Reliance Securities has maintained 'Buy' on KEC International with target price of Rs 136 in its report.
Commenting on the investment rationale, Reliance Securities said, "The company reported consolidated PAT of Rs 629 million for 4QFY15 higher than market expectation of Rs290 million and our expectation of Rs 445 million on account of better execution coupled with margin improvements. Consolidated net revenue for 4QFY15 increased 15.9% yoy to Rs 25.2 billion. Overall EBITDA margin was up by 37bps from 7.0% in 4QFY14 to 7.3% in 4QFY15 on account of lower commodity prices. PAT stood at Rs 629 million in 4QFY15 as against Rs 344 million in 4QFY14 - an increase of 83% yoy.
KEC has reported contraction in margins on account of new businesses, which were bid with the entry level pricing strategy. However, going forward, with stable margins from transmission tower business coupled with improving margins from new businesses will lead to growth in overall margins of the company.
We have revised our FY16E and FY17E EPS upward by 2.5% and 0.8%, respectively on account of higher-than-expected recovery in power transmission margins. At the CMP, KEC trades at 8.0xFY17E earnings, valuations appear to be attractive given the high revenue visibility, strong order flows, and likely improvement in return ratios in next two years. We expect the strong order backlog of Rs 103 billion coupled with improving margins to drive 54.7% CAGR in KEC’s earnings over FY14-17E. Thus, we recommend BUY on the stock with a target price of Rs 136 based on 11x P/E of FY17E EPS of Rs 12.4."
