KEC International’s stock tanked 18.5 per cent intra-day on Tuesday after it reported dismal performance in the Sept quarter KEC International’s stock tanked as much as 18.5 per cent intra-day on Tuesday after the company reported dismal performance in the September quarter (Q2). However, the stock stabilised later and closed the day with a decline of 9.3 per cent. While the company significantly exceeded sales growth expectations with robust execution rate, profitability took a beating.
Consolidated sales of Rs 1,668 crore grew at a robust rate of 32 per cent (over 30 per cent for the fourth consecutive quarter), which is significantly higher than expectations of 15-20 per cent. Domestic operations (77 per cent of overall sales) saw a jump of 35 per cent in revenues. Even international business witnessed a healthy growth of 24 per cent.
However, the company’s operating profit margin at 5.2 per cent, its lowest in the last five years, tanked by 200 basis points year-on-year despite a low base (due to forex loss in the same quarter last year). This is the fifth quarter where its operating margins have fallen by nearly 200 basis points. Low margins are a result of the company venturing into new businesses like water, railways, cable and telecom procured in the previous year and aggressively bidding for power grid orders.
Ramesh Chandak, managing director of the company in the post-result investor conference call said, “Our share in PGCIL orders was just 2.8 per cent two years ago, which is very low for the largest transmission line company in the country. Hence, we booked orders aggressively. Competition has also been fierce. Orders in our new business initiatives have also been procured at five per cent margins since that was our entry level strategy.”
Lower operating margins contributed to net profit margin, which slipped below one per cent (unprecedented) due to firm interest and depreciation costs. Slipping on both these parameters has come as a disappointment from a company, which is geographically well-diversified in terms of sectors, clients and geographies.
Though growth in the company’s order inflow and order book at 11.8 per cent and 11 per cent, respectively, in Q2 was satisfactory, revenue visibility (order book to consolidated sales) has increased only marginally from 1.5 times as on FY12-end to 1.6 times as the end of Q2.
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The second half of FY13 should be better than the first half (historically the case) in the domestic market and should help the company to shore up its order book.
There could be still some margin pressure on account of legacy low-margin orders and contribution from new business (27 per cent in the total order book of Rs 9,386 crore).
Chandak clarifies, “Blended margin of new business in current order book is about four-five per cent, which we expect to improve to eight-nine per cent in the next financial year as we were in the learning phase. Also, low-margin domestic orders are getting over.”
Going forward, net margin can improve as the company gets cash in hand, which can be used to retire debt. The company has government as its largest client, accounting for nearly 75 per cent of its business and generally gets paid in the last quarter of the financial year. Providing for higher tax in the first half can also help in improvement of net margin in the second half for KEC.