KEC International Ltd (BOM:532714) (Q1 2027) Earnings Call Highlights: Resilient Revenue Growth ...

Negative Points

• KEC International Ltd ( BOM:532714 ) faced significant challenges in Q1 FY27 due to geopolitical disruptions in the Middle East, leading to supply chain and logistics issues, elevated freight costs, and slower execution on certain projects.

• The company experienced delays in the finalization and award of new orders in the Middle East, impacting order intake conversion, despite strong tendering activity.

• Profitability was impacted by delays in legal closure of disputes and settlement of claims in transportation and metro projects, with the Civil and Transportation segments reporting negative margins.

• The company faced labor shortages during the quarter, particularly in the Civil segment, due to the election period, which slowed execution and impacted revenue growth.

• Calibrated execution of water projects due to delays in payments from customers (Jal Jeevan Mission) affected performance, with significant receivables of INR800-900 crores, of which INR400-500 crores are overdue.

• The company has significant stuck receivables from Afghanistan (approximately INR300 crores), which were expected in Q1 but have been delayed to Q2 or Q3, impacting cash flows and debt reduction.

• Higher inventory levels due to delayed dispatches from the Dubai factory and raw material storage amidst Middle East disruptions increased working capital requirements.

• The standalone performance was weak, with EBITDA margin declining to around 4% and PAT negligible, primarily due to negative margins in railways and civil segments.

• The company expects Q2 FY27 to remain challenging, with margins not expected to improve significantly until Q3, and management has not provided specific margin guidance for the year.

• The company faces ongoing headwinds in India T&D due to right-of-way issues in states like Rajasthan and Gujarat, which are impacting execution and revenue growth.

Q & A Highlights

Q: What caused the sharp decline in standalone EBITDA margins to around 4% in Q1, and when can we expect a recovery? A: Vimal Kejriwal (MD & CEO) attributed the weak standalone performance to negative margins in the transportation and civil businesses, which are primarily in the standalone entity, unlike the higher-margin T&D business which is largely in the consolidated entity. He noted that while Q2 will see some pickup, it will still be impacted by heavy rainfall in Gujarat. He expects margins to inch up from Q3 onwards, but does not foresee a return to double-digit margins in FY27. He stated that high single-digit margins should be achievable in FY28.

Q: Can you provide details on the stuck receivables from Afghanistan and the Jal Jeevan Mission (JJM) projects, and the roadmap for working capital reduction? A: Vimal Kejriwal (MD & CEO) stated that total receivables from Afghanistan and JJM are around INR800-900 crores, with INR400-500 crores overdue. The JJM dues are split between Odisha and Madhya Pradesh, and they have already received INR110 crores in July and August. Afghanistan receivables are around INR300 crores, expected from ADB, and are now anticipated in Q2 or Q3. Rajeev Aggarwal (CFO) added that the company is targeting a debt reduction of INR1,200 crores for the year, from INR6,700 crores to INR5,500 crores, leveraging collections from Afghanistan, JJM, project closures in Saudi Arabia, and railway claims.

Q: What is the impact of the Middle East conflict on your order book and execution, and what is the revenue growth outlook for the full year? A: Vimal Kejriwal (MD & CEO) explained that the Middle East accounts for 25% of the order book, split equally between Saudi Arabia and UAE. While on-ground execution is near normal, the company faces challenges with supply chain, logistics, and elevated freight costs. This has led to a deferment of around INR300 crores in revenue for the quarter. Despite this, he maintained the full-year revenue growth guidance of 12-15%, as the deferred revenue is expected to be recovered in subsequent quarters.

Q: What is the current status of the loss-making projects in the transportation and civil segments, and when will they be completed? A: Vimal Kejriwal (MD & CEO) clarified that the losses are primarily from four old metro projects (two DMRC and two Chennai Metro) that are completed but awaiting commissioning by the client. The company is incurring maintenance costs of almost INR10 crores per month per project. He noted that these projects are not in the order book as they are complete. He expects Q2 to remain at a similar level, with improvements from Q3 onwards as these projects get commissioned and new profitable orders ramp up.

Q: Can you provide an update on the SAE Towers business, including capacity, order book, and margins? A: Vimal Kejriwal (MD & CEO) stated that SAE Towers is operating at near 100% capacity, with a revenue potential of around INR2,000 crores based on current fixed assets. The order book and L1 position is at a record level of over INR3,800 crores, which will be delivered over the next 1.5 to 2 years. He confirmed that the business is currently generating close to double-digit margins.

Q: What is the opportunity in the data center EPC business, and what is the company's strategy to win orders? A: Vimal Kejriwal (MD & CEO) noted that while the market is large, it is fragmented, with developers often splitting orders into smaller packages. KEC's right-to-win is its ability to offer both civil and MEP (Mechanical, Electrical, and Plumbing) together. He expects some wins in the next quarter. He also highlighted a more interesting opportunity in the T&D segment, where data center developers are seeking power evacuation lines, as evidenced by a recent order win.

Q: What is the outlook for the cables and conductors business, and what is the margin potential? A: Vimal Kejriwal (MD & CEO) reported that the business achieved 57% year-on-year revenue growth in Q1. Current margins are around 5%, which is 200 basis points below the market. The company is investing in specialty products like elastomeric cables and an EBM plant, which are expected to improve product mix and support margin expansion. He stated that with current assets, the business can achieve revenues of around INR3,000 crores.

Q: What are the key levers for reducing working capital and debt in FY27? A: Rajeev Aggarwal (CFO) outlined several levers: 1) Collection of INR300 crores from Afghanistan; 2) Collection of INR300-400 crores of overdue receivables from JJM; 3) Release of retention money (INR300-400 crores) from project closures in Saudi Arabia and the Middle East; 4) Realization of INR150-200 crores from railway claims; and 5) Reduction of inventory levels by INR200-250 crores. These combined efforts are expected to reduce net debt to around INR5,500 crores by March 2027.

Q: How is the company addressing the challenges of rising input costs and freight rates in the Middle East? A: Vimal Kejriwal (MD & CEO) stated that the company is engaging with customers to recover additional costs incurred due to the conflict. He noted that procurement and project execution may be deferred until customer alignment is achieved on cost recovery. He also mentioned that the company has hedged a significant portion of its commodity exposure, particularly for steel, and does not see a major threat to T&D margins, which are expected to remain in double digits.

Q: What is the company's strategy for the renewable energy business, and what is the current project pipeline? A: Vimal Kejriwal (MD & CEO) reported securing new orders of INR800 crores in the quarter, bringing the cumulative capacity of solar and wind projects under execution to over 600 MW. The company recently commissioned 1 GW solar projects for Ircon and NTPC. He expressed confidence that the renewable business will become a significant contributor to long-term growth, with a focus on strategic partnerships with wind

For the complete transcript of the earnings call, please refer to the full earnings call transcript .