KEI Industries Ltd was incorporated in 1968 as a partnership firm under the name Krishna Electrical Industries. It is engaged in the manufacturing of cables and wires, with a product portfolio mix of housing wires to Extra High Voltage (EHV) cables, and is further diversifying into the Engineering, Procurement, and Construction (EPC) services for power and transmission projects. The company’s manufacturing units are located at Bhiwadi, Chopanki, Pathredi, Silvassa, and Chinchpada. KEI is setting up a plant in Vadodara (Gujrat), which is likely to be operationalized by the end of FY2024. The company also provides EPC services for electrification, including laying cables, setting up transformers, separating feeders, and last-mile connections.
· Well-established client base with increasing penetration
The company has over 6 decades of experience in the industry and has built a reputed client base namely Delhi Transco Ltd., L&T Limited, and Tata Power Limited as well as its strong connections with various vendors which assures the smooth flow of operations.
· Diversified product portfolio
Over the years, KEI has developed capabilities to manufacture a wide range of cables that are suitable for low tension, high tension, and extra high voltage conditions along with house wires, stainless steel wires, instrumentation, and control cables. To further diversify its product portfolio the company in FY22 introduced new products such as ESP & communication cables. In Q3 FY23 the cable institutional sale contribution is 48%, sales from the distribution network is 45% and EPC sales contributed 5% to the overall sales of the company during the quarter that ended 31st December 2022. The highest sales growth is achieved by cables and wires through the distribution network segment which is in line with the company's goal of expanding its footprints in the Retail segment.
· Focus on B2C to drive future growth
KEI has been expanding its distribution network by adding dealers to capture retail sales, which contributed ~45% in Q3FY23. B2C Sales were up 26% yoy (3-year CAGR +29%). Management has guided for c. 20% growth in the dealer/distributor network every year. The total active working dealer network of the company is c. 1900 as of Q3FY23, covering 20,000 – 25,000 touchpoints. Sales through a dealer network and dealer/distribution networks achieved in nine months are INR 2,208 crores, against INR 1,601 crores, in the same period, last year. This will provide benefits to the company in two ways, firstly improvement in margins and a relatively low working capital cycle. In line with the same, KEI plans to further increase its employee and dealer base, going forward. Its retail network is spread across India with 36% of the revenues contributed by the north, followed by 31% from the west, 18% from the south, and the balance 15% from the east in FY2022. In the medium term, the Retail segment will contribute more than 50% of the total sales of the company.
· Healthy Demand prospects for upcoming quarters
Management shared a positive demand outlook led by increase in government capex on infrastructure and private industrial capex. They also highlighted good demand from real estate. The pending order book of the company as of 31st December 2022 is approx. Rs 3443 crores. KEI’s operating income (OI) grew around 16% in Q3 FY23, as compared to the previous year's corresponding quarter. The company is witnessing robust demand for its products from various end-user industries such as urban and rural electrification, refinery expansion and upgradation, solar power projects, tunnel projects on highways as well as railway and metro rail projects. Its Capacity utilization levels during the nine months ended 31st December 2022 are at 87%, 78%, and 88% in the cable division, in-house wire division, and stainless steel wire division respectively. All this has resulted in a significant increase in the operating cashflows of the company. In FY22 the cashflows of the company stood at Rs 299 crores as against the cashflows of the previous year (FY21) for Rs 154 crores. This will ensure a smooth flow of working capital requirements of the company. Management has guided revenue growth of 18%-19% in FY23. Over the next 2-3 years expect revenue growth of 17%. Management expects EBITDA margins of 11% in FY24.
The 5-year Revenue & PAT CAGR of the company is at 17% & 32% respectively. The revenue for FY22 stood at Rs 5741 crores, the highest in five years. The PAT of the company was Rs 376 crores in Fy22. The 5-year EV/EBITDA of the company is 11x. The five-year average ROCE & ROE of the company is 19% & 21% respectively.
For the quarter ended 31st December 2022, the Revenue of the quarter stood at Rs 1784 crores, an increase of 14% & 11% on YoY and QoQ basis respectively. Revenue growth is led by strong volume growth (~20% overall). EBITDA for the quarter is Rs 182 crores, an increase of 16% & 13% on a YoY and QoQ basis respectively. EBITDA for the quarter increased on account of operating leverage. However, the EBITDA margin remains stable despite raw material cost volatility. PAT for the quarter is at Rs 129 crores, an increase of 28% & 21% on a YoY and QoQ basis respectively.
The company’s performance is impressive in the B2B segment along with its increasing footprints in the B2C segment as evidenced by Q3FY23 numbers as follows~ During the quarter ended 31st December 2022 the Company witnessed the growth of 37% YoY basis in cables and wires domestic institutional segment. Exports sales decreased by 24% yoy. The Domestic Institutional EHV cable sale stood at Rs 101 crore in Q3 FY23 as against Q3 FY22 Rs 184 Crore. Under its cable and wires dealer and distribution sales the growth is of 26% YoY basis. However, the company intends to reduce EPC contribution due to low margins received from that segment. 9m FY23 ended on 31ST December the EPC segment’s contribution reduced from 6.89% to 5.45%. This will benefit the company as the working capital requirements will reduce.
Risk & Concerns
· High working Capital requirement
KEI’s working capital intensity remained elevated, though it improved from the last fiscal, as indicated by NWC/OI of 28% in FY2022. Going forward, the NWC/OI is expected at FY2022 levels with the increasing scale of operations, the release of retention money, and likely further reduction of creditor days, despite having benefits of improving retail sales in the mix.
· Raw material prices volatility
Raw materials (copper, aluminium) make up most of KEI’s expenses. While its policy is to pass on any cost increases, its inability to pass on prices may hurt margins.
Outlook & Valuation
Pick up in private and government CAPEX in energy-intensive industries, NIP in railways, metros, highways, and ports, an uptick in real estate cycle, transmission and distribution rural electrification, data centers, and cement/steel industry expansion are key growth drivers for C&W industry. We expect strong volume growth on account of industry tailwinds. We believe strong demand & market share gain will increase volume growth going forward. The healthy order book provides long-term revenue visibility. Focus on the B2C segment will improve the margin going forward. Overall, we remain positive on the stock. At a CMP of Rs 1707, the stock is trading at 21.2x its FY25E earnings. We recommend a 'BUY' for the stock.