Kotak Upgrades KEC International Stock to ‘Add’ Despite 60% Annual Fall

Kotak Upgrades KEC International: A Strategic Move Amidst Challenges

Despite a significant drop in stock price, Kotak Institutional Equities sees potential in KEC International’s future.

Understanding the Stock’s Recent Performance

KEC International has faced significant headwinds, resulting in a 60% drop in its stock price over the past year. Factors contributing to this decline include weak margin performance in non-transmission and distribution (T&D) segments, execution delays in water projects due to payment issues, and geopolitical tensions affecting operations in West Asia. Additionally, a seven-month debarment from participating in Power Grid Corporation of India Limited (PGCIL) tenders has further strained the company’s performance.

However, following the upgrade from Kotak and the announcement of a significant order win worth ₹1,030 crore, KEC’s shares saw a nearly 5% increase in intraday trading. This uptick reflects investor optimism, suggesting that the market may be beginning to recognize the potential for recovery and growth in the company’s operations.

Key Growth Drivers Identified by Kotak

Kotak’s upgrade is underpinned by several growth drivers that could enhance KEC’s performance moving forward. The brokerage highlighted the rising traction in the cables and wires business, which is expected to enter a multi-year growth phase. With revenue potential projected to reach ₹50 billion over the next three to four years, this segment is anticipated to grow at a compound annual growth rate (CAGR) of 30%, driven by capacity expansion and new product launches.

Furthermore, KEC is well-positioned to benefit from India’s accelerating transmission capital expenditure cycle, with the Central Electricity Authority (CEA) outlining a ₹7.9 trillion investment in transmission infrastructure over the next decade. The recently approved ₹1.86 trillion Green Energy Corridor Phase III program adds further visibility to transmission spending, positioning KEC as a key beneficiary of this domestic buildout.

Earnings Outlook and Margin Projections

Despite the positive outlook, Kotak cautioned that near-term pressure on margins is likely to persist. The brokerage projects that KEC will continue to face challenges in its transportation and civil segments, which contribute approximately 20-25% of revenues. These segments are expected to operate at weak margins due to time and cost overruns, right-of-way challenges, and delayed collections.

Kotak anticipates EBITDA margins of 6% until the first half of FY28, with a gradual recovery to 7.7% by FY29. This recovery is expected to be supported by a higher contribution from the T&D and cables segments, which are anticipated to yield better margins. For FY2027, revenue growth is projected at 10%, below management’s guidance of 12-15%, reflecting ongoing uncertainties in the Middle East.

Key Highlights

• Kotak upgrades KEC International to ‘Add’ despite a 60% stock decline.
• Recent order win of ₹1,030 crore boosts investor sentiment.
• Cables and wires business expected to grow at a CAGR of 30%.
• India’s transmission capex cycle projected at ₹7.9 trillion over the next decade.
• Near-term margin pressures expected to persist until FY28.

Investor Note: The recent upgrade by Kotak reflects a cautious optimism about KEC International’s future, driven by significant growth opportunities in the cables and T&D segments. However, investors should remain vigilant regarding the ongoing margin pressures and geopolitical uncertainties that may impact the company’s performance in the near term.