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Main Research Report

KEC International Limited

Independent Equity Research

March - 2016

2

KEC INTERNATIONAL LIMITED

Background and Business

Business Overview – Established in 1945, KEC International Limited (KEC) is flagship arm of the RPG group. KEC is a

global EPC major in the Power Transmission and Distribution (T&D) space. The company has over 7 decades of

experience in executing power T&D projects on turnkey basis and has the ability to provide end-to-end solutions

encompassing designing, manufacturing, supply and construction of power transmission lines. Over the years, KEC

has evolved into a diversified infrastructure play with interests across Power T&D, Cables, Railways, Telecom and

Water sectors. Power T&D (including India and overseas ops) is the highest contributor to sales at 86% (FY15), followed

by cables 10.7%, railways 1.6% and water 1.6%. In FY15 KEC generated 53% of revenues (Rs 87 billion) from overseas

operations, with projects spreading across Africa, Americas, Middle East and North America.

KEC Service Offering and Verticals

Business segment Service offering Revenue mix

(FY15 Rs 87 bn)

Years of Experience

1. Power T&D

(standalone)

End-to-end solutions in power transmission,

EPC of Substations, Distribution network,

Electrical-Balance of Plant, Industrial

Electrification and Cabling

76.6% 7 decades

2. Power T&D

(The US

subsidiary-SAE)

Tower designing, engineering and

manufacturing 9.5% Acquired SAE USA in FY11

which is in operation since 1926

3. Cables Manufacturing power and telecom cables

(optic as well as jelly filled) 10.7% Acquired RPG cables in 2010 (5

decades of operations)

4. Railways Track work, Line electrification and

signaling 1.6% 2009

5. Water Water Resource Management and Water

and Waste Water Treatment 1.6% 2011

Operating structure- Being an international EPC player local presence is essential for project management mainly to carry

out civil construction work, for sourcing material and for contracting labour. KEC has therefore set up subsidiaries and

entered into joint ventures with local partners in the key overseas markets such as Americas, Africa and Middle

East. Overall KEC carries out its operations through 13 subsidiaries and 21 joint ventures across India and foreign

locations. In FY15 subsidiaries accounted for 28% of the consolidated top line (Rs 87 billion) and nearly30% of the net

profit (Rs 1.6 bn).

Acquisitions – In a bid to consolidate its overseas presence, KEC acquired 100% stake in SAE Towers Holdings LLC

(SAE Towers) in September 2010 at an enterprise value of $ 95 million. Headquartered in Houston, Texas, United

States, SAE Towers is the leading manufacturer of lattice transmission towers in the Americas. It has two manufacturing

facilities located in Brazil and Mexico. SAE commands over 40% market share in North America, Brazil and Mexico.

Manufacturing facility- KEC operates 5 tower manufacturing facilities spread across India, Mexico and Brazil with a

total capacity of 313,200 metric tons, of this 213,200 mt is spread across three locations in India- viz. Jaipur, Jabalpur and

Nagpur. Other two manufacturing facilities are located overseas in Brazil (65,000 mt) and Mexico (35,000mt). KEC also

owns 3 cable manufacturing facilities set across Vadodara, Mysore and Silvassa in India, where it manufactures a range of

power and telecom cables.

Management effectiveness – KEC became a part of the Rama Prasad Goenka promoted RPG Group in 1982. The group

has consolidated turnover of ~ Rs 200 billion and its operations span sectors like Power T&D, Tyre manufacturing,

IT/software services, Life sciences/ pharma, capital goods and rubber plantation. KEC operations are headed by Mr. Vimal

Kejriwal; Managing Director & CEO of the company and he brings over 32 years of experience in the engineering sector.

With the support of RPG Group, KEC has established itself as a leading global T&D EPC player with operations

spanning 60+ countries. The management has aggressively pursued topline growth through geographical expansion

and diversification into other infra EPC sectors. Reflecting superior leadership, KEC has stayed ahead of its peers in

terms of market share growth, capacity expansion and diversification outside India.

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Promoter shareholding - The Goenka family holds 50.54% stake in the company, none of which is pledged. What lends

greater comfort to investors is the fact that the promoters have consistently increased their stake in the company from

34.27% in March 2007 to 49.41% in March 2014 and even in the last one and half year promoters have increased their

stake by another 1.13% to 50.54%. Institutional (FII and DII) holding in the company is also high at 30.8%.

Investment thesis

We are positive on the growth prospects of KEC in the coming years. Our outlook on the company finds strength from its

leadership position in the power T&D segment in India coupled with its strong presence in the international

geographies. We believe that the company is best placed in the sector to benefit from the expected growth in order

flows. Overall we project revenue of the company to grow at a compounded rate of 17-18% to be close to Rs 200 billion in

FY21. Healthy growth in sales, improvement in profitability and reduction in financing cost is likely to result in a

much higher growth in net profit for the company. We project company’s PAT to grow at an impressive CAGR of ~32-

33% over FY16 to FY21.

a) T&D Order inflow gaining traction – With presence in both domestic and international markets, we expect KEC

order flows to increase leading to a higher growth in the order backlog and revenue over the next five years. The

current backlog of ~ Rs 95 billion is expected to grow at an impressive CAGR of 16-17% between FY16-21as

compared to 11.6% observed over the past five year period.

Domestic ordering- ordering activity is expected to gathered momentum in the power sector given the

Government’s impetus on augmenting capacities to fulfill its vision of providing ‘Power to all’ by 2022.

Additional generation capacities to the tune of 200,000 MW would have to be added in the next 6-7

years, which is more than 75% of capacity added in the last six decades put together. As per the Ministry

of Power, investments to the tune of Rs 2.6 trillion is required between 2018 to 2022, which is 2.1x higher

than the 11th plan actual achievement.

Particulars (Rs trillion)

11th Plan Period

(2007-2011)

Actual

12th Plan Period

(2012-2017)

Ongoing

13th Plan Period

(2018-2022)

Projected

Power sector Capex

(G+T+D) 7.03 11.25 13.10

% growth (absolute) - 60% 16%

Transmission

(T) 1.23 1.80 2.60

% growth (absolute) - 46% 44%

% mix in total 18% 16% 20%

Note: G: Generation, T: Transmission and D: Distribution

Quantum jump in transmission investment is required in order to - 1) Augment evacuation capacities to keep

pace with the growing generation infrastructure, 2) Reduce Technical and Commercial loses (AT&C loses)

from 25-27% to 15%, 3) Upgrade the network to bring in efficiencies and 4) to Synchronize state transmission

network with the national grid. Over and above the investment target set out for the 13th plan period at Rs 2.6

tr, additional funds to the tune of Rs 430 billion are required to create a ‘Green energy corridor’, which will

enable synchronization of renewable power generation with the grid. It is reported that transmission orders

worth almost Rs 1 trillion are in the pipeline and these are likely to come up for bidding over the next

18-24 months. We therefore expect order arsenal for the transmission EPC companies to go up

considerably in near future and KEC being the largest player in the segment will be a key beneficiary of

the domestic order flows.

Here we would like to point out that in our projections we have not assumed a significant rise in contribution

from the company’s non-T&D EPC segments, such as railways, cables, Water treatment and Solar, which

together constitute ~15% of the order book. We are very optimistic about the growth prospects of all the

non-T&D segments as well but await higher traction in order flows to take a decisive view on the growth

trajectory that these segments may chart out going forward. We believe that the non-T&D segments can

provide a huge upside trigger going forward and thereby boost order book growth even further.

International order flow- Over 45% of KEC’s order book comes from projects won outside of India. KEC is

a prominent player in some of the high growth regions/countries such as Africa, Saudi Arabia, Oman,

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SAARC, Brazil, Mexico, North America, etc. We believe that overall economic growth may taper in some of

the oil producing countries following the drop in oil prices, thereby deferring order flows but the trend would

be arrested by the expected growth in orders from some other regions such as North America, Asia and Africa.

We are of the opinion that deferment of demand would eventually lead to higher investments in the following

years to bridge the infrastructure gap, resulting in a healthy cumulated growth in order flows over the 4-5 year

horizon.

There is relatively high visibility on domestic ordering activity, whereas trajectory for international orders is difficult to

predict at this point in time. In case we assume international order flows to slow down over the next 1-2 years (even though

management interactions indicate no cause of worry), we believe that the growth in domestic ordering will keep KEC on

track to achieve the estimated 17-18% CAGR growth in topline over FY16-21.

b) Margin expansion underway - Margins which were under pressure since FY12 due to increase in competitive

intensity in the domestic market, reduced profitability in SAE operations and entry into new business verticals, are set

to improve as the company completes all the legacy orders by the end of FY16 and as SAE operations as well as

new business verticals turnaround. Operating margins fell from 11.6% recorded in FY11, to 8.7% in FY12, further to

6.2% in FY13 before rising to 7.0% in FY14 and in FY15 also it remained at 6.8%. Going forward we expect the

operating margins to improve by almost 200 bps to reach 8.8% by FY21.

c) Low incremental capital requirement– Management has guided for a nominal replacement capex of Rs 1,000 million

per annum for the next 2-3 years. Further it has set a target of 10-15% reduction in the gross working capital days, from

230-240 levels seen currently, over the next couple of years. In view of no large capex plan and the proposed

savings in working capital, we believe that KEC can support 20-25% growth (absolute) in revenue for the next

2-3 years through internal accruals itself. In the latest interaction also, management has reiterated its target for

working capital reduction and has expressed its confidence in improving leverage by maintaining debt at current

levels (Rs 20-21 billion) to support future sales growth. Interest cost as a percentage to sales is thus expected to

improve going forward and by FY17, the management aims to bring it down to 3.0% of sales as compared to 4.4%

achieved in the full year FY15.

Key assumptions for the base case forecast - FY15-21

Revenue – We project consolidated revenues to grow at a healthy CAGR of 17.3% for FY16-21 led by strong order

inflows from the transmission sector, along with good prospects for the railways and solar business. In view of soft

commodity prices, management has guided for 10% growth in sales for FY17. Thereafter we expect sales growth to be

relatively higher due to a) higher execution of domestic orders, to fulfill the 13th plan period targets and b) better flow of

international orders due to pent up investment demand. Revenue for FY17 is therefore projected to grow at 9.6% (Rs 99 bn)

as against estimated 4% YoY growth in FY16, subsequently we project 14.6% growth in FY18 (Rs 113 bn), 19.0% in FY19

(Rs 134 bn), 21.1% in FY20 (Rs 162bn) and another 22.7% in FY21 (Rs 200 bn).

EBDITA- We estimate consolidated EBDITA to grow at a higher CAGR of 20.7% as compared to sales CAGR of

~17% between FY16-21, led by 200 bps point expansion in margins to 8.8%. In FY15 KEC reported EBDITA margin

of 6.8%, which in 9MFY16 itself has improved to 7.7% (against 5.5% achieved in 9MFY15). We believe that blended

EBDITA margin of the company can range anywhere between 8-9% in the projection period (assuming 60:40 blend of

T&D and non T&D business). This is assuming that SAE margins come back on track to 9-10% levels, operating

profitability for new verticals (railways, water, solar and cables) improves to 7-8% and margins on domestic orders remain

stable at 9-10%.

Capital expenditure – For the past 4 years, on an average KEC has spent close to Rs 1,000 million p.a. towards the

purchase of construction and factory equipment. For the next 2-3 years as well the management is not planning for any

major capacity expansion and hence expects the past capex level to be maintained.

Working capital- Gross working capital days has come down from 271 in FY11 and 250 in FY14 to 242 days in FY15. In

line with the management’s target for further improvement in working capital efficiency, we have assumed gross WC days

to reduce to 225 by FY18. However, a concurrent contraction in customer advances (due to cheaper credit availability)

would negate the overall impact at the net level. Thus, we estimate NWC to sales to remain constant around 16.9% during

the projection period FY16-21.

Capital structure- Basis our assumption of stable working capital and limited capex requirement going forward, we expect

D:E to come down to 1.0x level by FY21 as compared to 1.54x reported in FY15.

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PAT- Healthy growth in sales, improvement in profitability, low depreciation and interest costs as a proportion to sales

should translate in PAT margins to grow from 1.9% in FY15 to 3.8% by FY21. Resultantly, we expect 4.0x growth in PAT

i.e. CAGR of 32.3% over FY16-21 to Rs 7.4 bn.

Return matrices- RoCE and RoE of the company was 14.6% and 12.1%, respectively in FY15. Going ahead we expect the

return matrices to improve to 24.4% and 22.5%, respectively by FY21, aided by profitability and capital efficiency

improvement.

Valuation and Recommendation

Increase in cash flows from operations, limited capex and rationalization of capital structure should translate in 4.0x growth

in net profit of the company. Overall we project EPS of the Company to increase from Rs 6.3 per share in FY15, to Rs 7.1

in FY16 (YoY growth 13%) and further to Rs 28.7 by FY21, implying an EPS CAGR of 32.3% over FY16-21.

KEC currently trades at a PE of 16x on the consolidated TTM EPS of Rs 6.8. Over the next 4-5 years we expect the stock

price to grow by 4.5-5.0x, this is arrived at by valuing the FY21 EPS of Rs 28.7 at 18-20x PE.

Valuation reflects our confidence in the management capability in capturing high growth opportunities both in India

and in the overseas market. Our outlook also finds strength from its leadership position in the power T&D segment and

its superiority in managing working capital requirement as compared to its peers. We therefore believe that KEC is

best placed in the sector to benefit from the expected growth in order flows.

The table below details the sensitivity of FY21 target price to different levels of EPS estimates and PE multiples.

FY-21 EPS sensitivity -15% -10% -5% 0% 5% 10% 15%

FY-21 EPS est. (Rs./-) 24.4 25.8 27.2 28.7 30.1 31.5 33.0

PE 14xs 341.0 361.0 381.1 401.1 421.2 441.3 461.3

PE 16xs 389.7 412.6 435.5 458.4 481.4 504.3 527.2

PE 18xs 438.4 464.2 490.0 515.8 541.5 567.3 593.1

PE 20xs 487.1 515.8 544.4 573.1 601.7 630.4 659.0

PE 22xs 535.8 567.3 598.8 630.4 661.9 693.4 724.9

PE 24xs 584.5 618.9 653.3 687.7 722.1 756.4 790.8

PE 26xs 633.2 670.5 707.7 745.0 782.2 819.5 856.7

Note – shaded cells indicate fair value of equity range

The table below runs the sensitivity of EPS CAGR over FY16-21 at different levels of sales growth over the same time

period and at different net profitability levels.

PA

T M

arg

in %

Est

.- F

Y2

1 Sales CAGR % FY16-21

8% 11% 14% 17% 20% 23% 26%

2.3% 10.4% 13.4% 16.5% 19.5% 22.6% 25.7% 28.7%

2.8% 14.9% 18.0% 21.2% 24.4% 27.6% 30.8% 34.0%

3.3% 18.7% 22.0% 25.3% 28.6% 31.9% 35.2% 38.5%

3.8% 22.2% 25.6% 28.9% 32.3% 35.7% 39.1% 42.5%

4.3% 25.3% 28.7% 32.2% 35.7% 39.1% 42.6% 46.1%

4.8% 28.1% 31.6% 35.2% 38.7% 42.2% 45.8% 49.3%

5.3% 30.6% 34.3% 37.9% 41.5% 45.1% 48.7% 52.4%

In our base case we have assumed sales to grow at 17.3% CAGR over FY16-21 and PAT margin to be at 3.8% in FY21,

which should translate in EPS CAGR of 32.3% over the same time period.

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Recommendation- We are very positive on the overall growth story that is unfolding for KEC and therefore strongly

recommend buying into the stock for the long term investors, having 4-5 years investment horizon. At the current market

price of Rs 110-115, KEC can be a strong value creator, with over 4.5-5.0x return potential over the next five year period.

Risks to the recommendation

Slowdown in order flows – Entire growth in revenue hinges upon the expectation of order pick up in the domestic

markets in the immediate term and sustained strength in the international markets. In case there are delays in

domestic tendering process or international markets continue to languish beyond estimated time period, then our

projections would face the risk of downward revision.

Subsidiary and new vertical turn around- Our assumption on margin expansion assumes turnaround in SAE

operations and improvement in the performance of new verticals from FY16 onward and would need to be

monitored closely for any deviations.

Capital efficiency improvement– Interest outgo will increase for the company if it is unable to improve working

capital efficiency as targeted or undertakes higher than Rs 1,000 million p.a. capex over the next 2-3 years

impacting the growth in PAT during the projection period

Input cost fluctuation- KEC derives sizable revenue from international operations (~53% of revenue in FY15),

which are fixed price in nature and therefore are vulnerable to adverse input cost movements. The company tries to

mitigate this risk by hedging the exposure to the extent possible but there are always some uncovered positions in

its order book.

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PEER SET ANALYSIS

Power transmission and distribution

Industry overview - One of the major reasons for power deficit in India is shortage in transmission infrastructure. The total

installed power generation capacity in India is around 278 GW. Power Generation capacities have increased at a higher pace

compared to transmission capacities in the past five years. Ideally 1:1 investment ratio has to be maintained between

generation and T&D, however it has been a dismal 2:1 during the past plan periods. This disproportionate investment

pattern has resulted in higher power deficit due to T&D losses and insufficient evacuation of power to the load centers from

surplus regions. At the end of 11th plan period generation capacities grew by an absolute rate of 51% (to 200 GW) as

compared to the 10th plan period, whereas growth in transmission capacity was only 27% (to 245 Tckm). Recognizing this

disparity in investment, the government has stepped up T&D spending in the 12th and 13th plan periods, creating attractive

opportunities for companies catering to this segment.

Historical trend in Generation vs. Transmission capacity additions

Source: planning commission

Peers analysis - KEC is the largest T&D EPC player in India with nearly double the size of operations as compared to its

nearest competitor in the space. Domestically the company has maintained its lead in PGCIL orders and currently holds

close to 30% market share. Further RPG Group’s vision of setting up a truly global enterprise has enabled KEC to emerge

as a strong contender in the global power T&D arena, wherein it is ranked no.1 in South & North America and in Africa,

while enjoying a prominent position in the Middle Eastern markets. Further due to geographically diversified revenue mix

and efficient capital management, KEC has stayed ahead of its peers in terms of sales growth and return parameters as well.

We believe that in the T&D EPC space, KEC is best placed as compared to its peers to benefit from the expected

pick up in T&D investments in India and from the rationalization of PGCIL bidding norms leading to reduction in

competitive intensity in the sector.

Largest and best performing T&D EPC player in India

FY2015 Unit KEC

International

Kalpataru

Power

Jyoti

Structures

Remark

PGCIL market

share % 29% 19% 0%

Largest share in PGCIL orders

Net sales Rs million 84,678 44,223 31,114 KEC is double the size of its nearest

competitor in India. Geographical diversity

gives KEC flexibility in quickly ramping up

operations in better performing markets

when faced with slowdown in specific

regions.

Sales 5 yr

CAGR % 17% 11% 2%

Order Book Rs million 95,084 51,500 46,100 Order flow for KEC has been stronger as

43

6986

105

132

200

6th Plan 7th Plan 8th Plan 9th Plan 10th Plan 11th Plan

Installed power generation capacity (GW)

33%

51%

52

80

116

146

197

245

6th Plan 7th Plan 8th Plan 9th Plan 10th

Plan

11th

Plan

Transmission line network strength ('000

ckm)

38%

27%

8

FY2015 Unit KEC

International

Kalpataru

Power

Jyoti

Structures

Remark

OB 3 yr CAGR % 4% -5% 2% compared to peers, specifically in the past

3yr when market conditions worsened.

EBDITA

Margin % 6.8% 10.2% 2.8%

Entry into new segments and reduced order

flows from SAE has put pressure on KEC

margins from the pre FY11 levels of 11-

12%. This is likely to change going forward. 5 yr Average % 8.1% 10.9% 9.6%

PAT Margin % 1.9% 3.7% -12.7% High interest cost has resulted in lower PAT

margin compared to Kalpataru, anomaly that

the company is set to remove by improving

leverage and operating margins. 5 yr Average % 2.4% 4.7% -0.8%

NWC % sales % 16.9% 18.1% 46.7% Being an EPC player, operations are highly

working capital intensive and KEC’s highly

efficient working capital management has

enabled the company to maintain its

leadership in the sector.

5 yr Average % 15.4% 18.0% 26.0%

Asset T/O Ratio 5.0 4.6 4.6 Comparable Gross fixed asset turnover

ratios. 5 yr Average Ratio 4.3 4.7 6.3

RoCE % 18.5% 13.6% 2.9% Working capital efficiency has translated in

high return ratios for the company despite

relatively poor leverage and lower PAT

margins. Next leg of improvement in RoCE

expected due to profitability improvement

and financing cost reduction. 5 yr Average % 18.8% 15.0% 16.1%

Debt: equity Ratio 1.5 0.4 5.7 Company is set to improve its leverage by

meeting incremental fund requirement

largely from internal accruals. 5 yr Average Ratio 1.4 0.3 2.2

CMP- as on 03.March.2016

Rs 115 183 12

Valuation parameters are weak compared to

Kalpataru, KEC’s closest competitor due to

lower profitability. Basis our expectation of

margin improvement going forward,

valuation parameters are likely to trend

upward.

Market

capitalization Rs million 29,565 28,083 1,314

Mcap/Sales Ratio 0.35 0.64 0.04

Mcap/EBDITA Ratio 5.12 6.20 1.52

Price/EPS Ratio 18.36 16.96 (0.33)

P/BV Ratio 2.22 1.36 0.32

Segment outlook - IEA projects a strong growth in T&D investment in Asia, North America, Middle East and Africa,

where KEC has created a notable presence over the years. Investment in these regions will be led by- a) growth in

generation capacities, b) development of inter regional interconnections, c) replacement of outdated networks and d) thrust

on quality of supply. Overall USD700-800 billion of investments is envisaged across the said regions to incrementally set

up ~105 billion km (over 100 KV) of transmission lines between CY14 to CY20.

Domestic T&D investments is also expected to see a quantum jump. The investment required for the transmission sector in

the 13th five year plan is pegged at Rs 2,600 billion as compared to Rs 1,800 billion allocated in the 12th Plan and Rs 1,230

billion achieved in the 11th Plan Period. We believe that growth in overall investments in the T&D sector should augur well

for a well entrenched player like KEC in the coming few years.

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ANNEXURE - I

Management Background and Pedigree

The RPG group acquired KEC International Ltd in 1982. The group was founded by R.P. Goenka and comprises of 15

companies operating in areas such as Power T&D, Tyre manufacturing, IT/software services, Life sciences/ pharma, capital

goods and rubber plantation. R.P. Goenka held the position of Chairman Emeritus until his death in 2013 and his son Mr.

Harsh Goenka now assumes the position of Group Chairman. After coming in the fold of RPG group, KEC has expanded

its operations from power T&D segment to areas such as cable manufacturing, railway infrastructure EPC, water resource

management and solar power EPC. Group aspirations of setting up global enterprises led KEC to acquire US based SAE

Towers in 2011 and thereby create one of the world's leading power T&D companies with over 3 lakh mt capacity.

Management profile

Managing Director & Chief Executive Officer Mr. Vimal Kejriwal- Mr. Kejriwal was appointed as the MD & CEO of

KEC International Ltd on April 1st, 2015. He is an alumnus of the prestigious Kellogg School of Management, USA and

Narsee Monjee Institute of Management Studies (NMIMS), India. He serves as a director on the board of SAE Towers

Holdings LLC, USA, a wholly owned subsidiary of KEC International. He has over 3 decades of diversified corporate

experience, including 13 years spent at KEC International Ltd. Mr. Kejriwal joined KEC as a Chief Financial Officer in Sep

2002, and since then has played a major role in scripting the company's success story.

President –Transmission & Distribution International Mr. Randeep Narang-With over 2 decades of experience in the

tyre and telecommunications sectors, Mr. Randeep Narang is the President-Transmission and Distribution International. He

is a commerce graduate and an MBA from Narsee Monjee Institute of Management Studies, Mumbai. He has worked in top

managerial positions across various companies, including CEAT, Reliance Communications and Bharti Airtel. He oversees

the Transmission, Distribution and Telecom businesses of the company in India and South Asia.

President - Transmission & Distribution, South Asia, Mr. Neeraj Nanda- Mr. Nanda has over 3 decades of experience

in marketing, sales and projects execution in the power sector. He is a B.E. (Mechanical) from Devi Ahilya University,

Indore with a Post-Graduation in Import/Export Management from Indian Institute of Foreign Trade.

President –Infrastructure & Cables Mr. Rakesh Amol- With nearly 3 decades of global experience in managing

operations across a range of sectors like power, oil & gas and steel, Mr. Amol assumed his present role with KEC in April

2014. He is a B.E. (Mechanical) from BITS Mesra and has done MBA in Finance from FMS -Delhi.

Chief Executive Railways, Mr. Rakesh Gaur-An engineer with an MBA in International Business, Mr. Gaur has over 3

decades of global experience in handling infrastructure and power Transmission & Distribution projects. In his career, he

has handled over 50 domestic and international projects in companies such as ACC, L&T, IRCON, Siemens and ABB,

across India, Canada and CIS countries.

Chief Financial Officer- Mr. Rajeev Agarwal- A Chartered Accountant with over two decades of experience in varied

areas of finance, Mr Rajeev Agarwal was appointed the CFO on Sep 2014. He has extensive experience in financial

planning, fund raising including public Issues and financial management and prior to joining KEC he has worked in

organizations like Essar Power, Shapoorji Pallonji, Jindal Steel & Power, Gujarat Flurochemicals, Cosmo Films and IFCI.

Shareholding Pattern

The Goenka family held 50.54% stake in the company (as on 30th September 2015), after combining the stake held by

individual family members and promoter group entities. None of the promoter holding is pledged. Promoters have

consistently increased their stake in the company from 34.27% in March 2007 to 50.54% on September 2015. Total

institutional holding was at 31.86% as per BSE disclosure for quarter ended September, 2015. Major institutional/corporate

shareholders in KEC include HDFC Trustees Company Ltd. 8.99% stake, Reliance Capital Trustee Company 4.41% stake,

Unit Trust of India 3.38% stake, Life Insurance Corporation of India 2.77% stake, SBI MF 2.49% stake, IDFC Sterling MF

1.12% and FIL Investment (Mauritius) Ltd. 2.58% stake.

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Shareholding pattern

Particulars Mar-07 Mar-10 Mar-14 Mar-15 Sept-15 bps change over

March 2007

A. Promoter 34.3 42.0 49.4 50.1 50.5 16.3

B. Public

Institution 49.5 44.7 35.8 30.8 31.9 (17.6)

Non-institution 16.2 13.3 14.8 19.0 17.6 1.4

B. Sub-total 65.7 58.0 50.6 49.9 49.5 (16.3)

(A+B) Total 100.0 100.0 100.0 100.0 100.0 -

Source: Bombay Stock Exchange

Key Market data

Particulars Details

Bloomberg Code KECI:IN

Last Price (Rs.) (as on 25th February 2016) 105 (BSE)

Shares outstanding (mn.) 257.1

Face Value 2.00

Promoter holding (as on 30th September 2015) 50.5%

Institutional holding (as on 30th September 2015) 31.9%

52 wk (H/L) (Rs.) 71.95/164.75 (BSE)

Daily Price Chart

0

50

100

150

200

10-Mar-06 10-Mar-09 10-Mar-12 10-Mar-15

11

Key Financial Parameters for Investment Screening

Sr.

No. Aspect

Required

Criteria for Equentis

5x5 strategy

FY10-15 Grading of

Historical

Performance

FY16-21E Grading of

future

estimates

Actual

Value

(Historical)

Future Value

(Forecasted)

1 Top-line CAGR 20-30% CAGR over last

5yrs 17% 17%

2 EBITDA CAGR 25-35% CAGR over last

5yrs 6% 21%

3 PAT CAGR 30-40% CAGR over last

5yrs (3)% 32%

4 ROCE At least avg. 15%over last

6yrs with increasing bias

Avg -- 19%.

Avg --

21%.Steady rise

from 14.6% in

FY15 to 24% in

FY21E

5 D/E Ratio

Avg. around 1-1.5xs over

last 6yrs with declining

bias

Avg -1.3xs

Avg – 1.1xs

Steady drop

from 1.5x in

FY15 to 1.0x in

FY21E

6 Working Capital

Intensity

Avg. less than 25-30% of

net sales over last 6yrs Avg – 16.3% Avg – 16.7%

7 Dividend Payout Avg. 15-20% of Net

profits over last 6 yrs Avg -- 20% Avg -- 20%

Note - Above – Blue, In-Line – Green, Below – Red

On revenue and operating profit growth front KEC does not meet Equentis’ criteria for company selection, however it

qualifies on the basis of expected growth in net profits. Further return ratios and capital structure of the company is expected

to improve significantly going forward, following the expected rise in profitability and capital efficiency. We believe that it

is the growth in net profits and improvement in return parameters that will determine the company’s valuation trajectory

going forward, hence KEC qualifies to be the part of Equentis’s 5x5 universe.

12

Annexure - II

Consolidated Financial Summary

Consolidated (INR mn) FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E FY19E FY20E FY21E

3yr

CAGR

(FY12-

15)

5yr

CAGR

(FY10-

15)

3yr

CAGR

(FY16-

19E)

5yr

CAGR

(FY16-

21E)

Gross Revenues 45,712 59,177 71,187 80,927 86,573 89,988 98,596 113,033 134,473 162,808 199,773 13.5% 17.0% 14.3% 17.3%

YoY 15.7% 29.5% 20.3% 13.7% 7.0% 3.9% 9.6% 14.6% 19.0% 21.1% 22.7%

Net Revenues 44,765 58,147 69,795 79,018 84,678 88,060 96,484 110,612 131,592 159,320 195,494 13.3% 16.7% 14.3% 17.3%

YoY 14.6% 29.9% 20.0% 13.2% 7.2% 4.0% 9.6% 14.6% 19.0% 21.1% 22.7%

EBITDA 5,200 5,059 4,307 5,566 5,779 6,759 7,757 9,225 10,975 13,765 17,282 4.5% 5.6% 17.5% 20.7%

YoY 18.3% -2.7% -14.9% 29.2% 3.8% 16.9% 14.8% 18.9% 19.0% 25.4% 25.5%

EBITDA margins 11.6% 8.7% 6.2% 7.0% 6.8% 7.7% 8.0% 8.3% 8.3% 8.6% 8.8%

Reported PAT 2,056 2,093 650 668 1,610 1,816 2,597 3,525 4,386 5,688 7,366 -8.4% -3.2% 34.2% 32.3%

YoY 8.4% 1.8% -68.9% 2.6% 141.2% 12.8% 43.0% 35.7% 24.4% 29.7% 29.5%

PAT margins 4.6% 3.6% 0.9% 0.8% 1.9% 2.1% 2.7% 3.2% 3.3% 3.6% 3.8%

FCFF -2,171 4,485 -2,188 -925 2,134 2,777 3,035 3,634 2,159 1,135 1,739

Debt:Equity 1.43 1.01 1.27 1.52 1.54 1.36 1.22 1.07 1.02 1.03 1.02

Asset turns 1.93 2.57 2.65 2.63 2.51 2.54 2.61 2.77 2.88 2.92 2.99

Net working capital/Gross sales 20.4% 11.2% 13.3% 15.2% 16.9% 16.8% 16.8% 16.3% 16.3% 16.8% 16.8%

Capex/Gross sales 10.4% 3.1% 2.4% 1.2% -0.6% 1.1% 1.0% 0.9% 1.5% 1.8% 2.0%

ROCE 20.6% 21.1% 15.1% 16.5% 14.6% 16.9% 18.7% 20.9% 21.9% 23.2% 24.4%

RoE 21.7% 18.9% 5.7% 5.6% 12.1% 12.4% 15.6% 18.2% 19.3% 21.0% 22.5%

EBIT/Gross Interest Expense 3.0 2.3 1.6 1.5 1.3 2.1 2.3 2.7 2.9 3.1 3.3

Shares o/s (mn) 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1 257.1

EPS 8.0 8.1 2.5 2.6 6.3 7.1 10.1 13.7 17.1 22.1 28.7

P/E

16.8 14.9 10.4 7.7 6.2 4.7 3.7

EV:

45,382 44,830 44,888 44,946 47,335 51,917 57,332

- M. cap

26,994 26,994 26,994 26,994 26,994 26,994 26,994

- Add: debt

20,451 20,037 20,306 20,717 23,236 27,950 33,466

- Less: cash & cash equivalents

(2,063) (2,202) (2,412) (2,765) (2,895) (3,027) (3,128)

EV/EBITDA

7.9 6.6 5.8 4.9 4.3 3.8 3.3

BVPS 36.8 43.1 44.6 46.3 51.7 57.1 64.9 75.3 88.4 105.3 127.2

P/BV

2.0 1.8 1.6 1.4 1.2 1.0 0.8

Dividend payout - as % of PAT 17.4% 17.1% 23.4% 27.0% 16.9% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%

13

Annexure – III

Financial Snapshot– Standalone, Consolidated and Subsidiary performance comparison

Particulars FY11 FY12 FY13 FY14 FY15 Remarks

Standalone

Gross Sales 40,598 47,073 57,313 67,496 67,816 Standalone sales has grown at a CAGR of

14% between FY11-15

EBDITA 4,228 3,734 2,780 4,330 3,875 EBDITA has declined due to reduction in

margins led by losses in new verticals and

higher competition in PGCIL orders EBDITAM% 10.4% 7.9% 4.9% 6.4% 5.7%

PAT 1,471 1,818 46 856 1,107 PAT margins were further impacted due to

higher financing cost due to inc. in debt

levels PATM% 3.6% 3.9% 0.1% 1.3% 1.6%

D:E 1.0 0.6 1.0 1.3 1.3 Low margins led to higher dependence on

debt for working capital

Asset T/O 1.0 1.0 1.1 1.1 1.1 Stable asset turnover maintained

NWC/Sales 21% 13% 16% 18% 20% Standalone working capital requirement has

remained range bound

Subsidiary

Gross Sales 5,114 12,104 13,874 13,431 18,757

Subsidiary sales recorded 38% CAGR over

FY11-15, largely reflecting performance eon

international subsidiaries and JVs

EBDITA 972 1,325 1,528 1,236 1,904 Margins of company’s international

operations has remained stable, in the past 2

years SAE performance has suffered due to

lower order inflows but growth in Middle

East operations countered any fall in margins

EBDITAM% 19.0% 10.9% 11.0% 9.2% 10.2%

PAT 586 275 605 (188) 503

PATM% 11.4% 2.3% 4.4% -1.4% 2.7%

D:E 6.0 4.7 2.8 3.1 2.7

Long term debt was raised to acquire SAE in

FY11 resulting in high D:E, which is

gradually getting repaid

Asset T/O 0.6 1.2 1.3 1.0 1.2 Post SAE acquisition in FY11 asset T/O has

stabilized

NWC/Sales 17% 5% 3% 1% 7% SAE operations encompass tower supply and

hence is less working capital intensity

Consolidated

Gross Sales 45,712 59,177 71,187 80,927 86,573 Consolidated sales has grown at a CAGR of

17%

EBDITA 5,200 5,059 4,307 5,566 5,779 Largely reflecting drop in profitability of

SAE ops and new verticals EBDITAM% 11.4% 8.5% 6.1% 6.9% 6.7%

PAT 2,056 2,093 650 668 1,610 PAT performance suffered due to rising

interest cost on the back of inc. in

consolidated debt PATM% 4.5% 3.5% 0.9% 0.8% 1.9%

D:E 1.4 1.0 1.3 1.5 1.5

Asset T/O 0.9 1.1 1.1 1.1 1.1

NWC/Sales 20% 11% 13% 15% 17%

14

KEC Order Book – Consolidated

Rs million FY11 FY12 FY13 FY14 FY15 9M15 9M16

Order Book 78,000 85,720 94,697 101,997 95,084 87,610 93,700

YoY gr% 41.8% 9.9% 10.5% 7.7% -6.8% -12.7% 6.9%

Order Inflow 62,000 62,390 74,840 84,820 82,230 54,150 61,470

YoY gr% 39.3% 0.6% 20.0% 13.3% -3.1% -16.7% 13.5%

Gross Sales 44,765 58,147 69,795 79,018 84,678 45,866 43,886

Book bill (ratio) 1.7 1.4 1.3 1.3 1.1 1.9 2.1

Order Book by segment


Transmission & Distribution 72,560 77,620 84,758 89,340 80,598 77,973 79,645

Cables 1,240 1,450 1,087 2,443 5,940 2,628 4,797

Railways 3,890 3,400 4,400 4,530 5,157 2,541 5,997

Water 310 3,250 4,451 5,684 3,390 4,468 3,261

Total 78,000 85,720 94,697 101,997 95,084 87,610 93,700

Y-o-Y Growth (%) 41.8% 9.9% 10.5% 7.7% -6.8% -12.7% 7.0%

Order book mix% FY11 FY12 FY13 FY14 FY15 9M15 9M16

Transmission & Distribution 93% 91% 90% 88% 85% 89% 85%

Cables 2% 2% 1% 2% 6% 3% 5%

Railways 5% 4% 5% 4% 5% 3% 6%

Water 0% 4% 5% 6% 4% 5% 3%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Order Book by Geography

Regions FY11 FY12 FY13 FY14 FY15 9M15 9M16

South Asia 47% 44% 54% 55% 60% 57% 61%

Americas 21% 16% 11% 9% 10% 11% 10%

Middle East 12% 13% 15% 20% 17% 21% 16%

Africa 19% 24% 17% 13% 11% 11% 12%

Others 1% 3% 3% 4% 2% 0% 1%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Revenue by segment- Consolidated


Transmission &Distribution (excl. SEA) 35,520 41,480 49,980 61,080 64,840 45,070 43,930

SEA 3,540 9,130 10,320 8,630 8,030 5,820 5,640

Cable 4,800 5,710 5,520 6,310 9,070 6,900 7,340

Railways 910 1,640 2,700 1,690 1,330 750 1,600

Water - 190 1,270 1,310 1,320 940 660

Solar - - - - 90 - 410

Total 44,770 58,150 69,790 79,020 84,680 59,467 59,577

Revenue mix % FY11 FY12 FY13 FY14 FY15 9M15 9M16

Transmission &Distribution (excl. SEA) 79% 71% 72% 77% 77% 76% 74%

SEA 8% 16% 15% 11% 9% 10% 9%

Cable 11% 10% 8% 8% 11% 12% 12%

Railways 2% 3% 4% 2% 2% 1% 3%

Water 0% 0% 2% 2% 2% 2% 1%

Solar 0% 0% 0% 0% 0% 0% 1%

Total 100% 100% 100% 100% 100% 100% 100%

15

Annexure - IV

Corporate Structure

Entity

As % of

Consolidated

Net Assets

Amount

in (Rs

million)

As % of

consolidated

Profit or

Loss

Amount

in (Rs

million)

Ownership

Parent

KEC International Ltd 67% 8,877 38% 617

(Net of consolidation adjustment) 0% - 0% -

Subsidiaries

Indian

Jay Railway Projects Private Ltd 1% 137 0% (2) 100%

KEC Power India Private Ltd 0% 3 0% 0 100%

Foreign

RPG Transmission Nigeria Ltd 0% 0 0% (0) 100%

KEC Global FZ – LLC, Ras UL Khaimah,

UAE 1% 121 -1% (17) 100%

KEC Investment Holdings Mauritius 0% 33 0% (1) 100%

KEC International Holdings, LLC USA 0% (0) 0% - 100%

KEC Brazil LLC, USA 0% (0) 0% - 100%

KEC Mexico LLC, USA 0% (0) 0% - 100%

KEC Transmission LLC, USA -2% (273) -11% (176) 100%

KEC US LLC, USA -1% (182) -7% (117) 100%

SAE Towers Holdings LLC, USA (Refer

Footnote) 10% 1,292 -36% (581) 100%

KEC Global Mauritius, Mauritius 0% 1 0% (1) 100%

KEC International (Malaysia) SDN BHD 0% 0 0% (0) 0%

Joint Ventures

Total 21 JVs (Incl. India and Foreign) 25% 3,287 117% 1,888

Grand-Total 100% 13,297 100% 1,610

16

Annexure – V

Quarterly Financial Snapshot– Consolidated

Particulars

( Rs. mn) Q3FY16 Q3FY15

YoY

(%) Q2FY16

QoQ

(%) 9M-FY16 9M-FY15

YoY

(%) FY15

Net Sales 20,588 20,533 0.3% 20,209 1.9% 59,577 59,467 0.2% 84,678

Expenditure 18,979 19,487 -2.6% 18,661 1.7% 55,013 56,196 0.2% 79,560

Raw Material 8,843 10,938 -19.2% 10,243 -13.7% 27,918 32,480 0.2% 45,664

%Net sales 43.0% 53.3%

50.7%

46.9% 54.6%

53.9%

Employee Cost 1,557 1,449 7.4% 1,608 -3.2% 4,743 4,425 7.2% 5,865

%Net sales 7.6% 7.1%

8.0%

8.0% 7.4%

6.9%

Op. & Manu. 8,579 7,100 20.8% 6,811 26.0% 22,352 19,291 15.9% 28,031

%Net sales 41.7% 34.6%

33.7%

37.5% 32.4%

33.1%

PBIDT (Excl OI) 1,609 1,046 53.9% 1,548 4.0% 4,564 3,271 39.5% 5,118


7.7%

7.7% 5.5%

6.0%

Other Income 23 1,350 -98.3% 37

92 1,376 -93.3% 1,462

EBDITA 1,632 2,396 -31.9% 1,585 3.0% 4,656 4,647 0.2% 6,580

%Net sales 7.9% 11.7%

7.8%

7.8% 7.8%

7.8%

Interest 675 809 -16.6% 685 -1.5% 2,069 2,378 -13.0% 3,089


3.4%

3.5% 4.0%

3.6%

Depreciation 222 226 -1.7% 211 5.4% 659 658 0.1% 881


1.0%

1.1% 1.1%

1.0%

PBT 735 1,360 -45.9% 689 6.7% 1,928 1,611 19.7% 2,611


3.4%

3.2% 2.7%

3.1%

Tax 364 696 -47.7% 248 46.8% 811 630 28.9% 1,001

ETR% 49.5% 51.2%

36.0%

42.1% 39.1%

38.3%

Net Profit 372 665 -44.1% 441 -15.8% 1,117 981 13.9% 1,610

Net Profit (Adj.) 372 (251)

441

1,114 66

695


2.2%

1.9% 1.6%

1.9%

EPS (Diluted) 1.45 2.58

1.72

4.36 3.81

6.26

EPS (Adj.) 1.45 (0.97)

1.72

4.35 0.26

2.70

Key highlight in KEC’s 9MFY16 performance includes improvement in margins and reduction in interest

cost. Further order book remains strong on YoY basis providing visibility for future growth.

Revenue - In nine month ended December 2016, consolidated revenues remained flat YoY, largely due to soft

commodity prices that impacted domestic orders with price variable clause. This drop was countered by higher

execution of fixed priced international orders.

Operating profit - Consolidated EBIDTA margins improved 216 bp YoY to 7.7% in 9MFY16, led by positive

contribution from SAE, sustained high profitability of other international operations and improvement in

profitability of new verticals.

PAT- After adjusting for the impact of one time asset sale of Rs 1,347 million in the 9MFY15 performance, PAT

has reported a significant jump over last year. Operationally, it is improvement in margin and marked reduction in

interest cost (both absolute as well as % to sales) that has aided net profit growth in 9M ended on December 2015.

Order book- The Order book stands at Rs 93.7bn, up 7.0% YoY and order intake improved 14% YoY to Rs 61.5

bn, led by improvement in finalization of orders. Order pipeline remains healthy with KEC as L1 supplier in Rs 30

bn worth of orders, which is expected to be awarded in Q4FY16.

17

Quarterly Financial Snapshot– Standalone

Particulars


YoY

(%) Q2FY16

QoQ

(%)

9M-

FY16

9M-

FY15

YoY

(%) Remarks

Net Sales 16,259 16,443 -1.1% 14,321 13.5% 44,540 47,015 -5.3% Domestic orders

have price

variable clause

hence RM cost

drop had to be

passed on,

resulting in

YoY sales drop

Expenditure 15,001 15,505 -3.2% 13,823 8.5% 41,830 44,911 -6.9%

Raw Material 7,463 8,554 -12.8% 7,533 -0.9% 21,555 25,753 -16.3%

%Net sales 45.9% 52.0%

52.6%

48.4% 54.8%

Employee Cost 1,012 888 13.9% 1,010 0.2% 3,012 2,693 -94.3%


7.1%

6.8% 5.7%

Op. & Manu. 6,527 6,063 7.7% 5,280 23.6% 17,264 16,466 -36.1%

%Net sales 40.1% 36.9%

36.9%

38.8% 35.0%

PBIDT (Excl OI) 1,258 938 34.1% 498 152.8% 2,710 2,104 -

91.8%

Improvement in

new vertical

performance

(incl. railways,

cables and

water) and

stable domestic

T&D ops. led to

margin

expansion


3.5%

6.1% 4.5%

Other Income 348 1,354 -74.3% 723 -51.8% 1,090 1,410 -47.6%

EBDITA 1,606 2,292 -

29.9% 1,221 31.6% 3,800 3,514 8.1%

%Net sales 9.9% 13.9%

8.5%

8.5% 7.5%

Interest 554 674 -17.9% 589 -5.9% 1,724 1,921 -10.3% Improvement in

op performance

and debt

rationalization

led to interest

cost savings


4.1%

3.9% 4.1%

Depreciation 185 181 2.1% 173 6.6% 541 527 -85.0%


1.2%

1.2% 1.1%

PBT 868 1,437 -

39.6% 458 89.2% 1,535 1,066

-

44.5%


3.2%

3.4% 2.3%

Tax 305 534 -42.9% 128 137.7% 557 398 -24.5%

ETR% 35.2% 37.2%

28.0% 154.3% 36.3% 37.3%

Net Profit 562 902 -

37.7% 330 70.4% 979 669

-

37.3%

Better margins

and interest cost

saving led to

PAT growth %Net sales 3.5% 5.5%

2.3%

2.2% 1.4%

Net Profit (Adj.) 562 (13)

330

975 (246)

Note: Other income higher in standalone entity due to dividend payouts from the JVs and subsidiaries

18

Quarterly Financial Snapshot– Subsidiary

Particulars


YoY

(%) Q2FY16

QoQ

(%)

9M-

FY16

9M-

FY15

YoY

(%) Remarks

Net Sales 4,329 4,090 5.8% 5,889 -26.5% 15,037 12,452 20.8%

Inc. execution

of fixed cost

international

orders

Expenditure 3,978 3,982 -0.1% 4,838 -17.8% 13,182 11,284 16.8%

Raw Material 1,380 2,384 -42.1% 2,710 -49.1% 6,364 6,727 -5.4% Reflecting the

drop in

commodity

prices %Net sales 31.9% 58.3%

46.0%

42.3% 54.0%

Employee Cost 545 562 -3.0% 598 -8.9% 1,731 1,733 -0.1%

%Net sales 12.6% 13.7%

10.2%

11.5% 13.9%

Op. & Manu. 2,052 1,037 97.9% 1,531 34.1% 5,088 2,825 80.1%

%Net sales 47.4% 25.4%

26.0%

33.8% 22.7%

PBIDT (Excl OI) 352 108 225.8% 1,050 -66.5% 1,854 1,167 58.8% International

orders are

fixed priced

in nature

hence

benefitted

from low

commodity

prices also

SAE

contribution

turned

positive


17.8%

12.3% 9.4%

Other Income (326) (4) na (686) na (999) (34) na

EBDITA 26 104 -75.1% 364 -92.9% 856 1,133 -24.5%


6.2%

5.7% 9.1%

Interest 121 135 -10.5% 96 25.9% 345 457 -24.5%


1.6%

2.3% 3.7%

Depreciation 37 45 -17.1% 38 -0.5% 117 132 -10.8%


0.6%

0.8% 1.1%

PBT (132) (76) na 231 na 393 544 -27.8%

%Net sales -3.1% -1.9%

3.9%

2.6% 4.4%

Tax 59 161 -63.8% 119 -51.0% 255 232 9.8%

ETR% 1.4% 3.9%

2.0% 32.4% 1.7% 1.9%

Intercompany

adjustments

and higher tax

resulted in

PAT drop

Net Profit (191) (238) na 111 na 138 312 -55.8%

%Net sales -4.4% -5.8%

1.9%

0.9% 2.5%

Note: Other income higher in standalone entity due to dividend payouts from the JVs and subsidiaries, hence it is a negative

figure in subsidiary account

19

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