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KEI Industries: Poised for higher growth, great long-term bet

At the current market price of Rs 433 per share, the stock is trading at 20 times FY19e and 14 times FY20e earnings, which is quite reasonable and offers scope for appreciation. Improving RoE and leadership in a growing market make it a worthy long-term bet.

May 21, 2018 / 01:37 PM IST

Jitendra Kumar GuptaMoneycontrol Research

In the engineering and power space, KEI Industries is probably the only company which is not complaining about slowing demand and capex cycle. It is operating at over 90 percent capacity utilisation and delivered a strong 24 percent year-and-year growth in revenue last fiscal.

Due to higher capacity utilisation, better product mix and bargaining power in a high demand environment, the company was able to grow its margins that led to a strong 54 percent YoY growth in FY18 net profit to Rs 144.7 crore. Moreover, it is set for yet another year of stellar performance, with FY19 volume and revenue growth guidance of close to 18 percent and 22-25 percent, respectively. In Q4 FY18, its cable business delivered a volume growth of 17 percent YoY.

financials

Growth in cables segment
KEI operates in two business segments: cable and engineering. The company is witnessing strong demand in solar, wind, railways, metro projects, housing sector and high voltage cables, which contributes to higher margins. During the year gone by, its high voltage and exports business recorded close to 65 percent and 21 percent YoY growth, respectively. The company is sitting on an order book of close to Rs 2,570 crore, which includes an order book of about Rs 327 crore from high voltage cables. This business clocked a sales turnover of Rs 168 crore in FY18 and given its current order book, the same should double.

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The cables segment accounts for almost 70 percent of its total business. The management is adding a new facility, of which Phase I will be operational in about a week from now. Phase II will be operational by March next year. Phase I, which was built with a capex of about Rs 30 crore, could produce materials worth Rs 300 crore. The same for Phase II stands at Rs 200 crore. The benefit of this will be visible in coming months, with margins and return ratios improving further.

Revenue visibility
In FY18, the management reported a return on equity of almost 27 percent as against 22.7 percent in FY17. During the year gone by, operating margins stood at 9.68 percent as against 9.5 percent YoY. Its engineering segment, which accounts for about 25 percent of revenue and caters to refinery, power, industrial, steel, cement and fertilisers, is also sitting on an order book of about Rs 1,400 crore on a sales turnover of Rs 956 crore.
The management is aiming at a sales turnover of about Rs 1,000 crore in FY19. Despite low growth in engineering, procurement and construction (EPC) business due to lack of orders, the company would still be growing its sales and earnings at a robust pace, due to strong growth in the cables business. Exports in FY18 grew in double-digits, delivering 21 percent YoY growth in sales to Rs 454 crore.

Valuation & outlook
For FY18, the company has delivered better-than-expectations earnings per share (EPS) of Rs 18.21. Even with a 28-30 percent growth in earnings, it should report an FY19 and FY20 EPS of about Rs 22 and Rs 30, respectively. At the current market price of Rs 433 per share, the stock is trading at 20 times FY19e and 14 times FY20e earnings, which is quite reasonable and offers scope for appreciation. Improving RoE and leadership in a growing market make it a worthy long-term bet.

Jitendra Kumar Gupta
first published: May 21, 2018 01:37 pm

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