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Initiating Coverage
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>
Investment Argument
KEI Industries is an established player in the manufacturing and marketing of EHV,
MV and LV power cables segments, and has recently forayed into EPC business. It
has a well-diversified product basket and business model across retail (domestic &
exports), institutional, EHV segments, suitably balanced to address the demands
of private and public sector organizations. Since the last two years, the focus is on
EHV and retail segment along with exports.
Key Investment Rationale:
Extensive product portfolio and wide user industries: Its wide product
portfolio encompasses the complete range of power cables, house wires,
winding wires and stainless steel wires. It is also engaged in EPC business. It
has a diversified client’s base across various industries such as power,
petrochemicals, steel, cement, oil & gas to name a few. With improving
outlook of these sectors, we see cable industry particularly KEI to benefit.
Reinforcing focus on the retail business: The retail business currently
contributes 25% of the Company’s revenues. The Company expects to scale up
this contribution to as much as ~40% in the coming years. Sales from dealer
distribution during FY14 were Rs 500 crore which is expected to grow to ~Rs
700 crores in FY15E and ~Rs 900 crores by FY16E.
EHV cable business seen ramping up: Over the past 3-4 years, the EHV
segment has emerged as a major focus area for the Company. The Company
has completed the pre-qualification criteria and expects increased EHV sales
going forward. We expect this segment to contribute Rs 280 crores of sales
during FY16E. Present EHV order book of the Company stands at Rs 200 crore.
Margins in EHV segment are higher at 18-20%
Moving up the value chain by entering EPC segment: With the necessary pre-
qualification criteria for EHV cables, its turnkey EPC business is all set to scale
new heights, which will add significantly to its profitability. The Company
intends to focus on projects where there is significant cabling requirement
ensuring that its own cable gets sold. The company is targeting EBITDA margin
of atleast 15% on such projects. Average execution period is 18-24 months.
Focusing on exports: Exports shall continue to be another focus area and a
key contributor to the revenue and profitability. We expect sales from export
to reach Rs 200-220 crore for FY15E.
Improving balance sheet: The Company expects to repay its long term debt to
the extent of ~Rs 60 crores/year over the next 3 years (Rs 184 crores long-
term debt in FY14). KEI has no major capex plans before FY17 which limits the
need for additional borrowing. With improving market conditions and higher
retail business contribution (which entails no inventory holding and lesser
credit period), its receivables position is likely to improve from the current
levels of 95 days.
Key Concerns:
Volatility in key raw materials namely Copper & aluminum and any delay in pick
up in investment in power sector and other user industry are the key concerns.
Valuation:
With the key growth drivers in place, we expect KEI Industries to register
significant growth in profitability in the coming years. We expect net sales to grow
at a CAGR of 12-15% over FY14-FY17E. At the CMP of Rs 58, the stock quotes at a
P/E of 6x its FY16E EPS of Rs 9.6 which is quite attractive. We recommend a BUY
for a long-term perspective.
Jan 30, 2015
KEI Industries Ltd.
BUY
Market Data
Price `58
BSE Code 517569
NSE Symbol KEI
Reuters Code KEIN.BO
Bloomberg Code KEII IN
Sensex 29183
Nifty 8809
52 week range (````) 10.9-59.3
Market Cap, Crore 440
Shareholding Pattern (%)
As on September 2014
Promoters 49.4
MFs, FIs & Banks 0.1
FIIs 1.6
Other Bodies corporate 22.5
Public and others 26.3
Price Performance
(%) 3M 6M 12M
Price (````) 34 30 12
Absolute 68 92 396
Rel to Nifty 57 73 351
Comparative Price Movement
5000
6500
8000
9500
0
20
40
60
80
100
Jan-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
KEI Industries NIFTY
(```` cr) FY14 FY15E FY16E
Sales 1618.9 1800.0 2150.0
Gr (%) -2.4 11.2 19.4
EBITDA 153.0 189.7 238.0
OPM (%) 9.5 10.5 11.1
PAT 11.6 37.0 73.9
EPS (Rs) 1.6 4.8 9.6
PE (x) 36.2 12.1 6.1
EV/EBITDA 5.7 4.7 3.7
RoCE (%) 17.8 21.5 26.3
RoNW (%) 4.4 12.8 21.4
Analyst : Nisha Harchekar
Tel: +9122-61462952
nishaharchekar@way2wealth.com
Page 2 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
Investment Argument
Extensive product portfolio and wide user industries
KEI manufacturers a wide variety of cables which serve the needs of both the
household sector as well as the industrial sector. Its wide product portfolio
encompasses the complete range of power cables - Low Tension (LT), High Tension
(HT) and Extra High Voltage (EHV), control and instrumentation cables, specialty
cables, elastomeric cables, rubber cables, submersible cables, flexible and house
wires, winding wires and stainless steel wires. It is probably one of the few to offer
specialty cables such as fire survival cables, zero halogen cables and braided
cables. Besides manufacture of electrical cables/wires and stainless steel wires,
the Company is also engaged in Engineering, Procurement and Construction (EPC)
business. It has a diversified client’s base and includes a wide gamut of industries
such as power, petrochemicals, steel, cement, oil and gas to name a few. With
improving outlook of these sectors, we see cable industry and in turn KEI to
benefit.
Product Portfolio
Products Covered Application
Power Cables
The power cables are used underground as well over head transmission of Power in Power
Plants, Industries, Projects and all other Electrical Installations.
Control Cables
These cables are used for Electrical Distribution System such as Generating Stations,
Industrial Application and Indoor Outdoor Projects.
Instrumental cables These cables are used to transmit power from the main control room to the Machines.
Rubber Cables
Rubber insulated cabled have variety of allocation in industries, mines, ships, aircraft, earth
moving equipment, etc.
Housing wires Electrification of residential, commercial and industrial establishments.
Flexible wires Electrical panel wiring, consumer electrical good.
Winding wires Submersible pumps and electrical motors.
Automobile cables Wiring harness for automobiles for various applications.
Welding cables Providing power from the welding power source to the electrodes.
Stainless steel wires
These wires are used in diverse areas such as in graded house fastners, spring quality,
weaving, knitting, filter wire and other industrial applications.
LT Power/
Rubber, 57%
HT
Cable, 16%
HW/WW,
17%
SSW, 6%
EHV, 1%
EPC, 4%
FY14 (Rs cr)
LT Power/
Rubber, 46%
HT
Cable, 17%
HW/WW,
18%
SSW, 6%
EHV, 3%
EPC, 9%
FY15E (Rs cr)
Reinforcing focus on the retail business
The retail business currently contributes 25% of the Company’s revenues. The
Company expects to scale up this contribution to as much as 40% in the coming
years, given the impetus on Infrastructure and Real Estate sectors. With major
investments planned in Highways, Ports, Airports and SEZs, and rapid growth
expected in Housing, IT Parks, Hotels, Shopping Malls and BPOs, the retail segment
is expected to witness a boom in the coming years. The Company currently has
Page 3 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
close to 600+ dealer-distributors which it expects to take it 800 dealer-distributors
by end of FY15. The Company earned `500 crore sales from dealer distribution
during FY14 which is expected to grow to ~`700 crores in FY15E and ~`900 crores
by FY16E.
EHV cable business seen ramping up
KEI forayed into Extra High Voltage Cables (EHV) in 2009-10 through a technical
collaboration with Switzerland-based M/s Brugg Kabel AG which enjoys over 100
years of experience in manufacture of cables upto 550kV. It is only the third
company in India with the capacity to manufacture EHV cables. Its plant is located
at Chopanki, Rajasthan and offers cables ranging from 66kV to 220kV. Expansion
upto 400 kV is also on the anvil.
The end-users of EHV cables include transmission companies, mega power plants,
metro cities, industries such as steel, cement, refineries, petrochemicals, large
realty projects such as IT Parks, large residential complexes, metro rail etc.
Over the past 3-4 years, the EHV segment has emerged as a major focus area for
the Company. Earlier, the lack of pre-qualification was hampering the growth in
this segment. But now the Company has completed the pre-qualification criteria
and expects increased EHV sales going forward. We expect this segment to
contribute `280 crores of sales during FY16E. Margins in EHV segment are higher at
18-20%. Recently, it has secured a large order for Delhi Metro Rail Corporation for a
turnkey project of 220 kV worth approximately `60 crores and another `50 crore
worth of cable orders from transmission utilities. Recently, PGCIL has floated
tender for EHV cables worth `700 crore, which is under bidding stage. Present EHV
order book of the Company stands at `200 crore.
Moving up the value chain by entering EPC segment
With the necessary pre-qualification criteria for EHV cables, its turnkey EPC
business is all set to scale new heights, which will add significantly to its
profitability. The Company intends to focus on projects where there is significant
cabling requirement ensuring that its own cable gets sold. The Company intends to
limit its participation to funded projects of PFC, REC, ADB, etc. to avoid any cash
flow risk. The company is targeting EBITDA margin of atleast 15% on such projects.
Average execution period is 18-24 months.
The main services offered by the company in the EPC segment includes execution
of Power transmission projects of 66kV to 400kV substations on turnkey basis, EPC
of EHV & HV cables systems, Electrical balance of plant system for power plant
and Electrical industrial projects. Its key strengths include In-house execution
capabilities, ability to manufacture own EHV cable / HV cable (which accounts for
nearly 70% of its EPC project value) and ability to offer the entire range of products
instrumentation cable, control cable and power cable.
Focusing on exports
The Company has been focusing on exports over the last 2-3 years. The Company
has established a strong presence in the export market with presence across 45
countries on the back of competitive pricing and the ability to offer customized
solutions and specialty cables. New offices established in Singapore, Nigeria and
Kazakhstan have set the stage for higher growth in the exports segment. Export
sales in FY14 jumped to `197 crore from about `97 crore a year ago. Going
forward, exports shall continue to be a key focus area and a key contributor to the
revenue and profitability. We expect sales from export to reach `200-220 crore for
FY15E.
Page 4 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
Improving balance sheet
FY14 debt on balance sheet is `510 crores out of which `184 crores is long term
debt. The Company expects to repay the debt to the extent of `60-70 crores/year
over the next 2-3 years. Current capacity utilization is 70%. With the current
capacity, the Company can achieve net revenue of `2700 crores. KEI has no major
capex plans before FY17 which limits the need for additional borrowing. However,
we expect a capex of `60 crores in FY16 for increasing its EHV capacity. We further
expect the working capital position to improve in near future. With improving
market conditions and higher retail business contribution (which entails no
inventory holding and lesser credit period), its receivables position is likely to
improve from the current levels of 95 days.
Key Concerns
Raw Material price volatility: Excessive volatility in the Company's key raw
materials - copper and aluminum - can have severe impact on its profitability. To
mitigate the risk of increasing raw material prices, the Company incorporates price
escalation clauses for large orders, while including a three-month price validity
clause for smaller projects.
Delay in pick up in investment in power sector and other user industry
Valuation
The business environment for Cable industry is showing signs of industrial and
infrastructure growth which implies better demand for the cable industry. The
Company has taken right steps by venturing into Extra High Voltage (EHV) Cables
and presence in Engineering, Procurement and Construction (EPC) space. These
segments are expected to contribute to the incremental growth for KEI and we
expect the two segments to contribute 12% and 24% of sales in FY15E and FY16E
respectively from the current levels of 5%. Its strategic focus towards expansion
through dealer-distributor network is expected to augment its house wire, flexible
wire and cables business.
With the key growth drivers in place, we expect KEI Industries to register
significant growth in profitability in the coming years. We expect net sales to grow
at a CAGR of 12-15% over FY14-FY17E and profits to be over the `100 crores mark
by FY17E. At the CMP of ````57, the stock quotes at a P/E of 5.9x its FY16E EPS of
````9.6 which is quite attractive. Hence we recommend a BUY on the stock at
current level for a longer-term horizon.
Page 5 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
Financial Summary (` in crore)
INCOME STATEMENT
FY14 FY15E FY16E
Revenues 1618.9 1800.0 2150.0
Total Expenditure 1465.9 1610.3 1912.0
Operating Profit 153.0 189.7 238.0
Dep. & Amortizations 21.0 23.2 25.1
EBIT 132.1 166.5 212.9
Interest 111.5 113.7 104.6
EBT 20.5 52.9 108.3
Other Income 1.3 1.5 2.0
Extraordinary Items 0.0 0.0 0.0
PBT 21.8 54.4 110.3
Tax 10.1 17.4 36.4
PAT 11.6 37.0 73.9
Revenue Growth % -2.4 11.2 19.4
Op. Profit Growth % -10.2 24.0 25.5
PAT Growth % -55.9 218.7 99.9
BALANCE SHEET
FY14 FY15E FY16E
Equity Share Capital 14.7 15.4 15.4
Reserves & Surplus 253.9 294.2 366.3
Networth 268.7 309.7 381.7
Non-current liabilities 118.9 86.6 26.6
Current liabilities 835.5 876.1 1023.3
Deferred tax liability 16.0 22.6 36.9
Minority Interest 0.0 0.0 0.0
Equities and Liabilities 1243.5 1299.3 1473.0
Gross Fixed Assets 433.2 463.2 523.2
Depreciation 119.9 143.0 168.1
Net Fixed Assets 313.3 320.1 355.0
Intangible assets 0.8 0.8 0.8
Capital WIP 0.2 0.0 0.0
Investments 3.1 3.1 3.1
Inventory 403.1 414.5 494.6
Trade receivables 428.6 449.0 500.0
Short term loans & advances 60.5 54.2 64.8
Cash and cash equivalents 4.6 30.8 24.0
Current Assets 922.7 970.3 1108.1
Long-term loans and advances 3.4 4.9 5.9
Total Assets 1243.5 1299.3 1473.0
Page 6 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
CASH FLOW FY14 FY15E FY16E
Operating cash earnings 27.6 57.3 113.2
Depreciation 21.0 23.2 25.1
Interest 111.5 113.7 104.6
Change in WC -71.1 16.8 -60.3
Tax paid 5.5 10.9 22.1
CFO 83.5 200.1 160.6
Net Capex 21.9 30.0 60.0
Net Borrowings 31.2 -33.0 -5.0
FCFE 92.7 137.1 95.6
RATIOS FY14 FY15E FY16E
Gearing (%) 1.86 1.68 1.36
Inventory turnover 4.2 4.4 4.7
Debtors (sale days) 96 91 85
RONW(%) 4.4 12.8 21.4
ROCE(%) 17.8 21.5 26.3
OPM (%) 9.5 10.5 11.1
NPM(%) 0.7 2.1 3.5
Eff. Tax Rate 21.1 20.0 20.0
VALUATION PARAMETERS
FY14 FY15E FY16E
EPS (`) 1.6 4.8 9.6
P/E Ratio 36.2 12.1 6.1
Book Value 37.0 40.7 50.0
P/BV 1.54 1.43 1.16
CEPS (`) 5.2 8.6 14.7
Dividend % 10.0 10.0 10.0
DPS (`) 0.2 0.2 0.2
Dividend Yield 0.4 0.3 0.3
Mcap/Sales 0.3 0.2 0.2
EV/EBITDA 5.8 4.7 3.7
EV/Sales 0.5 0.5 0.4
Page 7 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
Team
Analyst Designation Sector Email Telephone
Nilesh Doshi President (Research)
Pharmaceutical, Capital
Goods, Engineering
nilesh.doshi@tssl.in +9122-6633 8950
Shivani V. Vishwanathan Sr. Research Analyst FMCG, Auto shivani.mehra@tssl.in +9122-6663 8956
Nisha Harchekar Sr. Research Analyst Chemicals, Textiles nishaharchekar@way2wealth.com +9122-6146 2952
Ronak Morjaria Research Associate ronakd@way2wealth.com +9122-6633 8959
Amarpreet Kaur Wahi Management Trainee amarpreetkaur@way2wealth.com +9122-6633 8972
Institutional Sales Designation Email Telephone
Ramanjaneyulu BV Institutional Head – Sales raman@way2wealth.com +9122-6146 2956
Vinod Vijay Birla Senior Manager vinodbirla@way2wealth.com +9122-4019 2998
Bhavika Ravasia Senior Manager bhavikaravasia@way2wealth.com +9122-4019 2995
Institutional Dealing Designation Email Telephone
Ajay Prabhudesai Assistant Vice President ajay.prabhudesai@tssl.in +9122-4027 8930
Mitul Doshi Senior Executive mitul.doshi@tssl.in +9122-4027 8932
Gautam Vyas Institutional Sales Trader gautam.vyas@tssl.in +9122-4027 8934
Page 8 of 8
WAY2WEALTH Securities Pvt. Ltd.,
-
Email: research@way2wealth.com website: www.way2wealth.com
3rd
Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900
Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd.
DISCLAIMER
Analyst Certification: I, Nisha Harchekar, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our
personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly
or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s), principally responsible for the preparation of this research report,
receives compensation based on overall revenues of the company (Way2Wealth Brokers Private Limited, hereinafter referred to as Way2Wealth) and has taken reasonable care
to achieve and maintain independence and objectivity in making any recommendations.
Disclaimer
This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you. Way2Wealth is not soliciting
any action based upon it. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any such
transaction. The contents of this material are general and are neither comprehensive nor appropriate for every individual and are solely for the informational purposes of the
readers. This material does not take into account the specific objectives, financial situation or needs of an individual/s or a Corporate/s or any entity/s.
This research has been prepared for the general use of the clients of the Way2Wealth and must not be copied, either in whole or in part, or distributed or redistributed to any
other person in any form. If you are not the intended recipient you must not use or disclose the information in this research in any way. Though disseminated to all the
customers simultaneously, not all customers may receive this report at the same time. Way2Wealth will not treat recipients as customers by virtue of their receiving this report.
Neither this document nor any copy of it may be taken or transmitted into the United States (to US Persons), Canada or Japan or distributed, directly or indirectly, in the United
States or Canada or distributed, or redistributed in Japan to any residents thereof. The distribution of this document in other jurisdictions may be restricted by the law applicable
in the relevant jurisdictions and persons into whose possession this document comes should inform themselves about, and observe any such restrictions.
It is confirmed that Ms. Nisha Harchekar, the author of this report has not received any compensation from the companies mentioned in the report in the preceding 12 months.
Our research professionals are paid in part based on the profitability of Way2Wealth, which include earnings from other business. Neither Way2Wealth nor its directors,
employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may
arise from or in connection with the use of the information contained in this report.
The report is based upon information obtained from sources believed to be reliable, but we do not make any representation or warranty that it is accurate, complete or up to
date and it should not be relied upon as such. Way2Wealth or any of its affiliates or employees makes no warranties, either express or implied of any kind regarding any matter
pertaining to this report, including, but not limited to warranties of suitability, fitness for a particular purpose, accuracy, timeliness, completeness or non-infringement. We accept
no obligation to correct or update the information or opinions in it. Way2Wealth or any of its affiliates or employees shall not be in any way responsible for any loss or damage
that may arise to any person from any inadvertent error in the information contained in this report. The recipients of this report should rely on their own investigations. In no
event shall Way2Wealth be liable for any damages of any kind, including, but not limited to, indirect, special, incidental, consequential, punitive, lost profits, or lost opportunity,
whether or not Way2Wealth has advised of the possibility of such damages.
This material contains statements that are forward-looking; such statements are based upon the current beliefs and expectations and are subject to significant risks and
uncertainties. Actual results may differ from those set forth in the forward-looking statements. These uncertainties include but are not limited to: the risk of adverse movements
or volatility in the securities markets or in interest or foreign exchange rates or indices; adverse impact from an economic slowdown; downturn in domestic or foreign securities
and trading conditions or markets; increased competition; unfavorable political and diplomatic developments; change in the governmental or regulatory policies; failure of a
corporate event and such others. This is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular trading
strategy. No part of this material may be copied or duplicated in any form by any means or redistributed without the written consent of Way2Wealth. In no event shall any reader
publish, retransmit, redistribute or otherwise reproduce any information provided by Way2Wealth in any format to anyone. Way2Wealth and its affiliates, officers, directors and
employees including persons involved in the preparation or issuance of this report may from time to time have interest in securities / positions, financial or otherwise in the
securities related to the information contained in this report.
To enhance transparency, Way2Wealth has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views
expressed in the report.
Disclosure of Interest Statement in KEI Industries Ltd. as on 30th
January 2015
1. Name of the analyst : Nisha Harchekar
3. Analysts’ ownership of any stock related to the information contained : NIL
4. Way2Wealth ownership of any stock related to the information contained : NIL
5. Broking relationship with company covered : NO
6. Investment Banking relationship with company covered : NO
This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and
alterations to this statement from time to time. Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be
happy to provide information in response to specific client queries.
Before making an investment decision on the basis of this research or any information contained in this material, the reader needs to consider, with or without the assistance of
an adviser or a qualified professional, whether the advice is appropriate in light of their particular investment needs, objectives and financial circumstances. All investments
involve risk and past performance does not guarantee future results. Investigate before you invest. Readers are strongly cautioned to verify any information before using it for
any personal or business purpose. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of
the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the
value of the investment. Opinions expressed are subject to change without any notice. Neither the company nor the director or the employee of Way2Wealth accepts any liability
whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research.
Copyright in this document vests exclusively with Way2Wealth Brokers Private Limited.

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KEI Industries: Attractive Valuations, buy

  • 1. Initiating Coverage WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO> Investment Argument KEI Industries is an established player in the manufacturing and marketing of EHV, MV and LV power cables segments, and has recently forayed into EPC business. It has a well-diversified product basket and business model across retail (domestic & exports), institutional, EHV segments, suitably balanced to address the demands of private and public sector organizations. Since the last two years, the focus is on EHV and retail segment along with exports. Key Investment Rationale: Extensive product portfolio and wide user industries: Its wide product portfolio encompasses the complete range of power cables, house wires, winding wires and stainless steel wires. It is also engaged in EPC business. It has a diversified client’s base across various industries such as power, petrochemicals, steel, cement, oil & gas to name a few. With improving outlook of these sectors, we see cable industry particularly KEI to benefit. Reinforcing focus on the retail business: The retail business currently contributes 25% of the Company’s revenues. The Company expects to scale up this contribution to as much as ~40% in the coming years. Sales from dealer distribution during FY14 were Rs 500 crore which is expected to grow to ~Rs 700 crores in FY15E and ~Rs 900 crores by FY16E. EHV cable business seen ramping up: Over the past 3-4 years, the EHV segment has emerged as a major focus area for the Company. The Company has completed the pre-qualification criteria and expects increased EHV sales going forward. We expect this segment to contribute Rs 280 crores of sales during FY16E. Present EHV order book of the Company stands at Rs 200 crore. Margins in EHV segment are higher at 18-20% Moving up the value chain by entering EPC segment: With the necessary pre- qualification criteria for EHV cables, its turnkey EPC business is all set to scale new heights, which will add significantly to its profitability. The Company intends to focus on projects where there is significant cabling requirement ensuring that its own cable gets sold. The company is targeting EBITDA margin of atleast 15% on such projects. Average execution period is 18-24 months. Focusing on exports: Exports shall continue to be another focus area and a key contributor to the revenue and profitability. We expect sales from export to reach Rs 200-220 crore for FY15E. Improving balance sheet: The Company expects to repay its long term debt to the extent of ~Rs 60 crores/year over the next 3 years (Rs 184 crores long- term debt in FY14). KEI has no major capex plans before FY17 which limits the need for additional borrowing. With improving market conditions and higher retail business contribution (which entails no inventory holding and lesser credit period), its receivables position is likely to improve from the current levels of 95 days. Key Concerns: Volatility in key raw materials namely Copper & aluminum and any delay in pick up in investment in power sector and other user industry are the key concerns. Valuation: With the key growth drivers in place, we expect KEI Industries to register significant growth in profitability in the coming years. We expect net sales to grow at a CAGR of 12-15% over FY14-FY17E. At the CMP of Rs 58, the stock quotes at a P/E of 6x its FY16E EPS of Rs 9.6 which is quite attractive. We recommend a BUY for a long-term perspective. Jan 30, 2015 KEI Industries Ltd. BUY Market Data Price `58 BSE Code 517569 NSE Symbol KEI Reuters Code KEIN.BO Bloomberg Code KEII IN Sensex 29183 Nifty 8809 52 week range (````) 10.9-59.3 Market Cap, Crore 440 Shareholding Pattern (%) As on September 2014 Promoters 49.4 MFs, FIs & Banks 0.1 FIIs 1.6 Other Bodies corporate 22.5 Public and others 26.3 Price Performance (%) 3M 6M 12M Price (````) 34 30 12 Absolute 68 92 396 Rel to Nifty 57 73 351 Comparative Price Movement 5000 6500 8000 9500 0 20 40 60 80 100 Jan-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 KEI Industries NIFTY (```` cr) FY14 FY15E FY16E Sales 1618.9 1800.0 2150.0 Gr (%) -2.4 11.2 19.4 EBITDA 153.0 189.7 238.0 OPM (%) 9.5 10.5 11.1 PAT 11.6 37.0 73.9 EPS (Rs) 1.6 4.8 9.6 PE (x) 36.2 12.1 6.1 EV/EBITDA 5.7 4.7 3.7 RoCE (%) 17.8 21.5 26.3 RoNW (%) 4.4 12.8 21.4 Analyst : Nisha Harchekar Tel: +9122-61462952 nishaharchekar@way2wealth.com
  • 2. Page 2 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. Investment Argument Extensive product portfolio and wide user industries KEI manufacturers a wide variety of cables which serve the needs of both the household sector as well as the industrial sector. Its wide product portfolio encompasses the complete range of power cables - Low Tension (LT), High Tension (HT) and Extra High Voltage (EHV), control and instrumentation cables, specialty cables, elastomeric cables, rubber cables, submersible cables, flexible and house wires, winding wires and stainless steel wires. It is probably one of the few to offer specialty cables such as fire survival cables, zero halogen cables and braided cables. Besides manufacture of electrical cables/wires and stainless steel wires, the Company is also engaged in Engineering, Procurement and Construction (EPC) business. It has a diversified client’s base and includes a wide gamut of industries such as power, petrochemicals, steel, cement, oil and gas to name a few. With improving outlook of these sectors, we see cable industry and in turn KEI to benefit. Product Portfolio Products Covered Application Power Cables The power cables are used underground as well over head transmission of Power in Power Plants, Industries, Projects and all other Electrical Installations. Control Cables These cables are used for Electrical Distribution System such as Generating Stations, Industrial Application and Indoor Outdoor Projects. Instrumental cables These cables are used to transmit power from the main control room to the Machines. Rubber Cables Rubber insulated cabled have variety of allocation in industries, mines, ships, aircraft, earth moving equipment, etc. Housing wires Electrification of residential, commercial and industrial establishments. Flexible wires Electrical panel wiring, consumer electrical good. Winding wires Submersible pumps and electrical motors. Automobile cables Wiring harness for automobiles for various applications. Welding cables Providing power from the welding power source to the electrodes. Stainless steel wires These wires are used in diverse areas such as in graded house fastners, spring quality, weaving, knitting, filter wire and other industrial applications. LT Power/ Rubber, 57% HT Cable, 16% HW/WW, 17% SSW, 6% EHV, 1% EPC, 4% FY14 (Rs cr) LT Power/ Rubber, 46% HT Cable, 17% HW/WW, 18% SSW, 6% EHV, 3% EPC, 9% FY15E (Rs cr) Reinforcing focus on the retail business The retail business currently contributes 25% of the Company’s revenues. The Company expects to scale up this contribution to as much as 40% in the coming years, given the impetus on Infrastructure and Real Estate sectors. With major investments planned in Highways, Ports, Airports and SEZs, and rapid growth expected in Housing, IT Parks, Hotels, Shopping Malls and BPOs, the retail segment is expected to witness a boom in the coming years. The Company currently has
  • 3. Page 3 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. close to 600+ dealer-distributors which it expects to take it 800 dealer-distributors by end of FY15. The Company earned `500 crore sales from dealer distribution during FY14 which is expected to grow to ~`700 crores in FY15E and ~`900 crores by FY16E. EHV cable business seen ramping up KEI forayed into Extra High Voltage Cables (EHV) in 2009-10 through a technical collaboration with Switzerland-based M/s Brugg Kabel AG which enjoys over 100 years of experience in manufacture of cables upto 550kV. It is only the third company in India with the capacity to manufacture EHV cables. Its plant is located at Chopanki, Rajasthan and offers cables ranging from 66kV to 220kV. Expansion upto 400 kV is also on the anvil. The end-users of EHV cables include transmission companies, mega power plants, metro cities, industries such as steel, cement, refineries, petrochemicals, large realty projects such as IT Parks, large residential complexes, metro rail etc. Over the past 3-4 years, the EHV segment has emerged as a major focus area for the Company. Earlier, the lack of pre-qualification was hampering the growth in this segment. But now the Company has completed the pre-qualification criteria and expects increased EHV sales going forward. We expect this segment to contribute `280 crores of sales during FY16E. Margins in EHV segment are higher at 18-20%. Recently, it has secured a large order for Delhi Metro Rail Corporation for a turnkey project of 220 kV worth approximately `60 crores and another `50 crore worth of cable orders from transmission utilities. Recently, PGCIL has floated tender for EHV cables worth `700 crore, which is under bidding stage. Present EHV order book of the Company stands at `200 crore. Moving up the value chain by entering EPC segment With the necessary pre-qualification criteria for EHV cables, its turnkey EPC business is all set to scale new heights, which will add significantly to its profitability. The Company intends to focus on projects where there is significant cabling requirement ensuring that its own cable gets sold. The Company intends to limit its participation to funded projects of PFC, REC, ADB, etc. to avoid any cash flow risk. The company is targeting EBITDA margin of atleast 15% on such projects. Average execution period is 18-24 months. The main services offered by the company in the EPC segment includes execution of Power transmission projects of 66kV to 400kV substations on turnkey basis, EPC of EHV & HV cables systems, Electrical balance of plant system for power plant and Electrical industrial projects. Its key strengths include In-house execution capabilities, ability to manufacture own EHV cable / HV cable (which accounts for nearly 70% of its EPC project value) and ability to offer the entire range of products instrumentation cable, control cable and power cable. Focusing on exports The Company has been focusing on exports over the last 2-3 years. The Company has established a strong presence in the export market with presence across 45 countries on the back of competitive pricing and the ability to offer customized solutions and specialty cables. New offices established in Singapore, Nigeria and Kazakhstan have set the stage for higher growth in the exports segment. Export sales in FY14 jumped to `197 crore from about `97 crore a year ago. Going forward, exports shall continue to be a key focus area and a key contributor to the revenue and profitability. We expect sales from export to reach `200-220 crore for FY15E.
  • 4. Page 4 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. Improving balance sheet FY14 debt on balance sheet is `510 crores out of which `184 crores is long term debt. The Company expects to repay the debt to the extent of `60-70 crores/year over the next 2-3 years. Current capacity utilization is 70%. With the current capacity, the Company can achieve net revenue of `2700 crores. KEI has no major capex plans before FY17 which limits the need for additional borrowing. However, we expect a capex of `60 crores in FY16 for increasing its EHV capacity. We further expect the working capital position to improve in near future. With improving market conditions and higher retail business contribution (which entails no inventory holding and lesser credit period), its receivables position is likely to improve from the current levels of 95 days. Key Concerns Raw Material price volatility: Excessive volatility in the Company's key raw materials - copper and aluminum - can have severe impact on its profitability. To mitigate the risk of increasing raw material prices, the Company incorporates price escalation clauses for large orders, while including a three-month price validity clause for smaller projects. Delay in pick up in investment in power sector and other user industry Valuation The business environment for Cable industry is showing signs of industrial and infrastructure growth which implies better demand for the cable industry. The Company has taken right steps by venturing into Extra High Voltage (EHV) Cables and presence in Engineering, Procurement and Construction (EPC) space. These segments are expected to contribute to the incremental growth for KEI and we expect the two segments to contribute 12% and 24% of sales in FY15E and FY16E respectively from the current levels of 5%. Its strategic focus towards expansion through dealer-distributor network is expected to augment its house wire, flexible wire and cables business. With the key growth drivers in place, we expect KEI Industries to register significant growth in profitability in the coming years. We expect net sales to grow at a CAGR of 12-15% over FY14-FY17E and profits to be over the `100 crores mark by FY17E. At the CMP of ````57, the stock quotes at a P/E of 5.9x its FY16E EPS of ````9.6 which is quite attractive. Hence we recommend a BUY on the stock at current level for a longer-term horizon.
  • 5. Page 5 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. Financial Summary (` in crore) INCOME STATEMENT FY14 FY15E FY16E Revenues 1618.9 1800.0 2150.0 Total Expenditure 1465.9 1610.3 1912.0 Operating Profit 153.0 189.7 238.0 Dep. & Amortizations 21.0 23.2 25.1 EBIT 132.1 166.5 212.9 Interest 111.5 113.7 104.6 EBT 20.5 52.9 108.3 Other Income 1.3 1.5 2.0 Extraordinary Items 0.0 0.0 0.0 PBT 21.8 54.4 110.3 Tax 10.1 17.4 36.4 PAT 11.6 37.0 73.9 Revenue Growth % -2.4 11.2 19.4 Op. Profit Growth % -10.2 24.0 25.5 PAT Growth % -55.9 218.7 99.9 BALANCE SHEET FY14 FY15E FY16E Equity Share Capital 14.7 15.4 15.4 Reserves & Surplus 253.9 294.2 366.3 Networth 268.7 309.7 381.7 Non-current liabilities 118.9 86.6 26.6 Current liabilities 835.5 876.1 1023.3 Deferred tax liability 16.0 22.6 36.9 Minority Interest 0.0 0.0 0.0 Equities and Liabilities 1243.5 1299.3 1473.0 Gross Fixed Assets 433.2 463.2 523.2 Depreciation 119.9 143.0 168.1 Net Fixed Assets 313.3 320.1 355.0 Intangible assets 0.8 0.8 0.8 Capital WIP 0.2 0.0 0.0 Investments 3.1 3.1 3.1 Inventory 403.1 414.5 494.6 Trade receivables 428.6 449.0 500.0 Short term loans & advances 60.5 54.2 64.8 Cash and cash equivalents 4.6 30.8 24.0 Current Assets 922.7 970.3 1108.1 Long-term loans and advances 3.4 4.9 5.9 Total Assets 1243.5 1299.3 1473.0
  • 6. Page 6 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. CASH FLOW FY14 FY15E FY16E Operating cash earnings 27.6 57.3 113.2 Depreciation 21.0 23.2 25.1 Interest 111.5 113.7 104.6 Change in WC -71.1 16.8 -60.3 Tax paid 5.5 10.9 22.1 CFO 83.5 200.1 160.6 Net Capex 21.9 30.0 60.0 Net Borrowings 31.2 -33.0 -5.0 FCFE 92.7 137.1 95.6 RATIOS FY14 FY15E FY16E Gearing (%) 1.86 1.68 1.36 Inventory turnover 4.2 4.4 4.7 Debtors (sale days) 96 91 85 RONW(%) 4.4 12.8 21.4 ROCE(%) 17.8 21.5 26.3 OPM (%) 9.5 10.5 11.1 NPM(%) 0.7 2.1 3.5 Eff. Tax Rate 21.1 20.0 20.0 VALUATION PARAMETERS FY14 FY15E FY16E EPS (`) 1.6 4.8 9.6 P/E Ratio 36.2 12.1 6.1 Book Value 37.0 40.7 50.0 P/BV 1.54 1.43 1.16 CEPS (`) 5.2 8.6 14.7 Dividend % 10.0 10.0 10.0 DPS (`) 0.2 0.2 0.2 Dividend Yield 0.4 0.3 0.3 Mcap/Sales 0.3 0.2 0.2 EV/EBITDA 5.8 4.7 3.7 EV/Sales 0.5 0.5 0.4
  • 7. Page 7 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. Team Analyst Designation Sector Email Telephone Nilesh Doshi President (Research) Pharmaceutical, Capital Goods, Engineering nilesh.doshi@tssl.in +9122-6633 8950 Shivani V. Vishwanathan Sr. Research Analyst FMCG, Auto shivani.mehra@tssl.in +9122-6663 8956 Nisha Harchekar Sr. Research Analyst Chemicals, Textiles nishaharchekar@way2wealth.com +9122-6146 2952 Ronak Morjaria Research Associate ronakd@way2wealth.com +9122-6633 8959 Amarpreet Kaur Wahi Management Trainee amarpreetkaur@way2wealth.com +9122-6633 8972 Institutional Sales Designation Email Telephone Ramanjaneyulu BV Institutional Head – Sales raman@way2wealth.com +9122-6146 2956 Vinod Vijay Birla Senior Manager vinodbirla@way2wealth.com +9122-4019 2998 Bhavika Ravasia Senior Manager bhavikaravasia@way2wealth.com +9122-4019 2995 Institutional Dealing Designation Email Telephone Ajay Prabhudesai Assistant Vice President ajay.prabhudesai@tssl.in +9122-4027 8930 Mitul Doshi Senior Executive mitul.doshi@tssl.in +9122-4027 8932 Gautam Vyas Institutional Sales Trader gautam.vyas@tssl.in +9122-4027 8934
  • 8. Page 8 of 8 WAY2WEALTH Securities Pvt. Ltd., - Email: research@way2wealth.com website: www.way2wealth.com 3rd Floor, Tower B, Hincon House, 247 Park, L.B.S. Road Vikhroli (W), Mumbai 400 083, Tel: +91 22 6146 2900 Way2wealth Research is also available on Bloomberg WTWL <GO>KEI Industries Ltd. DISCLAIMER Analyst Certification: I, Nisha Harchekar, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflect our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. 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Disclosure of Interest Statement in KEI Industries Ltd. as on 30th January 2015 1. Name of the analyst : Nisha Harchekar 3. Analysts’ ownership of any stock related to the information contained : NIL 4. Way2Wealth ownership of any stock related to the information contained : NIL 5. Broking relationship with company covered : NO 6. Investment Banking relationship with company covered : NO This information is subject to change without any prior notice. Way2Wealth reserves at its absolute discretion the right to make or refrain from making modifications and alterations to this statement from time to time. Nevertheless, Way2Wealth is committed to providing independent and transparent recommendations to its clients, and would be happy to provide information in response to specific client queries. 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