Margin woes for KEC International may not have ended

KEC International’s stock tanked as high as 18.5% immediately after the company announced its dismal performance in September 2012 quarter (Q2). The stock closed today’s trading session with a decline of 11.4%.  While the company has significantly exceeded sales growth expectations, profitability has taken a big hit.

Consolidated sales of Rs 1,670 crore grew at a robust rate of 32% (over 30% for fourth consecutive quarter), which is significantly higher than expectations of 15-20%. Domestic operations (77% of overall sales) saw a jump of 35%. Even international business witnessed a healthy growth of 24%.

However, the company’s operating profit margin at 5.2% tanked by 200 basis points year on year (happening for past 5 quarters) due to execution of low margin orders procured in the previous year. What irked analysts more is that the operating margin now is at a historically low level and they were expecting 7.5-8% margin due to low-base (forex loss in same quarter last year). Even net profit margin has slipped below 1% (unprecedented) due to firm interest and depreciation costs. Slipping on both these parameters has come as a shocker from a company, which is geographically so well-diversified.

Though growth in the company’s order inflow and order book at 11.8% and 11% respectively in Q2 was  satisfactory, it is not enough given that revenue visibility has increased only marginally from 1.5 times consolidated revenues as on FY12-end to 1.6 times as the end of Q2. Current depressed scenario in the power generation sector could have some rub-off effect on the order pipeline. Hopefully, second half of FY13 should be better than first half as this is usually the case for awarding activity in the domestic market and should help company to shore up its order book. But margin pressure may not have ended thanks to competition, legacy low margin orders and contribution from new business with low margins.