Company Name – KEI Industries Limited (KEI)
Current Share Price – INR 1,199 (July 15, 2022)
Market Cap – INR 10,805 cr
1. What is interesting about the stock?
And God said, 'Let there be light' and there was light, but the electricity board said he/she would have to wait until Thursday to be connected. Wiring was missing!
Electricity gives us relatively cheap and safe lighting for our homes. This allows us to remain awake long after dark, which gives us more time to engage in leisure. Electricity also runs many of the things that we use for entertainment, like our televisions, computers, and smartphones.
When electricity is unavailable, there is no power to use your fridge or freezer, telephone lines are down and phone signal is lost. Your mobile phones will be useless as the battery dwindles, with no backup charging option. Your water supply stops pumping clean water. We need wires for transmission (EHV) or distribution (home wiring for end users) to keep electricity flowing.
KEI Industries Limited (KEI) was incorporated in 1968, as a partnership firm, under the name Krishna Electrical Industries and started by manufacturing switchboard cables. It was converted into a public limited company in 1992 and was listed on the stock exchanges in 1995. The Company is involved in manufacturing low tension (LT), high tension (HT), and extra high voltage cables (EHV), along with control and instrumentation and specialty cables, house wires, and stainless-steel wires. The Company's manufacturing facilities are located in Bhiwadi, Chopanki, Pathredi, Silvassa, and Chinchpada. In addition, it is involved in EPC work for electrification including cable laying, setting up of transformers, separating feeders, and last mile connection.
KEI has a 7-8% market share in the total cables and wires. Polycab is the largest player in the Wires & Cables industry enjoying a 13-14% market share (20-22% of the organized segment). Finolex, RR Kabel, and Havells are the other large players in the industry.
Product-wise revenue break-up in FY22 was:
LT cable – 38%
HT cable – 17%
EHV – 9%
Housing wire – 26%
EPC – 7%
Stainless steel wire – 4%
With an underground power supply grid more secure and reliable than overhead networks, Government’s thrust is on converting overhead electric grid network infrastructure to underground infrastructure in certain cities. EHV cables offer significant advantages over conventional overhead lines for sub-transmission and distribution of power, including higher power density, lower transmission losses, and efficient bulk power delivery. KEI is amongst few players globally with embedded manufacturing capabilities for EHV 400kV cables.
Channel-wise revenue break-up in FY22 was:
Institutions – 44%
Retail – 40%
EPC/SS Wire – 10%
KEI is also focused on augmenting its retail sales channel and has identified it as the next leg of growth. Over FY16-22, Retail sales grew at a CAGR of 25%. KEI’s retail segment comprises Household Wires (60% of retail sales) and LT/HT cables (40% of retail sales). Contribution of the Retail segment to sales increased from 26% in FY16 to 40% in FY22. Management's target is to increase the share to 50% in the next couple of years. Retail comes with a better margin and lower working capital requirements. Example – Working capital days of Polycabs is 69 in FY22 vs 102 of KEI.
KEI and its board of directors settled with SEBI in cases related to alleged manipulation in the issuance of GDRs by paying settlement charges of ~ INR 6 cr in 2019. SEBI had issued a notice in 2017 after investigating the GDR issuance amounting to USD 10 million in September 2005. It was alleged that KEI and its board of directors attempted to mislead the investors by making statements that the GDR issue was subscribed by several investors when the issue was subscribed by only one entity, Fusion Investments. Moreover, the subscription amount was paid by Fusion Investment after getting a loan which was secured by a pledge agreement between KEI and the bank.
Established relations with customers and increasing penetration with a focus on the retail segment – With over five decades of operations, the company has established strong relationships with reputed customers, in the institutional segments, such as Power Grid Corporation of India, L&T, HPCL, and Tata Power
Diversified product mix – capability in EHV
Increasing focus on the retail segment
Strong financial position – net D/E close to 0
Intense competition from large as well as unorganized players
Elevated receivable cycle resulting in the relatively high working capital cycle
Corporate governance issues in the past
2. Key Historical Financials
Company revenue and profit have been growing 17% and 32% on a CAGR basis respectively in the last 5 years. Management expects to maintain revenue growth of 18-20% in FY23
EBITDA margin is stable at around 10-11%
Deleveraging over last the few years led to higher growth in net profit
Working capital days increased from 85 in FY20 to 102 in FY22 leading to a poor CFO/EBITDA ratio (33% in FY21 and 39% in FY22)
3. What is my view on company valuation?
KEI share price has appreciated ~70% in the last year on the back of multiple expansions with the narrative of being a retail cables & wires player.
KEI trades at a P/E (TTM) multiple of ~29x vs Polycab at 36x and Finolex at 10x. Company is currently at an EV/EBITDA ratio of ~18x vs Polycab at 23x and Finolex at 8x.
Let’s assume that the Company can execute its plan in taking the retail segment to 50%. As we had used in Polycab analysis, the long-term P/E multiple of retail cable and wire business is 20x. Institutional business trade at a lower multiple of ~15x. So, the weighted average multiple of business comes at ~17.5x.
Also, the Company expects to maintain the margin with revenue growth of 17-18% for the next few years, implying that the profit growth will happen in the range of 18-20%. With a PEG ratio of 1x, the P/E ratio comes to the range of 18-20x.
So, the current valuation of the Company seems to be expensive. Additionally, Company is the number 3/4 player in a highly competitive market so the business strength is not great.
4. What are the risks to the investment analysis?
Risks to the analysis are:
The narrative of being a retail cable and wire stock and ample liquidity in the market can keep the stock price at an elevated level in the short/medium term
Strong revival in the real estate industry can push the revenue and profit growth higher to the 20-25% range
About the Author
I have over 15 years of experience in venture capital, private equity, and investment banking in India and the Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in the Middle East, to look after investments, M&A, and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB), and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purposes and not to be construed as investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.