KEC International Limited (KEC) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the KEC International Limited's Q3 FY '22 Earnings Conference Call. We have with us today from the management Mr. Vimal Kejriwal, MD and CEO; and Mr. Rajeev Agarwal, CFO. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vimal Kejriwal. Thank you, and over to you, sir.

Thank you so much. Good morning to all of you. I welcome you all to the Q3 earnings call of KEC. I hope that you and your family are safe and healthy during these challenging times. Let me start with an update on the overall performance for the quarter and the 9 months and thereafter talk about each of the respective businesses. We continue to have a robust order intake. We have secured our highest ever YTD order intake of INR 14,121 crores, a staggering growth of more than 2x over last year. Large contributions in the order intake has been from our international T&D and several businesses. This has significantly enhanced our YTD order book to an all-time high of INR 24,400 crores, a robust growth of 36% over last year. Additionally, we have an L1 position in excess of INR 4,000 crore. Our order book is well diversified across businesses with an equal share in both T&D and non-T&D businesses. Coming on to the financial performance. We have achieved revenues of INR 3,340 crores for the quarter against INR 3,289 crores of Q3 last year. The growth could have been higher, but for the impact on our 3 ongoing projects in DMRC, RRTS due to the NGT issues and Supreme Court ban. The Supreme Court ban has now been lifted, but excessive and prolonged rainfall in certain areas of South India and intermittent challenges due to COVID in some international locations, including Brazil. Considering the continuing elevated levels of commodity prices and freight charges, we continue with our strategy to regulate the supply of towers and conductors to some of the projects as per the requirements of the project cycle. Notwithstanding this, our YTD 9-month revenue stand at INR 9,467 crores, with a growth of 8% on consolidated basis and 12% on stand-alone basis via-a-vis 9 months last year. Considering our current order book and L1 position, we are very confident of a good growth going forward. Despite significant challenges, we have delivered double-digit EBITDA margins of 10.2% at the stand-alone level and 7.2% at the consol level for the quarter. The stand-alone EBITDA margins for the quarter has improved by 98 basis points sequentially. We have delivered a PBT margin of 7.1% and a PAT margin of 5.1% at the stand-alone level. Our consol PBT margin stands at 3.7% and PAT at 2.8%. The consolidated margins have been impacted primarily due to the continued time and cost escalations in SAE Brazil due to the pandemic so the elevated commodity prices and unusual rainfall in the year. Net debt as on 31st December '21 stands at INR 2,913 crores. The debt has increased during the quarter due to some delays in collection from the Railways. However, we expect the same to largely normalize in Q4. Now coming to the specific businesses. Our T&D business continued to witness significant traction with YTD order intake of over INR 6,400 crores, with a robust growth of 50% against last year. The inflows had been led by orders in the international markets, especially in the Middle East, SAARC and Americas. The business has achieved revenues of INR 1,610 crores for the quarter. The revenues are slightly lower due to the strategic realignment of dispatches in some projects as mentioned earlier, and intermittent COVID challenges in Americas and SAARC, primarily Bangladesh. The overall tender pipeline in T&D continues to remain strong, especially in international T&D. We are also witnessing a gradual revival in the domestic T&D market. The significant upcoming opportunities of Green Energy Corridor Phase 2 and Leh Ladakh HVDC lines. I presume you have heard recently that the Leh Ladakh HDVC lines Phase 1 has now been awarded to Power Grid on an RTN basis and will not go into TBCB. Majority of these tenders are expected to be announced by H1 FY '23. In Brazil, the 2 legacy projects are on the verge of completion and are expected to be completed in Q4. Despite the significant challenges, we have successfully commissioned 1 EPC project during the quarter and work on the 3 other EPC projects are going on as per schedule. We continue to see some challenges in the EPC project execution. We have secured a few large tower and hardware supply orders in Brazil. The supply prices and availability has eased significantly, but it's still not fully resolved. Our Railway business had achieved a revenue of INR 950 crores for the quarter, delivering a growth of 9% vis-a-vis Q3 last year. The business has secured YTD orders of over INR 1,500 crores, a growth of 45% over last year. In line with this diversification journey, the business continues to deepen its presence in technologically-enabled areas of metros for orders in OHE, power supply systems and track laying for metros and has also widened its presence in the conventional segments with orders in speed upgradation, port connectivity, tunnel ventilation and railway citings. We have seen some good success with orders in these new areas, especially in the semi high-speed rail order missions of Thar, where our current market share is over 70%. The overall tender pipeline in the U.S. continues to remain strong, with a blend of conventional, technologically-enabled emerging areas as well as international opportunities. Though the pipeline is robust, there is a delay in tendering awards of our tenders under evaluation in Railways. The total amount is around INR 6,000 crores currently, which is under evaluation. Additionally, we are also witnessing increased competition especially in the conventional segment with the entry of road EPC players and Tier 2, Tier 3 EPC contractors. However, now that the requirement of tender bonds has come back from 1st January, we do see that the competition will ease up a little. Nevertheless, with the continued thrust on execution, a strong tender pipeline and an order book of plus L1 of over INR 5,500 crores, we remain confident that Railways will continue its growth momentum going ahead. Our Civil business continues to be on a high-growth trajectory as we delivered another quarter of strong performance with revenues of INR 480 crores, an impressive growth of 1.8x vis-a- vis Q3 last year. The business has also seen a record year in terms of order inflows with orders exceeding INR 4,800 crores in YTD FY '22, a stellar growth of 7x over last year. The business continues to strengthen its presence in the growing areas of global infrastructure and water pipeline segments, with the second large order from Chennai Metro and 4 orders in the water pipeline segment has been averaging towards railway metros. The company is now executing 7 metro and RRTS, aggregate value of INR 4,500 crores. The business continued its diversification by flowing in public spaces to its first airport order, reinforcing presence in the industrial with orders, L1 in metros and mining, cement and FMCG segments and expanding footprint in data centers. The uptick in order intake has significantly enhanced the order book plus L1 to an all-time high of over INR 7,000 crores. We are confident that this business will continue to be one of the key growth drivers for us going forward. In oil and gas business, we have completed the acquisition of 100% equity in Spur Infra in October '21. And Spur as I mentioned earlier, the wholly owned subsidy of KEC now. The business has started demonstrating exemplary performance post acquisition as it has secured new orders of INR 300 crores and clocked revenues of INR 70 crores in this quarter. We are also progressing well with the integration of Spur Infra with KEC's policies and processes, delivering synergies for faster growth. With the order book in excess of INR 800 crores, we are confident that this business will become a significant part of KEC's overall business portfolio going forward, both in India as well as overseas. Our Cables business continued its superior performance as it achieved its highest-ever quarterly revenue of INR 387 crores with a robust growth of over 27% vis-a-vis Q3 last year contributed by growth across all segments. The business is operating well with the development of new products, it has also received approvals for 2 new products during the quarter. In Smart Infra, I'm pleased to share that the business has secured an order as a master system integrator, MSI, for Smart City components for 3 smart cities in Punjab. In terms of execution, the existing projects of Aurangabad and Bidkin Smart City and the project for integrated perimeter security system for defense airports are progressing well towards completion. Overall, we are pleased with our revenues and order intake despite significant challenges. We are making good progress in deploying several mechanization, automation and digitalization initiatives across projects to improve productivity and quality of execution. However, the business environment continues to remain uncertain with the prevailing high commodity and freight costs and uncertain pandemic scenario. I would also like to add that we have commenced execution of quite a few projects in the T&D business, which have been secured recently based on the current commodity logistic costs. Having said that, with a strong focus on execution, robust order book, plus L1 of over INR 28,500 crores and a strong tender pipeline, we are confident of a good performance going forward. Thank you. And we are open to questions now.

[Operator Instructions] The first question is from the line of Ashish Shah from Centrum Broking.

First question is -- yes, first question is on the working capital side. So there, our working capital has been increasing, we're saying because of Railways, et cetera, but what we're generally observing in many other engineering construction companies is that working capital broadly seems to be in a pretty okay shape. And the government also is very clearly releasing more money for -- to the various departments, et cetera, for payment. So why this particular situation that is happening with the Railways that we are facing?

What's happening is that there is some churning happening in the railway ministry. In fact, there's a talk today, I was seeing on television also saying that railway PSUs may merge et cetera. So I think there has been some internal reshuffling happening between [Technical Difficulty] and all that of railways -- within the railways, general railways and the various PSUs, like RVNL, RITES and IRCON, et cetera. So I think that's getting sorted out. And I think even in the month of January, we did risk while lot of parts on railways. And the other piece is that on the net basis railways, we were cash positive for the last few months. The collections have been slower. And I think the other 2 issues which were there is, one is you are aware that we have got some AR in Afghanistan, which has not yet come. And the third piece is that actually we have funded SAE to meet the losses. So that's ongoing. So I think overall, we don't expect that the situation both from railways and overall as a company, we will start improving. And like you quoted, I'd say almost back to normal. Rajeev, do you want to add something on this case, go ahead.

Vimal, I think you have elaborated. Basically, these are the 3 main issues which have impacted the -- some working capital, but we are close to about INR 2,900 crore on a net debt basis as against our guidance of INR 2,500 crore. These also appreciate -- one more thing, there has been a growth for the 9 months' period is roughly about 8% to 9% growth also is there in the company. So that also takes some additional working capital. But nevertheless, we are quite conscious of this fact that our net debt has expanded by INR 300 crore, INR 400 crore over the guidance that we had been giving to the investors, and we are quite confident that we should be able to bring it within our guidance of INR 2,500 crore by the end of quarter 4.

And sir, besides the net debt, there's also the acceptances number, which has increased substantially, as our interest costs, which typically we expect should remain in the 2% range has actually gone to 2.5% or so. So even that part is probably adding to the interest burden. So why is that also increasing, sir?

So basically, if you look at for the 9-month period, we are exactly at the same level at 2.3% of the interest cost as against last 9 months also. So this is exactly in line with the last year. And only in the quarter 3, we have seen the interest cost slightly higher and also because of the fact that interest rates have also expanded in Q3. If you look at the GSEC securities, the interest rates have increased by almost 70 basis points from -- compared to the last year. The commercial paper market is also showing the increase in the interest rates. So there also, we are seeing roughly 0.5% to 0.7% interest rates are going up. So there is an interest rate increase all around. So that is also one of the factors. And obviously, quarter 3 has been some issues that we have already highlighted on account of the delays in some railways and plus we have funded the losses in SAE. And obviously, the Q3 is the first quarter post-Afghanistan event where the money has not come. Q1, Q2, we had received money from -- regularly from Afghanistan. So these are the 3 factors. And we are quite sure we will normalize it by Q4.

Just last question, sir. Yes. Hello?

Yes, go ahead.

Just one on the SAE part, if you can just give us a glide path on how do we see the losses kind of normalizing, are we achieving a breakeven or a profit? If you can just tell us how the Q4 is looking and how early next year should be -- how should we be looking at that? And also on the SAE, you said, we funded some losses. So if you can just indicate how much have you funded during this quarter or this year, it would be helpful.

So, Ashish, we, as I mentioned in my opening remarks, we expect that 2 old orders which were loss-making, there actually one of them got completed over the last quarter. One is going to be -- actually one of them should be completed this quarter. One will be, I think over in this month itself, February. And the third order, there had been -- we had arrived at a settlement with the client where there have been some de-smoking et cetera. So whatever is our smoke will also get over in this quarter. So hopefully, with this all the losses on SAE for the old projects will get closed in this quarter. So this quarter, we'll also see some pain very clearly. On the new projects, I think we are generally going well. So we do hope that from Q1 onwards, we should start seeing either breakeven or maybe some minor losses if we continue, which are not accounted for this quarter. But broadly, we do expect that from Q1, we will start seeing better numbers from SAE, although we had expected to see better numbers in Q4, but unfortunately, the projects could not be completed due to various factors, some of it within our controls, some not in our control. And so Q4, we'll still see some pain, not more than Q3, definitely, but it doesn't look like that will be more than that. But Q1 onwards, I think the pain will subside significantly. We may even -- hopefully, we are trying to see if we can turn positive. But even if it is not that would be very small numbers, okay?

On the loss funding part, yes.

Yes, I think we have funded around INR 200 crores this year, Rajeev?

Absolutely, Vimal, we have funded. See, in the first 9 months, we have lost close to about INR 250 crore. The number is there in front of you in the consol number and in the subsidiaries account. So that number ultimately has been funded either partly by way of equity and partly by way of taking additional loan. Okay?

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

Congratulations on a decent performance during this quarter. Sir, my first question is, if I see the risks which are emulating for the company. So one is that working capital has been expanding, if there has been delay in collections from railways? Second piece was SAE, then Afghanistan and then commodity prices. So these 4, 5 factors I mean have been impacting that negatively. So do you think the worst is behind us with respect to these structures now?

So if you look at -- let me start with commodity price, which is the most talked about thing. I think on the steel side, we have been continuing to supply towers as we have said earlier. So I'll say a large part of the worst on steel is behind us, okay? Aluminum is something which continues to be there. We have not done much of aluminum supply this year, and we don't expect to do it for at least the next few quarters because that's why the projects don't require. Whatever the projects required had been fulfilled. So if the aluminum continues at this elevated level, then we will see some pain happening, but that pain would be accounted for in the margins, which we will discuss, let's say, later on for next year, okay? As far as Afghanistan is concerned, I think we are in regular discussion with all the multilateral lenders, et cetera. And we do expect that we will start seeing some light of day in Afghanistan. And as you may be aware, Government of India has already sent 3 consignments of the life-saving drugs and now we've been sending 50,000 tonnes of aid through Pakistan. So clearly, we are seeing that the interaction at the government levels are increasing. We are also seeing U.S. government opening up and talking about lending money, et cetera. So all the lenders are very keen that they pay their money. However, they are waiting for opening up of the international banking transactions, which the talk is that they will open up very quickly. So I think Afghanistan is that. Working capital, as I mentioned earlier, to Ashish, that we do expect that in Q4, we will -- international, we should be able to normalize to a large extent. SAE, again, as I said, Q4, we'll see some pace, but I think after Q4, we should start seeing a significant improvement in the numbers. I hope I've answered all your questions, Parikshit.

Yes. Sir, my second question was on SAE. So after ironing out the issues in the 3 projects and these projects getting completed this year and some pain may get carrying forward in the first quarter next year. But from the bidding perspective, profitability growth -- and so how are you positioned now -- SAE's position to now capture the opportunities, which may emerge in next year. So are you seeing opportunity for SAE playing out over the next year?

So Parikshit, one is that we have had some management changes in the Brazil setup, and we have sent 1 gentleman. I don't know if some of you maybe know him, but Rakesh Kumar was running -- he was part of our International T&D that running down Railways portfolio and he was at Kalpataru and he is right now back. He's gone to lead the operations in the last 2, 2.5 months. Our order book there is currently around INR 1,000 crores. A large part of that is now on power supplies and hardware supply. What we have done over there last year once we saw the problems which were happening, we had actually slowed down on EPC order intake till we sort of -- settled all the issues. Now that all the issues are getting settled, we will start to get ahead of the market, which is expanding, okay? There is a large auction in June and then there's another talk of a larger auction in December. So we do expect there's a market to pick up. And also as part of the entire shape up, we have seen a few smaller EPC companies falling off, okay? So I think competition will also slowly start coming down. And the last piece is that we have clearly seen the steel prices in Brazil and availability, which was a major issue, stabilizing, okay? So we do hope that next year onwards, we should start seeing better numbers in Brazil and SAE. The other part, which does not get dominant discussed is our Mexico operations, which also fall under SAE, and we are now clearly seeing that a lot of order traction coming out of the North American market, especially the U.S. market. After quite some time, I think our factory in Mexico is now running full and we have a decent order book for the next 2 quarters also.

Okay. Sir just lastly on the Railways segment. So if I understand correctly, now you have the metro projects, which are partly funded by state and sometimes funded by multilateral agencies jointly and the central government. So what is the really -- which part of that Railways is really the pain point in terms of collections for you? Sir, if you can just give me a little more granularity on that? And also, the number of debtor days or how much the total receivables or net working capital trend over the last 2, 3 quarters, how it has increased in this segment?

Rajeev, can give you the details. But on the broader level, the pain point is still on the conventional railway. The pain point is not on the metro side or the joint ventures or the multilaterally funded, okay? The pain point remains in the conventional railway. As I said, there have been some changes which are happening in the overall system, which I think are now getting sorted out. And that's why I said that in January, we had a pretty decent collection. So Rajeev, why don't you just give out some numbers on so other things on railways, which he has asked?

So Vimal, I don't have the exact railway number. In terms of the ER, ER, my sense is it should be approximately in the ballpark of INR 2,500 crore, but exact number I can provide later on.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Sir, first of all, congratulations on the robust order book. In terms of receivables and working capital was again going to be my question. I think a lot of it has been asked before. So if you could just give us the top 3, 4 debtors who are there with you, that would be very useful in terms of debtors and amounts because if one of chunky payments comes, then this INR 2,500 crores would be easily achieved. So please if we can get that, that would be useful.

I'll ask Abhishek to give you later on, but I don't think there are any single large chunky debtors that way. I don't think -- generally, our debtors have been spread over. See, what has happened is that at one part of trailing, Power Grid used to be our biggest client, okay? Then it became RVNL. Of late now the business has actually spread across, especially with Civil becoming a large business, our debtors are actually spread across. So I'm not seeing if there's some very large debtors, but basically, I'll say some are 1 or 2 zonal railways. And that is also because -- one more thing which we did not discuss is that the nature of business with Railways is changing with most of the tenders now coming out on an EPC basis, okay? And with the change in the business, there has been some discomfort in the zonal railways on how to pay, how to pass bills and want to say an EPC and all that. I mean, it's now getting sorted out because all the bills and all the projects are now coming on EPC. So largely, it would be the 1 or 2 of the zonal railways, it would be RVNL. It will obviously be Afghanistan. Therefore it will be 1 or 2 railways, I don't think international, we have anything major. Rajeev, anything else you want to say?

No, no, Vimal. It is largely basically what is happening is partly it is Afghanistan issue. Obviously, Afghanistan would have continued normal, probably we would have received INR 150 crore lower number on the debtor side and working capital. But largely our debtors are all spread out. Actually, we don't have any chunky payment like INR 200 crore, INR 300 crore from a single client, nothing of that sort. So even in Railways, where we are talking about, let's say, some delays. So they are spread out on a number of projects. It is not that only 1 or 2 projects, there is a significant amount, which is pending.

So, it is across various projects. It's spread across various projects. And each project in railways, each zone is different. In fact, we have got, I think, at least 13, 14 clients in railways, okay? So it's not one single client, except obviously RVNL was our biggest client, so there will be some outstandings from RVNL. Others are all spread across railway zones and all that.

Sure, sir, I understand that is it that while the projects may be spread out, the nature of the delays seem to be similar across the various -- because of all the things that we have well explained. So if we could have that railways number, like the previous quarters also, that would be very useful. But moving on to the international business...

Abhishek will give you the numbers, okay? Just Abhishek, he can give more data on the numbers. Yes, please go ahead.

Sure, sure. The second thing is on the international projects. Number one, I have 2 questions. One, given all that has happened, wasn't there a concept of a force majeure because a lot of the things you've done, which is beyond your control, and that seems to be a tough position to be in. And the second question is that you had mentioned that you'll be hedging some of the aluminum prices, is there any possibility at all? I know there's no active steel hedging market, but strategically tie-up with a few suppliers who will give you steel at a contracted price. Is that possible at all? That will reduce the risk, especially because your T&D order book you said is significantly from international projects where the commodity price pass-through is not there.

Vivek, steel, there some hedging mechanisms will be realized, except if you contract internationally, then by the time, it will take 2 or 3 months, 4 months and all that so that's the only way. Otherwise, if you look at the agency, the government sector doesn't hold it even for 1 day. At the time of loading whatever is the price is applicable. Obviously, if you look at JS Steel in Agra that would be a price which holds until they announce the next change in the pricing, okay? Aluminum, obviously, you can hedge, but there will be time gaps between when you bid and when you have been awarded, et cetera, which causes this problem. And I think one thing we have to understand is that with COVID, there has been a huge volatility in the base levels. And a couple of reasons why we see some of the impact of raw material prices is that if you remember, when this whole thing started in March and all that in India, et cetera, in otherwise, the metal prices and all have touched the rock bottom at that point of time. And that was the time when we were ready for our field projects. After that the entire project pipeline, et cetera, started drying up, and then the material prices went up. So by the time the projects came back to us for award, we had no choices, either you refuse all the projects and take it all your revenue as from company within that or take up all these projects knowing well that the prices have gone up, but the expectation all that metal prices have never remained at such an elevated level for such a long time. My entire life I have not seen the elevated prices of aluminum or steel and all that of 15, 20, 24 months. Continuously, they are not even coming down. So I think the choice we exercised and we had talk with everyone and then that we should protect our revenues, which is why you see that in spite of all the problems, for the 9 months, we have had 8% growth in revenues, but it was a conscious choice on the metal side.

Sure, sir. I mean, I can appreciate the scale of the problems that you are facing. So well done and all the best, sir.

Thank you so much. Thank you.

The next question is from the line of Swarnim Maheshwari from Edelweiss Securities.

Sir, my first question is on SAE. Now in one of the earlier participant's reply, you mentioned that you expect to breakeven from Q1. And I believe that we have won about INR 1,000 crores worth of order in 9 months so far. So is it that the new orders are also coming at quite a low margin? Or if you can give some sort of guidance on the SAE margin trajectory for FY '23/'24.

So Swarnim, difficult to give you a guidance trajectory today. The new orders have not come at a low margin, if you wanted to call it. The margins would be between 6% to 15% or 13% some of the orders. So it's not at a lower margin when you have taken the orders. The issue is that there is a large volatility still continuing in the steel prices, specifically and logistic cost, okay? Unfortunately, Brazil has had last couple of months have also been pretty bad in terms of rainfall, et cetera. I think the climate change, we are hearing about the Amazon with deforesting et cetera. There have been significant changes which have happened. So where will you end up with those margins, I do not know today, but the orders have been taken at decent margins. Number one. Number two, what I had said was that the old and legacy orders will get over in this quarter. So I think a major pain and whatever else what we are saying that INR 70 crores, INR 80 crores every quarter should get over by this quarter end. Okay? The new orders I think are reasonably okay. We have to wait and watch when we are closing those orders that we're executing what happens. I said that from Q1 onwards, we will start seeing the turnaround in the SAE fortunes. Will the Q1 itself will become positive or Q2 will become positive? I do not know honestly today. We expect that there will be significant pain or large pains in Q1. And that's what I said, and that's what I'll repeat again, Swarnim. Yes?

So Vimal, just to add what you have said, basically, the order intake in the first 9 to 10 months in SAE have been largely on account of the power supply and the hardware supply and which are -- which we have taken at a very healthy margin. In fact, ranging from 8% to 10% margins. As Vimal said that, unfortunately, the prices of raw materials have still not stabilized. So we'll have to see that's what happens, but there is an IPCA adjustment, which is available. But definitely, all these orders which have been booked, they have been booked at a healthy margin. And obviously, at the current prices applicable at the time of booking the order. So our sense is that these orders of supply of hardware and towers, they will be definitely giving us a profit, okay? They will be in profit even when we execute -- even, let's say, in terms of the volatile raw material prices. The only thing is that we have not bid any EPC order. So that we'll have to decide going forward.

Got it. Got it. Sir, my second question is our Civil business is scaling up really well. And on the intake side and on the revenue side, I just wanted to understand what's the margin trajectory over there? Are we broadly converging there with the T&D margins? Where are we in that trajectory basically?

So I think our margins are broadly converging towards T&D both ways. One was because the T&D margins came down and second one was the T&D average went up, okay? So I think we are quite happy with our margins which we are getting there, okay? And also on the working capital and cash flow and also on the widening gamut of orders, like as I mentioned, we have got I think now 5 or 6 orders we are executing in water. We just got our new data center order. We just -- we are relevant in a very large public space order, which we have been trying for long time. So I think on the Civil side, I was wondering, we are pretty happy actually on all accounts.

No. That's great, sir. But that's really happening to see our diversification strategy is actually kind of getting eradicated again. Sir, my one last question on bookkeeping. The L1 pipeline of INR 4,000 crore or INR 4,500 crore, so what's really the breakup with respect to verticals?

I don't have it. But I think 50% of it is Railways and balance will be T&D, which I can give you, but I think broadly, that's the structure of it, okay? Broadly 50% would be Railways and 50% would be non-railways, yes? I think T&D is around -- yes, yes, I think that's the order. Sorry, T&D is around 30%, non-T&D is around 70%. That's the breakup.

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

My first question is you had secured inaugural order in European Union as well as right in this quarter. So what I wanted to understand is, what are your expansion plans in the EU going forward? And is there any synergistic link with the UAE factory that you had set up, I think, in the last quarter of the previous fiscal? So can you help us on that, that how does the business model work here?

So Priyankar, we are right now not looking very actively or aggressively at EPC orders in the EU, okay? This order was on a bordering country, which probably classified as European, it could be classified as almost Soviet Union, so it is in East Europe. We will continue to look at increasing orders in that region, okay? We're still not looking at hardcore West Europe and that side. However, with the Dubai factory, and I think you very rightly classified that way, we are looking at doing some, let's say, tower supplies to that region. And we have got quite a few inquiries coming in from that region. So maybe hopefully next year onwards, you may start seeing some supplies from us to that market and another market which we did not talk about could be the Australia market, where there are some large projects coming up and with the current political relationship between Australia and China, we do shift to see that there would be a shift in the procurement from Australia. So EU and Europe -- and Australia could be 2 markets where you could see some tower supplies happening from the Dubai factory.

Okay. And sir, if I have to ask, can you give us a status like I can understand that during 1H FY '21, the orders that were secured in a low commodity price environment, that is where we are facing the pain now, right, due to the increase in the commodity prices. So are we largely done on those projects like, which were like secured probably in 1H FY '21 and some commentary on that? Or -- and when can we expect the overall broader level margins to sort of stabilize? I mean you used to do something like 10%.

So Priyankar, if you look at our standalone margins, we're 10.2% even today with all the problems which we have faced, okay? So once we are able to sort out the Brazil issues, which we have been saying we'll be able to do it. Unfortunately, we have not been able to do it as of now. So I think margins will start coming back. When? I do not know, to be very honest with you, whether it will be Q2 or Q3 next year, where we start showing the required levels of margins. Now Q4 will definitely be [indiscernible], so I don't see a significant improvement happening in Q4. I don't think there will be deterioration also. I don't see that happening. Coming back to your first question on H1 orders of FY '21. I would say largely, on the steel front, a large portion has been done away with. We are supplying most of the steel, et cetera. Balance will probably get supplied in this quarter or maybe Q1, which is why I said that the margins will start showing a significant improvement from probably Q2 or Q3 next year. It wouldn't be something which we have not yet supplied. We are slowly doing it, and we are still hopeful and [indiscernible] a lot of [indiscernible] advice saying that [indiscernible] post Chinese New Year and all that. Like copper, aluminum will also start correcting. So we will wait and watch. We still have -- the project requirements are not there before at least another, I'll say 3 quarters, not before Q3. See the way we have taken those orders [indiscernible] knowingly, most of these orders are pretty large orders for -- unlike the normal transmission order of 30 to 36 months. So that has given us a lot of flexibility in timing our supplies. I hope I'm clear.

Yes, absolutely clear, sir. And since your order inflows have been quite strong so far, like 9 months, like 140 million plus, so where can we hope to close it this year? I mean FY '22 -- I mean, a target that you may have in mind.

Our internal targets are close to INR 18,000 crores, to be very honest with you, okay? So we're still trying to see if we can convert some of the L1s into orders and we have got, as I said, a large tender pipeline. So frankly, we would like to reach there. I'm not sure whether we can reach that or not. So I think we'll end up between 14 and 18 probably, okay? There are some very large metro tenders to be quoted. There are a couple of large tenders in [indiscernible] to be reported, okay? If things go well, we should be doing a reasonable amount, maybe 16,000, 17,000, I don't know honestly. [indiscernible] Forget about the 18,000, okay?

Sir, the last question from my side. So on oil and gas, this new subsidiary. So what sort of growth trajectory can we expect from that? So should the past growth like we have seen in, let's say, railways and civil, can that be taken as a sort of a proxy? Can we achieve that sort of a growth with this business?

The growth should be faster than that, okay? The reason is that railway and civil was completely done organically. Where it is inorganic growth where you have acquired a large amount of capability upfront. So my view is that if you take the current company which we acquired and we had said last year there is INR 100 crores of turnover, we say we probably expect them to do almost INR 250 crores of turnover, okay? Although part of it will not come in our books because we acquired it in October. So I think next year onwards, we will definitely see 100% or maybe 200% growth at least in the next 1 year or maybe even 2 years. So the growth trajectory for oil and gas will be much faster than what we had seen in the initial days of both civil and railways.

And sir, margin wise, it would be broadly similar to the overall portfolio or...

Right now, we will -- we think it will be a signal. I think the good part there is the capital employed is pretty less. So even if [indiscernible] the level it may be slightly similar or lower, but at the PBT level it will be equal or better than the current businesses.

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

So my first question is around the core T&D business. Firstly, given that the overall execution in the core portfolio has been weak, is what I see, can you just help us understand what was the broad revenue growth between domestic and international T&D in the current quarter or YTD? And given the fact that international T&D orders have been fairly good and backlog is up by almost 50%, so what is the kind of ramp-up in the T&D revenues that we expect over the next 12, 18 months, both in terms of revenue going forward in the next fiscal?

So basically, what is happening, Renu, is that India business has degrown and the international business has grown, okay? And if we look at probably the numbers, we would have probably grown by the same percentages between the 2 businesses. And including SAE, I think we had a negative number of 7. Going forward, clearly, we have seen a large ramp-up happening in the international business. I think that next year international will probably, again, after checking my note, we'll probably grow by at least 35%, 30% from the current year in international. India growth would largely depend upon what happens with the Leh Ladakh and the Green Energy Corridor orders, okay? [indiscernible] import order expected today, if I'm not wrong, 1st February, on the entire [indiscernible] orders and the representation is being made and all that. So that order should come in today. That should also aid. I've been hearing some pieces of what is happening. But the Leh Ladakh, I think the Phase 1 has been given to Power Grid. That's around INR 18,000 crores of orders to be done by Power Grid. Right now they are in the midst of [indiscernible]. So those orders get issued by let's say during Diwali or something, there will be significant improvement happening. Otherwise, I think, India, we see the business flat. But we're seeing a lot of growth happening in Bangladesh. For us, Bangladesh is part of the India portfolio, South Asia, et cetera. Bangladesh, we have seen a lot of new projects coming up. International [indiscernible] is doing very well. And also part of the shares is doing well. We already have got one more order in [indiscernible], which we announced last night. And there are a couple of new tenders which are coming up. So I think international, we are very happy with what we are seeing.

Right. Because overall, when we see at the last few years, our order backlog in the international -- as an overall transmission business [indiscernible] has been approximately INR 10,000 crores, but on the revenue side, we have struggled to broadly move beyond INR 6,500 crores. So I was just trying to understand while this year has been plagued by multiple challenges on domestic side, somehow on the revenue side we have struggled to deliver similar kind of growth despite orders coming, shorter execution cycle, et cetera. So was just trying to connect the dots, where are we missing or lagging either in terms of mix or execution headwinds on the way? And if we see the environment improving, then probably coming towards '23, '24, can we see ex of SAE, the core transmission business coming back to double-digit growth or that still remains a challenge?

So the expectation is that next year we should have double-digit growth. Expectation is that, that next year we'll have double-digit growth definitely in the transmission business, because this year has been bad in any case, okay? And with the amount of aluminum, which we discussed, and with steel and all that, which we have deferred for the last 12 months, okay? I don't see any major issue or having a double-digit growth in this industry? And secondly, coming to your question of -- I was not very happy with the wording, struggling to this. I don't think it's a question of struggled in execution, et cetera. I think part of it is, as I said, deliberate, where we have delayed the execution going forward. Part of it is geopolitical, where Afghanistan, since last August, we have had 0 execution. And we may have done maybe INR 150 crore, INR 200 crores. Actually, our plan or to do more than INR 300 crores, INR 400 crores of execution in that country during this year. There have been various reasons, but not actually inability to do construction, that's the word we say.

Yes, I agree. There's a combination of external factors also here.

And then also COVID and all that. Today also we are seeing that again COVID is coming up and so these are issues. Like Brazil has not issued a single visa for the last 18 months. They are just issuing the first visas now. So we could not send anyone. Like we can keep on talking about SAE struggling and all that. Unfortunately, COVID did not help. With all the problems which we had, we wanted to strengthen the team and our investing just [indiscernible]. Okay? I think that's what has happened in transmission. But I think I'm very confident that next year we will have significant growth in transmission.

Sure. And along with the same time next year, by the time, as in by 1Q, most of the fixed price, all fixed price projects will be broadly done with. And margins should start trending, at a company level, back to 9% to 10% levels as we come towards mid of next calendar year -- next fiscal year?

I think most of that will be done with except for some part of capital supplies, okay? Because we don't need to commit the supplies till September. And unless the aluminum prices come down, I don't see supplying at a loss or a low price sale. When I can still wait for a chance for it to come down, okay? So except for that piece, which may or may not happen, you are absolutely right that by September, we would be out of all our orders.

Got it. And in the Rail segment, while we have done pretty good in terms of diversifying from the mainline to a variety of different end markets with more technical specifications. But overall, do we now see the growth in the Rail EPC segment moderating or coming in line with the T&D kind of portfolio with 10% to 15% kind of growth? The very high sales growth of 30%, 40% broadly is behind us. Am I right? Or probably we might still see some upsides in growth as and when we foray in international space in this vertical?

So I think you [indiscernible] that we will not be able to see anything beyond 11%. Best would be around 20%, if it happens. See that the base is growing. This year, we'll end up close to INR 4,000 crores. For a INR 4,000 crore business, I cannot expect to have a 30%, 40% growth. That's one part where the base has gone up. And second, obviously, if you remember, we have been talking over the last 2, 3 years about electrification coming to an end [indiscernible] some pieces are changing. However, we are very confident of what we are seeing on the metro side. We are already very close to bagging some international orders; one of the railway orders what we are talking is in the international market. So maybe the order size in international are larger. So if we are lucky and if we get 1 or 2 large orders, then maybe in some years, you may see a spike up on the percentage, but I think for the time being, 15% to 20% of growth should be, I think, a good estimate.

Sure. And sir, lastly, definitely would like to appreciate and acknowledge management's effort to successfully diversify its portfolio into the civil business, civil or oil and gas, and build a good credible portfolio there. But along with the diversification, especially in the non-T&D business, the core working capital intensity of the business as a portfolio for KEC should have substantially reduced. So from the structural perspective of working capital intensity reducing with changes in mix, by when do we expect the changes to start actually reflecting in terms of our books. Net working capital intensity coming down and probably incremental growth requirements not coming on the debt side and probably deleveraging processing some acceleration there based on the free cash flows.

See this quarter itself, if you look at our non-T&D business, it was 52%, and T&D was only 48%. So going forward, with the growth numbers, which we talked about 8% to 10% in railway and more than that, civil will definitely grow by at least 50% next year. And oil and gas will probably grow by 150%, 200% next year. So clearly, and if you look at civil and oil and gas, there the working capital is virtually negative, okay? And even on [indiscernible] cable business doing well, there again the working capital is negative. So I think once we able to push these businesses more and more, we do expect that the numbers will start improving. Rajeev, do you want to talk about this going forward and what we expect on the working capital, et cetera?

Clearly, Renu, we expect that civil vertical has a much better working capital intensity as compared to the, right now, T&D and the railways. So with the expected growth in the civil vertical, we expect, over the next at least 2, 3 years, it will grow at a much higher percentage. And similarly, cable has shown decent growth this year, by almost 20%, 25% growth over the 9-month period where the working capital is negative. So both these verticals put together, I think, will shoot about 20%, 25% over the next couple of years' time. And then we expect the working capital intensity to be much better, okay? And that will help us to overall, let's say, manage our working capital more efficiently. Maybe we'll be able to reduce our overall working capital debt and interest cost accordingly.

[Operator Instructions] The next question is from the line of Aashna Manaktala from ICICI Securities.

Sir, my first question is in terms of interest cost. So for 9 months, as we are now at 2.3% of sales, as you mentioned, and interest rates globally and both on the domestic front are going up. So how much further can we expect it to expand for the coming quarters?

Our expectation is that interest cost for the year as a whole, still we expect we should be able to manage within 2%, which is comparable to the last year. Reason being that Q4, we expect a much higher revenue in Q4. And generally, our Q4, the interest cost goes down below 2% because of the higher number and also because of the larger collection, which generally happens in Q4. So our expectation is that the interest cost for the year as a whole will be around 2%.

Okay. And coming to SAE. So as you mentioned that recently you've not booked any EPC orders. So out of the total order book that you have of around INR 1200 crores, so what would be the proportion of the EPC orders in the overall order book, if you can give that number?

So right now, in the total order book of SAE, we have close to about INR 1,000 crores order book and EPC portion will be about 20%.

Okay. Okay. And if I can squeeze one last question. In terms of our brand projects, like you mentioned there has been no execution lately. So is it due to difficulty in terms of execution? Or is it that the payments from the multilateral agencies are being stuck?

So it's not a question of multilateral payments and all. It's basically because of the Taliban takeover everything has been put to a stop, okay? There is no one from the multilateral agencies on the ground. So while we have the stores, we are maintaining everything, around 50, 60 local employees at the sites, maintaining everything. Obviously, the entire payment mechanism has been frozen. If we do the work, [indiscernible] payment for that, which is why the projects are on hold.

Okay. So how do you think it is going to be going forward? Or it is going to be a challenging thing going forward?

It will be a challenge for some time, but I think very clearly the world and the western world cannot keep Afghanistan's payment systems cut off. So there is lot of talks happening saying how will they resume the payment system. The dollars have to be [indiscernible]. They have to be made available for buying [indiscernible] shares or buying other things and all that. So I think it's a matter of time that basically the U.S. and the European Union [indiscernible] can agreement with the Afghanis on what needs to be done, how the payment channels have to be reopened. Once the payment channel reopens, we have had enough discussion with all the multilaterals who are ready to make the payments. It's not a question of that we are not going to make the payment. It is that channels are blocked right now. Once the channels reopen, the payments will happen.

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

Sir, firstly, if you could explain, sir, what is our scope of work at data center and the oil and gas portfolio, sir?

So data center, we make the complete data center. In the first order, we have done everything, including interiors and MEP and [Foreign Language] or some other thing. The whole thing was a plug and play where the data center operator can come in and then install whatever he has to install. So that one was a complete civil, mechanical, MEP, [Foreign Language] power, all that. Currently, when you do a larger data center, sometimes it's a combination. [Foreign Language] The second order which we have got is right now only civil where we will build the entire data center, the MEP and electrical will come in as a second package, which we are hopeful of getting also. [Foreign Language] Oil and gas right now, so that will pass. One is our civil business, which is quoting for various oil and gas projects, [Foreign Language]. That is civil and mechanical. The second piece [Foreign Language], that is for oil and gas pipeline. [Foreign Language].

Therein also sir, we are an EPC player, [Foreign Language]

Absolutely. Absolutely.

Sir, how has ForEx played, sir, for this quarter? What is the impact of ForEx? And [Foreign Language] aluminum has been the talking point for this call, sir. Many times, you have articulated and spoken about aluminum, but sir [Foreign Language]. What is our requirement? If today, we have to execute, what is the amount of the quantum of aluminum? And what could be the MTM impact, sir, if we can extrapolate the same, sir?

I don't have the exact number today. I think we'll have to wait and maybe if you could talk to Abhishek, he can give you the numbers. [Foreign Language] we will take our own time to supply. Fortunately, these are old -- these are orders which are long term in nature. [Foreign Language]. Forex, Rajeev, you want to give an answer on the ForEx, please?

Yes. ForEx has been working well for us. I think we are selling whatever forward is to be sold. So we are taking timely action and we are actually selling and we have reduced our foreign currency borrowing, and we are selling more forward, which are future receivables on the confirmed orders. So total for the 9-month period, I think we have booked a gain of roughly about INR 50 crores, INR 55 crores on a net basis.

And for this quarter, sir?

This quarter, I think it is about INR 15-odd crores, if I'm not [indiscernible].

INR 15-odd crores, and INR 50 crores, INR 55 crores is the total 9-month number?

That's right.

And lastly, sir, about quarter 4 being the largest quarter in terms of execution also. So last year, sir, out of the total top line, if I'm not wrong, we did 33%, 34% of our revenue. So this year also, sir, the ballpark number should be in that vicinity only, sir?

Broadly, we are hoping that, although we have earlier said that we'll do 58% and all that, but that is out of the window right now with the current way of things are happening, okay? I think we are hopeful that we should reach an overall double-digit growth. For that, I think I don't have the exact number, but I think [Foreign Language].

I didn't get the last point, sir.

I said, normally 35% to 40% [Foreign Language], and I see no reason why this quarter also we will not be at that number, okay?

Right. And last point on the tax rate, sir, we will be MAT paying?

No, no. There is no MAT. We are paying a regular tax. So we are not in the MAT because of the losses in Brazil. But at the stand-alone level, we are doing decent. So we are paying normal tax rate. So on the Brazil losses, we are creating the tax asset.

Right, sir. Sir, lastly, on this water pipeline layout also, sir. We have seen that EPC players have not been releasing orders, even holding orders from the government. [Foreign Language] Jal se Nal scheme, and all, how are you seeing the traction? Just like, in your case, you are just extending the deliverables for the T&D segment because of the purchases in aluminum and other base metals. Even in the DI Pipe segment, what we are observing is that the tendering process is not happening because of the higher raw material prices and the margins being completely squeezed out. So sir, finally, when will this deliverable start happening? And how is the pipeline going to look like and [Foreign Language]?

[Foreign Language]. The good part, Mr. Kapoor, is that most of our orders may be taken this year with the current pipe prices, okay? So we don't have any major issue in releasing orders for pipes and all that. The second piece is that the EPC orders in these schemes have a price variation also. The third piece is that clearly, with the steel prices coming down, the DI pipe and all other pipe prices have also started coming down. So at least we are not having any major problem in releasing orders for the DI pipes or anything. In fact, I mean, you will see that in our [indiscernible] business, water pipelines, and all that things, we have a very decent growth.

Thank you, sir, for all the elaborate answers, sir, and all the best. And you have told about some key changes at the team. I missed that point. Any key changes at the team?

We just said that we have a new CEO in place in Brazil.

Come again, sir, Hello?

We have a new CEO in place in Brazil.

The next question is from the line of Charanjit Singh from DSP Mutual Fund.

So sir, my first question is firstly on Civil infra. So Civil infra, the quality of jobs and the nature of jobs now which we have started taking has improved significantly. So from a margin perspective, any thoughts in terms of what we were expecting earlier and what we will be able to deliver going forward? That's my first question.

I think, Charanjit, on the margin front in civil, I'll say reasonably we're pretty happy with the margins which we are seeing. I think everyone had cautioned saying that the margins in civil are less and the capital and all that. I think we are very happy with the margins which we are seeing and that is across all sites, whether it is metros, whether it is water pipeline, whether it is residential or industrial and even public places. So I think generally we are happy with the margins which we are seeing in the civil business as a whole also.

Okay. And sir, on the international T&D front, in terms of the margin profile and the incremental orders and the competitive intensity there, if you can touch upon that, and quantify also in terms of how is the margin profile right now there?

So international, the margin profile depends upon region to region. Like if you go to Africa, you'll always have 10, 12 people, and you will have Europeans, you will have Chinese, and everyone for the players competitor. You go to Middle East, the competition is relatively limited, between 5, 6 players, couple of Indians and a couple of local players. You come to the SAARC region, you will have Indians and sometimes Japanese. So that way, the competition varies. Africa is obviously more competitive in terms of the number of players putting in bids. Margins, I would say, would depend upon individual orders rather than individual areas or say geographies and all that. As I've always been saying that in a country like Saudi, we can be at 4% margin, we can also be at 20% margin. Same thing applies to most of the other regions also. So margin is more specific to a project than to a region.

Okay. And sir, lastly, on railways. Railways, actually, if you look at overall number, what spending happens of almost all 2 lakh crores, so the opportunity size is pretty big. And we have seen a good uptick for us in the revenues till now. And going forward, from a tendering perspective and order financial perspective for next year, what is your view on the railways segment specifically? And if you can give more color in terms of EPC, OHE work, as well as signaling work, how are we positioned in each of these segments? Yes. That's all from my side.

So conventional OHE has come down significantly. Right now, we have got, I think, 7 or 8 orders on that Mission Raftaar, where they are replacing the conventional OHE by high-speed, high-capacity OHE, okay? That's one area which has been going on reasonably well. I think otherwise what we have seen is a general slowdown on the conventional spending, okay, for whatever reason. Government really has been focusing on increasing the speed, so doing some work on those things. And also, obviously, on the metro side, and development in the Northeast. So we have been seeing a shift in the tendering happening more towards, let's say, Assam, Tripura, and all those sides where lot of tenders are coming in, which are definite areas to also make money. Other case was that after COVID, government had taken out the need for putting in a bid bond. Because of which what we have seen, especially in railways, that the competition has increased significantly. As I said last time on a tender there were 53 bids coming in, in a Railways tender. Now that the government has restored that piece where you need to put in a bid bond, we are clearly seeing that market competition is coming down significantly. I think that will also be another factor where you'll see the share in the railways going up. Metros are doing very well where obviously the competition is very less. We hardly see 3 players, 4 players in every metro bid on the electrical side. I think that's why we are focusing as part of our Railway business.

The next question is from the line of Rishab Dugar from CD Equisearch.

So my question is your debtor days is somewhere around 160 days, and it has been there for quite a while. So I just want to understand that what kind of initiatives are being taken by you to bring it down?

Rajeev?

Yes. So Rishab, if you look at debtor days, 160 days or so, that is a normal debtor for the EPC industry, if you look at per se. So what happens is that generally, on an EPC project, you have progress debtor, which is you are doing monthly progress, then the measurement happens, and then you are able to build. And then after building, the customer takes about 45 to 60 days' time to generally pay. And so generally, the cycle is between 90 to 120 days. In few cases, payment delays happen, for example, in railways and et cetera. So normally, for all the EPC industry, if you look at, generally, the progress debtor will be roughly about 120 to 150 days or so. So that's a general trend in the industry. And we are trying to improve the billing cycle in terms of putting a lot of efforts in terms of billing on a monthly basis, fast-tracking the joint measurement certificate with the client. So there are a lot of efforts which are going on in this direction. But currently, it is what it is, at 150, 160 days. But definitely, the efforts are on to improve the cycle. As I mentioned previously also, in civil, our working capital cycle is much better, where the clients generally pays after raising the bill, they pay within 30 to 45 days. So with the civil turnover going up and gaining more share, in the overall pie, the overall working capital cycle should come down.

Okay. So could you give any brief estimate about where do you see your debtor days moving forward in the near future?

The idea is to bring it down to -- see, the progress debtor should come down to 100, 120 days level. So there is clearly 30 to 40 days improvement, which is possible, and we are making all the efforts to achieve those numbers.

Okay. So currently, what you are saying that in the near term it would be around 150, 160 days, that's what in the near term.

Normally, what happens is that in quarter 4, there is generally a lot of collection, so it comes down. You are seeing these numbers in Q3. So they are slightly elevated at this level. But the way the efforts are going on, I think it will take some time, probably next year we should be able to bring it down. Once our collection from the railway business becomes normalized, we should be able to bring it down at least by 30 days.

As there are no further questions, I now hand the conference over to Mr. Vimal Kejriwal for closing comments. Over to you, sir.

I would just like to thank all the people for their continued interest, and would just pray that everyone stays safe. Thank you so much.

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