2QFY2013 Result Update | Capital Goods

November 08, 2012

KEC International
Performance highlights
Quarterly Highlights (Consolidated)
` cr Revenue EBITDA EBITDA margin (%) 2QFY13 1,668 86 5.1 2QFY12 1,263 92 7.2 21 % chg (yoy) 32.1 (6.2) (210)bp (22.3) 1QFY13 1,364 103 7.6 33 % chg (qoq) 22.3 (16.9) (242)bp (50.3)

BUY
CMP Target Price
Investment Period
Stock Info Sector Market Cap (` cr) Net Debt (` cr) Beta 52 Week High / Low Avg. Daily Volume Face Value (`) BSE Sensex Nifty Reuters Code Bloomberg Code Capital Goods 1,598 964 1.2 81/32 73,635 2 18,846 5,739 KECL.BO KECI@IN

`62 `73
12 Months

Adj.PAT 16 Source: Company, Angel Research

KEC International (KEC) reported a robust top-line performance, posting a 32.1% yoy growth to `1,668cr, beating our expectations. The strong sales growth was largely aided by strong revenue growth in power systems and South Asian transmission segments. The power system segment grew by 221.8% to `267cr while South Asian Transmission segment grew by 40.2% to `411cr. However, operating margin contracted by 210bp to 5.1% since new businesses of cable, telecom and water currently operate at low/negative margins. Robust order book: The company reported strong order inflow during the quarter at ~`1,470cr, diversified across all of its operating segments (transmission, power systems, water, cables, and railways) as well as geographies. The strong order accretion led to a robust order backlog of `9,386cr (1.5x trailing 4 quarter revenues) split across transmission (67%), power systems (16.6%), railways (6.3%), water (5.2%), cables (2.0%) and telecom (3.0%). Geographically, order backlog is spread across India (49%), MENA (10.2%), Americas (11.7%), and Central Asia and Africa (24.6%). Apart from international orders, the company is likely to enjoy healthy ordering from the domestic markets in the coming quarters, especially from Power Grid Corporation of India Ltd (PGCIL). Outlook and valuation: KEC has a geographically diversified business model which insulates itself from slowdown in any particular region. Further, the company has also ventured in new businesses of railway and water, which have fared well and order inflows as well as revenues have been picking up at measurable pace. Given the attractive valuations (stock is trading at 6.8x FY2014E EPS), we maintain Buy on the stock with target price of `73. Key financials (Consolidated)
Y/E March (` cr) Net sales % chg Adj. PAT % chg EBITDA (%) EPS (`) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x)
Source: Company, Angel Research

Shareholding Pattern (%) Promoters MF / Banks / Indian Fls FII / NRIs / OCBs Indian Public / Others 44.5 37.3 2.7 15.5

Abs. (%) Sensex KEC

3m 7.1 10.5

1yr 7.3 19.4

3yr 16.6 (41.7)

FY2011
4,477 14.6 206 7.8 10.7 8.0 7.8 1.8 34.8 24.9 0.6 5.9

FY2012
5,815 29.9 209 1.8 8.1 8.1 7.6 1.5 30.1 20.3 0.4 5.4

FY2013E
6,858 17.9 184 (12.3) 7.0 7.1 8.7 1.3 22.0 19.5 0.4 5.1

FY2014E
7,431 8.4 234 27.6 7.6 9.1 6.8 1.1 23.2 20.8 0.3 4.6
Amit Patil 022-39357800 Ext: 6839 amit.patil@angelbroking.com

Please refer to important disclosures at the end of this report

KEC International | 2QFY2013 Result Update

Exhibit 1: Quarterly performance (Consolidated)

(` cr) Net Sales Other operating income Total income Stock adjustments Raw Material (% of total income) Erection and sub cont.exp. (% of total income) Employee Cost (% of total income) Other Expenses (% of total income) Total Expenditure EBITDA (EBITDA %) Interest Depreciation Other Income PBT (% of total income) Total Tax (% of PBT) Reported PAT PAT Margin (%) Extra ordinary (exp)/inc Adj PAT Adj EPS (`)
Source: Company, Angel Research

2QFY13 1,640 28 1,668 30 943 58.3 297 17.8 126 7.6 187 11.2 1,583 86 5.1 44 14 2 29 1.7 13 43.5 16 1.0 0 16 0.6

2QFY12 1,242 21 1,263 (22) 699 53.6 231 18.3 108 8.5 156 12.3 1,172 92 7.2 40 12 2 41 3.2 19 45.6 21 1.7 (1) 21 0.8

% chg (yoy) 32.0 37.2 32.1 34.8 28.7 17.1 19.9 35.1 (6.2) 10.1 13.1 (28.5) (31.7) (22.3)

1QFY13 1,337 27 1,364 (61) 715 48.0 321 23.5 115 8.4 170 12.5 1,261 103 7.6 40 12 3 54 3.9 20 38.2 33 2.4 0

% chg (qoq) 22.7 22.3 31.7 (7.4) 10.0 9.6

1HFY13 2,977 56 3,032 (31) 1,658 53.7 618 20.4 241 8.0 357 11.8 2,843

1HFY12 2,265 21 2,286 (51) 1,205 50.4 473 20.7 205 9.0 268 11.7 2,099 188 8.2 74 24 2 92 4.0 37 39.9 54 2.4 (1) 54 2.1

% chg (yoy) 31.4 32.7 37.6 30.8 17.6 33.3 35.5 0.8 14.8 9.3 (9.9) (9.5) 0.5 (8.5)

(16.9) 11.0 11.6 (45.6) (37.9) (50.3)

189 6.2 84 26 4 83 2.7 33 40.1 50 1.6 -

(22.3) (22.3)

33 1.3

(50.3) (50.3)

50 1.9

(8.5) (8.5)

Exhibit 2: Actual vs estimates

(` cr) Revenue EBITDA PAT
Source: Company, Angel Research

Actual 1,668 86 16

Estimates 1,465 111 31

Var (%) 13.9 (22.9) (47.0)

November 8, 2012

KEC International | 2QFY2013 Result Update

Execution picks up but margins under pressure

The consolidated operating revenue grew by 32.1% yoy to `1,668cr. The upside in growth was largely aided by strong revenue growth in power systems and South Asian transmission segment. The power system segment grew by 221.8% to `267cr while the South Asian transmission segment grew by 40.2% to `411cr. Relatively new business segments of telecom, railways and water reported strong revenue numbers at `30cr (`19cr), `61cr (`21cr) and `11cr (`2cr) respectively.

Exhibit 3: Top-line remains buoyant...

2500 2000 1500 1000 500 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 14.3 1,001 12.9 1,071 14.9 1,559 1,023 1,263 1,460 2,069 1,364 1,668 20.9 26.2 36.3 32.7 33.4 32.1 40 35 30 25 20 15 10 5 0

Exhibit 4: ...but margin pressures continues

180 160 140 120 100 80 60 40 20 0 11.6 10.1 14 10.5 9.4 7.2 7.8 12 8.2 7.6 5.1 10 8 6 4 86 2QFY13 2 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13

101

125

164

113

170

Sales (` cr, LHS)

Growth (yoy %, RHS)

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Nonetheless, margins continued to remain under pressure the consolidated EBITDAM for the quarter contracted by 210bps yoy to 5.1%. The new businesses of cable, power systems and railway are currently operating at low/negative margins, which exerted additional pressure on the companys operating margin.

Exhibit 5: Trend in PAT (Consolidated)

90 75 60 45 30 48 58 79 33 15 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 1.7 1.0 21 45 74 33 16 5.4 4.8 5.0 3.6 2.4

3.2

3.1

Adj. PAT (` cr, LHS) Source: Company, Angel Research

PATM (%, RHS)

November 8, 2012

103

96

92

KEC International | 2QFY2013 Result Update

Healthy order book

The company reported strong order inflow during the quarter at ~`1,470cr, diversified across all of its operating segments (transmission, power systems, water, cables, and railways) as well as geographies. The strong order accretion led to a robust order backlog of `9,386cr (1.5x trailing 4 quarter revenues) split across transmission (67%), power systems (16.6%), railways (6.3%), water (5.2%), cables (2.0%) and telecom (3.0%). Geographically, order backlog is spread across India (49%), MENA (10.2%), Americas (11.7%), and Central Asia and Africa (24.6%). Apart from international orders, the company is likely to enjoy healthy ordering from the domestic markets in the coming quarters, especially from PGCIL.

Exhibit 6: Order inflow (` cr)

3,000 2,500 2,000 1,500 1,000 1,754 2,300 1,300 1,300 1,200 2,500 1,800 2,254 1470 500 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13

Exhibit 7: Order backlog (` cr)

10,000 8,000 6,000 4,000 7,025 8,000 7,800 8,611 8,450 9,200 8,572 9386 2QFY13 2,000 0 2QFY11 3QFY11 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 9,462 32.2 26.7 41.8 52.4 20.3 15 10 9.9 11.1 60 50 40 30 20 10 0

Source: Company, Angel Research

Source: Company, Angel Research

Exhibit 8: Geographically diversified Order Book

Asia Pacific, 2

Exhibit 9: Business Segment: Order book breakdown

Telecom, 3 Water, 5.2

Africa and Central Asia, 25 SAARC, 2 India, 49

Power Systems, 16.6

Railways, 6.3 Transmission , 66.9 Cables, 2 MENA, 10

Americas, 12

Source: Company, Angel Research

Source: Company, Angel Research

November 8, 2012

KEC International | 2QFY2013 Result Update

Investment arguments
Growth opportunity on cards: Globally the thumb rule entails that for every rupee invested in generation, an equivalent amount is to be invested in T&D; however, India has spent only 50%, thus creating a huge opportunity for players in the T&D space. PGCIL envisages a T&D capex of ~`1lakh cr for the 12th plan, 55% of which is estimated to be transmission and sub-station capex, thus providing a number of opportunities to KEC, given its strong presence in the domestic T&D market. Outlook and valuation: KEC has a geographically diversified business model which insulates itself from slowdown in any particular region. Further, the company has also ventured in new businesses of railway and water, which have fared well and order inflows as well as revenues have been picking up at measurable pace. Given the attractive valuations (stock is trading at 6.8x FY2014E EPS), we maintain Buy on the stock with target price of `73.

Exhibit 10: Angel EPS forecast

Angel FY2013E FY2014E
Source: Bloomberg, Angel Research 7.1 9.1

B'berg
7.2 9.4

Var
(1.4) (3.2)

Exhibit 11: One year forward PE Band

250 200 150 100 50 0

Jun-07

Jun-08

Jun-09

Jun-10

Jun-11

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Jun-12
20x

Feb-07

Feb-08

Feb-09

Feb-10

Feb-11

Share Price (`)

6x

10x

14x

Source: Company, Angel Research

November 8, 2012

Feb-12

Oct-12

KEC International | 2QFY2013 Result Update

Exhibit 12: Peer comparison

Company ABB* BHEL BGR Energy Crompton Greaves Jyoti Structures KEC International Thermax Reco. Sell Neutral Neutral Buy Buy Buy Neutral CMP (`) 725 237 267 113 45 62 590 Tgt. price (`) 593 145 54 73 Upside (%) (18.3) 28.5 21.3 17.5 P/BV(x) FY13E 5.5 2.9 1.6 1.9 0.5 1.3 3.8 FY14E 4.8 2.5 1.4 1.7 0.5 1.1 3.3 P/E(x) FY13E 50.2 9.6 10.7 28.3 4.1 8.7 21.0 FY14E 29.4 10.9 9.6 14.5 3.3 6.8 18.9 FY2011-13E EPS CAGR 68.4 (13.2) (5.3) 15.5 5.9 5.8 (4.1) RoE (%) FY13E 11.6 33.5 31.1 6.9 10.8 22.0 19.2 FY14E 17.6 24.5 27.1 12.6 12.3 23.2 18.5

Source: Company, Angel Research

Company Background
KEC International (KEC) is a flagship company of the RPG Group. The company is a global player in the T&D space, present across 45 countries (~51% of revenue contributed by international operations). The company acquired US-based SAE Tower Holdings LLC (SAE) in FY2011. KEC has also forayed into new business verticals such as cable, telecom, railway and water resource management - though currently these businesses are at a nascent stage.

November 8, 2012

KEC International | 2QFY2013 Result Update

Profit & Loss Statement (Consolidated)

Y/E March (` cr) Operating income % chg Total Expenditure Raw Materials Mfg costs Personnel Costs Other Costs EBITDA % chg (% of Net Sales) Depreciation& Amortisation EBIT % chg (% of Net Sales) Interest & other Charges Other Income (% of PBT) Recurring PBT % chg Extraordinary Expense/(Inc.) PBT (reported) Tax (% of PBT) PAT (reported) Add: Share of earnings of asso. Less: Minority interest (MI) Prior period items PAT after MI (reported) ADJ. PAT % chg (% of Net Sales) Basic EPS (`) Fully Diluted EPS (`) % chg
previous year numbers

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E 3,430 21.7 3,128 1,976 575 142 435 302 (15.7) 8.8 23 279 (16.3) 8.1 100 2 1.1 181 (31.9) 0 181 62 34.2 119 0 0 0 119 119 (32.4) 3.5 4.8 4.8 (32.4) 3,907 13.9 3,501 2,013 958 169 362 406 34.6 10.4 27 379 36.0 9.7 86 2 0.6 294 62.9 0 294 104 35.2 191 0 0 0 191 191 60.3 4.9 7.7 7.7 60.3 4,477 14.6 4,000 2,255 981 275 489 477 17.4 10.7 41 436 15.0 9.7 126 7 2.2 317 7.6 0 317 111 35.1 206 0 0 0 206 206 7.8 4.6 8.0 8.0 3.5 5,815 29.9 5,343 3,150 1,167 427 599 471 (1.1) 8.1 48 423 (2.9) 7.3 161 62 19.0 324 2.4 0 324 115 35.5 209 0 0 0 209 209 1.8 3.6 8.1 8.1 1.8 6,858 17.9 6,381 3,696 1,498 459 727 477 1.2 7.0 53 424 0.1 6.2 153 4 1.3 274 (15.5) 0 274 90 33.0 184 0 0 0 184 184 (12.3) 2.7 7.1 7.1 (12.3) 7,431 8.4 6,868 3,939 1,652 498 780 563 18.0 7.6 63 500 17.9 6.7 157 4 1.2 347 26.7 0 347 113 32.5 234 0 0 0 234 234 27.6 3.2 9.1 9.1 27.6

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

November 8, 2012

KEC International | 2QFY2013 Result Update

Balance Sheet (Consolidated)

Y/E March (` cr) SOURCES OF FUNDS Equity Share Capital Preference Capital Reserves & Surplus Shareholders Funds Minority Interest Total Loans Deferred Tax Liability Total Liabilities APPLICATION OF FUNDS Gross Block Less: Acc. Depreciation Net Block Capital Work-in-Progress Goodwill Investments Deferred Tax Asset Current Assets Cash Loans & Advances Inventories Debtors Others Current liabilities Net Current Assets Mis. Exp. not written off Total Assets
previous year numbers 632 125 507 51 0 0 0 2,539 144 303 226 1,866 0 1,888 651 0 1,210 836 157 679 38 0 0 0 2,680 73 396 250 1,962 0 1,778 903 0 1,620 1,038 237 802 28 281 69 0 3,645 154 410 336 2,172 574 2,396 1,249 0 2,428 1,095 285 810 112 321 73 0 4,235 203 510 440 2,506 576 3,153 1,083 0 2,398 1,295 338 957 35 321 0 0 5,032 495 510 588 3,439 0 3,699 1,333 0 2,646 1,545 402 1,143 35 321 0 0 5,240 370 510 593 3,767 0 3,895 1,345 0 2,844 49 0 509 558 0 622 30 1,210 49 0 736 785 0 787 46 1,620 51 0 895 947 0 1,432 50 2,428 51 0 1,056 1,108 0 1,239 51 2,398 51 0 1,204 1,255 0 1,339 51 2,646 51 0 1,402 1,453 0 1,339 51 2,844

FY2009 FY2010 FY2011 FY2012 FY2013E FY2014E

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

November 8, 2012

KEC International | 2QFY2013 Result Update

Cash flow statement (Consolidated)

Y/E March (` cr) Profit before tax Depreciation (Inc)/Dec in Working Capital Less: Other income Direct taxes paid Cash Flow from Operations (Inc.)/Dec.in Fixed Assets (Inc.)/Dec. in Investments Other income Cash Flow from Investing Issue of Equity Inc./(Dec.) in loans Dividend Paid (Incl. Tax) Others Cash Flow from Financing Inc./(Dec.) in Cash Opening Cash balance Closing cash balance
previous year numbers

FY2009 181 23 81 (2) (62) 221 (147) 2 (144) (10.4) 30 (29) 9 (9) 76 68 144

FY2010 294 27 (323) (2) (104) (107) (201) 2 (199) 0.0 165 (36) 106 129 (71) 144 73

FY2011 317 41 (265) (7) (111) (25) (199) -7 (261) 2.1 645 (36) (243) 611 82 73 154

FY2012 FY2013E FY2014E 324 48 215 (62) (115) 410 (141) -62 (83) -193 (36) (50) (229) 49 154 203 274 53 42 (4) (90) 275 (123) 4 (47) 100 (36) 64 292 203 495 347 63 (137) (4) (113) 157 (250) 4 (246) 0 (36) (36) (125) 496 370

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

November 8, 2012

KEC International | 2QFY2013 Result Update

Key Ratios
Y/E March Valuation Ratio (x) P/E (on FDEPS) P/CEPS P/BV Dividend yield (%) EV/Sales EV/EBITDA EV / Total Assets OB/Sales Per Share Data (`) EPS (Basic) EPS (fully diluted) Cash EPS DPS Book Value DuPont Analysis (%) EBIT margin Tax retention ratio (%) Asset turnover (x) RoIC (Pre-tax) RoIC (Post-tax) Cost of Debt (Post Tax) Leverage (x) Operating ROE Returns (%) RoCE (Pre-tax) Angel RoIC (Pre-tax) RoE Turnover ratios (x) Asset Turnover (Gross Block) (X) Inventory / Sales (days) Receivables (days) Payables (days) WC cycle (ex-cash) (days) Solvency ratios (x) Net debt to Equity Net debt to EBITDA Interest Coverage
previous year numbers

FY2009 FY2010 FY2011 12.9 10.8 3.1 1.6 0.6 6.7 2.1 1.5 4.8 4.8 5.8 1.0 20.1 8.1 65.8 4.0 32.7 21.5 10.8 2.0 42.4 31.3 34.1 46.7 6.0 23 175 181 58 1.6 1.6 2.8 8.0 7.0 2.1 1.9 0.6 5.5 1.6 1.4 7.7 7.7 8.8 1.2 29.8 9.7 64.8 3.5 33.8 21.9 8.0 1.4 41.3 32.3 35.2 44.4 5.3 22 179 186 62 1.3 1.8 4.4 7.8 6.5 1.8 1.9 0.6 5.9 1.3 1.7 8.0 8.0 9.6 1.2 35.4 9.7 64.9 2.7 26.5 17.2 7.4 1.6 33.2 24.9 27.0 34.8 5.6 24 169 156 78 1.9 2.5 3.5

FY2012 FY2013E FY2014E 7.6 6.2 1.5 1.9 0.4 5.4 1.2 1.5 8.1 8.1 10.0 1.2 42.1 7.3 64.5 3.1 22.7 14.7 7.8 1.6 25.5 20.3 23.6 30.1 7.6 24 147 132 62 1.3 2.0 2.6 8.7 6.7 1.3 1.9 0.4 5.1 1.1 1.4 7.1 7.1 9.2 1.2 47.8 6.2 67.0 3.8 23.3 15.6 8.0 1.1 23.9 19.5 24.3 22.0 7.8 27 158 139 46 0.9 1.8 2.8 6.8 5.4 1.1 1.9 0.3 4.6 1.0 1.3 9.1 9.1 11.6 1.2 55.5 6.7 67.5 3.7 25.1 16.9 7.9 0.9 25.1 20.8 25.5 23.2 6.8 29 177 147 45 0.9 1.7 3.2

Note: Some of the figures from FY2011 onwards are reclassified; hence not comparable with

November 8, 2012

10

KEC International | 2QFY2013 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

DISCLAIMER
This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document are those of the analyst, and the company may or may not subscribe to all the views expressed within. Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. While Angel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed or passed on, directly or indirectly. Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in connection with the use of this information. Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement 1. Analyst ownership of the stock 2. Angel and its Group companies ownership of the stock 3. Angel and its Group companies' Directors ownership of the stock 4. Broking relationship with company covered

KEC International No No No No

Note: We have not considered any Exposure below `1 lakh for Angel, its Group companies and Directors.

Ratings (Returns):

Buy (> 15%) Reduce (-5% to -15%)

Accumulate (5% to 15%) Sell (< -15%)

Neutral (-5 to 5%)

November 8, 2012

11