4QFY2013 Result Update | Capital Goods

May 9, 2013

KEC International
Performance highlights
Quarterly Highlights (Consolidated)
` cr 4QFY13 Revenue 2,150 EBITDA 89 EBITDA margin (%) 4.1 Adj.PAT (14) Source: Company, Angel Research 4QFY12 2,069 170 8.2 74 % chg (yoy) 3.9 (47.6) (406)bp 3QFY13 1,797 103 5.8 29 % chg (qoq) 19.6 (14.0) (162)bp -

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 1,226 1,319 1.2 81/47 62,213 2 19,939 6,050 KECL.BO KECI@IN

`48 `63
12 Months

For 4QFY2013, KEC Internationals (KEC) top-line and bottom-line performance was below our expectations. KEC reported a subdued 3.9% yoy growth in its top-line to `2,150cr. Margin pressure along with elevated interest cost (partly due to capitalization of Vadodara facility) and higher tax rate (since the company was unable to take tax benefit on deduction from overseas business) led to a loss of `14cr. Margin pressure intensifies: The consolidated EBITDAM for the quarter contracted by 406bp yoy to 4.1%. Although transmission segment margins continue to be ~8%, cable segment and relatively new segments of railway and water are currently operating at low/negative margin which is exerting pressure on the companys operating margin. Cost escalation in some of these projects has led to a `45cr hit on EBITDA in the quarter. The company had aggressively bid for some of these low margin projects to get a foothold in these segments; the margins are expected to improve gradually as new orders are being booked at higher margins. The company also booked a forex loss of `12cr in the quarter. Robust order book: The order intake during the quarter stood at `1,704cr, a decline of 7.7% yoy. However, strong order accretion over FY2013 has led to a robust order backlog of `9,470cr (1.4x trailing 4 quarter revenues). The Management has indicated shifting its priorities from aggressive order accretion to margin improvement. 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 with order inflows and revenues picking up at measurable pace. The only concern is continued margin pressure. However, considering managements assurance that new orders are being booked at higher margins and attractive valuations (stock is trading at 5.6x FY2015E EPS), we maintain Buy on the stock with a revised target price of `63. 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 36.4 2.6 16.5

Abs. (%) Sensex KEC

3m 1.5

1yr 20.5

3yr 18.9 (53.5)

(15.0) (10.1)

FY2012
5,815 29.9 209 1.8 8.1 8.1 5.9 1.1 33.6 21.1 0.4 4.8

FY2013E
6,979 20.0 65 (68.9) 5.5 2.5 18.9 1.1 9.5 15.5 0.4 6.7

FY2014E
7,709 10.4 156 140.0 6.7 6.1 7.9 1.0 20.2 19.1 0.3 5.1

FY2015E
8,399 9.0 219 40.2 7.2 8.5 5.6 0.9 23.0 20.3 0.3 4.2

Amit Patil 022-39357800 Ext: 6839 amit.patil@angelbroking.com

Please refer to important disclosures at the end of this report

KEC International | 4QFY2013 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

4QFY13 2,105 45 2,150 52 1,182 57.4 489 22.7 118 5.5 220 10.2 2,061 89 4.1 57 16 5 21 1.0 35 164.6 (14) (0.6) 0 (14) (0.5)

4QFY12 2,024 45 2,069 46 1,185 59.5 378 18.3 111 5.4 180 8.7 1,900 170 8.2 41 12 0 117 5.7 43 36.4 74 3.6 0 74 2.9

% chg (yoy) 4.0 3.9 (0.2) 29.5 5.7 22.2 8.5 (47.6) 38.9 34.7 (81.8) (17.6)

3QFY13 1,773 24 1,797 (21) 995 54.2 387 21.5 124 6.9 208 11.6 1,694 103 5.8 53 15 7 43 2.4 13 31.5 29 1.6 0 29

% chg (qoq) 18.7 19.6 18.8 26.5 (5.0) 5.5

FY2013 6,854 125 6,979 1 3,835 55.0 1,494 21.4 483 6.9 785 11.2 6,598

FY2012 5,703 112 5,815 (9) 3,159 54.2 1,167 20.1 427 7.3 599 10.3 5,343 470 8.1 160 48 62 324 5.6 115 35.5 209 3.6 1 208 6.8

% chg (yoy) 20.2 20.0 21.4 28.0 13.0 31.1 23.5 (18.9) 21.7 17.0 (54.7) (28.9) (68.9)

(14.0) 7.6 7.1 (50.0) 161.3

381 5.5 194 56 16 147 2.1 82 55.7 65 0.9 0 65

(68.8) (62.7)

(118.7)

1.1

(147.5)

2.5

Exhibit 2: Actual vs estimates

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

Actual 2,150 89 (14)

Estimates 2,400 149 59

Var (%) (10.4) (40.3) (123.5)

The sharp variance in actual vs estimates in EBITDA is on account of cost escalation in some of the projects in new segments and cable business leading to a `45cr hit on EBITDA and further `12cr forex loss.

May 9, 2013

KEC International | 4QFY2013 Result Update

Subdued top-line growth

For 4QFY2013, KEC Internationals (KEC) top-line and bottom-line performance was below our expectations. KEC reported a subdued 3.9% yoy growth in its top-line to `2,150cr. Margin pressure along with elevated interest cost (partly due to capitalization of Vadodara facility) and higher tax rate (since the company was not able to take tax benefit on deduction overseas profits) led to a loss of `14cr.

Exhibit 3: Subdued top-line growth

2500 2000 1500 1000 500 0 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 14.9 1,559 1,023 1,263 1,460 2,069 1,364 1,668 1,797 2,150 20.9 26.2 36.3 32.7 33.4 32.1 23.1 40 3.9 35 30 25 20 15 10 5 0

Exhibit 4: Sharp decline in margins

180 160 140 120 100 80 60 40 20 0 10.5 9.4 7.2 7.8 8.2 7.6 5.1 5.8 12 10 4.1 8 6 4 164 113 170 103 103 96 92 86 89 4QFY13 2 0 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13

Sales (` cr, LHS)

Growth (yoy %, RHS)

EBITDA (` cr, LHS)

EBITDAM (%, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Margin pressure intensifies

The consolidated EBITDAM for the quarter contracted by 406bp yoy to 4.1%. Although transmission segment margins continue to be ~8%, the cable segment and the relatively new segments of railway and water are currently operating at low/negative margin, which is exerting pressure on the companys operating margin. Cost escalation in some of these projects has led to a `45cr hit on EBITDA in the quarter. The company had aggressively bid for some of these low margin projects to get a foothold in these segments; the margins are expected to improve gradually as new orders are being booked at higher margins. The company also booked a forex loss of `12cr in the quarter. Margin pressure along with elevated interest cost (partly due to capitalization of Vadodara facility) and higher tax rate (since the company was unable to take tax benefit on deduction from overseas business) led to a loss of `14cr.

Exhibit 5: Trend in PAT (Consolidated)

90 75 60 45 30 15 0 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 (15) (30) 5.0 45 33 3.2 21 1.7 3.1 2.4 3.6 33 16 1.0 2QFY13 1.6 (0.6) 3QFY13 4QFY13 (14) 29 4 3 2 1 0 (1) 79 6 74 5

Adj. PAT (` cr, LHS)

PATM (%, RHS)

Source: Company, Angel Research

May 9, 2013

KEC International | 4QFY2013 Result Update

Exhibit 6: Order inflow (` cr)

3,000 2,500 2,000 1,500 1,000 1,300 1,154 2,383 1,847 2,020 1,470 2,290 855 500 0 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1,704

Exhibit 7: Order backlog (` cr)

12,000 10,000 8,000 6,000 4,000 7,800 8,611 8,450 2,000 0 4QFY11 1QFY12 2QFY12 3QFY12 4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 20.3 41.8 52.4 9.9 9.9 11.1 10.3 60 10.5 50 40 30 10,150 15.0 9,200 8,572 9,462 9,386 20 9,470 10 0

Order Backlog (` cr, LHS)

Growth (yoy %, RHS)

Source: Company, Angel Research

Source: Company, Angel Research

Healthy order book

The order intake during the quarter stood at `1,704cr, a decline of 7.7% yoy. However, strong order accretion over FY2013 has led to a robust order backlog of `9,470cr (1.4x trailing 4 quarter revenues). The Management has indicated shifting its priorities from aggressive order accretion to margin improvement. It has also assured that almost all low margin orders are expected to be executed by 2QFY2013 and new orders are being booked at higher margins.

Exhibit 8: Geographically diversified Order Book

Africa and Central Asia, 17 South East Asia, 3

Exhibit 9: Business Segment: Order book breakdown

Telecom, 2 Power Systems, 12 Water, 5

South Asia, 3 India, 52 America, 11 MENA, 15

Railways, 5 Cables, 1

Transmission , 75

Source: Company, Angel Research

Source: Company, Angel Research

May 9, 2013

KEC International | 4QFY2013 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 with order inflows and revenues picking up at measurable pace. The only concern is continued margin pressure. However, considering managements assurance that new orders are being booked at higher margins and attractive valuations (stock is trading at 5.6x FY2015E EPS), we maintain Buy on the stock with a revised target price of `63.

Exhibit 10: One year forward PE Band

200

150

100

50

0 May-07 May-08 May-09 May-10 May-11 May-12 May-13 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 16x Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Share Price (`) Source: Company, Angel Research

4x

8x

12x

May 9, 2013

KEC International | 4QFY2013 Result Update

Exhibit 11: Peer comparison

Company ABB* BHEL BGR Energy Jyoti Structures KEC International Thermax Reco. Reduce Neutral Neutral Accum. Buy Neutral CMP (`) 528 196 202 96 30 48 578 Tgt. price (`) 463 117 33 63 Upside (%) (12.4) 22.4 7.8 32.1 P/BV(x) FY14E 4.1 2.1 1.1 1.6 0.3 1.0 3.2 FY15E 3.8 1.8 1.0 1.4 0.3 0.9 2.8 P/E(x) FY14E 45.9 9.4 8.1 13.9 3.5 7.9 18.6 FY15E 29.7 10.3 7.2 10.2 3.0 5.6 16.8 FY2013-15E EPS CAGR 65.7 (11.3) 11.2 111.6 15.2 83.5 12.8 RoE (%) FY14E 8.9 23.7 25.2 11.7 9.9 20.2 18.6 FY15E 12.8 18.8 22.6 14.5 10.5 23.0 17.9

Crompton Greaves Buy

Source: Company, Angel Research

Company Background
KEC International (KEC) is the flagship company of the RPG Group. The company is a global player in the T&D space and has presence across 45 countries (~59% of FY2013 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 railway and water resource management - though currently these businesses are at a nascent stage.

May 9, 2013

KEC International | 4QFY2013 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

FY2010 FY2011 FY2012 FY2013 FY2014E FY2015E 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
-

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
-

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
-

6,979 20.0 6,598 3,836 1,494 483 785 381 (19.1) 5.5 56 325 (23.2) 4.7 195 16 10.9 147 (54.7) 0 147 82 55.7 65
-

7,709 10.4 7,192 4,163 1,642 555 833 516 35.4 6.7 63 453 39.3 5.9 229 7 3.0 231 57.5 0 231 75 32.5 156
-

8,399 9.0 7,795 4,519 1,781 605 890 605 17.1 7.2 66 539 18.9 6.4 230 16 4.9 324 40.2 0 324 105 32.5 219
-

191 191 60.3 4.9 7.7 7.7 60.3

206 206 7.8 4.6 8.0 8.0 3.5

209 209 1.8 3.6 8.1 8.1 1.8

65 65 (68.9) 0.9 2.5 2.5 (68.9)

156 156 140.0 2.0 6.1 6.1 140.0

219 219 40.2 2.6 8.5 8.5 40.2

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

May 9, 2013

KEC International | 4QFY2013 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 Other Non CA Total Assets
previous year numbers 836 157 679 38 0 2,680 73 396 250 1,962 0 1,778 903 0 1,620 1,038 237 802 28 281 3,645 154 410 336 2,172 574 2,396 1,249 69 2,428 1,095 285 810 112 321 4,235 203 510 440 2,506 576 3,153 1,083 73 2,398 1,295 341 954 57 342 4,790 156 662 396 2,887 689 3,550 1,241 92 2,685 1,545 405 1,140 57 360 5,209 196 662 463 3,379 510 3,842 1,368 0 2,925 1,670 471 1,199 57 382 5,947 345 537 504 3,941 620 4,400 1,547 0 3,186 49 736 785 787 46 1,620 51 895 947 1,432 50 2,428 51 1,056 1,108 1,239 51 2,398 51 1,096 1,147 1,476 62 2,685 51 1,216 1,267 1,596 62 2,925 51 1,399 1,450 1,673 62 3,186

FY2010 FY2011 FY2012

FY2013E

FY2014E

FY2015E

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

May 9, 2013

KEC International | 4QFY2013 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

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 (192) 2.1 645 (36) (243) 611 151 73 223

FY2012 FY2013E FY2014E FY2015E 324 48 215 (62) (115) 410 (141) 62 (79) -193 (36) (50) (229) 53 223 276 147 56 (204) (16) (82) (99) (145) 16 (129) 237 (36) (93) 201 (120) 276 156 231 63 (88) (7) (75) 125 (250) 7 (243) 120 (36) 74 84 40 156 196 324 66 (30) (16) (105) 239 (125) 16 (109) 78 (36) (22) 41 150 196 345

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

May 9, 2013

KEC International | 4QFY2013 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

FY2010 FY2011 FY2012 FY2013E FY2014E FY2015E 6.2 5.4 1.6 2.5 0.5 4.7 1.4 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 6.0 5.0 1.3 2.5 0.6 5.3 1.2 1.7 8.0 8.0 9.6 1.2 35.4 9.7 64.9 2.7 26.5 17.2 7.4 1.8 34.8 25.4 27.0 36.9 5.6 24 169 156 78 2.3 2.7 3.5 5.9 4.8 1.1 2.5 0.4 4.8 1.1 1.5 8.1 8.1 10.0 1.2 42.1 7.3 64.5 3.1 22.7 14.7 7.8 1.9 27.5 21.1 23.6 33.6 7.6 24 147 132 62 1.5 2.2 2.6 18.9 10.1 1.1 2.5 0.4 6.7 1.1 1.4 2.5 2.5 4.7 1.2 43.2 4.7 44.3 3.6 16.7 7.4 6.3 1.7 9.2 15.5 17.5 9.5 8.1 22 141 129 51 1.9 3.5 1.7 7.9 5.6 1.0 2.5 0.3 5.1 1.0 1.3 6.1 6.1 8.5 1.2 47.9 5.9 67.5 3.5 20.3 13.7 10.1 1.8 20.1 19.1 20.8 20.2 7.2 20 148 131 53 1.6 2.7 2.0 5.6 4.3 0.9 2.5 0.3 4.2 0.9 1.2 8.5 8.5 11.1 1.2 55.0 6.4 67.5 3.5 22.3 15.1 9.5 1.4 23.0 20.3 22.9 23.0 6.8 21 159 139 52 1.3 2.2 2.3

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

May 9, 2013

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KEC International | 4QFY2013 Result Update

Research Team Tel: 022 3935 7800

E-mail: research@angelbroking.com

Website: www.angelbroking.com

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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%)

May 9, 2013

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