Sample  write-ups  
 KEI Industries    
Vol. No. : 23    Issue No. : 2                             Friday, November 18, 2016

Low tension growth

Improving product mix and focus on volume growth in steadily growing user industries are key positives

Related Tables
4KEI Industries: Financials
4KEI Industries Results

Idea  KEI Industries
BSE Code 517569
BSE Group B
NSE Code KEI
ISIN Demat INE878B01027
Bloomberg KEII@IN
Reuters KEIN.BO
Par Value Rs 2
52-week High/Low Rs 140 / Rs 86
Current Price Rs 116 (as on 18th November 2016)

KEI Industries (KEI) was established in 1968 as a partnership firm under the name Krishna Electrical Industries, with prime business activity of manufacturing house wiring rubber cables. The firm was converted into public limited with the corporate name KEI industries Limited in December 1992. In 1996, KEI acquired Matchless, a company under same management, which was engaged in manufacture of stainless steel wires. Currently, KEI manufactures variety of cables namely High Tension (HT) and Low tension (LT) power cables, Control and Instrumentation Cables, other specialty cables, rubber insulated power, control & instrumentation cables. KEI also manufactures and sell wide range of steel wires, which have various applications such as manufacturing of springs and fastenings.

To follow the present demands of the market, KEI set foot into the manufacturing of EHV cables up to 220KV and 400 KV in collaboration with BRUGG Kables, a century old Swiss company.

The company also targets EPC business (cabling turnkey projects) only where there is significant cabling (about 40-15%) of total project cost is involved. This ensures its own cable products get sold.

Leading cable manufacture catering to T&D segment and various industries

Cables form the largest component within the electrical T&D industry with a weightage of ~31%. As per IEEMA, the cables segment has consistently outperformed industry growth in the trailing five years (except in FY13 when it fell 26%, sharper than the industry contraction of 8%). During FY16, the segment grew by 7.2% while the overall electrical equipment index was up 6.8%.

Company’s cables are dominantly sold to T&D space, solar and wind power sector and Rail Metro space in India. Of the total project costs of Metros, Transmission lines, Solar and Wind power sector, cables account for around 5% of total project value, while in distribution space, its share is somewhere around 15% of total project value.

KEI caters to institutional as well as retail customers. It addresses cabling requirements of sectors, such as power, oil & gas, railways, automobiles, cement, steel, fertilizers, textiles and real estate. KEI is a registered vendor for both Indian and many overseas EPC contractors like ABB. Siemens. BHEL, Areva. Alstom and McDermott to name a few and is registered as a vendor for more than 100 large Indian companies encompassing almost all industrial sectors.

The company is perhaps one of the few to offer customers specialty cables such as fire survival cables, zero halogen cables and braided cables.

The business environment for Cable industry is showing signs of industrial and infrastructure growth. Medium-to-long term outlook in terms of investment in the infrastructure sector, particularly power, is also good. This indicates that demand for the cable business should improve. With Company's successful venture into Extra High Voltage (EHV) Cables and presence in Engineering, Procurement and Construction (EPC) space, the company has an edge in the Cable Industry. The company has specific tie-ups in this segment i.e. Foreign Technical Collaboration with Brugg Kabel AG, Switzerland which will help the Company to capitalize on its proven presence in the Cable and EPC business.

Good order book

The company has total order book of around Rs 2926 crore as on Sep’16. Of which cables account for about Rs 672 crore of orders, Rs 195 crore orders are from EHV segment and exports are of around Rs 160 crore and rest around Rs 2000 crore is from EPC segment. The current EPC order book includes orders from transmission and distribution in Uttar Pradesh and some from Karnataka, Telangana, J&K, Kerala and West Bengal.

The Turnkey projects will be executed in about 2 year’s time while rest of the order book have to be executed in 12 months time.

More than 50% of the order book has copper pass through clause.

The business outlook continues to be strong; the company achieved significant new orders in EPC business from various utilities under IPDS (Integrated power development schemes).

In-house manufacturing of cables gives a strong competitive edge to KEI , translating into a sustainable EBITDA margin of about 10-11%.

Creating brand and increasing distribution reach through retails sales

In domestic market the company has expanded distribution network to expand sales through distribution channel. The distribution channel sales come largely from construction, Infrastructure and industries.

KEI has set a target of achieving 45-50% of revenue from the retail segment (direct sales via dealers) by FY20 from 31% in FY16 (up 450bp in two years).

Since FY11, it has increased dealer networks by 7 times to 926 in FY16 and plans to add 100 new every year. KEI has stepped up efforts on brand building and spent around Rs 7 crore on advertising in FY’16, which otherwise used to be around Rs 2 crore for the past 3-4 years.

The company has strengthened its top management team by appointing a new business head for the retail business.

Retail sales through dealer network have seen a 18.5% growth in volumes and around 12% growth in value terms in H1 FY’16-17. Net sales through dealer network, which now stands at around 1020 dealers, stood at around Rs 380 crore.

Expanding in high margin 400 KV EHV segment

KEI industries is the only organised player in EHV cable segment. The company currently has capacity of manufacturing around 600 km of EHV cables. The company is already prequalified with various SEB for 400 KV EHV cables. Lot of tenders for 400 KV EHV cable is expected from many SEBs such as Maharashtra, Odhisa, Tamil Nadu, Rajasthan etc.

KEII has undertaken a Brownfield expansion at its Chopanki factory to start manufacturing EHV cables up to 400kV. This would add an incremental 500 km of EHV capacity, taking total to 1,000km of capacity at an estimated cost of around Rs 120 crore and the plant is expected to be operational from Dec’17 onwards. Major capex is completed and only around Rs 40 crore of capex will be completed by Dec’16.

The additional capex has potential to generate around Rs 225 crore of revenues with higher Ebidta margin for the company every year.

Currently the company is L1 in around Rs 200 crore of EHV orders which it will receive before Jan’17.

Strong exports

Export sales stood at Rs 188 crore and were up by 88% on YoY basis for H1 FY’16-17.

The company increased its geographical presence in exports and has started exporting to Australia and Gulf countries. Within Middle East, the company sales its products to countries such as Qatar, Oman and Abu Dhabi and mainly to Oil & Gas space.

Due to high cost of production & closing down of plants in Europe, outsourcing from Asia will grow, benefiting KEI.

KEI has SABS certification which will enable it to make inroads into the African markets viz. South Africa, Namibia, Bostwana, Zimbabwe, Zambia, Angola etc.

Exports margin are 2-2.5% better than domestic market and cash receivable is better.

Going forward, exports which constitute around 10% of total sales is expected to be around 15% of total sales in next couple of years.

Financials showing good traction

For the quarter ended Sep’16, sales grew by around 3% YoY basis to Rs 624.50 crore. OPM was higher by 90 bps to 10.7% thus, resulting in an OP growth of 13% to Rs 66.92 crore. Other income stood at Rs 1.89 crore as compared to Rs 1 lakh for Sep’15 quarter. Interest costs were higher by 5% to Rs 31.77 crore and depreciation cost rose 10% to Rs 6.82 crore. Thus, PBT was up by 33% to Rs 30.22 crore. Due to lower deferred tax provision, the overall tax stood at Rs 7.33 crore which was more or less flat on YoY basis. Thus, PAT increased by 49% to Rs 22.89 crore for Sep’16 quarter.

Cables segment grew by 3% on YoY basis to Rs 557.35 crore and accounted for 76% of sales. PBIT from the same however grew by 20% to Rs 65.84 crore and accounted for 75% of total. PBIT margin stood at 11.8% for Sep’16 quarter as compared to margin of 10.2% for Sep’15 quarter.

Sales from the stainless steel wire segment was more or less flat at Rs 27 crore and accounted for 4% of sales. PBIT from the same de-grew by 13% to Rs 1.63 crore and accounted for 2% of total.

Sales from the Turnkey division de-grew 1% to Rs 144.97 crore and accounted for 20% of sales. PBIT from the same stood at Rs 20.02 crore against a profit of Rs 17.16 crore YoY. PBIT margin stood at 13.8%, for Sep’16 quarter. .

For the 6 months ended Sep’16, sales grew by around 5% YoY basis to Rs 1175.26 crore. There was a volume growth of around 12% in H1 FY’16-17 while value growth was around 5%. Copper prices were lower by around 10% on YoY basis and Aluminum prices were more or less flat on YoY basis. OPM was higher by 30 bps to 10.5% thus, resulting in an OP growth of 8% to Rs 122.86 crore. Other income stood at Rs 2.79 crore up by 116% YoY. Interest costs were lower by 8% to Rs 58.47 crore while depreciation cost rose 9% to Rs 13.35 crore. Thus, PBT was up by 36% to Rs 53.83 crore. Due to lower deferred tax provision, the overall tax stood at Rs 14 crore, up by 13% YoY. Thus, PAT increased by 47% to Rs 39.83 crore for 6 months ended Sep’16.

For the 6 months ended Sep’16, sales from the Cables segment grew by 3% on YoY basis to Rs 1037.60 crore and accounted for 76% of sales. PBIT from the same grew by 7% to Rs 121.34 crore and accounted for 78% of total. PBIT margin stood at 11.7% for 6 months ended Sep’16 as compared to margin of 11.2% for the 6 months ended Sep’15. Sales from the stainless steel wire segment was lower by 1% to Rs 53.12 crore and accounted for 4% of sales. PBIT from the same grew by 38% to Rs 3.53 crore and accounted for 2% of total. Sales from the Turnkey division grew 15% to Rs 279.62 crore and accounted for 15% of sales. PBIT from the same stood at Rs 31.62 crore up by 15% YoY with PBIT margin at 11.3%.

Management is confident of continuation of strong growth 

The company expects 15% jump in sales in FY 2017. In three years the company hopes to take OPM to 12% levels. RoCE is expected to rise to 25% due to higher OPM and lower working capital.

The company is constantly working on improving its product mix and expects H2 margins to be better following operating leverage and the new capacity coming up in H2 FY17.

Going forward with not much capex, declining interest costs and increasing volumes will drive the bottom line for the company.

Valuation

In FY 2017 we expect the company to register sales and net profit of Rs 2536.50 crore and Rs 85.28 crore respectively. EPS works out to Rs 11. Current price of Rs 116 discounts the FY2017 projected EPS by 10.5 times.

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KEI Industries: Financials
 
  1303 (12) 1403 (12) 1503 (12) 1603 (12) 1703(12P)
Sales 1658.36 1618.91 2030.95 2325.58 2536.50
OPM (%) 10.3 9.5 9.5 10.4 10.5
OP 170.52 153.04 192.88 242.26 268.51
Other inc. 2.36 1.28 2.38 5.35 7.04
PBIDT 172.87 154.32 195.26 247.61 275.55
Interest 109.35 111.53 120.39 126.97 122.47
PBDT 63.52 42.79 74.87 120.64 153.08
Dep. 20.44 20.97 24.59 25.29 28.24
PBT 43.08 21.82 50.28 95.35 124.84
EO 0 0 2.61 0.00 0.00
PBT after EO 43.08 21.82 52.89 95.35 124.84
Total Tax 16.74 10.22 18.63 33.14 39.57
PAT 26.34 11.6 34.26 62.21 85.28
EPS (Rs) * 3.4 1.4 4.2 8.1 11.0
* on current equity of Rs 15.54 crore. Face Value: Rs 2
EO: Extraordinary items; (P) Projections
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Databases

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KEI Industries Results
 
  1609(03) 1509(03) Var. (%) 1609(06) 1509(06) Var. (%) 1603 (12) 1503 (12) Var. (%)
Sales 624.50 606.30 3 1175.26 1120.94 5 2325.58 2030.95 15
OPM (%) 10.7 9.8   10.5 10.2   10.4 9.5  
OP 66.92 59.17 13 122.86 113.88 8 242.26 192.88 26
Other inc. 1.89 0.01 999 2.79 1.29 116 5.35 2.38 125
PBIDT 68.81 59.18 16 125.65 115.17 9 247.61 195.26 27
Interest 31.77 30.30 5 58.47 63.45 -8 126.97 120.39 5
PBDT 37.04 28.88 28 67.18 51.72 30 120.64 74.87 61
Dep. 6.82 6.19 10 13.35 12.23 9 25.29 24.59 3
PBT 30.22 22.69 33 53.83 39.49 36 95.35 50.28 90
EO 0.00 0.00 0 0.00 0.00 0 0.00 2.61 0
PBT after EO 30.22 22.69 33 53.83 39.49 36 95.35 52.89 80
Total Tax 7.33 7.32 0 14.00 12.43 13 33.14 18.63 78
PAT 22.89 15.38 49 39.83 27.06 47 62.21 34.26 82
EPS (Rs) * # #   # #   8.1 4.2  
* on current equity of Rs 15.45 crore: Face value of Rs 2 each
# EPS can not be annualised due to nature of business
EO: Extraordinary items; Var. (%) exceeding 999 is restricted to 999
EPS is calculated after excluding EO and relevant tax
Figures in crore,
Source: Capitaline Databases

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