KEC International: Strong order flow

Stock split and new orders have made analysts bullish on the stock, which has already bottomed out

After touching a 52-week low of Rs84 on December 20, 2010, the KEC International stock bounced back on Monday to close 25.77 per cent higher at Rs105.65. The Sensex and the BSE Midcap Index rose about four per cent each during the period.

Analysts say the scrip rallied on the back of stock split (ratio of 1:5) and new orders worth Rs2,000 crore, including a Rs980-crore one bagged on January 3. The stock seems to have a lot of steam left, as it still trades at an attractive valuation of about 10.7 times 2011-12 average estimated earnings.

A strong order pipeline has also brightened prospects. The company concluded the December 2010 quarter with an order inflow of Rs2,400 crore, as compared to Rs2,750 crore in the first half of 2010-11. Revenue visibility also remains strong, with the highest-ever order book of Rs7,400 crore (1.9 times 2009-10 sales).

Analysts expect strong traction in order inflows, especially from Power Grid Corporation of India (PGCIL), as companies rush to meet year-end targets. The international markets have also become quite active of late. However, competition in the domestic market is intensifying, especially for PGCIL orders. Though PGCIL contributes less than 20 per cent to KEC’s order book, analysts expect this to rise.

The operating profit margin (OPM) fell 100 basis points year-on-year to 10 per cent in the first half of 2010-11. Fluctuations in foreign exchange due to greater exposure to the international market (about 50 per cent of the order book), rising input costs and interest rates also pose risks to margins.

Hence, the impact of robust growth in order inflows on OPM needs to be monitored. The company’s initiatives to increase presence in railways, telecom and power cables, along with the acquisition of US-based SAE Towers Holdings and opportunities in the new business area of BOOT (build-own-operate-transfer) and BOOM (build-own-operate-maintain) projects not only augurs well for inflows but will also help diversify the order book.