The reputation has seen KEC, the flagship company of the $3.4-billion business group, emerge as one of the few credible EPC players left in the business which focusses mostly on midsized projects in India and more than a 100 other countries around the world. Many EPC companies have burnt their fingers by bidding aggressively for projects and abandoning them midway due to lack of financial viability. The liquidity crunch in the banking system has also stretched the balance sheets of several of these companies, which are grappling with high debt. Many of them, including IVRCL, Jaypee Infratech, Lanco Infratech, and Madhucon Projects are dealing with insolvency proceedings. While larger engineering companies like Larsen and Toubro (L&T) and Afcons (part of the Shapoorji Pallonji Group) typically focus on very large projects, there is a burning need fora smaller player to take up midsized projects, and that’s where KEC has made a mark for itself.

Renu Baid, vice president–research at IIFL Securities, says KEC’s biggest differentiator is that the promoters of the company don’t interfere in its day-to-day operations and strategy, which is entirely entrusted to professional managers. “Most EPC companies, especially those that focus on civil work, are heavily influenced by their promoters who have their own political affiliations. KEC isn’t like that, which makes it a clean business,” she says. In FY19, KEC recorded a turnover of ₹11,001 crore; an Ebitda of ₹1,150 crore; an Ebitda margin of 10.5%; and net profit of ₹496 crore. While its turnover has grown at a compound annual growth rate(CAGR) of close to 7% over the last four years, profitability has risen at a much sharper CAGR of around 64%.

RPG Enterprises chairman Harsh Goenka, 62, says KEC’s objective is to become the best EPC player in the country after L&T, “but much nimbler and a better executor, and that’s a challenging proposition”. “We weren’t doing that well till the mid-2000s, but then the company started turning around due to a three-pronged strategy: better bidding quality, greater globalisation to mitigate the cyclical nature of the India business, and quality execution on time.”

On the execution front, Kejriwal says that when he joined the business in 2001, KEC took 48-52 months to complete a project. Driven by clients’needs, increased competition, and better technology, projects now get done in 6-12 months. “The entire workflow and process flow at our end and that of our vendors has been streamlined to manage projects better,” Kejriwal says.

A diversification into non-T&D EPC business streams and international markets has stood the company in good stead. Apart from the legacy T&D (as a part of which KEC also makes its own transmission towers) and cables manufacturing businesses, the company has entered new verticals such as railways (electrification of railway lines, track laying and signalling, including for metro rail), and EPC work for civil structures (railway overbridges and under bridges, auto and cement factories, and residential projects).

“Though concerns of slowing infra investments and poor balance sheet have plagued most small-to-mid-sized EPC players, the diversified portfolio of projects in India and overseas, and the increasing share of non-T&D EPC projects in rail, metro rail and other infra opportunities have ensured growth visibility for KEC, while maintaining margins,” a recent research report by IIFL Securities noted.

Nearly 35% of the company turnover, which Kejriwal estimates at around ₹12,700 crore for FY20, comes from non-T&D sources. The company order book, as on December 31, 2019, stood at ₹22,011 crore. Along with this, KEC was also the lowest bidder for projects worth another ₹2,500 crore (which are yet to be awarded), which could potentially take the order book up to over ₹24,500 crore. While T&D accounts for 54.6% of this order book, railways and civil account for another 31.1% and 11.3%, respectively. Though order inflows were slow to come by in the first half of FY20, they have picked up pace in the third quarter of FY20and the momentum is expected to continue in the fourth quarter as well.

This diversification is aiding the company at a time when power transmission projects in India have slowed down due to subdued power demand and challenges in growing thermal power capacity in the country. In FY20(till December 31, 2019), KEC’s order intake was ₹9,820 crore, out of whichT&D only accounted for 35.4% of the fresh orders, while civil and railways collectively accounted for 56.4%. Kejriwal, however, is hopeful that with the government's mission to give electricity to all citizens, the focus on electric mobility and green energy corridors should help revive orders for power transmission projects in the country.

Till then, KEC’s international bets are helping offset domestic weakness. In 2010, KEC acquired Brazilian transmission towers company, SAE Towers, for around $95 million. The company gave KEC a foothold in the lucrative North- and South American markets and its business accounted for around 19% of KEC’s T&D turnover in the first nine months of FY20. After a lull in growth over the last couple of years due to increased competition and general weakness in the American markets, SAE will report a year-on-year growth of 40% in its business inFY20, expects Kejriwal. This is due to the fact that in addition to SAE’s products business, KEC has also turned it into an EPC services business, leveraging the parent company’s strengths in this area. In turn, SAE’s technical expertise has helped KEC’s operations with higher automation levels.

Of late, the company has also been bullish on countries in the MENA (Middle East and North Africa) region and India’s neighbouring countries like Bangladesh and Nepal, which are investing meaningfully in infrastructure creation. In February, KEC acquired an automated transmission tower manufacturing facility in Dubai for ₹100 crore to bolster its T&D EPC business in West Asia, where it is executing six power transmission projects worth $325 million. KEC’s transmission towers manufacturing business feeds its T&D EPC business as 95% of its requirements for transmission towers is met from its seven manufacturing units. This helps the company control costs and supply, Kejriwal says.

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