kei: Fundamental Radar: Why KEI Industries could surpass October highs to record next 12 months?

It rallied more than 70% from February lows to hit a new record in October 2022, but soon lost momentum. Fundamental factors indicate that a new peak is approaching.

Investors who missed the rally can still look to buy the stock now or on the downside for a target of Rs 1,895 based on strong management guidance, doubling of earnings and improved margins.

Industries is a leading player in wires and cables (W&C) with a wide product portfolio and distribution capability with PAN India presence.

KEI ranks among the top three wire and cable (W&C) manufacturers in the country. Serves retail and institutional clients.

Its product portfolio ranges from residential wiring to extra high voltage (EHV) products that meet the cabling requirements of sectors such as power, refineries, railways, automotive, cement, steel and real estate.

The data shows that indoor wiring has a current market share of ~ 6%, while cables have a market share of ~ 12%.

The cables and wires industry is highly fragmented, but the market share of organized players is expected to grow from 61% in FY2014 to 74% in FY2023, which bodes well for industry leaders like KEI, the Sharekhan report said.

Investment rationale:

Wires and cables form an important part of industrial capital. For example, in real estate, cabling accounts for 3.5-4% of total costs, while in transmission and distribution, this ratio is 15-25%. Cables also have strict qualification norms in the institutional business as they last at least 25-30 years. years.

Hence, given its presence in various sectors, there is huge scope for growth for KEI.

“KEI has increased its focus on the retail business by increasing its dealer and distributor base (currently 1,805 units) and expects the retail segment to grow at 30-35% YoY,” Khadija Mantri, AVP Research at Sharekhan

he said.

KEI expects 10-15% annual growth in exports in the coming years. The company is present in the Middle East, Africa and Australia and is currently expanding in Latin America.

“Thus, operating leverage due to better product mix (higher ratio of retail segments and EHV cables) and volume growth will lead to margin improvement in the coming years,” he said.

Growing instructions:

Management expects a revenue CAGR of 17-18% over the next two-three years and an operating margin of 10.5-11% and a PAT margin of 6.5% on a sustainable basis. It aims to almost double its revenue to Rs 10,000-11,000 crore by FY26/27.

Key risks

Mantri stressed that any slowdown in the sectors it covers could have a significant impact on demand for KEI’s products. Second, sharp changes in commodity prices are risk factors.

Evaluation

5 year revenue and PAT CAGR has been better than competitors

and .

“It has a strong balance sheet as it turns into net cash and has a healthy ROE and ROCE of 19% and 23% respectively. The stock trades at 25x and 21x FY2024/FY2025E EPS. We recommend a buy share with a target price of Rs 1,895 per share,” advises Mantri.

(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. They do not reflect the views of Economic Times)