Buy This Mid-Cap Transmission & Equipment Stock For 26% Surge: ICICI Securities

Renowned brokerage firm KEC International has suggested investors to buy the stock of KEC International. If investors buy the stock at its current price of Rs 397 apiece they can expect to receive a potential return of 26% with a target price of Rs 502 apiece. KEC International's FY22 revenue grew 5% to Rs137bn, led by growth in civil, railways and cables businesses.

Execution was impacted by covid-related challenges, political unrest in Afghanistan, temporary suspension of construction activity in Delhi due to environmental restrictions and elevated commodity prices.

1. Stock Outlook

The current market price of the stock of is Rs 397 apiece. Its 52-week high is Rs 550 apiece and 52-week low is Rs 345.50 apiece, respectively. The stock gained 2.40% in today's trading. According to ICICI Securities, the stock has the potential to offer a return of 26% if they buy today at its current price of Rs 397.

2. Elevated commodity costs led to margin contraction

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin during FY22 contracted 210bps to 6.6% due to cost and time escalations mainly in SAE Towers. During the year, company focused on supplying hardware, where it is able to command better margins in an inflationary scenario. It made an exceptional provision of Rs992mn towards impairment in subsidiaries, of which Rs973mn was towards SAE Towers.

During FY22, working capital was elevated due to i) higher losses from subsidiaries; ii) company maintained higher-than-normal inventory due to commodity inflation; and iii) delayed collection in railway segment. This led to net debt increasing to Rs26bn in FY22 as against Rs16.8bn in FY21 and working capital days to ~137 days.

3. Higher interest cost to prevail in short term

Interest cost as a %age of revenue grew to 2.3% as against 2% in FY21 due to higher debt and rising interest rates. However, we believe higher execution in civil segment is expected to elevate working capital pressure. A better mix of rupee and foreign currency borrowing might help elevate borrowing costs.

4. Valuation

According to ICICI Securities, " The company has guided for 15% YoY growth in order inflow and revenue in FY23 on the back of strong order book. In our view Any normalisation on current headwinds related to higher commodity prices, supply-chain disruption may boost execution and profitability. With global capex revival in the oil & gas space, we expect ordering to pick up in that segment as well. Key risks: Any further increase in commodity prices and any incremental execution challenges at SAE Towers."

5. About KEC International

KEC International Limited, headquartered in Mumbai, India, is the flagship company of the RPG Group. A USD 1.8 billion Engineering, Procurement, and Construction (EPC) major, it delivers projects in key infrastructure sectors such as Power Transmission & Distribution, Railways, Civil, Urban Infrastructure, Solar, Smart Infrastructure, Oil & Gas Pipelines, and Cables. The current market capitalization is Rs 10,212 crore.

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before taking any investment decision.