KEC International Ltd appears well-positioned to meet its FY25 order inflow guidance of around ₹25,000 crore. Last week, the company secured three big orders totalling nearly ₹4,000 crore, bringing its FY25 order intake to ₹17,500 crore so far. Additionally, its lowest bidder (L1) portfolio stands at ₹8,400 crore, further supporting its order pipeline.
These order wins are expected to drive robust revenue growth in FY25 and FY26, given the typical order execution cycle of 18-24 months. The management has set an ambitious Ebitda margin guidance of 7.5% for FY25. To achieve this, KEC’s Ebitda margin in the second half of FY25 would need to reach 8.3%, assuming a full-year revenue growth of 15%. However, this target may be challenging, as the highest Ebitda margin the company has recorded in the past 14 quarters was 7.2% in Q3FY22.
Nonetheless, KEC can be a potential beneficiary of financial leverage. The company’s Ebit/pre-tax-profit ratio for FY25 was 2.5x indicating that the interest cost relative to its Ebit is high. In such cases, even a small growth in Ebit with stagnant or marginal drop in interest costs can significantly boost pre-tax profits. For instance, interest cost in absolute terms fell marginally in H1FY25, accounting for 59% of Ebit, compared to 75% in the previous year. Consequently, H1FY25 pre-tax-profit doubled year-on-year even as Ebit growth was much slower at 22%.
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KEC’s net debt, including acceptances, as of 30 September stood at ₹5,265 crore and the management expects to reduce this to ₹4,000-4,500 crore by the end of FY25.
Valuation and risks
While brokerage estimates for KEC’s FY25 and FY26 earnings might initially appear aggressive, they become plausible when viewed through the lens of financial leverage. For instance, Motilal Oswal Financial Services has forecast an earnings per share (EPS) growth of 82% for FY25 and 67% for FY26, even after the doubling of EPS in FY24 over FY23. As the delta (rate of change) in net profit is significant, the stock starts to look significantly cheaper in terms of price-to-earnings multiples. Based on Motilal’s FY26 estimates, KEC’s shares trade at 24x.
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That said, investors have already reaped substantial gains, with the stock delivering a 75% return so far in 2024. This strong performance may limit sharp near-term upside potential. Key risks to KEC’s growth include volatility in commodity prices, particularly steel, and execution challenges stemming from manpower shortages and geopolitical uncertainties. Notably, 33% of KEC’s current order book is from international markets.
