KEC is making amends to repair margin, allay debt concerns
KEC International Ltd's problems of weak margin profile in select segments, elevated debt, and an elongated working capital cycle are set to ease.
The capital goods company is prioritising improving its cash flows and profitability. This is backed by better traction in transmission and distribution (T&D) business and KEC's strategic moves to reduce the earnings drag from non-T&D segments.
At its annual investor conference recently, KEC said its current order book, including L1 positions, stood at around ₹40,000 crore. The order book was ₹33,398 crore in FY25. Plus, KEC has a strong bid pipeline of around ₹1.8 trillion, of which 50% is T&D, which typically has a higher margin and a favourable working capital cycle. A robust order book provides near-term revenue visibility. But execution remains crucial to meet its revenue growth guidance of 15% in FY26 from around 10% in FY25.
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The Middle East, Australia and the Americas are boosting T&D demand in the international market, the management said. Domestic T&D demand is robust, led by rising power demand and the shift from fossil fuels to renewable energy. Plus, competitive intensity in the T&D segment has cooled off with the average number of bidders per project dropping to three to five from around 10 earlier.
Margin pressure
Reducing competitive intensity in T&D could act as a margin lever for KEC, which is eyeing an operating margin of 8-8.5% in FY26 from 6.9% in FY25. On the flip side, the non-T&D business, particularly civil and railways, is facing pressure on margin and net working capital (NWC) days.
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For these segments, KEC is trying to improve return ratios with higher collections, targeting better margins in projects, and timely project completion. However, Motilal Oswal Financial Services cautions, while NWC improvement can happen faster, margin improvement will still take some time to reflect for non-T&D segments. KEC expects NWC days to drop from 122 in FY25 to 100 in FY26.
KEC reduced its net debt by ₹500 crore in FY25 to ₹4,558 crore, and a similar drop is likely in FY26. It is also making efforts to lower interest costs from 3% to 2.5%. 'Whilst historically lower margins and NWC elevated segmental mix led to debt bloat up, KEC's course correction may see debt stabilizing with growth driven by surplus cash flow from operations," said an HDFC Securities report on 4 June.
If this strategy yields desired results, it may help reverse the performance of the stock, which is down about 27% in 2025 so far.
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