We recommend ?BUY? on KEI INDUSTRIES LTD for a target of INR 436 – valuing the company at P/E 26x of FY19E Earning.
Investment Rationale:
- KEI Focus on increasing presence in higher margin products.
- Improvement in working capital through change in sales mix.
- EHV cables and EPC to drive institutional segment growth.
- Robust revenue/EBITDA/PAT growth with improving return ratios.
- Expanding capacity to address growth in EHV cables.
- Building competencies in EPC division (Forward Integration).
- Exports to report decent growth due to strong geographical presence.
- Working capital cycle to improve along with positive FCF in future.
- Well-entrenched distribution network: Covering all major metros, Tier I & Tier II cities to connect with clients pan-India.
- Adhering to the most stringent quality standards laid down by various institutions.
Valuations And View:
KEI is likely to be a major beneficiary of key government initiatives in power, infrastructure and real estate sector. It is well-poised to garner opportunities from the power utilities, core infrastructure and construction projects across the country. Its prudent foray into the EHV cable and EPC Services for Power Sector Projects has further expanded the opportunity horizon. We value the business at 26x FY19E EPS and recommend a BUY rating on the stock with a target price of INR 436 per share.
Risk & Concerns
- Changing Government Policies: EHV and EPC segment of the business are directly affected by Government policies, thus affecting important divisions of the Company. These segments do well under a steady policy regime and vice-a-versa.
- Cyclical Risk: The Company?s primarily operations cater to the needs of cyclical businesses and thus Company?s revenues are subject to volatility in interest rate and capex cycles.
- Competition Risk: The Company offers the products which are highly competitive and thus faces threat from other players in the market.
- Raw Material Price Fluctuation Risk: The Company is exposed to volatility in its crucial raw material like copper and aluminium, which can adversely impact the profitability of the Company.
- Currency Fluctuations Risk: Imported raw material which the Company uses, are exposed to exchange rate fluctuations and can adversely affect the cost thereby impacting margins adversely.
Company Background
Established in 1968, KEI is engaged in manufacturing and marketing of Power Cables. It has a significant presence in domestic and international markets. It services retail and institutional segments and caters to both private and public sector clients. It has built its manufacturing facilities at Bhiwadi and Chopanki (both in Rajasthan) and Silvassa (Dadra and Nagar Haveli). Its prudent foray into the EHV cable and EPC Services for Power Sector Projects has further expanded the opportunity horizon.
KEI cables segment comprises of a whole range of cables such as Extra High Voltage (EHV), High tension (HT) and low tension (LT) power cables, control and instrumentation cables, winding wires, flexible wires, and house and stainless steel wires. Their products are supplied to various sectors like oil refineries, railways, automobiles, cement, steel, fertilizers, textile and real estate sectors. KEI has a diversified business model with a significant presence in domestic and international markets. It services retail and institutional segments and caters to both private and public sector clients. It is well-poised to garner opportunities from the power utilities, core infrastructure and construction projects across the country. Its prudent foray into the EHV cable and EPC Services for Power Sector Projects has further expanded the opportunity horizon.
Industry Overview
Global electricity consumption is expected to increase at a CAGR of about 4.3 per cent over the next decade. This is being driven by rapid economic and population growth, primarily in developing countries. Globally, around 1,760 GW of new capacity is planned or proposed to be added over the ten-year period of 2016?25. About 1,351,920 km of lines at the 100 kV and above voltage levels are estimated to be added across the globe by 2025. Of this, about 8 per cent is expected to be based on DC technology. Underground and undersea cables will account for 1.4 per cent and 0.8 per cent, respectively. Most of the lines (30 per cent) shall be at 220?287kV, while 6.7 per cent shall be constituted by UHV lines.
During 2016?25, Asia will account for close to three-fourths of the total new line length addition, with plans to add over 970,537 km of transmission lines. Around 5,752 GVA of transformer capacity will be added globally between 2016 and 2025. The Indian power sector has an investment potential of ` 15 trillion (US$ 225 billion) in the next 4?5 years, thereby providing immense opportunities in power generation, distribution, transmission – equipment. The government?s immediate goal is to generate two trillion units (kilowatt hours) of energy by 2019. This means doubling from the current level of electricity generation to provide 24×7 power for residential, industrial, commercial and agriculture customers. The Government is taking a number of steps and initiatives in order to achieve the set targets which will unfold a bright future for sector.
