KEC International – Outperformer

KEC International reported a net profit of Rs526mn for the merged entity (inclusive of RPG transmission and NITEL) for the quarter, while the adjusted net profit (standalone KEC) was at Rs448mn (17% yoy), in line with our estimates. KEC’s revenues grew by 8% yoy to Rs6.2bn, while margins expanded by 60bps to 14.7% yoy led by execution of higher margin orders and execution of value added component of contracts.

On a consolidated basis (inclusive of RPG transmission) KEC has an order backlog of Rs50bn.The pipeline of international orders is extremely robust mainly driven by huge capex in Middle East (led by firm oil prices – 30% of international order backlog) and African countries (led by multilateral agency funding – 20% of international order backlog).Operating margins improved by 60bps yoy to 14.7% in 3QFY08. The margin expansion was led by execution of
high value add contracts (lower tower sales) during the quarter. Moreover, the new orders are being booked (over the last 12 months) at higher margins (+100-150 bps) compared to the earlier orders, which further led to margin expansion during the quarter.

KEC international has announced the merger of RPG transmission and NITEL with itself. As per the merger ratios (based on the closing prices at the time of announcement of merger), RPG transmission has been valued at Rs4.1bn. On the other hand, NITEL has been valued at Rs2.8bn, which is fair considering the strong growth opportunity in the telecom tower business as well as the winning of USO fund projects for 384 cell sites (telecom towers).

For FY09 expect KEC to report an EPS between Rs 48 to Rs 49. HSBC has a stock target of Rs 870 while IDFC SSKI has set a target of Rs 890. One can hold the stock or accumulate at Rs 650 levels.