KEC International Q3 FY26: Profit Dips Despite Revenue Growth as Margin Pressures Mount

The quarter's performance highlights a critical challenge facing KEC International: whilst the company continues to grow its top line at a healthy double-digit pace, bottom-line expansion remains constrained by elevated interest expenses and margin volatility. With a market capitalisation of ₹17,473 crores and trading at a P/E ratio of 26x, the stock appears moderately valued within its peer group, yet concerns around profitability quality and execution consistency have weighed on investor sentiment.

For the nine-month period ending December 2025 (9M FY26), KEC International posted cumulative revenue of ₹17,115.79 crores, representing growth of 13.72% compared to the corresponding period last year. However, net profit for the same period stood at ₹412.81 crores, up just 36.28% year-on-year, indicating margin compression relative to revenue growth.

Financial Performance: Growth Momentum Meets Profitability Challenges

KEC International's Q3 FY26 revenue of ₹6,001.35 crores marked a 12.19% year-on-year increase from ₹5,349.38 crores in Q3 FY25, demonstrating the company's ability to secure and execute large infrastructure projects. However, the sequential decline of 1.48% from Q2 FY26's ₹6,091.56 crores suggests some lumpiness in project execution and revenue recognition patterns typical of the EPC business model.

Operating profit (PBDIT excluding other income) reached ₹429.99 crores in Q3 FY26, translating to an operating margin of 7.16%, a marginal improvement of 16 basis points year-on-year from 7.00%. This marks the fourth consecutive quarter where operating margins have remained within the 6.97%-7.16% band, indicating operational stability but limited pricing power or cost efficiency gains.

The profitability squeeze becomes evident when examining the journey from operating profit to net profit. Interest expenses remained stubbornly high at ₹171.14 crores in Q3 FY26, virtually unchanged from ₹170.22 crores in Q3 FY25 and ₹171.49 crores in Q2 FY26. This persistent interest burden—consuming nearly 40% of operating profit—reflects the capital-intensive nature of KEC's business and its moderate debt levels. The company's debt-to-EBITDA ratio of 3.43x and net debt-to-equity of 0.87x indicate manageable but elevated leverage.

Employee costs rose to ₹417.73 crores in Q3 FY26 from ₹379.95 crores in Q3 FY25, a 9.95% year-on-year increase that outpaced revenue growth, suggesting challenges in productivity or the need for additional manpower to execute the growing order book. Tax expenses of ₹32.47 crores represented an effective tax rate of 20.30%, down from 24.52% in Q2 FY26, providing some relief to the bottom line.

Operational Challenges: Return Ratios Signal Efficiency Concerns

Whilst KEC International has demonstrated consistent revenue growth over the past five years—posting a sales CAGR of 13.83%—the company's return metrics reveal deeper operational challenges. The latest return on equity (ROE) of 12.11% and return on capital employed (ROCE) of 14.29%, whilst improved from historical averages of 9.61% and 12.91% respectively, remain modest for a company in the infrastructure space.

The company's average ROCE of 12.91% over recent years falls short of its weighted average cost of capital, suggesting value destruction rather than creation. This is particularly concerning given the capital-intensive nature of the EPC business, where efficient deployment of capital is paramount. The EBIT-to-interest coverage ratio of 2.07x provides limited cushion against earnings volatility or interest rate increases.

The balance sheet structure reveals both strengths and vulnerabilities. Shareholder funds have grown robustly to ₹5,347.45 crores in FY25 from ₹4,095.70 crores in FY24, driven by retained earnings. However, trade payables have surged to ₹10,503.48 crores, indicating the company's reliance on vendor credit to manage its working capital cycle. This is typical for EPC companies but creates execution and relationship risks if not managed carefully.

From a cash flow perspective, FY24 data shows operating cash flow of ₹311 crores, a significant decline from ₹613 crores in FY23, primarily due to adverse working capital movements of ₹790 crores. This cash generation challenge, combined with investing cash outflows of ₹242 crores and financing outflows of ₹144 crores, resulted in a net cash decline of ₹76 crores during FY24.

Industry Context: Infrastructure Boom Meets Execution Realities

KEC International operates in India's booming infrastructure sector, particularly power transmission and distribution, railways, and civil construction. The company's order book remains robust, supported by government thrust on infrastructure development, renewable energy integration, and grid modernisation. However, the translation of this favourable macro backdrop into superior financial performance has been inconsistent.

The construction and EPC sector in India faces several structural challenges: intense competition leading to aggressive bidding, raw material price volatility, execution delays due to land acquisition and regulatory clearances, and working capital intensity. KEC's performance reflects these industry-wide pressures, with margin expansion proving elusive despite scale advantages.

KEC's positioning as a global player in power transmission provides diversification benefits, with international operations contributing meaningfully to revenues. However, this geographic spread also brings currency risks, geopolitical uncertainties, and varying margin profiles across regions. The company's ability to navigate these complexities whilst maintaining operational discipline will be critical for sustained performance improvement.

Peer Comparison: Valuation Discount Reflects Quality Concerns

When benchmarked against construction sector peers, KEC International trades at a relative discount on most valuation metrics, reflecting market concerns about profitability quality and return ratios. The company's P/E ratio of 26.09x sits below the sector average, whilst its price-to-book ratio of 3.16x is also lower than several peers.

The peer comparison reveals KEC's positioning as a mid-tier player in terms of profitability. With an ROE of 9.61%, KEC lags behind NBCC (21.71%), Ircon International (12.99%), and Kalpataru Projects (10.52%), though it outperforms IRB Infrastructure (4.34%) and IndiGrid Trust (6.82%). This middling return profile, combined with moderate leverage of 0.87x debt-to-equity, explains the valuation discount.

KEC's dividend yield of 0.79% matches Kalpataru Projects but falls short of Ircon International (1.61%) and NBCC (1.10%), reflecting the company's need to retain earnings for working capital and growth investments rather than distribute cash to shareholders. The dividend payout ratio of 25.65% indicates a conservative approach to capital allocation, prioritising business reinvestment over shareholder returns.

Valuation Analysis: Fair Value Amidst Execution Uncertainty

At the current market price of ₹669.50, KEC International trades at a P/E ratio of 26x trailing twelve-month earnings, representing a discount to the construction sector average P/E of 34x. This 23.5% valuation discount reflects market concerns about the sustainability of earnings growth and the quality of profitability given the company's modest return ratios.

The stock's price-to-book ratio of 3.16x appears reasonable when considered against the latest ROE of 12.11%, though the historical average ROE of 9.61% suggests the current multiple may be pricing in optimistic assumptions about sustained improvement in capital efficiency. The EV/EBITDA multiple of 13.41x and EV/EBIT of 15.09x are broadly in line with sector medians, indicating fair valuation rather than compelling value.

The stock's PEG ratio of 0.42x appears attractive on the surface, suggesting the stock is undervalued relative to its 5-year EBIT growth rate of 8.00%. However, this metric must be interpreted cautiously given the volatility in quarterly earnings and the challenges in sustaining consistent profit growth given margin pressures and elevated interest costs.

From a historical perspective, KEC's valuation grade has oscillated between "Fair" and "Expensive" over the past year, most recently settling at "Fair" valuation. The stock is currently trading 29.33% below its 52-week high of ₹947.30 and 10.65% above its 52-week low of ₹605.05, suggesting it has found a floor but lacks near-term catalysts for re-rating.

Shareholding Pattern: Institutional Confidence Building Modestly

The shareholding pattern for Q3 FY26 reveals interesting dynamics in institutional ownership. Promoter holding remains rock-solid at 50.10%, unchanged for the past five quarters, demonstrating strong promoter commitment. The key movements have been in institutional categories, with mutual funds increasing their stake to 23.00% from 20.21% in Q2 FY26, a meaningful 2.79 percentage point sequential increase.

However, this increase in domestic institutional interest was offset by a sharp 4.16 percentage point decline in foreign institutional investor (FII) holdings, which dropped to 11.76% from 15.92%. This divergence suggests that whilst domestic mutual funds see value at current levels—possibly viewing the stock as oversold after its 17.40% decline over the past year—foreign investors remain cautious about the company's near-term prospects.

The total institutional holding of 37.23% (combining FIIs, mutual funds, insurance companies, and other DIIs) indicates moderate institutional interest, neither exceptionally high nor concerningly low. The presence of 27 mutual funds and 195 FIIs in the shareholder base provides reasonable liquidity and diverse ownership, though the net outflow from FIIs bears watching as it may signal concerns about execution or margin sustainability.

Positively, there is zero promoter pledging, eliminating concerns about financial stress at the promoter level. The top promoter entities—Swallow Associates LLP (25.45%), Summit Securities Limited (10.58%), and Instant Holdings Limited (8.38%)—represent the RPG Group's holding structure, providing stability to the ownership base.

Stock Performance: Sustained Underperformance Reflects Fundamental Concerns

KEC International's stock performance over the past year has been disappointing, with the shares declining 17.40% compared to the Sensex's 7.18% gain, resulting in a negative alpha of 24.58 percentage points. This underperformance is even more pronounced when compared to the construction sector's 4.58% gain, with KEC lagging by 21.98 percentage points.

The recent price action shows some stabilisation, with the stock gaining 5.93% over the past week, outperforming the Sensex by 5.03 percentage points. However, this appears to be a technical bounce rather than a fundamental re-rating, as the 1-month, 3-month, and 6-month returns all remain deeply negative.

From a technical perspective, KEC International is currently in a bearish trend, having changed to bearish on January 6, 2026 at ₹734.05. The stock trades below all key moving averages—5-day (₹645.77), 20-day (₹689.98), 50-day (₹702.00), 100-day (₹772.28), and 200-day (₹799.74)—indicating sustained selling pressure and lack of buying conviction.

The stock's beta of 1.40 indicates high volatility relative to the market, with the shares experiencing 40.09% annualised volatility compared to the Sensex's 11.21%. This high-beta, high-volatility profile makes KEC International suitable only for risk-tolerant investors who can withstand sharp price swings. The risk-adjusted return of -0.43 over the past year (compared to the Sensex's 0.64) underscores the poor risk-reward profile.

Investment Thesis: Quality Concerns Outweigh Valuation Appeal

KEC International's investment case rests on several pillars: exposure to India's infrastructure boom, a diversified business model spanning power transmission, railways, and civil construction, and reasonable valuation multiples at 26x P/E. However, these positives are overshadowed by persistent concerns about profitability quality, modest return ratios, and execution consistency.

The company's quality grade of "Average" (downgraded from "Good" in November 2024) reflects concerns about deteriorating return metrics and profitability consistency. Whilst the short-term financial trend remains "Positive" based on Q3 FY26 profit growth, the sequential decline and margin pressures raise questions about sustainability.

The bearish technical trend, with the stock trading below all moving averages and showing negative momentum across multiple timeframes, suggests the market has lost confidence in the near-term outlook. The divergence between improving domestic institutional interest (mutual funds adding) and declining foreign institutional interest (FIIs exiting) indicates mixed signals on the investment case.

Key Strengths & Risk Factors

Outlook: What to Watch

Looking ahead, KEC International's performance will hinge on its ability to improve operational efficiency and capital productivity. The company needs to demonstrate that it can translate its strong market position and healthy order book into superior returns on capital. Margin expansion, working capital optimisation, and disciplined capital allocation will be critical factors to monitor.

The infrastructure sector backdrop remains favourable with government thrust on power transmission, renewable energy integration, and railway modernisation. However, KEC must prove it can capture this opportunity profitably rather than just growing revenues. Until return metrics improve meaningfully and profitability becomes more consistent, the stock is likely to remain range-bound with limited re-rating potential.