KEI Industries - Rising retail share, leaner balance sheet to drive re-rating; Buy says Anand Rathi with price target of Rs 586

KEI Industries, with its revenue falling 12% yoy, 11%, EBITDA margin, Q3 was a mixed bag for KEI. Continued traction in retail/EHV cables (up 11%/15% y/y) was negated by EPC, down 33% (intentionally), and by exports (high base due to the Dangote order). Net debt shrank to Rs.5.3 bn (Rs.9.2 bn at end-Mar’20). B2B is expected to revive on the Union budget’s infra focus while the better mix/cost-savings would support high margins (11%), says management of KEI Industries.

With its robust growth, KEI Industries focus on shortening the WC cycle by restricting its EPC business (largely to EHV-cable-related projects) will generate strong FCFs, to be re-invested in growth capex. Thus, Anand Rathi yet believes in its sustainable growth prospects and retain their Buy rating on KEI Industries, with a Rs.586 target (14x FY23e P/E, closer to the five-year mean), earlier Rs.485. The rising retail share and leaner balance sheet are keys to a re-rating in the stock.

KEI Industries Q3 was a mixed bag:

Revenue slid 12% y/y due to EPC down 33% and to export (Rs1 bn, vs. a high, Rs 2.6 bn, base from the Dangote order the quarter prior). Continued traction in retail/EHV cables, though, and the 11.1% EBITDA margin (superior mix, cost savings) were positives. Net debt shrank to Rs5.3 bn, (Rs 9.2 bn at end-Mar’20). Capex will step-up from FY22 on a green-field plant.

KEI Industries Greater focus on retail/EHV cables to support higher margin:

A better mix toward retail/EHV cables (up 11%/15% y/y in Q3) and cost savings will help KEI Industries maintain 11% EBITDA margins, per management. A 33% yoy dip in EPC revenue in the last two quarters reflects management’s clear focus on restricting the EPC business largely to EHV-cable-related projects.

KEI Industries leaner balance sheet, key to re-rating:

While growth for KEI has been robust, its focus on reducing the WC cycle by restricting its EPC business will lead to strong FCFs, to be re-invested in growth capex – key to a re-rating.

KEI Industries Valuation:

Anand Rathi are positive on KEI Industries and maintain a Buy rating with a Rs 586 target (14x FY23e P/E). 

KEI Industries Risks: 

Volatile RM costs, delay in industrial capex.