KEC International Ltd.
CMP: Rs 577.00
Target: Rs 692
Muted Topline growth
KEC reported muted results for the current quarter on account of slower rate of project execution. While the revenues were marginally up by 7% (yo- y), EBDITA and PAT grew by 34% (y-o-y) and 85 % (y-o-y) respectively driven by the positive impact of forex gain and lower interest cost for the current quarter. The Forex gain for Q3FY10 was at Rs 10 mn as against a loss of Rs 166 mn for the year ago period. Interest cost also reduced by 25% (y-o-y) to Rs 297 mn as compared to Rs 224 mn for the year ago period. EBIDTA margins for 3QFY10 were lower than our estimates at 10.3% as compared to 8.2% for the year ago period. Adjusted for the forex gains, EBIDTA margins for the current quarter were at 10.24% as compared to 10.08% for the year ago period. Sequentially Revenues, EBIDTA and PAT were up by 8%, 7% and 10% respectively. For nine months ending Dec 09, revenues were at Rs 25.5 bn up by 11%, while EBIDTA rose by 44% to Rs 2.75 bn and PAT registered 85% growth to Rs 1.27 bn.
Robust Order book.
Driven by strong order inflows of Rs 18.5 bn, the unexecuted order backlog stands at Rs 60.5 bn ( 1.5x FY10E Sales) of which 52% comes from the South Asia market while the balance 48% relates to the International market.
Merger of RPGCL with KEC
The shareholders of both KEC and RPG cables (RPGCL) have consented to the merger of RPGCL with KEC. RPGCL manufactures power & control, telecommunications and instrumentation cables at its manufacturing facilities at Thane, Silvassa and Mysore. As on 31st March 2009, the total debt in RPGCL was over Rs 1.78 bn and the accumulated losses were to the tune of Rs 1.6 bn. Net losses for the nine month period ending Dec 2009 were at Rs 175 mn (excluding the profit on sale of land). Under the terms of the proposed merger, RPGCL shareholders would be receiving 1 share of KEC for every 20 RPGCL shares held by them. The appointed date of merger of RPGCL with KEC is March 1, 2010. Based on the above merger ratio, KEC will allot 2,073,068 new equity shares valued at Rs 1.14 bn (Closing price of 30th October 2009), to the existing shareholders of RPGCL resulting in a 4.2% increase in equity base from Rs. 493 mn to Rs. 514 mn. Consequently, the promoter holding in KEC is expected to reduce from 41.94 % to 41.59%
Accumulated losses in RPGCL till 3QFY10 would be Rs 1.7 bn (excluding the profits on sale of land) and we expect KEC to be benefited to the extent of the tax savings post the merger. On the operational front, KEC claims that the merger of the loss making RPG cables with KEC would enable the entire cable capacities of RPGCL to be utilized in various project management businesses to be undertaken by KEC in the near future.
Last year, KEC consumed cables worth Rs 1.5 bn of which the company procured cables worth Rs 1 bn from RPGCL.
Valuations
We are currently not changing our estimates for FY10E and FY11E and await the details of the merger in order to gauge the full impact of the same on the future revenues and profitability. At the CMP of Rs 536, KEC trades at a PE of 14.3x and 11.2x its FY10E and FY11E earnings respectively. We continue with our BUY rating and maintain our previous price target of Rs 692
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 24.52 | 09/02/10 |
| EPS (Rs) | 23.57 | Mar, 09 |
| Sales (Rs crore) | 937.66 | Dec, 09 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 3.39 | Mar, 09 |
| Last dividend (%) | 50 | 29/04/09 |
| Return on average equity | 20.81 | Mar, 09 |
Related posts: