Valuations offer a long-term play

Nitin Shrivastava

In the buoyant economy, huge investments in infrastructure and power projects have been lined up for next 5-6 years. This along with ongoing growth in realty, construction and industrial sectors provides a compelling growth environment for the cable industry.

KEI Industries (KEI), an established player and second-largest power cable company in India is into manufacturing of high and low tension cables (HT and LT), control and instrumentation cables, house wires and stainless steel wires. It also manufactures variety of specialty cables such as rubber cables, braided cables, fire survival and zero halogen cables. The company’s facilities are located at New Delhi, Bhiwadi (Rajasthan) and Silvassa (D&N H).

Business: KEI currently has healthy order book position of around Rs 300 crore in addition to dealer distribution sales of Rs 25 to 30 crore per month that includes Rs 75 crore order work of HT cables.

Cables:  KEI’s major revenue comes from cables segment with LT & HT contributing Rs 524 crore (77%) and Rs 45 Crore (7%) respectively to total sales turnover of Rs 681 crore in FY07. With its new HT manufacturing facility at Bhiwadi commissioned in June 2006, fully operational now, KEI expects revenue of Rs 150 crore from HT cable segment in FY08.

House wires: This segment accounted for Rs 14 crore (2%) out of total sales in FY07. To cater to the booming construction & realty segment, KEI significantly expanded its production capacity (at Silvassa) in February 2007, which would give revenues of around Rs 150 crore at its full capacity. KEI is expecting revenues of Rs 100 crore in FY08 & Rs 150 crore in FY09 from house & building wires thorugh retail sales.

Stainless Steel Wires accounts for 13% of the sales turnover.

Power and Infrastructure sectors contribute 30-35% to company revenues each. KEI sells 70% of its products to institutions including Suzlon, Gail , L&T, Power Grid , Essar, Tata Steel, BPCL, HPCL, BHEL,  Railways.

Distribution and retail sales account for 20%. The company is concentrating on retail segment by strengthening distribution network. Exports: Exports accounted for 10% of sales turnover in FY07 with revenues of Rs 83.5 crore, almost three-fold increase over FY06. It improved its presence in Gulf, Africa and West Asian countries. With EOU plant functional, it is expecting revenues of Rs 150 crore in FY08 & Rs 300 crore by FY09.

Expansion of Capacities:

KEI is continuously investing in expansion and upgradation of its capacities by developing new units around the existing facility in Bhiwadi and increasing its product offerings. Majority of the expansion plans are funded through FCCBs. These expansions will lay the foundation for taking on and executing high value EPC projects and enable KEI to expand its footprints overseas.

KEI recently inaugurated its new 100% EOU plant for manufacturing HT/LT power cables at Chopanki near Bhiwadi.

Future plans: As part of retail focus, KEI is thinking of vertical diversification by foraying into synergistic electrical product business which would encompass manufacturing and supply of power ancillaries and household electrical products.

It is contemplating to cover the entire value chain from manufacturing and supplying cables to executing EPC contracts and manufacturing and supplying transformers. For manufacturing of transformers, it may take the inorganic expansion route and supplement it with green field expansion.

Investment Rationale: The ongoing infrastructure and realty boom and the huge capex planned in various heavy industries would continue to create unprecedented demand for power cables and housing wires.

KEI has been regularly expanding capacities and climbing up the value chain to fully exploit the huge growth opportunity. It is also contemplating to diversify into related electrical business, EPC contracting & power generation segment that will complete the entire value chain of electrical business.

Concerns: Any delay in execution of power and infrastructure projects or delays in commissioning of internal capacity expansion, steep rise in raw material costs, or change in economic growth would affect the revenues and margins adversely.

Valuations:  Given the fact that that KEI is into diversified growth segments, the current valuations offer a good long-term investment opportunity. KEI has been growing its business and revenues rapidly.

KEI earnings are expected to grow at CAGR of 45% over FY07-FY10 and net profit at CAGR of 47% between FY07-10 driven by capacity expansions. The margins are likely to improve in the next two years. At CMP of Rs 90.80, it trades at a P/E of just 12.73x its FY08 earnings and at 8x & 5.48x its FY09 & FY10 earnings respectively.

Disclaimer: The author does not hold any shares in the company.