in the domestic market in the non-T&D segments and in international T&D orders may impact order inflows lowering revenue visibility.

Margin decline Low Operating margins have expanded over the past 3 years from 8.1% in FY16 to 10.6% in Q3FY19. Management has guided that they should be able to maintain margins at current level. However, slowdown in execution and higher impact of fixed costs can dent margins.

➢ The stock may show a huge upside in a much shorter period than expected, if the following were to happen; which

too can’t be covered in our financial projections at this stage.

10

Stock price Catalysts –

Positive Factors Probability Reasons

Strong revival in domestic T&D ordering

Moderate Domestic T&D tendering has been muted over the past 2-3 reasons due to multiple reasons. Ordering is expected to revive over the next couple of quarters. Strong tendering and revival in bidding can be a boost to the order inflow.

Pick up in SAE operations Moderate

Over the past 5 years, SAE has not been able to grow its revenues and PAT. Operating margins have fluctuated widely on a QoQ basis. Management has guided for a subdued FY19. Turnaround in the operations to generate high profitability can aid the consolidated profit growth.

Debt re duction

Low D:E had reduced to 0.88 in FY18. However, the same has inched up again to 1.1-x in FY19 due to higher short-term borrowings to fund working capital. Reducing the leverage back to sub 1-x level at the earliest will be a positive.

Conclusion – We are keenly tracking the stock for any positive development as well as to understand if the company

is facing any challenges in the business. We specifically are monitoring company’s performance with regards to a)

improvement in WC parameters b) order inflows, c) capital expenditure, d) revival of SAE operations and e) leveraging.

Any positive or negative movement in these parameters will impact valuation multiples of the company.

11

PEER SET ANALYSIS

Equentis’ investment pecking order in the T&D EPC sector

We believe that increasing spend towards power T&D and Railway electrification would augur well for domestic EPC

players focusing in these segments, including KEC, Kalpataru Power and Skipper. In this section, we have done a relative

assessment of the afore-listed three players to arrive at the investment pecking order in the sector. We have compared

these companies on following parameters to select the best performing company with attractive return potential in the

medium to long term.

❖ Size of operations – Companies which are larger in size in terms of revenue reflect their strength in order

execution based on their vast experience and ability to handle large orders across verticals.

❖ Order Book visibility – Order book backlog will help understand revenue visibility for the coming years. Traction

in inflows would also be important to gauge revenue growth.

❖ Diversification – Companies which are well diversified both geographically and in business segments reduce

revenue concentration risk and can withstand volatility in specific segments.

❖ Profitability – Presence in niche segments and the value proposition that the company brings will be key

determinants for higher profitability. It is also important to understand the margin expansion potential of

companies.

❖ Capital efficiency – Companies in the T&D space have high working capital requirements. Thus, companies

which can manage working capital efficiently will have lower debt and hence better return ratios.

Summary table - Historical and Forecast

Historical performance

Revenue- FY18 (Rs. mn)

3-yr CAGR % (FY16-FY19)

EBDITAM% (3 yr avg. FY17-FY19))

PAT -FY18 (Rs. mn)

3-yr CAGR% FY16-FY19

Order Book -FY18 (Rs. mn)

D:E (3 yr avg. FY17-FY19))

ROCE% (3 yr avg. FY17-FY19))

NWC/Sales% (3 yr avg. FY17-FY19))

KEC 1,00,561 9.8% 10.0% 4,604 50.9% 1,72,980 1.51 21.0% 23.3%

Kalpataru 57,412 16.5% 10.9% 3,220 26.7% 1,24,040 0.31 16.2% 26.3%

Skipper 20,737 10.2% 11.8% 902 -31.6% 26,270 0.86 16.1% 34.0%

Projections Revenue -FY19 (Rs. mn)

3-yr CAGR% (FY19-FY22)

EBDITAM% (3-yr avg. FY19-FY21)

PAT –FY19 (Rs. Mn)

3-yr CAGR% (FY19-FY22)

Order Book -9MFY19 (Rs. mn)

D:E (3-yr avg. FY19-FY21)

ROCE% (3-yr avg. FY19-FY21)

NWC/Sales% (3-yr avg. FY19-FY21)

KEC 1,12,754 15.0% 10.5% 5,074 17.6% 2,05,920 0.97 22.0% 27.3%

Kalpataru 68,448 13.7% 11.0% 3,917 14.5% 1,41,670 0.33 17.5% 27.8%

Skipper 19,929 13.8% 10.9% 304 70.6% 26,380 0.84 15.2% 36.7%

We are positive on the entire T&D space over the long term given the large opportunity size in the sector and

attractive valuations from current level. We list below why KEC is best placed among the peers to capture sector

opportunities and deliver superior performance:

• Largest player – KEC’s order book for 9MFY19 is 1.5-xs the size of its immediate competitor Kalpataru Power

and more than 9-xs the order book of both Skipper and Techno Electric. In terms of revenue for 9MFY19, KEC

is almost 1.6-x larger than Kalpataru Power and 5-xs the revenue of Skipper. KEC’s experience of more than 7

decades in the domestic T&D space and strong execution skills and ability to handle large orders (given the

highest capacity) have helped it to win more orders.

• High net profit growth potential – In terms of growth, KEC has multiple levers available for growth compared

to its peers on account of operating leverage resulting in margin expansion and reduction in interest cost outgo.

Diversified revenue stream ensures that other segments coverup if a segment’s performance dip.

• Diversified order book – KEC is well diversified and has presence across different segments and geographies

with domestic T&D constituting 63% of the order book in 9MFY19, SAE 10% and non-T&D constituting 27%.

Kalpataru’s order book is comprised of 57% T&D orders and 43% non-T&D. Skipper is mainly into T&D.

• Focused EPC player – KEC is a global and focused player with presence only in the EPC space unlike its peers

which have presence in different businesses. Kalpataru Power Transmission is into power transmission, oil and

gas infrastructure and into civil construction and agri logistics through its subsidiaries, JMC Projects Ltd. and

Shubham Logistics Ltd. Skipper is into manufacturing of towers and polymer pipes and fittings as well.

12

I. KEC Financial Summary and Forecast Table

Background: KEC, the flagship company of RPG Group, is a global infrastructure Engineering, Procurement and

Construction (EPC) major. It has presence in the verticals of Power Transmission & Distribution, Cables, Railways, Civil and

Renewables. It has an installed capacity of 3,12,200 MTPA and operates through 5 tower manufacturing facilities spread

across India, Mexico and Brazil. It has presence in 64 countries across Africa, Americas, Central Asia, Middle East, South

Asia and South-East Asia.

KEC International FY18 FY19 FY20 FY21 FY22 FY23 3 year CAGR 3 year CAGR

Consolidated FY16-FY19 FY19-FY22

Revenue 1,00,561 1,12,754 1,33,052 1,53,010 1,71,371 1,88,508 9.8% 15.0%

YoY Gr % 17% 12% 18% 15% 12% 10%

EBDITA 10,060 11,829 13,970 16,066 17,994 19,793 19.5% 15.0%

YoY Gr % 23% 18% 18% 15% 12% 10%

EBDITA Margin % 10% 10% 11% 11% 11% 11% Avg-10.0% Avg-10.5%

PAT 4,604 5,074 6,138 7,302 8,244 9,057 50.9% 17.6%

YoY Gr % 51% 10% 21% 19% 13% 10%

PAT Margin % 5% 4% 5% 5% 5% 5% Avg-4.2% Avg-4.6%

Avg Avg

Debt 17,663 28,459 28,784 26,758 27,284 26,574

Net worth 19,975 24,153 29,207 35,220 42,009 49,468

D:E 0.9 1.2 1.0 0.8 0.6 0.5 1.13 0.97

NWC/Sales 19.3% 29.3% 27.4% 25.2% 25.2% 25.2% 23.3% 27.3%

RoCE% 23.8% 20.3% 21.9% 23.8% 24.0% 24.1% 21.0% 22.0%

II. Skipper Financial Summary and Forecast Table

Background – Skipper is an integrated Transmission Tower manufacturing company with Angle Rolling, Tower, Accessories

& Fastener manufacturing and EPC line construction. It has installed capacity of 300,000 MTPA. The company also

manufactures huge range of premium quality pipes and fittings, which are used in different areas such as Plumbing, Sewage,

Agriculture and Borewell sectors. It has a capacity of 51,000 MTPA in the polymer segment

Skipper FY18 FY19 FY20 FY21 FY22 FY23

3 year CAGR 3 year CAGR

Standalone FY16-FY19 FY19-FY22

Revenue 20,737 19,929 22,765 25,765 29,335 33,011 10.2% 13.8%

YoY Gr% 25% -4% 14% 13% 14% 13%

EBDITA 2,749 1,778 2,580 3,216 3,934 4,436 -4.0% 30.3%

YoY Gr% 25% -35% 45% 25% 22% 13%

EBDITA Margin % 13% 9% 11% 12% 13% 13% Avg- 11.8% Avg- 10.9%

PAT (Adjusted) 902 304 774 1,164 1,509 1,798 -31.6% 70.6%

YoY Gr% -5% -74% 155% 50% 30% 19%

PAT Margin % 4% 2% 3% 5% 5% 5% Avg- 3.4% Avg- 3.1%

Avg Avg

Debt 4,972 6,516 5,720 6,047 6,518 6,688

Net worth 6,373 6,594 7,209 8,178 9,492 11,094

D:E 0.8 1.0 0.8 0.7 0.7 0.6 0.86 0.84

NWC/Sales 31.3% 41.7% 34.8% 33.5% 33.5% 33.5% 34.0% 36.7%

RoCE% 19.4% 10.4% 16.3% 19.0% 20.9% 21.4% 16.1% 15.2%

13

III. Kalpataru Financial Summary and Forecast Table

Company background – Kalpataru Power Transmission (KPTL) is part of the Kalpataru Group, a diversified conglomerate

spanning Real Estate, Power Generation and Transmission, Construction of Roads, Factories, Buildings and Oil and Gas

Infrastructure and Agri-Logistics spaces. KPTL is mainly into power T&D EPC and it also operates transmission assets under

BOOT/BOOM model. It has an installed capacity of 1,80,000 MTPA. It is also into civil construction and infrastructure

projects through its subsidiary JMC Projects Ltd. and agri-logistics through Shubham Logistics Ltd

KPTL FY18 FY19 FY20 FY21 FY22 FY23 3 year CAGR 3 year CAGR

Standalone FY16-FY19 FY19-FY22

Revenue 57,412 68,448 79,585 91,523 1,00,676 1,10,743 16.5% 13.7%

YoY Gr% 17% 19% 16% 15% 10% 10%

EBDITA 6,312 7,517 8,754 10,068 11,074 12,182 18.4% 13.8%

YoY Gr% 19% 19% 16% 15% 10% 10%

EBDITA Margin % 11% 11% 11% 11% 11% 11% Avg- 10.9% Avg- 11.0%

PAT 3,220 3,917 4,599 5,345 5,877 6,469 26.7% 14.5%

YoY Gr% 20% 22% 17% 16% 10% 10%

PAT Margin % 6% 6% 6% 6% 6% 6% Avg- 5.6% Avg- 5.8%

Avg Avg

Debt 7,742 11,878 11,391 11,461 10,013 8,323

Net worth 27,700 31,225 35,365 40,175 45,465 51,287

D:E 0.3 0.4 0.3 0.3 0.2 0.2 0.31 0.33

NWC/Sales 27.9% 28.7% 27.4% 27.4% 27.4% 27.4% 26.3% 27.8%

RoCE% 16.3% 16.5% 17.6% 18.5% 18.9% 19.4% 16.2% 17.5%

14

ANNEXURE - I

Management Background and Pedigree

The RPG group acquired KEC International Ltd in 1982. The group was founded by R.P. Goenka and comprises 15

companies operating in areas such as Power T&D, Tyre manufacturing, IT/software services, Life sciences/ pharma,

capital goods and rubber plantation. R.P. Goenka held the position of Chairman Emeritus until his death in 2013 and his

son Mr. Harsh Goenka now assumes the position of Group Chairman. After coming in the fold of RPG group, KEC has

expanded its operations from power T&D segment to areas such as cable manufacturing, railway infrastructure EPC,

water resource management and solar power EPC. Group aspirations of setting up global enterprises led KEC to acquire

US based SAE Towers in 2011 and thereby create one of the world's leading power T&D companies with over 3 lakh

MT capacity.

Management Team Designation With KEC

since Brief Profile and Prior Experience Qualification

Mr. Vimal Kejriwal Managing Director & CEO

2002

- Mr. Kejriwal has over 3 decades of diversified corporate experience. He joined KEC as a Chief Financial Officer in Sep 2002, and since then has played a major role in scripting the company's success story.

- Chartered Accountant - Company Secretary - MBA from Kellogg School of

Management

Mr. Rajeev Agarwal Chief Financial Officer

2014

- He has extensive experience in financial planning, fund raising including public Issues and financial management

- Prior to joining KEC he has worked in organizations like Essar Power, Shapoorji Pallonji, Jindal Steel & Power, Gujarat Flurochemicals, Cosmo Films and IFCI.

- Chartered Accountant

Mr. Randeep Narang

President –Transmission & Distribution International

2011

- He has over 2 decades of experience in the tyre and telecommunications sectors.

- He has worked in top managerial positions across various companies, including CEAT, Reliance Communications and Bharti Airtel.

- He oversees the Transmission, Distribution and Telecom businesses of the company in India.

- B. Com - MBA from NMIMS

Mr. Neeraj Nanda

President - Transmission & Distribution, South Asia

2015 - Mr. Nanda has over 3 decades of experience

in marketing, sales and projects execution in the power sector

- BE(Mechanical) - Post-graduation in

export/import from IIFT

Mr. Kaushal Kodesia Chief Executive- Railways

1993

- Mr. Kodesia has over 3 decades of rich experience in handling large value infrastructure projects, especially in Power Transmission & Distribution.

- He is employed with KEC since the last 25 years, prior to which he was with Godfrey Philips Ltd.

- BE (Electrical Enginnering)

Mr.Nagesh Veeturi Senior Vice President & Head – Civil Business

2016

- Mr. Veeturi has over 27 years of rich experience in the Real Estate & Infrastructure sectors.

- Prior to joining KEC, he has worked in several top managerial positions with leading organizations like Larsen & Toubro Ltd. and Navayuga Engineering Company. During his long association with L&T, he managed significant large value and Prestigious Projects.

- Civil Engineer

Mr. Gustavo Cedeno Executive Officer-SAE Towers

2015 - Mr. Cedeno has spent his career in various

leadership positions within the Energy, Power Generation and Oil & Gas industries.

- BE (Electrical Engineering) - Executive MBA in

International Business from the University of Houston

15

Management Team Designation With KEC

since Brief Profile and Prior Experience Qualification

- He has also published several papers for the power industry on the topics of Industrial automation and Turbomachinery controls.

Credit Rating:

KEC International has consistently improved on its credit ratings over the past 5 years. CARE rating has improved from

BBB+ in FY14 to current AA-. This is mainly due to the improvement in the leverage ratio as D:E has declined from 1.8x

in FY14 to 0.9 in FY18 and current 1.1x. As per CARE, the ratings derive strength from the company’s strong and

diversified order book position - diversified across varied geographies and segments, sustained improvement in

profitability and debt coverage indicators driven by efficient working capital management as well as improvement in

margin profile of businesses like Railways and KEC’s strong project execution capabilities in power transmission

segment. The ratings are further strengthened by KEC’s dominant market position in power transmission and distribution

segment as well as strong and experienced parentage (part of RPG group). However, there is scope for improvement.

CARE has pointed out few negatives in the company like working-capital intensive nature of business, operations being

exposed to variability in currency rates and commodity prices and inherent risk involved in execution of large-sized

orders.

Year Credit Rating

FY19 ICRA AA- CARE AA-

FY18 ICRA AA- Crisil AA-

FY17 ICRA A+ CARE A+

FY16 ICRA A+ CARE A+

FY15 ICRA A+ CARE A+

FY14 CARE BBB+

Shareholding Pattern

The Goenka family held 51.35% stake in the company (as on 31st March 2019), after combining the stake held by

individual family members and promoter group entities. None of the promoter holding is pledged. Promoters have

consistently increased their stake from 44.6% in FY13 to 51.35% currently. Total institutional holding stands at

31.1% for quarter ended March 2019. Major institutional/corporate shareholders in KEC include HDFC Trustees

Company Ltd. (8.97%), Reliance Capital Trustee Company (2.96%), Aditya Birla Sun Life (3.52%), Kotak Select Focus

Fund (2.65%), IDFC Sterling Value Fund (1.9 %) and LIC of India (1.70%).

Shareholding pattern:

Particulars Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 bps change over March 2013

A. Promoter 44.6% 49.4% 50.1% 50.9% 50.9% 51.0% 51.4% 677

B. Public 55.4% 50.6% 49.9% 49.1% 49.1% 49.0% 48.7% -677

Institution 37.0% 35.8% 30.8% 33.1% 32.5% 30.9% 31.1% -590

Non-Institution 18.4% 14.8% 19.0% 16.1% 16.7% 18.2% 17.5% -87

(A+B) Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Key Market data table:

Close of 19th April, 2019

Bloomberg Code KECI:IN

ISIN INE389H01022

Last Price, M. Cap, 52w H/L Rs. 292/- (BSE) – Rs. 75.1bn/ USD 1.1bn, Rs. 442/230

Face Value, Shares outstanding

Rs. 2.0/-, 257.08 mn, (March 2019)

16

Promoter holding (as on 31st March 2019)

Promoter holding at 51.35% (Nil share pledged). vs 50.99% as on 31st March 2018 and 51.28% as on 31st December 2018.

Institutional holding (as on 31st March 2019)

FII –6.61% (vs 10.66% as on 31st March 2018 and 7.64% as on 31st December 2018)

DII 24.52–% (vs 20.2% as on 31st March 2018 and 23.90% as on 31st December 2018).

Marquee Investors (as on 31st December 2018)

HDFC Trustee Co.(8.97%), Reliance Capital Trustee(2.96%), Aditya Birla Sunlife Trustee Co.(3.52%), Kotak Select Focus Fund(2.65%), IDFC Sterling Value Fund (1.91%) and LIC of India(1.70%).

Key Financial Parameters for Investment Screening

Sr. No.

Aspect Required

Criteria for Equentis 5x5 strategy

FY14-19 Grading of Historical

Performance

FY19-24E Grading of

future estimates

Actual Value (Historical)

Future Value (Forecasted)

1

Top-line CAGR 15-20% CAGR over last 5yrs 7% 13%

2

EBITDA CAGR 15-20% CAGR over last 5yrs 19% 13%

3

PAT CAGR 15-20% CAGR over last 5yrs 50% 14%

4

ROCE At least avg. 15% over last 5 yrs with increasing bias

Avg -- 17%. Avg -- 23%.

5

D/E Ratio Avg. around 1-1.5xs over last 5 yrs with declining bias

Avg -1.5xs Avg – 0.82-xs

with a declining Bias.

6

Working Capital Intensity

Avg. less than 25-30% of net sales over last 5 yrs

Avg – 24% Avg – 26%;

stable

7

Dividend Payout Avg. 15-20% of Net profits over last 5 yrs Avg -- 16% Avg -- 15%;

stable

Note - Above – Blue, In-Line – Green, Below – Red

Note- KEC being an EPC player we have taken conservative estimates on growth parameters. Thus, growth in profits can

be higher than projected over the long-term. Over the next three years, we expect PAT to grow at a CAGR of ~14-15%.

With improvement in margin and sustained high capital efficiency parameters, along with continued reduction in leverage

is expected to translate in the return ratios to expand. Overall therefore, KEC should attract better valuations going ahead,

making it one of the best investment opportunities in the space

17

Daily price chart – BSE

Annexure – II

Consolidated Order Book & Inflow

Particulars (Rs. Million) FY14 FY15 FY16 FY17 FY18 9MFY18 9MFY19

Order intake 84,820 82,230 87,140 1,23,580 1,50,980 1,13,000 1,15,300

YoY(%) N.A. -3.1% 6.0% 41.8% 22.2% 30.9% 2.0%

Order book 1,02,000 95,080 94,490 1,26,310 1,72,980 1,71,480 2,05,920

YoY(%) N.A. -6.8% -0.6% 33.7% 36.9% 53.3% 20.1%

Segment-wise order book break-up

Particulars (Rs. Million) FY14 FY15 FY16 FY17 FY18 9MFY18 9MFY19

Transmission & Distribution 80,784 71,310 70,868 90,943 1,03,788 1,08,032 1,29,730

% OB 79.2% 75.0% 75.0% 72.0% 60.0% 63.0% 63.0%

YoY(%) N.A. -11.7% -0.6% 28.3% 14.1% 34.1% 20.1%

SAE 8,568 9,508 11,339 12,631 19,028 17,148 20,592

% OB 8.4% 10.0% 12.0% 10.0% 11.0% 10.0% 10.0%

YoY(%) N.A. 11.0% 19.3% 11.4% 50.6% 27.7% 20.1%

Cables 2,448 5,705 4,725 1,263 3,460 3,430 4,118

% OB 2.4% 6.0% 5.0% 1.0% 2.0% 2.0% 2.0%

YoY(%) N.A. 133.0% -17.2% -73.3% 173.9% 53.3% 20.1%

Railways 4,488 4,754 5,480 15,157 41,515 36,011 47,362

% OB 4.4% 5.0% 5.8% 12.0% 24.0% 21.0% 23.0%

YoY(%) N.A. 5.9% 15.3% 176.6% 173.9% 168.3% 31.5%

Water/Civil 5,712 3,803 1,701 1,263 3,460 3,430 4,118

% OB 5.6% 4.0% 1.8% 1.0% 2.0% 2.0% 2.0%

YoY(%) N.A. -33.4% -55.3% -25.7% 173.9% 206.6% 20.1%

Solar N.A. N.A. 378 5,052 1,730 3,430 618

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Particulars (Rs. Million) FY14 FY15 FY16 FY17 FY18 9MFY18 9MFY19

% OB N.A. N.A. 0.4% 4.0% 1.0% 2.0% 0.3%

YoY(%) N.A. N.A. N.A. 1236.8% -65.8% 206.6% -82.0%

Revenue by segment- Consolidated

Particulars (Rs. Million) FY14 FY15 FY16 FY17 FY18 9MFY18 9MFY19

Transmission & Distribution 61,160 64,841 63,810 60,290 67,950 43,270 39,050

% Net sales 77.4% 76.6% 73.3% 68.9% 67.3% 67.3% 54.5%

YoY(%) N.A. 6.0% -1.6% -5.5% 12.7% 8.6% -9.8%

SAE 8,540 8,036 8,306 10,020 10,250 7,180 6,480

% Net sales 10.8% 9.5% 9.5% 11.4% 10.2% 11.2% 9.1%

YoY(%) N.A. -5.9% 3.4% 20.6% 2.3% -3.4% -9.7%

Cables 6,320 9,062 11,180 10,540 10,090 7,310 8,340

% Net sales 8.0% 10.7% 12.8% 12.0% 10.0% 11.4% 11.6%

YoY(%) N.A. 43.4% 23.4% -5.7% -4.3% -2.7% 14.1%

Railways 1,690 1,322 2,104 4,470 8,440 4,850 12,850

% Net sales 2.1% 1.6% 2.4% 5.1% 8.4% 7.5% 17.9%

YoY(%) N.A. -21.8% 59.2% 112.5% 88.8% 101.2% 164.9%

Water/CIVIL 1,310 1,315 1,028 850 2,680 1,420 3,350

% Net sales 1.7% 1.6% 1.2% 1.0% 2.7% 2.2% 4.7%

YoY(%) N.A. 0.4% -21.8% -17.3% 215.3% 149.1% 135.9%

Solar - 90 935 1,590 2,880 990 3,090

% Net sales N.A. 0.1% 1.1% 1.8% 2.9% 1.5% 4.3%

YoY(%) N.A N.A 938.9% 70.1% 81.1% 0.0% 212.1%

Total 79,020 84,666 87,093 87,550 1,00,950 63,919 71,598

YoY(%) N.A. 7.1% 2.9% 0.5% 15.3% 9.5% 11.3%

19

Annexure – III

Q3FY19 Performance Highlights

Particulars Q3FY18 Q2FY19 Q3FY19 9MFY18 9MFY19 Q4FY19E FY18 FY19E

Net sales 24,048 24,085 26,466 63,919 71,598 44,529 1,00,561 1,16,127

-YoY chg.% 25.8% 13.1% 10.1% 11.5% 12.0% 21.5% 17.1% 15.5%

-QoQ chg.% 12.9% 14.4% 9.9% N.A N.A 68.2% N.A N.A

EBDITA 2,442 2,532 2,814 6,361 7,508 4,641 10,060 12,148

-YoY chg.% 34.3% 17.4% 15.2% 23.1% 18.0% 25.5% 23.0% 20.8%

-QoQ chg.% 13.3% 17.1% 11.1% N.A N.A 64.9% N.A N.A

EBDITA Margin 10.2% 10.5% 10.6% 10.0% 10.5% 10.4% 10.0% 10.5%

PAT - Reported 1,118 978 1,124 2,641 2,970 2,107 4,604 5,077

-YoY chg.% 78.5% 9.4% 0.5% 66.5% 12.5% 7.3% 51.4% 10.3%

-QoQ chg.% 25.1% 12.6% 14.9% N.A N.A 87.5% N.A N.A

PAT Margin 4.6% 4.1% 4.2% 4.1% 4.1% 4.7% 4.6% 4.4%

EPS Reported 4.3 3.8 4.4 10.3 11.6 8.2 17.9 19.7

Order Book Details

Total Order book 1,71,480 2,01,350 2,05,920 1,71,480 2,05,920 2,27,170 1,72,980 2,27,170

-YoY chg.% 53.3% 43.7% 20.1% 53.3% 20.1% 31.3% 36.9% 31.3%

-QoQ chg.% 22.4% 10.7% 2.3% N.A N.A 10.3% N.A N.A

Total Order Inflow 55,530 51,840 35,980 1,13,000 1,15,300 55,016 1,50,980 1,70,316

-YoY chg.% 105.2% 75.3% -35.2% 30.9% 2.0% 44.9% 22.2% 12.8%

-QoQ chg.% 87.8% 88.6% -30.6% N.A N.A 52.9% N.A N.A

➢ Performance Review:

• Operational Performance – Total revenue increased by 10.1% YoY and 9.9% QoQ to Rs. 26.4 bn. Growth in

revenues was led mainly by non T&D segments like railways (164.9% YoY), civil (26.4% YoY) and cables

(14.0% YoY). Domestic T&D grew by 2% YoY, while SAE revenues declined 38.9% YoY. Decline in SAE

revenues was mainly because of delay in the start of SAE orders and delay in order dispatches. Non-T&D

segment contribution has increased from 23.0% in the corresponding quarter of last year to current 33.6%.

• Margins – Total EBITDA increased by 15.2% YoY to Rs, 2.8bn. EBITDA margins improved by 47 bps YoY

to 10.6%. Margins were in line with earlier management guidance of 10.0-10.5%. They were partially boosted

by forex currency gain of Rs. 150-200 mn.

• Interest expense-Interest expense as % of total income increased by 90 bps YoY to 3.2%. YoY increase is

mainly due to the increase in the domestic borrowing and increase in working capital debt due to lower payable

days. However, management has guided for interest cost as % to sales of 2.7% in FY19 and ~2.5% in FY20.

Management aims to achieve this by bringing down the debt to Rs. 25 bn from current Rs. 30 bn. Larger receipt

from PSUs projects in Q4, advances from large order wins and use of Saudi retention money would be made to

bring down the debt.

• Net Profit: PAT increased by 0.5% YoY to Rs. 1.1 bn. Lower PAT growth despite reasonable EBITDA growth

was mainly due to higher interest expense and lower other income. Strong revenue growth and decline in interest

cost expense would be key for higher profitability growth going forward.

• Orders – Order intake in the quarter remained weak at Rs. 35.9 bn, a decline of 35% and 30.6% on YoY and

QoQ basis, respectively. Order book however, stands at Rs. 205 bn, which is 1.9x TTM revenue, providing ample

revenue visibility over the next 18-24 months. Management has guided that domestic ordering from PSUs,

central and state governments would remain muted over the next 2 quarters owing to the election code of conduct,

which will get applied from the end of Feb, 2019. However, management is optimistic about inflows from export

market given robust bidding pipeline.

20

Annexure - IV

Consolidated Profit & Loss Summary

Consolidated (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E 3yr CAGR (FY16-19)

5yr CAGR (FY14-19)

3yr CAGR (FY19-22E)

5yr CAGR (FY19-24E)

Gross Revenues 80,927 86,573 87,096 87,550 1,00,964 1,14,952 1,35,645 1,55,992 1,74,711 1,92,182 2,11,401 9.7% 7.3% 15.0% 13.0%

YoY 13.7% 7.0% 0.6% 0.5% 15.3% 13.9% 18.0% 15.0% 12.0% 10.0% 10.0%

Net Revenues 79,018 84,678 85,178 85,844 1,00,561 1,12,754 1,33,052 1,53,010 1,71,371 1,88,508 2,07,359 9.8% 7.4% 15.0% 13.0%

YoY 13.2% 7.2% 0.6% 0.8% 17.1% 12.1% 18.0% 15.0% 12.0% 10.0% 10.0%

EBITDA 4,933 5,118 6,923 8,179 10,060 11,829 13,970 16,066 17,994 19,793 21,773 19.5% 19.1% 15.0% 13.0%

YoY 37.5% 3.8% 35.3% 18.1% 23.0% 17.6% 18.1% 15.0% 12.0% 10.0% 10.0%

EBITDA margins 6.2% 6.0% 8.1% 9.5% 10.0% 10.5% 10.5% 10.5% 10.5% 10.5% 10.5% Avg- 10.0% Avg- 8.8% Avg- 10.5% Avg- 10.5%

Reported PAT 667 1,610 1,476 3,041 4,604 5,074 6,138 7,302 8,244 9,057 9,905 50.9% 50.0% 17.6% 14.3%

YoY 2.6% 141.2% -8.3% 106.0% 51.4% 10.2% 21.0% 19.0% 12.9% 9.9% 9.4%

PAT margins 0.8% 1.9% 1.7% 3.5% 4.6% 4.5% 4.6% 4.8% 4.8% 4.8% 4.8% Avg- 4.2% Avg-3.3% Avg- 4.6% Avg- 4.7%

EPS (Rs.) 2.6 6.3 5.7 11.8 17.9 19.7 23.9 28.4 32.1 35.2 38.5 50.9% 50.0% 17.6% 14.3%

Balance Sheet

Consolidated (INR mn) FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E

3yr CAGR (FY16-

19)

5yr CAGR (FY14-

19)

3yr CAGR (FY19-22E)

5yr CAGR (FY19-24E)

LIABILITIES

Share Capital 514 514 514 514 514 514 514 514 514 514 514

Reserves and Surplus 11,402 12,784 12,390 15,349 19,460 23,638 28,693 34,706 41,495 48,954 57,110

Net worth 11,916 13,298 12,904 15,864 19,975 24,153 29,207 35,220 42,009 49,468 57,624 23.2% 15.2% 20.3% 19.0%

Debt Funds 21,296 22,141 32,212 21,057 17,663 28,459 28,784 26,758 27,284 26,574 26,954 -4.0% 6.0% -1.4% -1.1%

Current Liabilities & Provisions 39,971 41,094 42,387 48,841 66,303 58,470 68,996 79,345 88,866 97,753 1,07,528 11.3% 7.9% 15.0% 13.0%

Total 73,897 77,272 88,740 87,148 1,05,125 1,12,266 1,28,171 1,42,507 1,59,343 1,74,979 1,93,290

ASSETS

Net Fixed Assets 13,520 12,589 11,977 11,488 11,122 11,901 12,501 13,017 14,455 15,719 18,222 -0.2% -2.5% 6.7% 8.9%

Current Assets 56,908 59,469 71,577 70,542 88,388 94,164 1,08,493 1,21,354 1,35,870 1,49,418 1,64,320 9.6% 10.6% 13.0% 11.8%

Total 73,897 77,272 88,740 87,148 1,05,125 1,12,266 1,28,171 1,42,507 1,59,343 1,74,979 1,93,290 8.2% 8.7% 12.4% 11.5%

21

RATIOS: FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E FY22E FY23E FY24E 3yr Avg

(FY17-19) 5yr Avg

(FY15-19) 3yr Avg

(FY19-21E) 5yr Avg

(FY19-23E)

Debt:Equity 1.79 1.66 2.50 1.33 0.88 1.18 0.99 0.76 0.65 0.54 0.47 1.13 1.51 0.97 0.82

Asset turns 2.33 2.34 1.84 2.24 2.59 2.10 2.25 2.42 2.43 2.44 2.42 2.31 2.22 2.26 2.33

Net working capital/Gross sales 19.6% 19.3% 33.0% 21.3% 19.3% 29.3% 27.4% 25.2% 25.2% 25.2% 25.2% 23.3% 24.4% 27.3% 26.5%

Capex/Gross sales 1.2% -0.6% -0.6% 0.6% 1.2% 1.7% 1.5% 1.3% 1.7% 1.6% 2.1% 1.2% 0.5% 1.5% 1.6%

ROCE 12.9% 12.0% 12.3% 18.7% 23.8% 20.3% 21.9% 23.8% 24.0% 24.1% 23.8% 21.0% 17.4% 22.0% 22.8%

RoE 5.6% 12.1% 11.4% 19.2% 23.1% 21.0% 21.0% 20.7% 19.6% 18.3% 17.2% 21.1% 17.4% 20.9% 20.1%

Dividend payout - as % of PAT 27.0% 16.9% 14.7% 16.3% 16.1% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.8% 15.8% 15.0% 15.0%

BVPS (Rs.) 46.3 51.7 50.2 61.7 77.7 93.9 113.6 137.0 163.4 192.4 224.1 Cagr- 23.2% Cagr- 15.2% Cagr- 20.3% Cagr- 19.0%

22

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