KEC International Limited (KEC) is a global infrastructure Engineering Procurement and Construction major. It has presence in the verticals of Power T&D (Transmission & Distribution), Cables, Railways and Water & Renewable.
Q4FY20 revenue de-grew marginally by 4.4% YoY to Rs3,671cr which is in line with our estimates, supported by robust execution in railway & SAE tower business. SAE revenue grew by 39% YoY to Rs444cr & Railway (36% YoY to Rs861cr). T&D business declined by 17% YoY while civil business grew by 6% YoY. During March 2020 KEC had lost collection of Rs300 to Rs400cr, which were cleared in April 2020. We expect railway & SAE business continue to outperform due to improved traction in order inflow and approvals for EPC projects. KEC’s operations at Brazil & Mexico have not impacted due to Covid as sector being identified as essential services. Currently, 85% of the projects are started (with 50% of labours) while exodus of labour remain a problem. The company has not given any revenue guidance due to pandemic situation. We expect execution to pick up from H2FY21 supported by ease in lockdown.
FY20 order book (including L1) stands at Rs 24,000cr (2xFY20 revenue) provide strong visibility for coming years. Full year order inflow declined by 19.5% to Rs 11,331cr due to Covid. Orders in Civil segment improved by 286% YoY in FY20. We expect ordering activity to gain traction due to strong pipeline from Power Grid (~Rs15,000cr) railway (~Rs10,000cr) and various state electricity boards to be finalised in H1FY21. International order inflow was weak during FY20 while KEC expecting some pick up in orders from SAARC, MENA, America& Africa in FY21.
EBITDA margin declined by 29bps YoY to 10.1% despite 556bps improvement in gross margin at 556bps YoY. Rise in employee cost by 45% YoY due to ramp up in SAE execution impacted margins. Net profit was flat at Rs193cr (-0.5%) mainly on account of fall in interest cost (23% YoY) and tax rate to 28% (vs 34% in Q4FY19)
The near term outlook remains conservative due to pandemic situation while sector is likely to witness recovery from H2FY21. Going forward we expect T&D, railway & civil business will be the growth drivers. We value KEC at a P/E of 12x on FY22E EPS with a TP of Rs 329 and maintain our BUY rating.
Analyst: Antu Eapen Thomas, Geojit Financial Services Ltd., INH200000345
General Disclosures and Disclaimers: KEC International Ltd – https://bit.ly/3hTkho1
Q4FY20 revenues grew by 9% YoY, led by 7% growth in Nutrient and other allied businesses and, 22% growth in crop protection business (CPC). In the Nutrient and allied business, complex fertilizer volumes grew at 23% YoY to 5.8 Lakh tonnes. The recent lockdown did not have a large effect on sales volumes as Agriculture was classified as an essential sector by the government. 6 new products were launched in the crop protection segment during the year and these were met with a positive response from the market.
During the quarter, EBITDA margins expanded by 380bps to 13.6% compared to Q4FY19, as the expansion of the Phosphoric acid plant during Q3FY20 led to a lower cost of production for CRIN. As a result, net profit grew at 113% YoY to Rs.239cr with net profit margins at 8.3% vs 4.2% in Q4FY19. During the year EBITDA margins grew to 13.2% vs 10.9% in FY19 as an increase in the sale of high margin complex fertilizers, de-bottlenecking of plants and soft raw material prices aided margin expansion. With the company’s focus on new launches in the CPC segment and lower raw material costs, we expect EBITDA to grow at 13% CAGR over FY20-FY22E. The company continues to have a strong balance sheet with a debt/equity ratio of only 0.4.
The company expects the recent ban on the pesticide molecules to be overturned. Most of the molecules mentioned in the ban are not banned in other countries and farmers have been using these pesticides for the last 30 years. One of the banned molecules, Malathion, which is marketed by CRIN has been proven to be effective against locusts, which has been spreading rapidly in North India over the last few weeks. Capex of Rs.300-400crs is being planned for the next few years for the development of new CPC products and specialty nutrients, further de-bottlenecking of plants as well expansion of the retail segment.
IMD has predicted a normal southwest monsoon this season, which will aid in the offtake of fertilizers for the company. We believe CRIN’s focus on improving its bottom-line through the increase in R&D spends, new product launches in the CPC segment, and backward integration as well as increasing its volume of complex fertilizers should see net profit grow at a CAGR of 12% over FY20-FY22E. The recently announced Agri schemes to replace archaic laws, reform Agri marketing, raise farm-gate prices and unify domestic markets can further boost demand for fertilizers in the long term. Hence, we recommend a “Buy” and value CRIN at 18x FY22E EPS with a target of Rs.821.
Analyst: Joe V Samuel, Geojit Financial Services Ltd., INH200000345
General Disclosures and Disclaimers: Coromandel International Ltd – https://bit.ly/3fT2RGe
Jyothy Laboratories Ltd (JLL) is an Indian FMCG player with products across Fabric care, Dishwashing, Mosquito repellents & Personal Care. The company’s brands include Ujala, Henco, Mr.White (fabric care), Maxo, Exo, Maya (Home care), Margo, FA (personal care) and Exo, Pril (Dish wash). In addition, the company operates a chain of laundries through its subsidiary, JyothyFabricare Services Limited (JFSL) and provides specialised fabric care services across multiple cities in India.
For Q4FY20, revenue de-grew by ~24% YoY on account of nationwide lockdown due to COVID-19 pandemic. ~Rs.150cr sales was impacted due to this lockdown as generally the dealers stock household Insecticides(HI) products in anticipation of onset of high mosquito infestation season from April and stocks of ‘Soaps’ anticipating a higher demand with the arrival of Summer season. HI and Personal segments declined by the most (~36% YoY each) while Fabric and Dish wash segments de-grew by 17% YoY and 21% YoY respectively. As per the company, despite this lockdown led restrictions, April and May have seen positive growth. This is because; ~85% of the product portfolio comprises of essential and hygiene products which is supporting sales. The company continues to focus on its innovation strategy and has launched liquid hand-wash and Sanitizer under the Margo brand during this COVID period. The strong focus on hygiene products coupled with strong penetration in rural markets will also help the company to support growth. The expectation of normal monsoon will support the rural demand. We downgrade our revenue estimates to factor demand slowdown due to the impact of COVID-19 on the economy and expect ~7% CAGR in revenue over FY20-22E.
EBITDA margin declined by 550bps YoY in the quarter to 10.3% and EBITDA de-grew by 50%YoY. This was largely due to the drop in sales along with fixed costs like staff cost (80% of the production from own plants) and pre-committed advertisement spends. Now, with sales are back to pre-COVID levels along with reduction in crude prises, the company expects the EBITDA margins to be in the range of 15%-16% for FY21E. Focus on lower unit packs which do not have any trade schemes (higher margins) now contributes ~35% of total revenue which will also support margin improvement.
The COVID-19 led disruption in the economy is expected to have impact on consumption demand. However, the essential and hygiene related products will be beneficial to the company. JLL continuously invest in brand building for its power brands through advertisements and promotions, which result in market share gains. Additionally, the expectation of normal monsoon will support rural demand. We lower our valuations to factor the slowdown in the economy, value JLL at 23x to arrive at a revised Target of Rs135 but maintain Accumulate rating due to recent sharp drop in stock price.
Analyst: Vincent K A, Geojit Financial Services Ltd., INH200000345
General Disclosures and Disclaimers: Jyothy Laboratories Ltd – https://bit.ly/3dx89FU
AARTI Industries Ltd (ARTO) is a global leader in Benzene based derivative products. The company has a diversified product portfolio with end users in pharma, agrochemicals, specialty polymers, paints & pigments. Its major business segment includes Speciality chemicals, Pharma and Home & personal care chemicals. Company is diversifying into Toluene & Ethylene based products, with firm off-take commitments from global chemical majors. Focus on high margin products and cost reduction through forward and backward integration led to expansion in EBITDA margins to 23.3% from 13.6% during FY11-FY20. During last 2-3yrs, ARTO is aggressively building CAPEX in various product categories with a focus on global markets. Global chemical companies are de-risking the supply chain for their raw-material by diversifying from China to India, which will benefit domestic companies like ARTO.
Q4FY20 Revenue declined by 6% YoY, as revenue from Specialty chemicals was flat and pharma business de-grew by 3% YoY. The specialty chemical business was impacted by lockdown. Supply disruptions of certain raw materials also had an impact on the revenue. Further overall revenue growth was also impacted by fall in realization due to decline in raw material prices. In pharma segment, certain high value products were impacted. Going ahead, Q1FY21E revenue is likely to see significant impact due to full impact of lockdown. The capacity augmentation is on track with an investment of Rs1,200cr, NCB capacity to increase from 75000 to 108000 MTPA. The expanded capacity will cater to increasing domestic demand and for downstream captive consumption. ARTO will continue to benefit from backward integration, expansion of product portfolio and shift in volume from China in the medium term. However, we lower our revenue estimates by 20% & 14% to factor in the impact of lockdown.
EBITDA margins declined by 160bps YoY to 20.3% due to lower than expected sales and higher cost. Specialty chemicals EBIT margins declined by 420bps YoY. Pharma segment margin continue to witness better traction largely on account of higher contribution from regulated markets and improvement in product mix with higher value addition. PAT declined by 12% YoY to Rs110cr. Considering significant impact due lockdown in Q1FY21E and overall impact for FY21E, we lower our EPS estimates by 28% & 13% for FY21E & 22E. We expect PAT to grow by 16% CAGR over FY20-22E.
In the near term revenue growth is likely to be impacted by lower volume off-take of specialty chemicals. However, we remain constructive on ARTO’s long term growth given strong capacity building focusing on global markets, backward integration and increase in downstream products. With start of execution of multi-year contracts, revival in volumes from Specialty chemicals &pharma segments and improved outlook on account issues in China, will benefit the company in the long run. We value ARTO at 28x on FY22 and upgrade to Buy from Accumulate with target price of Rs1,151.
Analyst: Anil R, Geojit Financial Services Ltd., INH200000345
General Disclosures and Disclaimers: Aarti Industries Ltd – https://bit.ly/2VenQeR