KEC International Limited (KEC.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to KEC International Limited Q3 FY '26 Earnings Conference Call. From the management, we have with us today Mr. Vimal Kejriwal, Managing Director and CEO; and Mr. Rajeev Agarwal, CFO of the company. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Vimal Kejriwal. Thank you, and over to you, sir.

Thank you. Good evening, everyone. Welcome to the Q3 Earnings Call of KEC. Our apologies for a little bit late release of results because the Board meeting just got over. I'll start with a snapshot of our financial performance for the quarter and the 9-month period, followed by a few key business highlights. We have delivered record revenues of INR 6,001 crores for the quarter, reflecting a strong growth of 12% year-on-year, led by healthy execution momentum in our T&D business across India and International. For 9 months FY '26 with a revenue of INR 17,116 crores, our growth stands at 14%. Aligned with our strategic focus, the T&D segment's contribution to overall revenues increased to 67%, up from 57% in 9 months last year. Our EBITDA has grown by 15% in Q3 and 22% in 9 months. EBITDA margins for Q3 have increased by 20 basis points year-on-year to 7.2% vis-a-vis 7% last year. The performance on EBITDA margin front reflects lower progress in Water projects, closure costs associated with the completion and delay of RODs for metro projects and delay in settlement of some of the claims. Notwithstanding the same, the EBITDA margins for 9 months have increased by 50 basis points to 7.1% vis-a-vis 6.6% last year. Our interest expenses as a percentage of revenue have reduced by 30 basis points in Q3 and by 40 basis points in 9 months, resulting in an interest cost of 2.9% for both Q3 and 9 months. We have achieved a healthy operating PBT growth of 37% in Q3 and 53% in 9 months. Operating PBT margins increased by 60 basis points in Q3 to 3.6% vis-a-vis 3% last year and increased by 80 basis points in 9 months to 3.4% vis-a-vis 2.6% last year. We have achieved an operating PAT of INR 171 crores in Q3 and INR 457 crores in 9 months. The growth in operating PBT and PAT continued to outpace the EBITDA growth. The operating PBT and PAT numbers do not include the exceptional provision of INR 59 crores made during the quarter in line with the new Labor Code. In terms of order intake, we have achieved YTD order intake of INR 19,300 crores. Notably, a substantial 70% of this order intake has been secured by our T&D business across India and the International markets. Additionally, we hold L1 positions of INR 4,500 crores, primarily in the T&D segment. We have a strong order book of INR 26,725 crores as on date. Including the L1 position, our order book and L1 stands at over INR 41,000 crores. Coming to our debt levels, our net debt, including acceptances stand at INR 6,806 crores as on 31st December vis-a-vis INR 5,575 crores (sic) [ INR 5,574 crores ] on 31st December '24. The increase in debt level is on account of strong revenue growth, increase in strategic inventory due to benign commodity prices, muted payments in the Water projects and spillover of certain large collections, which happened in the current month. The debt levels have already come down by almost INR 300 crores in January '26 and are expected to normalize by March '26 end. We continue to maintain a watch on working capital and remain committed to balance sheet strengthening. Coming to specific businesses. Our T&D business continues to be the primary growth driver, delivering revenues of INR 4,161 crores, a remarkable growth of 31% for the quarter. This stellar performance is backed by consistent execution across geographies. On the order intake, the business secured YTD orders of over INR 13,500 crores across India, Middle East, CIS and the Americas. In India, several large intrastate transmission projects, earlier executed by state utilities, have transitioned to the TBCB route driving heightened participation from private developers and utilities. This shift has led to a notable increase in private sector involvement with six new private players entering the TBCB segment during the year. As a result, the market share of private players has expanded significantly to 75% this year compared to 45% last year. Aligned with this structural change, we continue to steadily increase our order intake from private sector clients. During the quarter, the business has secured its largest ever order of INR 1,050 crores in India T&D from a reputed private player for a 765 kV transmission line and a 765/400 kV AI substation. In International, the business continues its momentum with multiple L1 orders across the Middle East and Africa. We expect these L1s to get awarded in Q4. In SAE, the business achieved revenues of INR 525 crores for the quarter, reflecting a robust 70% growth. During the quarter, the business secured a few large tower supply orders in Mexico Stock U.S., signaling a clear uptick in the North American market. On a YTD basis, SAE has secured order inflows of approximately INR 1,250 crores for the supply of towers, hardware and poles across the North America and Brazil. Consequently, the business now has a robust order book and L1 position exceeding INR 2,600 crores, providing strong revenue visibility going forward. Capacity expansion initiatives are progressing well. Following successful capacity enhancements at our plants in Dubai, Jaipur and Jabalpur, the expansion of our Butibori facility in Nagpur is expected to be completed by March '26. We have also invested small amounts for expanding our hardware and manufacturing facilities in Brazil. These expansions will further strengthen our ability to cater to rising demand for transmission infrastructure across domestic and international markets. The overall tender pipeline in T&D continues to be healthy in both domestic and international markets. In India, peak power demand continues to rise with record highs recently and sustained growth expected driven by economic expansion, electrification and changing weather patterns. With transmission increasingly emerging as a critical bottleneck amid rising grid congestion, there is a heightened policy and execution focus on strengthening transmission infrastructure, supported by the government's emphasis on renewable evacuation corridors, green transmission and interregional interconnections. This is translating into a robust multiyear pipeline of opportunities for the sector. I'm actually pleased to announce that yesterday, we commissioned a large transmission line, Ahmedabad-Navsari, ANTL from Ahmedabad to Navsari, a large part of it. We also commissioned the Ahmedabad substation and the power is from Navsari substation, which has also been built by us. And as of today, almost 2,600 megawatts of power started flowing in this line, mainly from the Khavda renewable part. Coming to the International front, the market outlook remains strong and encouraging. The Middle East continues to be a key growth engine with significant opportunities across Saudi Arabia, UAE and Oman. At the same time, we are witnessing a clear pickup in opportunities across Africa and the CIS region. Africa, which experienced a slowdown post-COVID, is now seeing a gradual revival with multiple tenders coming to the market. In addition, demand across the Americas remains robust, particularly in Brazil, Mexico and the U.S., driven by requirements for towers, and hardware and poles. With an order book and L1 position in T&D of over INR 26,000 crores, we are confident of delivering sustained and significant growth in this business. In Civil, the business continued to strengthen its order book with multiple orders of over INR 4,000 crores in the Building & Factories vertical from reputed clients. During the quarter, the business has achieved success across hospitals, thermal power projects, metals and mining and residential building segments, including an order for additional civil and structural work of 150-megawatt thermal power plant from a prominent private sector player, two orders from a leading steel manufacturer for execution of upstream and downstream facilities, a luxury villa development project from one of India's largest real estate developers. The business is also well placed for securing orders for a few greenfield hospital projects. The business delivered revenues of INR 923 crores for the quarter. The revenues could have been higher, but for labor constraints, delayed release of work front in some projects and slower release of payments in the Water projects. While the labor situation is gradually improving, it remains below optimal levels. We continue to adopt a calibrated approach to execution in Water projects given the current payment scenario in this segment. With a large order book and L1 position of over INR 10,000 crores, gradual improvement in labor availability and expected collections from Water projects, we expect that the Civil business will deliver good growth in the coming quarters. The Transportation business recorded revenues of INR 349 crores for the quarter. During the quarter, the final section of the Ahmedabad Metro Phase 2, in which KEC executed the ballastless tracks, BLT works was flagged off by the Honorable Prime Minister. The business continues to focus on the Train Collision Avoidance System, TCAS projects under KAVACH in partnership with our JV partner. The business has successfully implemented KAVACH across 611 route kilometers and is currently deploying the KAVACH system on an additional 1,836 route kilometers of the railway network. With the government's continued focus on railway safety, modernization and indigenization initiatives such as KAVACH, are expected to see wider deployment across the rail network over the medium term. We expect to secure additional orders in this segment. The business is also well placed to secure orders in the Automatic Block Signaling, ABS segment that increase the railway line capacity through automation. We are actively pursuing international opportunities, especially in the MENA region. With an order book and L1 of over INR 3,000 crores, our priorities remains clear: accelerate completion of ongoing projects, optimize working capital and selectively bid for high-quality margin-accretive opportunities in both domestic and international markets. Our Cables & Conductors business has achieved healthy revenues of INR 556 crores, a strong growth of 37% year-on-year. The profitability of this business is also witnessing consistent improvement driven by better product mix and cost optimization. Notably, it has also achieved its highest ever profitability for the 9-month period of this year. The business continues to witness steady inflow of orders for supply of cables and conductors. Our capital investment for E-Beam and Elastomeric cables is progressing as planned. And we expect production for Elastomeric cables to commence by the end of this financial year. Our Renewable business has achieved revenues of INR 122 crores. In a significant development, the business has forwarded into the Wind Energy segment with a breakthrough order for a 100-plus megawatt wind project in Southern India from a renowned private developer. The execution of the existing 500-megawatt solar projects in Karnataka and Rajasthan are progressing well towards completion within this quarter. We continue to bid for select opportunities in solar, wind and BESS. We are well placed to secure a few more orders in Renewable in Q4. The Oil & Gas pipeline business has secured its third international order for a pipeline laying project in the Middle East. Given the subdued domestic tender pipeline and heightened competition, the business continues to strategically focus on expanding its global footprint. We expect the upcoming union budget to introduce supportive measures that further accelerate infrastructure development, particularly in power transmission, renewables and transportation segments. To summarize, with a strong focus on execution, expanded capacity, a robust and diversified order book and L1 of over INR 41,000 crores and a current tender pipeline of over INR 180,000 crores. Particularly in T&D and Civil, we are well positioned to deliver sustained profitable growth in the coming quarters. Thank you. We are now open to take questions.

[Operator Instructions] The first question is from the line of Balasubramanian from Arihant Capital.

On the Transportation side, we have seen pressures on the revenue side as well as the order book inflow is also muted. And I just want to understand how this segment is being repositioned and what is the strategy to regain momentum? I think earlier, you mentioned about focusing on technology-led projects like KAVACH, TCAS and strategically away from low-margin field work. I just want to understand, how the mix will change over the next 3 to 5 years timeframe? And if you could share more details about Transportation segment side?

So the strategy is that we will focus on completing the existing legacy projects so that we can realize our cash flows and also the various claims which we have in the system. We have clearly defocused on the Civil projects in the country, because of intense competition. In some tenders, we have seen 13, in one of them, I saw, 41 bids coming in, mainly from local, I'll say, road contractors because of a slowdown in the, I'll say, NHAI business. So our focus has been on, as I talked about KAVACH, so some more orders are expected to become in KAVACH maybe within the next couple of weeks or so. Then we are focusing on PSI, which is Power Supply, as well as on the Automatic Signaling, ABS. Those are three, four areas where we are working on. On the metro side, we are looking at BLT as well as Power Supply and also third railway line electrification. The other piece here is on the international, we have started bidding. I'll not say aggressively, but we have started bidding especially in the MENA region. So, a couple of countries are where we have a large T&D presence and focus are the countries where we are bidding. So, looking at the revenue and order book, we have very clearly -- and I'll say it's a very conscious decision to degrow the business for a couple of years till we get out of the old projects. This year, we are, I think, L1 orders are of around INR 700 crores, INR 800 crores already. We may get a few. We are L1 in a large private sector railway siding contract also. So, the focus is that we stay away from projects which require large block work or working on existing high-density railway lines. We do expect that in the coming budget, there is a talk of high-speed -- new high-speed railway corridors coming, which would be new lines and all that, not on existing, which is where you require blocks. So, we are waiting and watching. We are not very aggressive on this business, at least for the next 1 year.

Okay, sir. Sir, currently, we are executing five HVDC projects and also one another project [ from another ] developer. What is the total HVDC opportunities in India and internationally and how we are going to take a leverage on that?

I don't think I have the number on what is the total opportunity as such, but there is a talk of, I think, two more HVDC projects coming in India, one in the South and one in Rajasthan. And there is a large HVDC project under bidding right now in Saudi. Typically, each one of them is around INR 25,000 crores, typically. I don't know the exact value of each of these projects, but they will be -- so if you add three of them, there'll probably be INR 75,000 crores or more.

Okay, sir. And sir, my last question on Civil only data center pipeline is INR 2,000 crores. And how much we are bidding, entire pipeline or like what is the expected win rate and margin profile for data center project? And how it is aligning with our building and factory side? And secondly, I think we have entered wind energy with 100-plus megawatt order. And we are also bidding for solar and battery storage side. And currently, the government is planning to open up -- opening up for China or other countries. How this landscape is changing, especially for renewables and how the landscape will change, especially for renewables in the next 3 to 5 years?

So if you look at China, we are an EPC player and we don't compete -- no Chinese EPCs do not compete in India. We are actually happy if the government opens it up. Because it eases out the supply chain constraint about which I've been talking every quarter. So to me, as an EPC, I'm very happy if that happens because today, a typical substation project, which used to take 12 months or so is now going into 18 to 24 months. So if things start happening, we are generally happy about it, especially on the T&D side. We don't take any module responsibility. So whether the Chinese modules they are coming, they continue to come on, will not have any impact as far as we are concerned. On data center, we have executed five data centers till now, and we are actively bidding for more data centers. I think the issue with data centers, what we are finding is that most of the data center orders are getting split across various parties. So there's no -- although the entire cake appears to be very big, but what comes in bids are very small slices of it. So, we are looking at it and choosing and deciding what segments to play. Right now, we are bidding for -- in some cases for Civil, in some cases for Civil plus MEP. We think it is going to be an exciting sector. But as of now, there have been large announcements, but all these need to get translated into hardcore tenders and all that. Right now, there are very few tenders open in the market. But I think it will open up. So I don't think we are too much worried about it. It will grow definitely, yes.

The next question is from the line of Vaibhav Shah from JM Financial.

Yes. Sir, firstly, on the Civil side, what would be our JM exposure right now in terms of order book and receivables?

So, our total exposure in terms of order book would be roughly around INR 1,400 crores. Okay? And AR would be around INR 900 crores, which was I'll say virtually similar to last year, except it has gone up by INR 7,500 crores or so. So as mentioned earlier, what we have been doing, Vaibhav, is that it's almost like a cash and carry. [Foreign Language] So whatever money we get and we are exposed to two states only, Orissa and MP. And we have generally been getting money from both of them, not to the extent we want them to pay. But whatever they pay, that is a sort of, I'll say, investment we are doing in the projects.

So sir, if you look at our order backlog of INR 11,000 crores from the Civil segment, if I remove this INR 1,400 crores, it will be roughly around INR 9,000 crores, INR 9,500-odd crores, if I remove the JJM part. So is that portion, which is roughly around 10%, 11% of the order book impacting the execution so much? Or...

It will impact. Because what happens is in the Civil piece, generally, the execution cycle is pretty fast. So if some orders don't get -- let's say, don't get kick started early. And early part also what happens is you do RAPs and other things, so the revenues in the early part of projects are pretty high. So since some of the projects have got delayed because of non-availability of front, it has impacted. Plus I think I'd say, INR 400 crores, INR 500 crores impact would be from our Water business. So in all, if you just want to take a ballpark number, maybe Civil could be probably a INR 1,000 crore impact on the revenues in terms of the overall number.

Okay. Sir, for the entire year, last year, we did around INR 4,500 crores of revenue from Civil. So this time, we may see a decline of roughly 15-odd percent?

I don't know the exact number. There will be a marginal decline, okay? I don't think it will be a significant decline, but there could be some marginal decline.

Okay. Sir, secondly, on the margin front, you are guiding for a 100 bp improvement on a Y-o-Y basis for the entire year, for FY '26. So the first 9 months margin is roughly around 7.1%. So how do you see this target for the entire year now?

So I think the margins will definitely come down the way things are happening. Okay? Because of the slowdown in Water, which is obviously a much higher margin and some other newer projects plus I think the way we had expected that our legal where arbitrations and cancellations, et cetera, were going on. So since they have been taking much longer than what we have, so we have also, based on prudence, have started providing for some of these numbers, which earlier we had thought that we will be able to get the orders and close the books accordingly. So I think right now, if you look at -- look at the numbers, probably will be anywhere between 7% to 7.5%. Okay? We are hoping that it goes to 7.5%. But today, I don't have the confidence to tell you that it will be 7.5. It should be between the two numbers. So I think what we have achieved till now, 7.1%. And maybe there could be some improvement in Q4. But overall, numbers could be between 7% to 7.5%.

In '27/'28, it should be around 9%, which you were targeting earlier or...

I think it's too early right now to say. I don't know whether we can maintain 9%, but I think it's a little bit early. Maybe when we do the annual accounts, we'll be able to look at the numbers, but it will definitely be better than what we are achieving this year.

And sir, lastly, on the debt side, we maintain our target of roughly INR 5,500 crores of debt by the year-end?

I think so. I think, honestly, we have been talking internally that we should try to reduce it further, but I think INR 5,500 crores is a safe number. We will definitely achieve that number.

And the working capital days?

[Foreign Language] Rajeev?

110 to 115 days.

1110 to 115 days what Rajeev is saying.

The next question is from the line of Parikshit from HDFC Securities.

Congrats on a decent quarter. So my question is on debt. So I mean, if I see quarter-on-quarter, the execution has largely been flat. And despite that, our debt has gone up. So any particular reason why that is going up given that we have not seen any ramp-up on the execution on quarter-on-quarter basis?

[Foreign Language]

[Foreign Language]

I think, Parikshit, what has happened in quarter-on-quarter?

INR 16 crores...

Quarter-on-quarter, I think it's roughly around INR 300 crores. INR 300 crores debt. I think the only reason why that happened was that there were some large receivables from Saudi, which got moved into the first week of January. So, we have already brought our debt down by INR 300 crores. So, we are actually now back at the September numbers.

Okay. Secondly, I mean, on the margin, we are -- we have reduced our guidance. I mean, last quarter also 8% to 8.5% -- you have said 8% and now we're going to 7%, 7.5%. I know there are pressure. But just on this commodity increases, which we have seen in copper and other material, largely in copper, so how does it impact our margins for next year? How are we covering the risk on the commodity side? So help us understand that how are you hedging this?

So, Parikshit, on copper, we hardly have any exposure, except in our Cable business. And Cable business is 100% hedged. So there, we have a very clear policy that the moment we take an order, we hedge it. Okay? So as far as copper is concerned, I don't think we have any exposure, maybe something minor here and there, but you can take it as good as not having an exposure. In fact, to me, if my Cable team is able to get more manufacturing clearance and all that, the revenues may grow. Because then it will be at a much higher copper than what it was last year. So, I don't see any impact of copper on my numbers. Yes.

Sir, just coming back a little bit, I think, more on the margins, we have been highlighting in every quarter that now the legacy projects and the low margin legacy projects are getting over. So now what has come back is hitting us again on the margins? And do you think that there could be pressure on margins will continue for some more quarters?

So I think, Parikshit, what is happening is that we have been honestly very a little bit unhappy with the delays in the closure. We were expecting that gradually projects will get closed. Like we have closed at least, I'll say, 10% of our railway projects, overall numbers, I'm just saying another 20% will close in this quarter. So what is happening, and I'll give you a simple example. We take a project and we expect that the project will be closed because the client has agreed for descoping a part, which is not executed. But now the client comes back and says, no, no, I want you to execute. So you are stuck there for another 6 months. So things like that are happening. I have got three metro projects where the wire ducts are ready, CMRS has been done, ready for commissioning. Unfortunately, they have not been inaugurated. So you continue to keep on maintaining them and spending money of INR 15 crores, INR 20 crores a month. Okay? They'll all get into claims. [Foreign Language] So right now, we have made provisions for that. So unfortunately, there are issues which are hitting, which are something which you would not have predicted saying that this will -- what will come. And ultimately, we are running doing around 270, 275 projects. So, some way or the other, you keep on -- you do get some surprises. I don't think we are happy downgrading our, I'll say, estimates. But what is happening is what is happening. So we have to tell you this is what is there. When last time we said 8%, we were very pretty confident that we'll achieve 8%. But now seeing what has happened and the delay in some of the projects which are -- like as I said, Water. Water is a double-digit margin project. Now if it's not executing, that's impacting some of the newer projects, which have got delayed. Like I'll give a simple example. I've got a couple of projects in NCR. Now because of a little bit of some earthquakes which came and all that, the seismic zones have been changed, the design parameters have been changed. So all those projects have been on hold. Because the developers are redesigning all the projects. So, there are various reasons. One is a little bit delay in closure of old projects and also a delay in start-up of more profitable projects where the revenues, in some cases, have come slower than what we were expecting. I think basically, those are the two reasons of that. However, I would like to assure you that our new orders or the current order book is reasonably profitable, which gives us the confidence for these numbers. The other thing what you should also look at is one is EBITDA, but you should also look at the PBT and all that. So if you look at that interest cost, while it has not come down in absolute numbers, as a percentage, it has been going down. So at the end of it, 30%, 40% increase is happening on the -- below the line also. The other piece, I think, is we discussed Civil and I did say that we are run short of INR 1,000 crores of revenue because of various reasons. This has also led to an under recovery of overheads. That's another one piece which is happening for which now we are running a special program and all that to see how do we cut down costs, et cetera. But it's taking its time. I hope I'm clear, Parikshit.

So just -- just to summarize, I think one way you are getting impacted on Railways and Civil where your working capital is blocked and your debt is bloated up. And secondly, the margin pain points continue in these two segments, right? So, on a normalized basis, so if one has to see -- if these two headwinds are behind us, so what kind of margins on the core business [indiscernible] one should look at while [ marking ] the margins?

So if you're asking for margins on T&D, then they are -- the question was not very clear to me, but if you're asking margins on T&D, then we'll be -- we are in double-digit margins.

So my question was excluding all the same [indiscernible] headwinds related to metro projects and some part of the civil projects. So on a core basis, what kind of margins you would have reported if the headwinds are not there?

Then you will be closer to 9% to 10%, very clearly.

And when do you expect to start hitting it on a quarterly basis? Are we two quarters away from that or three quarters away from that?

If you're looking at 9% to 10%, then I can always say FY '28. But that's why the earlier question I did not answer for FY '27, what your margins are, but I said we will definitely be higher than this. Okay? 9% to 10%, I need to clean up that entire closure of all the projects of -- mainly more of railways and also some part of the civil metro projects which are there, which are now getting commissioned. So I think that will get cleaned up. So I think by FY '28, we'll definitely be at -- I don't know whether it's 9% or 10%, whatever number we are talking. But next year, it will be better than what we are talking. This year, we said 7% to 7.5%, next year, I'm clearly saying it will be better than that. Number, I think in a couple of months, we'll be able to give an exact number of what we expect to achieve.

The next question is from the line of Amit from PL Capital.