Kotak Upgrades KEC International Stock Despite Yearly 60% Drop

Kotak Institutional Equities (KIE) has raised its rating on KEC International shares to 'Add' even though the target price for the stock has been revised downward. This upgrade comes despite the global infrastructure engineering, procurement, and construction (EPC) firm experiencing a sharp 60 per cent decline in its share price over the past year.

KEC International has faced a series of operational challenges that have weighed on its stock performance. These include weak profit margins in its non-Transmission & Distribution (T&D) business segments, slower project execution in its water division due to delayed payments, and a seven-month suspension from bidding on Power Grid Corporation of India Limited (PGCIL) tenders. Additionally, geopolitical tensions in West Asia have disrupted project execution in that region.

Following the upgrade by Kotak Institutional Equities and an announcement of a significant order win worth ₹1,030 crore spread across various business lines, KEC International’s shares rose nearly 5 per cent during intraday trading on Friday. The stock reached a high of ₹366.50 on the Bombay Stock Exchange (BSE) compared to its previous closing price of ₹349.85. By 12:45 PM, the share price was trading up 0.90 per cent at ₹353, while the BSE Sensex increased 1.05 per cent to 72,340.

Kotak Institutional Equities’ Perspective

KIE highlighted growing momentum in KEC’s cables and wires business and a robust pipeline of transmission and distribution projects in India as key reasons for their positive outlook. They noted that KEC is well-positioned to benefit from India's expanding transmission capital expenditure cycle.

The Central Electricity Authority (CEA) has projected transmission investments totaling ₹7.9 trillion over the next ten years to support more than 900 gigawatts of non-fossil fuel power capacity. In addition, the recently approved ₹1.86 trillion Green Energy Corridor Phase III project further strengthens visibility on transmission infrastructure spending. Kotak anticipates these developments will result in a sustained increase in transmission project awards, with KEC’s strong track record making it a prime beneficiary.

Moreover, the cables segment is entering a period of multi-year growth, with expected revenues reaching ₹50 billion over three to four years. This projection implies a compound annual growth rate (CAGR) of approximately 30 per cent, driven by capacity expansion and new product introductions.

While recovery in the West Asia and North Africa markets is expected to be gradual, Kotak noted that the product pipeline remains solid across Saudi Arabia, the United Arab Emirates, and Oman. These international markets, combined with domestic transmission and distribution opportunities, provide a diversified platform for continued earnings growth.

Earnings Outlook and Challenges Ahead

Kotak’s report also cautions that margin pressures are likely to continue in the near term. KEC generates about 20 to 25 per cent of its revenues from transportation and civil infrastructure segments, which currently face difficulties such as time and cost overruns, right-of-way issues, and delayed payments. These challenges are expected to keep execution and margin headwinds in place through the first half of fiscal year 2028 (1HFY28).

The brokerage forecasts EBITDA margins of around 6 per cent until 1HFY28, followed by a gradual rebound to 7.7 per cent by fiscal year 2029. This recovery will be supported by the higher-margin T&D and cables businesses, which are anticipated to contribute about 75 per cent of revenues.

For fiscal year 2027, revenue growth is projected at 10 per cent, slightly below management’s guidance of 12 to 15 per cent, reflecting ongoing uncertainties in the Middle East region. EBITDA margins are expected to hover near 6 per cent due to delays in concluding legacy projects. Estimates for fiscal years 2028 and 2029 have been lowered by 11 per cent and 6 per cent respectively, indicating a slower margin recovery than previously anticipated.

As a result, Kotak has reduced its fair value estimate for KEC International shares to ₹400 from an earlier ₹470, based on a price-to-earnings multiple of 10 times earnings expected in 1HFY28.

Context and Industry Significance

KEC International operates as a major player in the global infrastructure EPC sector, specializing in transmission, distribution, and related civil infrastructure. The company’s performance is closely tied to government and private sector investments in power infrastructure, especially as India aims to expand renewable energy capacity and upgrade its transmission network.

Investments like the Green Energy Corridor and the CEA’s transmission plans underscore the growing demand for infrastructure that can support clean energy integration. Companies like KEC with established execution capabilities stand to gain from these long-term trends despite short-term operational hurdles.

Investors have closely watched KEC’s stock due to its volatility and exposure to international markets, particularly in West Asia. Kotak’s upgrade suggests a cautious optimism about the company’s ability to navigate current challenges and capitalize on emerging opportunities in its core businesses.