Look who’s at the receiving end of steel price rise: This EPC player may languish for 6 months

Analysts said 20-25 per cent of the company’s order book was of fixed price in nature, and thus was impacted adversely due to the rise in commodity prices, especially steel. They expect margins to remain depressed in the coming two quarters and so will be the stock in the near term.

Overall, brokerages have 12-month targets ranging Rs 420 to Rs 435 on the stock, suggesting up to 14 per cent potential upside from its current level. On Monday, the stock opened at …

The RPG Group company has two business verticals: transmission & distributions (T&D) & non-T&D.

The T&D business includes operations of SAE Towers, which is the largest steel lattice tower producer in the Americas. The non-T&D businesses include segments such as railways, civil, cables and others. The T&D vertical accounted for 56 per cent of the company’s revenues in FY21 against 66 per cent in FY20. The non-T&D segment, thus, has seen its share rising to 44 per cent in FY21 from 34 per cent FY20.

Nomura India noted that KEC’s T&D orders have execution cycles typically of 12-15 months. Thus, contracts secured prior to the first half of FY21 in a relatively weak commodity environment are likely to be executed by FY22-end.

“Some of the contracts secured overseas will be impacted by the rise in steel prices,” Nomura said.

Covid impact and other country-specific issues have hit SAE Towers’ operations hard in Brazil with revenues tanking 46 per cent YoY, which Edelweiss said is likely to continue in H1FY22 even as the management is targeting zero loss from SAE in FY22 .

“We are enthused with the margin of the non-T&D business (at 8 per cent) now converging with the margin of core business. Interest-to-sales has declined to 1.4 per cent, down 40 bps). The management is confident of double-digit revenue growth in FY22 (no formal guidance though), which is possible in our view given the Rs 25,000 crore order book, including L1,” Edelweiss said, and trimmed its FY22 margins expectations by 50 bps.

The stock could languish at current levels for next three-six months, Edelweiss said.

KEC expects a healthy double-digit revenue growth for FY22, but Nirmal Bang Institutional Equities expects the margin pressure to persist due to elevated commodity costs, fixed-price nature of international projects and challenges in SAE Tower business.

Data showed Ebitda margin for KEC International fell 200 basis points YoY to 8.1 per cent in March quarter from 10.1 per cent in the year-ago quarter. This is against a consensus estimate of 9.1 per cent. Margin was hit by Covid-related expenses, time overrun and cost escalation in SAE Towers and increase in commodity prices.

Revenue rose 19 per cent YoY to Rs 4,361 crore for the March quarter while profit was almost flat at Rs 194 crore, broadly in-line with consensus estimate. Order flows for the quarter were healthy at Rs 5,050 crore while FY21 order inflow rose 5 per cent YoY to Rs 11,876 crore. That said, the order book shrank 7 per cent YoY to Rs 19,100 crore with domestic-international mix at 62-38 per cent, with an additional L1 position worth Rs 5,900 crore.

The company’s net debt declined by Rs 537 crore to Rs 1,679 crore in FY21 from Rs 2,216 crore in FY20. Thanks to deleveraging and lower interest rate on borrowing, interest-to-sales fell to 2 per cent in FY21 from 2.6 per cent in FY20. Net working capital (NWC) declined to 112 days as of March 31 compared with 119 days a year-ago.

“We have cut our FY22 EPS estimate by 12 per cent and FY23 by 2 per cent. We downgrade our rating on KEC to ‘Accumulate’ from ‘Buy’ earlier with a revised target price of Rs 425 from Rs 435 earlier) based on 14 times FY23 earnings,” Nirmal Bang said and suggested a price target of Rs 425 for the stock.

Prabhudas Lilladher has an ‘accumulate’ rating on the stock with a price target of Rs 420. Nomura India has a target of Rs 435.