Expansion Into Transportation And Manufacturing Will Boost Future Prospects

Key Takeaways

• Strategic moves in business operations and new plant commissions are set to enhance revenue and profitability while aligning with global trends.
  
• Strong and diversified order inflows offer improved future visibility and are expected to sustain revenue growth and net earnings.
  
• Challenges like payment delays, labor shortages, and currency volatility could hinder revenue growth and margin improvement across multiple segments and regions.

Catalysts

Engages in the engineering, procurement, and construction (EPC) business.

• The successful transfer of the Cables business to a subsidiary is expected to unlock growth opportunities and create long-term value, enhancing revenue and profitability for the company.
  
• The commissioning of the new aluminum conductor plant and forthcoming production of e-beam and elastomeric cables are likely to drive significant growth, strengthening both revenue and profitability for the cables business.
  
• The strategic capacity expansion through debottlenecking programs at various plants without additional investment increases the manufacturing potential, which positions the company to meet growing demand, impacting revenue positively.
  
• The rebranding of the railways business to transportation aligns with global trends and positions the company to capture advanced and sustainable solutions in transportation, potentially improving net margins with a more diversified business focus.
  
• Strong order inflows and a healthy, well-diversified order book, along with significant secured orders and L1 positions, provide improved execution visibility and a robust future pipeline, which is expected to sustain revenue growth and improve net earnings.

KEC International Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KEC International's revenue will grow by 15.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.1% today to 4.4% in 3 years time.
• Analysts expect earnings to reach ₹14.3 billion (and earnings per share of ₹53.9) by about May 2028, up from ₹4.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹16.0 billion in earnings, and the most bearish expecting ₹11.4 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.4x on those 2028 earnings, down from 40.9x today. This future PE is greater than the current PE for the IN Construction industry at 21.1x.
• Analysts expect the number of shares outstanding to grow by 3.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.82%, as per the Simply Wall St company report.

KEC International Future Earnings Per Share Growth

Risks

• Delays in the execution of water projects due to payment issues from clients could negatively impact revenue and cash flow.
  
• Although KEC has a diverse and healthy order book, labor shortages and execution complexities, especially in the civil and transportation segments, could constrain revenue growth and affect net margins.
  
• The Brazilian currency depreciation has already impacted revenue in the SAE segment; continued currency volatility could further affect earnings and profitability.
  
• The execution of projects in politically sensitive or unstable regions such as Mexico or Brazil carries risks that could affect the company's projections, impacting both revenue and net margins.
  
• High reliance on the T&D segment for growth, while facing competitive intensity in international markets, might limit the potential for significant margin improvement, affecting overall earnings.

Valuation

• The analysts have a consensus price target of ₹946.25 for KEC International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1250.0, and the most bearish reporting a price target of just ₹801.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹325.9 billion, earnings will come to ₹14.3 billion, and it would be trading on a PE ratio of 29.4x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹698.2, the analyst price target of ₹946.25 is 26.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.