Supported by a strong backlog, picking up execution and lower commodity prices, KEC International’s earnings are expected to grow at a CAGR of 47% in FY22-24E. However, any further increases in commodity prices and additional SAE tower challenges are among the risks. We maintain the “buy” rating on the stock, assigning an 18x multiple on the FY24E EPS and arrive at a target price of Rs 566.

There are important lessons to be learned from our interaction with senior management – the contribution of transmission and distribution (T&D) activities should be reduced to 20-25% in the long term, from 50% in the financial year 22; SAE Towers profitability is expected to return from the first quarter of FY24 with revenue of Rs 1,000 crore and 7-8% EBITDA margin in FY24; and net working capital days are expected to improve from Q4FY23.

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Management reiterated a strong pipeline of orders at Rs 1.1 trillion across businesses, of which the company has already participated in tenders worth Rs 35,000 crore. FY23-YTD order inflow stands at Rs 6,000 crore with large orders coming from PGCIL. The current consolidated order book stands at Rs 30,000 crore.

T&D contribution can be reduced to 20-25% in the long term: Over the past six years (FY16-FY22), KEC’s non-T&D revenue contribution increased from 17% in FY16 to 50% in FY22. This was led by strong revenue growth in non-T&D businesses, primarily civil and rail, which grew 63% and 62% CAGR, respectively, in FY16-FY22.

SAE tower profitability will improve from Q1FY24: Legacy order fulfillment is expected to be completed by October to November 2022. The company said it will focus on fulfilling tower supply orders and will be selective in accepting EPC orders .

Strong order pipeline: For FY23, management has forecast order intake growth of 15%. Based on FY23-YTD, the company received orders worth Rs 6,000 crore across all businesses.