KEC International Limited (KEC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the KEC International Limited Q2 FY '21 Results Conference Call. [Operator Instructions] I now hand the conference over to Mr. Vimal Kejriwal. Thank you, and over to you, sir.

Thank you, Stanford. Good morning to everyone. I welcome you all to the Q2 earnings call of KEC. I hope that you and your family are safe and healthy. As we continue our operations during this pandemic, I am pleased to share that we have now recovered on all fronts, barring few localized issues that arise at some project sites occasionally. Coming to the performance for the quarter, we have achieved revenues of INR 3,258 crores, with a robust growth of 16% vis-à-vis Q2 last year and a growth of 48% sequentially despite Q2 being a monsoon quarter. This is a result of our concerted efforts towards accelerated ramp-up in execution, increasing labor strength and deployment of mechanization, automation and digitalization initiatives to improve productivity and quality of execution with reduced manpower. We have delivered an EBITDA margin of 9% for the quarter. The margins were slightly lower primarily due to the continued extra cost being incurred on account of COVID-19 precautions, a relatively faster ramp-up of railway and civil projects in comparison to T&D projects, especially international and steep depreciation of the Brazilian real, along with the pandemic spread, leading to a significant cost escalations in Brazil. We have achieved a PBT margin of 6% and a PAT margin of 4.4% for the quarter, primarily on the back of significant reduction in interest cost and optimization in tax costs. Our YTD order inflows stand at INR 4,366 crores, a growth of 16% over YTD last year. Our core T&D business has substantially contributed to the order inflows this year, especially from the international market. We have a strong order book of INR 19,515 crores as on September 30. Additionally, we have an L1 position of INR 3,500 crores, again, majorly from our international T&D business. Now coming to the specific businesses. Despite the intermittent issues due to localized restrictions, excessive rainfall in some regions and reduced labor strength initially during the quarter, our core T&D business as well as SAE Towers have been successful in maintaining revenues at the same level as the corresponding quarter. In SAE Brazil, the pandemic is now coming under control and operations are getting stabilized. This is being reflected in the progressive ramp-up in execution of the 3 EPC projects with one project slated to be completed within this quarter. We have also commenced work on a new EPC project in Brazil. However, the pandemic and the steep depreciation of the currency has resulted in significant cost escalations impacting the margins. As far as the Essel project is concerned, the deal is in place between the lenders and another developer and is awaiting final approval from CERC for the change in the developer. As you are aware, there has been a recent Supreme Court judgment, which has put a spanner in the working of CERC. So as soon as that is resolved, we do expect the CERC order to be out. Our railway business has clocked a revenue of over INR 800 crores for the quarter with a robust growth of 45% vis-à-vis Q2 last year, demonstrating a fast and consistent ramp-up across project sites. I'm also happy to share that in line with our strategy to diversify new segments in the railways, the business has secured the first order for a metro electrification project, which marks our entry into the technologically enabled areas of urban infra. We continue to bid for opportunities in other non-civil areas in metros such as power supply, third rail, ballastless tracks, S&T, et cetera. With the continued thrust on execution and an order book plus L1 of over INR 5,300 crores, we remain confident that railways will continue its revenue growth trajectory for this year and the next year also. Our civil business has registered a robust growth in revenues of over 4x vis-à-vis Q2 last year, backed by execution of the 2 DMRC and Kochi Metro projects. The business has also commenced work on the second project of Kochi Metro, which was secured recently. We are pleased with the physical progress achieved in all our metro projects. In line with our strategy to scale up business, with addition of new subsegments for growth, we have been successful with breakthrough orders in the FGD and warehouse space in addition to L1 positions in chemicals and water pipeline segments. We continue to bid for opportunities in warehouses, data centers, defense, water pipelines, airports, oil and gas pipelines, hydrocarbon, urban infrastructure and select industrial and residential segments. With a robust order book plus L1 of over INR 3,000 crores, along with the smooth execution of the metro and other projects, we are confident of the civil business becoming one of the major growth drivers for us going forward. Despite the muted industry scenario, our cables business has maintained the revenue at the same level in the corresponding quarter. In line with the strategic focus on development of new products, the business is on track to commercialize a few products in the second half of the year. Further augmentation of the capacities of railway catenary conductor and signaling cables is underway. We expect a reasonable growth in revenues of the business through these new products and expanded capacity going forward. The execution of the existing orders, both in the solar and smart infra are on track. Additionally, the smart infra business has secured new orders in defense, which has expanded up against the defense sector from the current civil projects to technologically advanced smart infra projects. Our net debt as on 30th September, 2020, stands at INR 2,425 crores, which is within our targeted average borrowing levels of INR 2,500 crores for the year. With concerted efforts, we have brought down our interest costs consistently for the last few quarters, both in absolute terms as well as percentage to sales. Our interest costs for the quarter as a percentage of sales has been brought down to 2.1% which is a reduction of 80 basis points vis-à-vis last year and a reduction of 18% in absolute terms. The overall tender pipeline continues to remain strong across most of the businesses. We continue to see significant traction in the tendering activity internationally, especially in the Middle East and Africa. In case of domestic T&D, the revised bidding of Green Energy Corridor projects Phase II tenders is in advanced stage with developers expected to submit their proposal within this month. In fact, some of the bids are to be submitted next week, unless extended. The bidding process is expected to be concluded in Q3. In case of railways, the tendering activity has started picking up Q2 onwards. However, we are still witnessing a delay in awards. I'm also pleased to share that our recently acquired transmission tower manufacturing facility in Dubai has started commercial production. We have already received a few orders for tower supplies from other EPCs as well as approvals from some of our existing international clients for tower supply. The dispatches from the Dubai factory have started from yesterday. With operations largely normalized and an order book plus L1 around INR 23,000 crores, we are confident of delivering a good performance in the second half of the year. Thank you very much. Stanford, we are happy to take questions now.

[Operator Instructions] The first question is from the line of Jonas Bhutta from PhillipCapital.

Congratulations on a great set of numbers. So my first question was on the tender pipeline and how you expect that to fructify given that you have a pretty strong L1 position plus what we've already declared in the first half. Now are you in a position to sort of guide us in terms of what could be the year-end inflow and where would that come from because that's -- a lot of your FY '22 growth -- or second half of FY '22 growth depends on the orders that you win over the next 4, 5 months, sir? So that's the first question.

So Jonas, if you look at the numbers, which we've just talked about, we have an order book plus L1 of INR 23,000 crores as on 30th September, okay? To me, even if I don't get a single new order, I think we have enough of order book in our backlog to take care of FY '22. At least next 6 quarters, 7 quarters, I do not expect any issue -- even if we don't get any orders. So that's point number one. Point number two is we have quoted roughly around INR 30,000 crores of orders in the last few months, some of which have been open, some of which are yet to be opened or awarded. And in the next, I'll say, 2 months or so, we have to quote another INR 25,000 crores of orders. So I don't think we are right now worried about the future of what will happen in, let's say, H2 of FY '22 or H1 of FY '23 because we have a backlog, we have our tender pipeline. I think the other point is that if you look at the tender pipeline, the tender pipeline is virtually across, whether it is international T&D, whether it is railways, whether it is even part of, I'll say, domestic T&D not too much, but in international, again, Africa, Middle East, SAARC. I think SAARC is another big player, almost INR 5,000 crores of tenders would be quoted in the next 2 months. So I think we are pretty comfortable with what is happening. I think the only discomfort, which we have is that the order awards have been slightly slow, okay? Which is why although we have a 16% growth in the order book, we would have loved to have more. Okay?

Sure. Sir, my second question was on SAE. Now the backlog for that business is down to almost INR 500-odd crores. And just wanted to understand how are you looking at that business from a 1- to 2-year perspective? Do you have large orders in the pipeline that can help drive order book for that business in the near term?

So we have, if I'm not mistaken, 3 or 4 L1 or I think 4 L1 orders in SAE, which are right now under negotiation, okay? So we do expect that probably within this quarter or maybe first week of January because December 20 onwards they're virtually shut down. If they're able to conclude before that, we will have them before this or we'll have them after that. But most of these orders are for execution in Q1 FY '22. So I don't think we are too much worried about this. But the other thing is that with what's happening in the Brazil market, as I talked about earlier, there is a huge amount of volatility in the metal prices and other prices in the market there. So we have also been very cautious in looking at and negotiating new orders. I think that is one of the reasons I'll say we deliberately slowed down because there was too much -- after the Vale dam burst, there is -- the market has been very, very volatile in terms of commodity, in terms of transportation, in terms of labor, government, et cetera. So we had deliberately slowed down. The market is now stabilizing, which is why we restarted negotiation. And I think we should be getting -- concluding a few orders in maybe the next 2 or 3 months or maybe even 1 month.

Got it. And just, sir, if I can squeeze in one more because you commented on the raw material prices. There was a -- in the PPT also, you sort of alluded to the thing there, raw material prices. Was that comment more from SAE perspective or it was totally from KEC perspective, because we've seen gross margin decline even in KEC -- on the consol basis or even on a standalone basis of almost a 200, 250 basis points. So just wanted your view on how you see raw material prices now impacting us because steel prices are going up?

So the comment was for an overall business, but I don't think, except for SAE, we have seen any significant impact of the metal prices on our results, okay? I think what we are talking about is, as we have been maintaining, we are generally hedged. But there are items like steel and all that which don't get hedged, but which we had bought for some time, but the steel prices continue to be, I'll say, firm. They are not going up now. In fact, we did see some reduction now happening. But that's a challenge, which we see. As far as other metal prices and all are concerned, we are generally okay, except in our cable business. In the cable business, the basic problem is that people are waiting for the prices to come down before giving orders, which is the reason why the cable business has been flat. But all the other EPCs and everyone has been waiting, saying copper will come down, aluminum will come down, we'll buy cables later on. So that's one business which has been impacted. The other way I'll say is that the opportunity of making more money by some play with a metal price between the time you quoted the tender and by the time you get award and by the time you supply it, right now, that opportunity is not there. And so one of the reasons why our margins are slightly lower has also been the lower margins on the international T&D because of lower revenues also. The primary reason was that because of the COVID, people were not able to travel. So whoever was there, was there. Who were not there was not there. So because of this execution came down and that impacted the margin. So I will not read too much on the margin impact of commodities, except in Brazil, okay?

So it was more of a sales mix issue in this quarter?

Yes, yes.

The next question is from the line of Priyankar Biswas from Nomura.

Yes. Congratulations, sir, on a great set of results.

Thanks, Priyankar.

So the first point is the execution that you have done for the first half, it's almost like up 5%. Whereas, I would say that other, let's say, infrastructure companies are struggling to even, let's say, be flattish. So what exactly are the productivity measures that the company has taken? I mean productivity cost wise, whatever measures that the company has taken. Can you please elaborate on that and how it has helped? So ...

So -- let me put it in a -- let me give it a different answer. See, first of all, our businesses are de-risked into various -- we have got T&D, we have got T&D India, we've got SAARC, we have got international. Then we have, SAE, railways, civil. If you look at the primary growth drivers for the quarter, they have been railways and they have been civil. So with the 2 primary growth drivers, T&D has been more or less planned, okay? So that's -- when you look at the way the numbers have grown up. Railways, I think we really went all out, especially for the OHE piece and also some parts of the composite projects where the new tracks were to be laid and all that. And in that, we have done a lot of work on mechanization and on digitalization. You can probably talk to Abhishek who will tell you what we have done more. But I think I can -- just to tell you that in some of the items where we have introduced mechanization in some forms of digitalization with the help of an international consultant, we have been able to reduce, let's say -- let me put it positively, we have been able to increase productivity by probably 2x or 3x, and I'm saying 2x or 3x. So let's say, in a block, if I could do 10 kilometers, now we're able to do 25 kilometers in a block, okay? So that's part of digitalization. In mechanization, as you may be aware, Indian Railway has been -- traditionally been much, much more labor oriented. Even if you want to do a foundation, they would have expected you to do it manually with the help of favda and all that stuff, okay? Now we have been able to push through and say we will use excavators, we'll use other equipment and all that. And we've been able to get those approvals and all those things. So some very fundamental things. So I think the entire thrust on mechanization and digitization has really helped us in ensuring that even with lower manpower, we have been able to maintain productivity. The third piece for us is, as a company, we have a very high level of focus on project execution. If you look at our culture pillar, of course, culture pillar is delivery focus, okay? So notwithstanding whatever was happening in terms of, let's say, COVID, people not being there, suppliers not being there, we really spent a huge amount of effort on ensuring that our physical progress continues. And in some ways, we are also lucky that in our international market, in a SAARC market, et cetera, we had a lot of people who are already available at the sites to do work. For many companies I think that was a challenge. For us because we had resources already available in most of the places, I think that was not a challenge for us. The only challenge we are facing in international market is the new projects which we have got and where we did not have people, we are now sending people. So I think mechanization, digitalization and a lot of advanced planning has helped us in maintaining our growth and focus on execution.

So sir, based on these measures, so it seems a lot of these are sustainable, I mean, going forward. So can you just give us some highlights like what you expect, let's say, the second half to be? Let's say, how much growth eventually you are seeing for, let's say, FY '21?

So today, I don't want to stick my neck out and give a number. Let me be very open. However, we are very confident that with an order book and what -- where we are, we will definitely have a good performance unless a second round of COVID comes and hits you, okay? If that happens, I think nobody can say what will happen. But the way things are there, if you look at our numbers, we had an 8% sort of growth, this was in first quarter. We have a 16% de-growth in second quarter. You can just extrapolate and see where we will be. For H1, we have a 5% overall growth as against most of the companies. So I think we are very, very confident of what we can achieve in terms of growth and all. But right now, because of COVID, I just want to hold myself back and not give a number. I can give you an assurance that I think execution will do very well in the coming half.

And so sir, the last question for me. So you had highlighted that there was this margin impact, especially from SAE due to this commodity fluctuations and a lot of disruptions over there. Now if SAE was not there in the mix or maybe it has performed normally, so what KEC has been in the second quarter, be able to match up to the run rates of margins, like 10%, 10.5% possibly, if those impacts were not there by SAE?

Maybe. Maybe. It should be possible. Maybe.

The next question is from the line of Renu Baid from IIFL.

Congratulations for the strong performance for the quarter and the first half. Sir, few questions from my side. First to understand a little bit more, as you did mention on railways had the various cost-saving measures and mechanization, automation that have done. We are also working with the consultant to drive improvement in margins. So would we be in a position to quantify what has been the kind of margin improvement of gains so far or anticipated by the end of the year in the railway EPC segment for us?

So let me put in -- yes, Renu, I think the margins are in the benchmark of what we were saying that we will be close to double digit. We would have crossed double digit, which we had touched in March end, okay? But because of the COVID impact and the costs which are there. You need understand one thing is that many of these COVID issues are right now a matter of contract now, whether the customer will pay, not pay, what happens, will he pay the cost for the extended stay, force majeure. So there are a lot of issues that are going on with various customers, okay? Some of them are agreeing to reimburse some costs, some are not paying. So a lot of things will happen. So I think a part of the margin would also depend upon how the contractual issues pan out. So we had these -- had the COVID and all not happened, we would have definitely been on double digit in railways, okay, which we should actually touch exit of 2020, which is what we had promised. So I think railways is doing well. And even -- for us, even civil is now doing well, okay? Especially on the urban infra side, both our DMRC projects and the 2 projects with Kochi our RRTS project. I think all the 5 projects are doing very well in terms of execution, which is another reason why we had a significant growth in the revenues, okay? The last part of the growth in our revenues for Q2 has also been contributed by the urban sector.

Sir, this means as is in now in second half, the core T&D execution has also picked up while rail, civil will continue to do well. So in the second half, can we now expect the operating margin to be back to 10%, 10.5% range, at least 10% plus for the company as a whole in second half? Or you think there could be cost headwinds continuing?

See, to me, I'm not -- I don't think I'm too much worried about cost headwinds. I think it will also depend upon the mix of the business. I think now we are already at 41%, 42% on non-T&D. And clearly, non-T&D is still below double digits when you look at railways, civil, cables and all of them put together, okay? So I think it would depend upon how quickly my international T&D is able to ramp up, especially on the new projects, which we have secured, okay? If my T&D business goes back to, let's say, 50%, 60% of my turnover or something like that, then I think we should be heading for those sort of number. If it's more than T&D, if civil and railways do that, then we may have some challenge on the numbers. I'm not very apprehensive about margins, okay? To me, it's a question of being 25, 50 basis points here or there. Whether we'll cross 10, whether we'll not cross 10, I don't think I'm too much worried about it, okay? If you also look at our interest costs and all the interest savings have been continuing. And the way the interest costs are going down further, I do expect that we should see -- and especially because Q3, Q4 do have a much higher revenue in any case. So the interest will get spread over a much larger revenue. So I'm very sure that Q3, Q4, we should also have a reasonable improvement on the interest cost. The overall interest cost for the year should probably go down below 2%. We're at 2.1% already now.

Right. Got it. The second would be, overall, I mean, there was a good improvement in the operating cash flows also, but how is the environment with respect to payment cycles from customers? Now that especially in the second half, as we're looking to ramp up execution, do you think working capital will be able to keep pace and payment from government customers across rail and other businesses will keep pace?

So I think we are very happy with what has happened on the working capital cycle, especially on the receivable side, we've been able to collect a lot of money, especially -- I'll say, especially on the railways and all that, where not only we got a lot of cash, but we've got INR 400 crores or INR 500 crores of bank guarantees also back, which were not technically due based on what the Government of India guidelines have come. So I -- we have not seen any headwind on the collection, I think, across -- I'll say, including the private clients in civil, surprising. I was surprised, we have thought that we'll face some headwind there, but we have not faced. So I think on the cash flow side, I think we are pretty comfortable. Also on the working capital, apart from what is happening on the client side, I think banks are flush with funds and are willing to look at giving money at a reasonably lower market. I think our overall cost now is less than 5%. Maybe, Rajeev, would you want to add something on this?

No, Vimal. Basically, as interest cost -- because of the surplus liquidity in the system, Renu, basically, the banks are now willing to offer short-term money, 3 months, 6 months, even up to 1 year. So at a lower rate, even, in fact, below their respective MCLR. So earlier the banks, for a long period of time, last 3, 4 years, banks were not willing to lend anything below MCLR, which now last 3 months suddenly, we have seen that banks are coming on their own that, why don't you take? What rate would you like to take? And this is happening because of the surplus liquidity in the system. The CP market has virtually crashed. The people as AAA rated they are borrowing at 3.5% or so. So now they are seeing that they can get a slightly better rate from the -- from companies like KEC where we are spending at AA. So they are offering maybe a 30, 40 basis points, 50 basis points higher than what we are lending at AAA, because anything which they are able to get higher, so they are -- it is going to be improving their bank's margin. So now they are actually giving us money at -- below MCLR, which is quite a strange phenomena, which I have not seen at least in the last 5 years.

But good for us, for working capital-intensive businesses like ours. Sir, my last question is on the export incentive side, especially if you look at the MEIS incentives have been withdrawn. So though for us, technically, they were just about 1-odd percent of revenues, but approximately, our EBITDA used to be close to 10%. So are we looking at any likely impact on our margins also coming in from these export incentives? And in this particular quarter, have you recognized or stated any provision for MEIS-related incentives as well?

So Renu, the provisions are automatic because MEIS is booked once you export and what you expect to get. So obviously, what has happened in this quarter, whatever shipments have taken place overseas are booked at the revised rates or nil rates, if you want to say that, okay? So there is clearly an impact of MEIS in the numbers. I don't have the exact number, but it will be probably be around maybe INR 10 crores of -- INR 5 crores, INR 10 crores. Not significant, but there has been an impact, okay? There will be an impact in Q3 also because the new scheme, which government has notified and all is coming only effective from 1st January, okay? So Q3, we will definitely have an impact of INR 10 crores, INR 15 crores. I'm very clear on that piece. But I think those are things which keep on happening. So I don't think it's something which will significantly impact the numbers. And also for us, what has happened is that with our Dubai plant commission now, okay, it's now becoming easier for us to decide [Foreign Language] because earlier India was getting a 3% MEIS benefit. Now with that benefit not being there, in many places, what we have started doing is that the India offtake is now getting more consumed in India. And we are slowly pushing that for the international offtake gets pushed to Dubai. But yes, there is some impact. And as far as the new scheme is concerned, we feel that overall, there could probably be an impact of 1%, 1.5% for the international tower supplies and all that, what we continue to do from India, once the new scheme comes in. Let us wait and see because the new scheme also provides for, let's say, offset a lot of duties, which are not offset in MEIS. So we'll have to wait and see how it works out. But our gut feeling or back of the envelope calculation has been that there could be a 1%, 1.5% -- out of -- if MEIS was 3%, you'll probably get 1.5% or 2% under this scheme.

[Operator Instructions] The next question is from the line of Ashutosh Mehta from Edelweiss.

This is Swarnim here. Sir, 2 set of questions. The first one, on the margins, I'm sorry to really harp on this again. I just wanted to understand this better this 150 bps margin drop, this is a temporary blip. And is this on account of just the project mix? Or just -- or there is something to do with the railways or the civil businesses being a low margin business over there? What is the theory?

So Swarnim, long term, our margin will be 10% plus. I think that there is no discussion on that from my side. I'm very clear that the margin drop is a blip mainly because of the COVID cost, what has happened and also, as I told about what happened in SAE and all that. Otherwise, if you look at our non-T&D margins have gone up by almost 200 basis points from the earlier quarters, okay? So I don't think we are worried about what will happen to our margins. Quarter here and there, will always be there. For the long-term trajectory and our long-term numbers will continue at what we were talking earlier also. So maybe as people have been saying, '20 -- FY '21 [Foreign Language] on the margin front and all that. You start again with FY '22, you'll find the growth continuing the way we were continuing both on revenue as well as margins.

Correct. Got it, sir. Sir, second thing, so we have seen successfully that the non-T&D portion is now almost about 40%, which used to be about 25%, 30%. Now -- so where do you see over the next few years, because civil is going to be one of the major drivers. And I think we have been bidding in a lot of civil-related businesses. So how do you see this the non-T&D shares to move up over the next 2 to 3 years?

So this year, I think we are around 41% or something, we should end up the year between 45%, 46%. But that's the way we are looking at it, notwithstanding the fact that most of our order intake this year and our L1 is on T&D, okay? But those execution will now start. So I think maybe Q4 it will pick up. So going forward, I still feel that it will probably be around 45%, 50%. So half of it would be T&D, half of would be non-T&D for a year or 2. But later on, we clearly see that railways and civil will grow, okay? T&D, obviously, is not growing at the same pace, especially because of the base, the base of INR 8,000 crores and all that as compared to a base of INR 2,500 crore, or a base of INR 1,000 crores. We have to also looked at that number itself. Saying that the base is so large, that a growth of 20%, 25% on that base is very difficult, but achievable. Like civil this quarter has grown 3x, okay, or railway has grown 45% because the bases are small. So they will continue to grow at a much faster speed. And when you combine, let's say, railways and civil together, that the growth will definitely outnumber in percentage terms the T&D, but the T&D base is high. So I think -- to us, I think our target is that it should be around 50% and to me what is also happening is with the margins going up in those businesses, okay? We are now not worried or constrained saying the employee [Foreign Language] because they are delivering me growth, they're delivering me margins, okay? So we will not put an artificial barrier to say [Foreign Language], okay?

So in the non-T&D business overall, the margins are, of course, converging with the T&D part. But I think the question is, is the working capital levels also broadly the same with that of T&D? Or is that a bit higher?

So working capital is, I'll say, more or less similar, okay? In fact, railways probably on the net basis, is slightly better. The ROCEs are significantly higher. It's a little bit of a different combination. But I think it doesn't impact our numbers significantly. If you look at the working capital, that yes, if you look at our this quarter numbers also, the numbers have not been impacted adversely on the working capital or on the interest cost with 41% being non-T&D. So I don't think it is very, very different, virtually on the similar lines, okay?

The next question is from the line of Ajinkya Bhat from Macquarie.

Congratulations on the great set of numbers. Sir, 2 questions. The first one is you spoke about improving margins in the non-T&D businesses. So could you give us an indication of where is the current margin level of both railways and civil businesses? Because I remember when you started railways, initially, you built up the capacity. And then as the business ramped up, obviously, your margins would have gone up. Is that the case with civil as well? And how much do you need to ramp it up from today's levels in order to reach your benchmark margin in civil?

Ajinkya, we will not be able to give you exact numbers like this. But let me tell you the other way, that railways, we had touched the double-digit margin at the end of last financial year. Right now, we are slightly lower because of the COVID-related costs and we have build quarters, we have to do a lot of other things for workers. And there's a lot of other costs, which are getting incurred. You have to get workers, you are sending buses, you're hiring planes and all that. So there have been a large number of costs, which is why the numbers have come down slightly. So the target is, again, very clear that they have to go back to double digit. Civil, again, I think, fortunately, we entered the market at a time when many civil companies are in a bad shape. So I think the margins are looking up. They have a slightly -- I'll say -- to me the way I look at it civil is, let's say, around 6 or 8 quarters behind railways. So you have to follow the same trajectory as what railways followed, which we'll follow in civil. This year, we'll end up civil with INR 1,400 crores, INR 1,500 crores of revenue, while railways will be INR 3,500 crores plus and all that, which was what railways was 2 years back. I think that's the model which we are following. And in my view is that civil also should start touching double digit maybe by the end of next year, next year or something, next year or close. That's the way we are looking at it.

Okay. Understood. Sir, and my second question is, could you just throw some light on the significant increase that you have seen in contract assets in 1H? So is it that your revenue composition has changed? Let's say, there was a higher share of power supply revenues, which may not get billed to the government until these structures are erected. Is that the reason for this increase in contract assets? And then would that essentially impact the overall working capital levels or cash flow conversion for this year?

So there is some impact of the business mix, especially railways. Railways have a very different form of billing, et cetera. So there's a large chunk of billing which happens on milestone based. So that is the reason why you see the contract assets going up. They're primarily railways, okay?

The next question is from the line of [ Vikas Singh ] from Aurum Capital.

Congratulations on good set of quarter 3 and first half numbers. Sir, you already talked about the payment situation in India. I have one question specifically to Saudi Arabia and Middle East market. The question is, what kind of exposure we have to these markets right now? And how is the payment situation there?

So I don't have the AR number, but we have an order book of close to INR 2,000 crores there, okay? That's -- because we just announced an Oman order of almost close to INR 900 crores. So the order book has gone up significantly. As far as the payment situation is concerned, Saudi is completely normal. We don't have SAR 1 of outstanding money in that country, nothing. 0, okay? Other countries, Dubai, Abu Dhabi, Jordan, Oman, I don't think we have anything which is due and not paid. So as far as Middle East is concerned, I think we are very happy with the performance on the collection front.

The next question is from the line of Ravi Swaminathan from Spark Capital.

Congratulations, sir. Yes, sir, 2 questions. One is on the railways segment. For the past couple of years, the order inflow run rate has been like around INR 3,000 crores, INR 3,500 crores. Has the end market -- addressable end market expanded so that can we grow at a much faster pace than this kind of inflow run rate? Are we addressing new categories in railway space?

So Ravi, if you look at the order book today, of my order book of INR 5,000 crore plus, roughly 2/3 is non-OHE, okay? When we started our business, it was all electrification. Then we went into composite. Then we went into pure civil of the railway, railway tracks and all that. Today, a large part of our bidding is happening on metro non-civil in the railways, okay, which is whether it is track -- whether track laying, ballastless tracks or third rail or power supply, okay? In fact, we just has got a first order also in OHE in one of these metro stations. So to me, very clearly the entire -- let's say, if you look at the gamut of where we are playing, it has changed significantly from first OHE to composite then to a pure play civil in the conventional rail, okay? Now what we have done is we have added the metro sector to it, okay? So large bidding is happening on the metro sector. And I think the third piece which will come and which has started coming up is going to be the international market, whether it is some countries in SAARC, whether it is in Africa, whether it is in some pieces of Middle East or even [indiscernible] or CIS, okay? There are countries where we have large presence in T&D, there are opportunities there. So right now, there is nothing in my order book plus L1 on the international market. But I think maybe in a quarter, 2 quarters or 3 quarters, we will definitely start seeing some orders L1 from international also. So I don't think we are at all apprehensive about the, let's say, availability of market in railways for this sort of growth, which we are planning.

Okay. But this overhead electrification job, et cetera, I mean, are they still at the same pace at which the ordering used to be a couple of years ago? Is the government awarding same kilometers or more kilometers as of now?

So as of now, they are awarding probably more than before because there's always a backlog of the earlier work. But what has changed, Ravi, is that they have stopped giving smaller orders now. Entire -- the entire ordering of electrification has shifted to EPC where the contractor is supposed to take the call on the quantity. So from a BOQ base, it has gone to LSTK, where the contract sizes are -- in fact, we had, last year, announced almost, I think close to INR 1,000 crore job, which we got. And we have bid for some very, very large projects in this OHE EPC, but there has been some delay on the award, okay?

Okay. Yes. Got it, sir. And with respect to civil, so last year, we had ramped up phenomenally from, say, INR 700 crores of order book -- order inflow the previous year to INR 2,700 crores. Where are we -- I mean, over the next 2 to 3 years, what kind of magnitude of order inflow we can see? Can we see 15%, 20% CAGR in the civil segment order inflow alone?

100%. No question about it. Because, as I said, this year, we'll probably do INR 1,300 crores, INR 1,400 crores or INR 1,500 crores of revenue. Next year, probably, we should do at least a 50% growth on it. So the civil order book has to grow, okay? Whether it grow by 25% or 30% or 40%? I do not know. But civil is something where you can keep on adding, like as I was saying earlier, we added chemical industry, we added warehousing. We are L1 in a couple of water pipeline projects. So civil, the canvas is very wide, okay? Whatever you think that there is something good, you can go. And I think lastly, there is international also, not infra, but there are other projects in internationally, which are available, which are Government of India funded, et cetera. So I think there are enough numbers available on the civil side in the order book.

The next question is from the line of Sunil Shah from Turtle Star Portfolios.

Sir, I have some different type of a question in terms of -- sir, there's is a start-up in New Zealand, which has been successful in doing wireless transmission of power. So is there anything which is really a possibility about such a thing which can happen over a long period of time? If you could make us understand more about the technology evolution on transmission of power, the risks which are there because this is completely something which is really different from the way which power has been transmitted over decades?

Sunil, wireless transmission of power has been talked about at least for the last 2 decades. I've been in this industry for 18 years now. And since I joined from that time onward, there is a talk. People have been experimenting with it, okay? It's still on an experimental stage where someone is claiming that I have done it over whatever kilometer we have done it, okay? There are still a lot of questions attached to it saying, is it viable over longer distance, larger volumes? I think the biggest question, which has been attached to wireless transmission has been the health issue, okay? People are worried even when power flows through wires, right? Saying that [Foreign Language]. People have been very worried even for wire transmission. When it comes to wireless transmission, there are huge questions being raised on that, saying that how much unsafe it would be also. So I think there are a lot of things which are going around it. To me whether it is possible or not, I cannot give you an answer. I have no idea about it, whether -- but in today's world, technology has changed a lot of things, okay? So this can also become a reality of, like, tomorrow. But this has been there for a very long, long time. Today because of social media, this particular instance got very well publicized and more viral, but the same thing has been talked about, at least, as I said, about 20 years, I been hearing it, okay, without any movement happening. And as I said, primarily because of health concerns also. Primarily, okay? People are saying that if electricity starts getting transmitted wirelessly and all that, there will be huge radiation and we don't know what will happen and all. So I think technology will always come, technology will always change, but [Foreign Language] I can't give an answer today. No.

Okay. Sir, this has been there for, as you are saying, a couple of decades, so it's not something which is just new and something revolutionary. It has, so to say, evolve over a period of time?

Absolutely.

One more question which I have is, if I can get some quantification on the railway electrification opportunity in terms of kilometers and value wise over the next, say, 3 to 5 years. With railway electrification, how serious they are in terms of implementing their targets?

As far as I know, the total electrification target was around 30,000 to 33,000 kilometers, okay? They claim to have been awarded around 24,000. Let's say around 20,000 has been electrified, okay? Every year, they've been awarding around 6,000 kilometers. That's -- 6,000 kilometers. And if the award is with along with the conductor and catenary, it would be around INR 1 crore per kilometer. So broadly [Foreign Language]. But now this market is for the trunk routes and all that, okay? Now there's a talk saying we will also electrify all the side roads, we want the entire network to be electrified, okay? All the new lines, which they are planning to build should also be electrified. So whether this opportunity will end in 3 years or will continue after that is a guesswork today, okay? But looking at that, that's why we have said that we are reducing our dependence significantly on this segment of the market, yes.

Yes. And we are moving to the metro piece, which Vimal mentioned about.

Sir, if I can have one more question. And this again, something [indiscernible]. Sir, the transmission towers, the scrap value of that, can it be recycled? The galvanized steel which is used, is that recyclable? And if so, is it cheaper for us to get that? Or at what price would that be available?

So Sunil, it is recyclable. We do sell scrap from our factory, which sells at around 60% of the original cost, okay? So that is one profit. But what people do is they scrap off the zinc and the zinc is used and the steel is sold off. As far as we are concerned, we don't even buy from electric arc furnace. Our entire steel is bought from primary producers like SAIL and JSPL and JSW. We don't even go to any other market to buy steel. So there's a big difference between what we do and what some of other players have been doing. We just don't go into that market. That market would be at least INR 4,000 to INR 5,000 cheaper per ton. There are people who do it, but we are very clear. And if you look at the power grid norms and all that, they insist that you should buy only from primary steel producers.

The next question is from the line of Harshit Patel from Equirus.

Sir, my first question would be, sir, could you give us an outlook on what kind of solar capacity additions are happening in the country? Sir, if it slows down materially over a slightly longer period, which is, I think, presently the case. So there wouldn't it be a risk to our Green Energy Corridor order?

[Foreign Language] Green Energy Corridor order, as far as I am concerned, is from either Power Grid or from Adani or from Sterlite, whoever it is, okay? So my client is that. That's number one. Number two, if you look at the various statements being issued by CERC, CEA and everyone. Where the government has -- and even the MNRE secretaries and all that, they have been very clear saying irrespective of the progress on what happens on the larger solar parts, we are going to go ahead and build the transmission line because what has happened is that many of the large solar players have gone and talked to the ministry, have talked to the Prime Minister, saying [Foreign Language]. So I think the government has taken a very clear-cut position that all the large solar parks, which they planned at MNRE level, I'm not talking about the state level. I'm talking about the central level, at SECI level and NTPC and all that. There, they have very clearly taken a decision that as soon as they finalize the park or whatever they want to approvals and all that, they will go ahead and award the lines, okay? So that is a very clear statement. So I do not see any risks to our lines once the parks are finalized and bid out, okay? Secondly, I don't depend upon the solar park players for my money. I'm a contractor. My client is Power Grid or my client is Adani or someone else, and that's where it is.

Right, sir. Sure. Sir, again, just a follow-up on the SAE Brazil. So sir, there, we had a couple of orders from Sterlite, which was not converted into confirmed orders because they were trying to sell out the projects. So is there any update over there?

So we had a few orders from them. So one of them was already sold out to a French party which is now under -- I had mentioned that we have [indiscernible] that is one of our Sterlite orders, okay, which Sterlite had sold. So we are now executing it for the new party. We have 2 more orders from Sterlite, which are right now in my L1 position of SAE. And there, now I understand that Sterlite wants to start implementing those orders. These are not -- I don't know whether they want to sell or they don't want to sell, but they are right now negotiating to start work on those orders, okay? So what I was talking about saying that some of our orders may be converted, some of our L1s will get converted to orders include at least one order from Sterlite, which we expect to get converted into an order book.

The next question is from the line of [ Nita Shah ] from [ Quess Investments ].

I have one question on domestic T&D, where do you see the growth coming from? Like what is TBCB pipeline which is currently ongoing in for the entire FY '21 and '22, if you could give a picture on how is it panning out to be?

So currently, there are, I think, INR 10,000 crores or INR 12,000 crores of tenders, which are under bidding. Hopefully, they will be bid this month, okay? Some of the bids are -- some of the bids are due on, I think, 10th and 11th of this month, okay? So if they don't get extended, you will see a large number of tenders getting bid out next week, okay? And if they get bid out next week, then I think the award should -- normally they take around 6 weeks to award. So I think before the end of the quarter, the developer should have been announced and awarded. If it is Power Grid, where Power Grid has already signed agreements with many of the EPC players, then the EPC players will also get their award very quickly. If it is the private sector, maybe it may take another 2, 3 weeks more. So in case if the private guys win the award, the EPC should be done by January or so. If it is Power Grid, hopefully, by December end or so, we should have orders in the industry.

Okay. And from the state, do you see any other traction coming?

So state, we are seeing some traction happening from usual states like Karnataka, Tamil Nadu. We're now seeing Andhra now talking about some orders. There are some orders coming out of Northeast, Assam, et cetera. West Bengal has been regularly giving. Then Orissa and Rajasthan now, okay? These are other 6 or 7 states where we are seeing -- I will say decent traction, not very good, but decent, I'll say.

Okay. And going forward, what would you give a guidance for the debt level and cash flow?

Rajeev, you want to answer this?

So basically, Nita, as far as the cash flow and our borrowing, we have generally guided that with the whatever growth that we are doing, we will be able to achieve these goals with the existing working capital. So we are, obviously, in terms of trying to squeeze further working capital and bring our NWC days down to closer to 100, 110 level. So currently, it is at about 130. So we clearly believe that another 20%, 25% of the growth can be achieved with the current borrowing and the current overall working capital, so we don't need further working capital. And this is quite evident from our numbers. If you look at -- we have been guiding the investor for the past 1, 1.5 years that we will be operating within the INR 2,500 crores level of borrowing and we are well within that. In fact, during the pandemic time also, we did not exceed those numbers. And we have been able to collect a good amount of money from our customers. And by and large, our collections have been at the same level as last year. So our entire focus has been on reducing the cost of borrowing and the interest costs and interest as a percentage to sales, which is quite evident. If you look at the last 2 years, our interest cost as a percentage sales has come down significantly. We were at about 3.5% or so. And now for this quarter, it's 2.1%. And by and large, overall borrowing levels have also come down. If you look at slightly longer-term on the past 3 years, our borrowing levels have actually come down despite maybe 30% to 40% growth in the business.

No, actually, I was asking if you have further plans of reducing, like, below INR 2,500 crores or something or any specific target for FY '22, '23?

Actually, it would be slightly difficult to that guidance. Because if we are going to achieve a growth of 15% to 20%, then it is really difficult to reduce the borrowing level beyond INR 2,500 crores. So what we are trying to do, that is what I'm saying, that we'll try to reduce the NWC days, which is closer to 100, 110 days from the exisiting 130 days. So the interest cost will go down. But probably, I don't think that at least next 1, 1.5 years, I don't think that we can go down significantly below INR 2,500 crore of borrowing.

Okay. And my last question would be, like you said, you're implementing mechanization and digitalization in railways. Do we have any other segment where you are implementing this or any other cost efficiency matters, which we can -- which we will see in terms of productivity getting multiplied in such a manner?

So Nita, we are implementing it across all the businesses, okay? So that time, railway was getting discussed and all that, we did mention about some items in railways. Similarly, we are discussing in other businesses. But the difference is that in transmission and in our civil business, especially in civil, we are already very advanced in mechanization, et cetera, okay? Transmission has been slightly slower than civil. So transmission would be the next area where we will implement. And the third area is going to be on the supply chain side, especially on the operations in the factory and all that. There are a lot of low-cost automation is taking place, okay, which will improve the productivity.

Okay. So any specific CapEx you have in mind for this exercise?

Why don't you speak to Abhishek later on, he'll talk to you on that, okay? We have got a lot of cases we can discuss there.

The next question is from the line of Meet Parikh from B&K Securities.

Congratulations on the good set of numbers. Sir, I just wanted to know if you can quantify the margin which we compressed during the quarter by 150 bps? Can you quantify it between the COVID and the other items?

Very, very difficult. I don't have the numbers right now. See, it will largely be COVID except for some impact of SAE, okay? So to me, it would be COVID, it would be SAE. And it would also be a little bit because of the mix, okay? Because clearly, the non-T&D pieces have gone up. So there is some impact of that. So there would be broadly 3 elements for it, okay? And exact number probably you can speak to Abhishek. But as I said, one is the COVID piece. One is SAE piece. And the third is, what you call, aggregating the various businesses.

Okay. Sir, and my second question would be, now as mix changed in this quarter, has impacted the working capital to an extent? Or will it retract back in 3Q?

Rajeev, do you want to answer this?

Vimal, I didn't understood the first portion. Can you please repeat that question?

Yes. So the mix has changed a bit in this quarter, so has that impacted the working capital?

Not really. In fact, as Vimal also mentioned earlier in the call that by and large my -- all the businesses, whether it's civil or railways, the working capital requirement is more or less in line. So in fact, I would say slightly -- civil is slightly better. Railways and civil, they are slightly better than the T&D, but they are in the same ballpark. So the growth in the non-T&D, which is taking place is not impacting my working capital at all.

The next question is from the line of Saket Kapoor from Kapoor Company.

Sir, firstly, correct me, sir. You told that interest costs as a percentage of sales will go below 2% for the second half, that is what the endeavor is?

Yes, for the year also.

For the year also. Okay. There's a good traction on that front. And sir, on the MEIS front, you told that there will be an impact of INR 15 crores to INR 20 crores to the bottom line due to the withdrawal for the H2 or the third and fourth quarter, respectively?

If it's very big, but broadly [Foreign Language], because it will depend upon [Foreign Language]. But there would be -- there is definitely some impact in the third quarter. Fourth quarter would, Saket ji, would depend upon how the new scheme comes in [Foreign Language]. Our expectation is that there could be -- there would probably be a 1% loss in the new scheme and MEIS, okay? But we got to wait and see government [Foreign Language]. Okay? So difficult to say, but we are expecting the [Foreign Language]. Q2 definitely, in September, there has been an impact.

Okay. Can it be quantified, sir?

I don't have the numbers, but [Foreign Language]. Okay?

Okay, sir. Sir, how have ForEx played for this quarter? Generally, ForEx do contribute -- sorry, how has that part played?

ForEx this quarter has played a different role. And why I'm saying that is, what we did was the -- because our international order book was growing significantly, we have borrowed a lot of money in foreign currency. So my overall mix in debt is now, I think, 60% is foreign currency, okay? And 40% rupee. So what happened because of that is that I did not have too many dollars to sell in the forward market, okay? Normally, what I mean so because we match the liability of the loans with the receivables. So we did not sell too much foreign currency in the market because we have taken loans against that. Now what has happened is that the Indian rupee loan cost has come down, we are, again, switching back to the Indian rupee loans, okay? So next quarter onwards, we will start seeing a lot of ForEx gain. For this quarter, I think we had virtually 0 ForEx gain. Rajeev, I don't know what is the exact number.

No. No, Vimal, you're right. It was very meager amount, maybe INR 4 crores, INR 5 crores only. But that's a valid point that now we are starting to sell more foreign currency for our future receivable from the international market rather than borrowing against that because my rupee cost of borrowing currently, which is less than 5%, is not justifying the borrowing in the foreign currency loans.

And sir, there is a capital work in progress of INR 151 crore, sir. What does it reflect about?

That would primarily be the Dubai plant, which was -- that was capitalized in October.

Okay. The entire amount?

Yes, yes.

And then last year, sir, we made an investment of INR 174 crores, if I'm not wrong, in the KEC Investment Holding Mauritius. What was this attributable to, sir?

Rajeev, [Foreign Language]

No, no. That was basically -- we sent out some money basically for acquisition of the Dubai plant for INR 100-odd core was remitted last year and some more money has been sent. So that is largely on account of Dubai. There is no other acquisition that we have done in the recent quarter.

That is for the Dubai one only, sir?

Yes.

You also mentioned in your release, investor presentation, that civil secured breakthrough out orders in the flue-gas desulfurization and warehouse space. So what is this flue-gas desulfurization space all about? With relating to the power plants, I think so efficiency. So what kind of a...

It is not for efficiency. It is basically there's a Supreme Court mandate that all the thermal power plants have to contain their sulfur content what the release in the gas -- in the air, okay? So every power plant has to set up a flue-gas desulfurizing plant, okay, all the thermal power plants. So this is what all of them are doing. Now I think the Supreme Court has -- or I don't know, government has given them 2 more years to set it up. And so each of the thermal power plants will set it up. So we have -- we are not in the full business of this, but what we do is we just do the civil work of it. The mechanical work, I think this order has come from Thermax, if I'm not mistaken. So it was a Thermax order, Thermax got the full order to set up the entire FGD and the civil job we have taken up from them, okay?

Excuse me, this is the operator. Mr. Kapoor, may we request you to come back for a follow-up.

Yes, we'll have to close it also in any case.

Yes, sure. We take the next question from the line of Parikshit Kandpal from HDFC.

Sir, congratulations on a good set of numbers. Yes, my question was on, sir, what kind of opportunity does KEC have in mega projects like high-speed rail? Because I didn't see our name figuring there, our competitors have tied up in this -- for this project. So this being a very significant project, and maybe we'll have some more coming in over the next few years. So what is our role there, if at all we have opportunity in this segment?

So as far as the current bids were concerned, they were bid quite some time back. And at that time, we were not very big in civil or we were not big in urban infra. And to me, secondly, I think those project sizes are beyond my capability as a civil company. I don't think I'm looking at getting -- taking a single INR 8,000 crore civil contract, okay? So I'm very clear. In civil, we have been taking contracts, we've been doing -- but we have a very clear risk profile of what we will do, what we will not do, number one. Number two, what we have seen is that all these projects, including DFCC, which were awarded earlier of the same size and all that, okay? Have all run into significant delays, significant cash flow issues, land acquisition and other issues and all that. Considering the size of the tenders, I just didn't want to touch anything. Because if I take a INR 7,000 crore project, and then it gets stuck into, let's say, land acquisition. Like today, you know what is happening on the Aarey depot. The Aarey depot is stuck, somebody has to go somewhere. And for a company like me, where the civil portfolio is not very large. If you take some very large projects and if those projects can get stuck or even the costs move up or down, it can take your company down, okay? So my risk management does not permit me to take such large contracts in either civil, maybe we will not even take it in transmission. So if I take INR 7,000 crores or INR 8,000 crores contract in my order book of INR 20,000 crore, I don't think our risk will allow it to do us, okay, that's too much of risk concentration in one contract, okay?

Second question was on the civil again, sir. So I mean we have seen INR 1,500 crores and then moving to INR 3,000-odd crores of revenue subsequent years. So we'll have to fill in the order book about INR 10,000 crores to INR 15,000 crores the backlog, we have to pay for that over the next few years. So what are the key segments which will fill in the civil order book? So what's your view also on water and the road segment? If you can also give some clarity on that. How are you going to fill the order book?

So Parikshit, we are not on the road sector. So that is very, very clearly out. So we -- if you look at from the volume angle, it would be -- the metro civil would be a large portion, okay? The second piece would be on the water pipeline, okay? Not within the cities or within this, but from the source, from the intake well to outside the cities and all that. So water pipelines is the second one, when you look at volumes and all that. Apart from that, when you come -- it will be warehouses, okay? It would be data centers. It would be some part of residential. We work with 2 or 3 builders, developers only some part of residential, it would be industrial. It would be hospitals, okay? We have bid for quite a few now hospitals. We have bid for a few airports, okay? So there's a whole list of industries where we are picking and choosing and bidding. And we have done a lot of work on auto and cement. I forgot to add. So cement and auto we were -- cement would have built by now, I think, 8 or 9 plants. We have been associated very closely with 5 auto plants. So these are the areas where we look at it. We just got our first order in the chemical industry because we felt that post-COVID, the chemical industry will start looking up. So we started looking at it and we just got our first order in chemicals. I think that's the way we are looking at it. There would be some piece of international play, but that will be largely Government of India funded and all that stuff, okay? We don't want to go and do civil right now outside on our own with third-party risk and all that. So those are the broad areas where if you look at it -- sorry, I forgot to mention hydrocarbons, okay? There's a lot of work now happening on the hydrocarbon side, whether it's refineries or petrochemicals, whether it is gas grids, which have been talked about. So there will be a lot of work on the pipeline, on the infrastructure for refineries, for petrochemicals. I think that's another -- that could be a large area also. Like urban infra, the hydrocarbons could become a large portfolio also.

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Vimal Kejriwal for closing comments.

Thank you, everyone, for participating. I do see there are some more questions, but unfortunately, we have to log off. If your questions remain unanswered, please talk to Abhishek, and we'll get back to you. Thank you so much. Thank you, everyone.

Thank you.

Thank you very much, sir.

Thank you.

Ladies and gentlemen, on behalf of KEC International, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.