Initiating Coverage - KEI Industries: Angel Broking

Wiring for growth

KEI Industries (KEI) is a cable manufacturing company and also engaged in Engineering, Procurement and Construction (EPC) business. It offers high and low tension cables, control and instrumentation cables, house wires, stainless steel wires, and high-technology specialty cables. Its manufacturing facilities are located at Bhiwadi, Chopanki & Silvassa. Through export KEI is present in over 45 countries across the globe.

Healthy order book indicates strong revenue visibility: KEI's current order book stands at Rs.3,233cr (Rs.2,154cr from EPC segment, Rs.667cr from Cable segment, Rs.200cr from EHV segment, Rs.49cr from Substation and the balance from EPC L1 business). Its order book grew by ~28% in the last 3 years on the back of order inflows from State Electricity Boards, Power grid, etc. This gives KEI, a revenue visibility for the next 12-16 months.

Strengthening distribution network and higher ad Spend to increase B2C business: KEI's consistent effort to increase its retail business from 30% of revenue in FY16 to 40-45% of revenue in the next 2-3 years on the back of strengthening distribution network (currently 926 which is expect to increase 1500 by FY19) and higher ad spend (increased from Rs.2cr in FY13 to Rs.7cr in FY16 and expected to spend). Exports to continue its growth momentum: KEI's exports (8% of revenue in FY16) is expected to reach a level of ~14-15% in next two years on the back of higher order execution from current order book of ~Rs.180cr and participation in various international tenders worth Rs.500cr. We expect a strong ~26% growth CAGR over FY2016-19 in exports.

Interest cost as % of net sales to decline by 150bp over FY16-19: We expect the company's interest cost to decline due to (1) full repayment of its Rs.211cr term loan in next 2-3 years and (2) marginally lower interest cost arising due to the improvement in credit rating. While company may see some rise in its working capital requirement due to higher sales in EPC segment, the debt repayment and low interest rate should offset the same. Due to this, we expect interest cost to decline as % of sales which will further result in better profitability.

Outlook and Valuation: We expect KEI to report net revenue CAGR of ~13% to ~Rs.3,335cr over FY2016-19E mainly due to (a) higher order book execution in EPC segment (b) growth in EHV business and (c) higher B2C sales and (d) higher exports. On the bottom-line front, we expect a CAGR of ~24% to Rs.118cr over the same period on the back strong revenue and lower interest cost. At the CMP of Rs.124, the stock trades at 8.1x its FY2019E EPS of Rs.15.3. We initiate coverage on the stock with a Buy recommendation and target price of Rs.153 based on 10x FY2019E EPS, indicating an upside of ~23% from the current levels.

Shares of KEI INDUSTRIES LTD. was last trading in BSE at Rs.122.45 as compared to the previous close of Rs. 122.55. The total number of shares traded during the day was 41421 in over 943 trades.

The stock hit an intraday high of Rs. 125.35 and intraday low of 122.1. The net turnover during the day was Rs. 5119030.

Source : Equity Bulls

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