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    1,650% surge in 5 years & counting: Analysts betting on this smallcap to deliver more

    Synopsis

    In last five years, the company’s profit has grown at a CAGR of 73 per cent.

    Rise-gain-4---GettyGetty Images
    Analysts count the stock among top India bets due to a likely increase in government spend on power, housing and metro projects and also private capex.
    NEW DELHI: Despite a 1,650 per cent rise in five years, the best performer of the BSE500 pack still appears to have more steam left in it.

    Shares of cable wire manufacturer KEI Industries are up 33 per cent so far this year, and January-March period was the 11th straight quarter of double-digit revenue growth for the company.

    Ebitda margin hit a 14-quarter high of 10.9 per cent during the quarter. Its order book stood at a record high of Rs 4,700 crore as of March 31. Further, company cut its debt by Rs 100 crore to Rs 600 crore in FY19.

    Analysts count the stock among top India bets due to a likely increase in government spend on power, housing and metro projects and also private capex.

    They say KEI’s retail and exports businesses enjoy 100-200 basis points better margins than domestic institutional business. Return on equity (RoE) is likely to stay in the north of 20 per cent over FY19-21.

    The company’s focus on dealer network should result in better margin and a drop in working capital requirement. The ongoing projects may start paying off soon, with utilisation likely to hit optimum levels in 18-24 months, they say.

    The management has guided 17-18 per cent sales growth and 10-11 per cent operating margins in FY20, targets analysts feel are achievable.

    Strong show
    Jefferies in a recent note said KEI is a holistic India play given its exposure to capex, consumption (housing spend) and engineering exports. The brokerage has a price target of Rs 675, 40 per cent higher from its Monday’s trading price of Rs 450.

    KEI manufactures cables and stainless-steel wires. In 2008, it entered the EPC business, offering execution of power transmission projects on a turnkey basis, EPC projects of extra-high voltage (EHV), high voltage (HV) cable systems and underground cabling systems. These activities today act as forward integration of the company’s cable production.

    In last five years, the company’s profit has grown at a compounded annual growth rate (CAGR) of 73 per cent to hit Rs 180.70 crore in FY19 from Rs 11.60 crore in FY14. Sales have risen 21.43 per cent compounded annually to Rs 4,231 crore from Rs 1,602 crore. PAT margins have expanded year after year to hit 4.3 per cent in FY19 from 0.7 per cent in FY14.

    Edelweiss Securities said the company has been a consistent outperformer vis-a-vis peers owing to a diversified revenue base.

    “Housing for all and improving power availability, in our view, will be key drivers of the domestic cables and wires industry. With the government sharpening focus on power generation, transmission and distribution, demand for cables as part of T&D equipment is expected to expand significantly. KEI’s expertise in EPC projects and excellent track record have rendered it the preferred candidate for such deals,” it said.

    Key strengths
    The company has increased its focus on branding of its retail cables, which has helped it post 20 per cent CAGR growth over the past three years. The distribution network has improved dealer count to 1,450.

    Chairman & MD Anil Gupta in the recent conference call said his company was targeting 28-30 per cent growth in retail sales this year.

    “KEI is reaping the fruits of its thrust on the retail segment, with strong growth and higher margin profile. KEI has more than 1,450 dealers currently and is expected to grow this by at least 10 per cent every year. Sales from this segment are expected to grow about 25 per cent. As more than 50 per cent of sales come through channel financing, KEI’s working capital remains in control,” Dolat Capital Markets said in a note.

    The company is expecting a working capital cycle in the 2.25-2.5 months range this year.

    In the EPC space, KEI has the advantage of manufacturing EHV, HV and low-tension (LT) cables in house, which account for product pull through of 30 per cent, leading to superior margin, Edelweiss Securities said.

    “Also, technological collaboration with Switzerland-based Brugg Kabel has helped the company gain faster entry into the EHV cable market with designs and process backup — services sought by end users,” the brokerage said.

    Capex plan
    Gupta said a new plant in Silvassa, for which land was acquired in October 2018, is under construction. The first phase of the project is likely to be commissioned by July and the second phase by February or March 2020. Approximate investment in both phases will be Rs 90- 100 crore. The plant will give a lift to production of house wires and flexible wires.

    Besides, the cables manufacturer, which enhanced its LT and MHV capacity at Pathredi in FY19, is undertaking debottlenecking activity at the same location. “Based on these expansions, the company can achieve a peak turnover of Rs 5,700 crore,” said Prabhudas Lilladher.

    Court cases
    The company recently settled two cases with Sebi on alleged manipulation in issuance of GDRs (global depository receipts) by paying over Rs 1.78 crore. It was alleged that KEI and its board of directors attempted to mislead investors by deliberately making statements that the GDR issue had been subscribed by several investors, when it was actually subscribed by only one entity, Fusion Investments.

    What analysts say
    YES Securities, which has a price target of Rs 558 on the scrip, said the company could continue to witness valuation re-rating as earnings growth remains robust on a large base. The brokerage expects the company to see a decline in debt-equity ratio while ROE is projected at more than 25 per cent going ahead.

    Prabhudas Lilladher has a price target of Rs 599 on the stock. This brokerage said newer capacities should help achieve optimum utilisation within 18-24 months as the company is well-established in the institutional segment, is seeing higher retail demand and expanding footprints globally.

    Elara Capital has a price target of Rs 555. It said a significant drop in distribution capex leading to lower order inflows, slower pace of execution, higher commodity (copper & alumunium) prices and lower-than-expected expansion in retail are key downside risks.



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    (What's moving Sensex and Nifty Track latest market news, stock tips and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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