HSBC puts neutral on KEC International

RESEARCH: HSBC

RATING: NEUTRAL

CMP: 521

HSBC initiates ‘Neutral’ rating on KEC International with a target price of 595. KEC International has signed an agreement to acquire 100% stake in SAE Towers, for an enterprise value of $95 million.

This proposed acquisition is strategically compelling due to: 1) Deal at attractive price 2) Deal likely to be earnings accretive with about 15% estimated incremental earnings in first 12 months post closure 3) Access to new geographies 4) Synergies arising from technology and process sharing deal likely to be earnings accretive.

The management has indicated that the capacity utilisation of SAE Towers is expected to increase from 60% to 100% in the next three to four years given the strong demand expected in American markets. Further, EBITDA margin is expected to be sustainable at about 12-14 % with PAT margin at about 7-8 %.

HSBC estimates the acquisition to be earnings accretive as SAE is likely to provide incremental earnings of about 15% in first 12 months post deal closure. The transaction would provide access to KEC in North and Latin America and would also lead to KEC becoming the largest lattice tower manufacturing company globally. Further it would also help both companies, which are leaders in their respective markets to draw synergies from each other in terms of technology and processes.