KEC International: Growth in order book, but could face margin pressures

KEC International, a global infrastructure EPC player, has received orders worth Rs 147 cr in the Water and Railways businesses. One of the orders worth Rs 98 cr is from the Water business. This order is to construct canals for irrigation systems in Gujarat and Madhya Pradesh. The other order worth Rs 49 cr is to supply railway track materials, tools and signaling equipments in Kenya.

The company has recently forayed into the Water and Railways businesses. Revenues from both these segments represent just over 1% of its topline. In the Water business, its order book stood at Rs 31 cr as of March 2011, which has now increased to Rs 178 cr. In  the Railways business, its order book position was at Rs 30 cr as of March 2011, and with the order inflows, this now stands at Rs 400 cr. Both these sectors have fetched some good orders in this fiscal, and now represent over 6% of its total order book of Rs 8597 cr in September 2011.

From an interview of Ramesh Chandak, MD and CEO, KEC International, that was published on Moneycontrol.com, it seems that the company is witnessing stronger order inflows than it is able to execute. Earlier this month, the company has also received an order for transmission lines from customers like Power Grid Corporation (PGCIL), Visa Power and Saudi Electric Company. The total value of these orders is Rs 400 cr. From the new orders the company has received, it is quite clear that it is witnessing a good momentum in its order book.

As mentioned in its FY11 Annual Report, KEC's order book has grown at a 4-year CAGR of 27%. By March 2011, its total order book stood at Rs 7800 cr, against Rs 5500 cr in FY10. Its order book to sales ratio in FY11 was 1.70, compared to 1.39 in FY10.

It should be highlighted that KEC has also received orders from PGCIL. We expect that there will be a rise in orders from the Corporation, as KEC has announced a capex of Rs 1 lakh cr for its next Five Year Plan. The company will also spend 20% of the Rs 55000 cr capex as part of the current (11th) plan in the remaining period of this year. This will give KEC a good opportunity to bag further orders from PGCIL in its transmission business. 

We believe that the company's growth will largely be fuelled by orders from the Middle East. However, on the domestic front, KEC will face some headwinds and its margins will remain under stress.