Leading brokerage firm Sharekhan in its recent report published on KEI International Ltd. has given a buy call to the stock of the company for a target price of Rs 1,765 apiece. Considering the estimated target price by the brokerage, the stock could surge 19% if the stock is purchased at the current market price (CMP).
KEI was established in 1968 with the prime business activity of manufacturing house wiring rubber cables. It manufactures cables and wires, with a product portfolio ranging from housing wires to Extra High Voltage (EHV) cables, and further diversifying into the Engineering, Procurement, and Construction (EPC) services for power and transmission projects. Today, it has grown into an empire with a global presence, offering holistic wire & cable solutions. KEI Industries is a small cap company having a market cap of Rs 13,530.23 crore.
The current market price of KEI stock is Rs 1,492.60 apiece on NSE. The stock hit the 52-week low at Rs 801 apiece in October 2021, and the 52 week high at Rs 1,606.95 apiece in September 2022, respectively.
Returns On Investment
KEI share in the past 1 week has fallen 1.87%. Whereas, over the past 1 and 3 months, it has given 7.94% and 30.49% positive returns, respectively. The stock over the past 1 year has surged 75.99% and 197.27% multibagger returns in the past 3 years. The stock over the past 5 years, has given 370.46% multibagger returns.
On a sustainable growth path
Sharekhan said, "Our interaction with KEI Industries Limited's (KEI) management reinstates our bullish outlook, supported by robust demand outlook in institutional, retail, as well as exports. The company is expediting efforts to gain market share, expanding its retail business and capacity to cater to the rising demand. The recent decline in commodity prices may not lead to significant margin expansion, as procurement prices are adjusted with the suppliers accordingly; and the company does not carry very high inventory. However, a better product mix (higher proportion of the retail segment and EHV cables) and operating leverage due to volume growth would lead to margin improvement. Further, improvement in the working capital cycle and strong and improving return ratios give us comfort."
Robust revenue and margin guidance for the medium to long term
KEI targets to grow its total revenue by18-20% y-o-y in FY2023 and maintain a 17-18% CAGR in the coming years. The company expects the retail segment to contribute 45% to total revenue in FY23 (over 50% to total revenue in the next two-three years). The company expects exports to contribute 12% to the total revenue and the rest would come from institutional sales. The company expects continuous demand from public and private capex. The institutional segment is witnessing strong demand from oil and gas, refinery, tunnelling, and ventilation projects on highways as well as railways and metro rail projects, transmission and solar projects, cement, steel, and real estate. In retail, dealer network expansion and strong demand for housing wires (55-60% of the retail business) hold the key for robust 30-35% growth. Further, overhead electric transmission networks continue to move underground in large cities, which would generate demand for cables.
Capacity expansion to cater to rising demand
The company would be expanding LT, HT, and EHV capacity over 3-4 years with an investment of ~Rs. 800 crore. The company has acquired land in Baroda, Gujarat, for its capacity expansion and the first phase should be commercially operational by FY2023E. The company is undertaking greenfield capacity expansion in LT, HT, and EHV cables with capex of ~Rs. 800 crore over 3-4 years through internal accruals. The company through debottlenecking would also improve capacity utilisation of its existing plants by 5-7% per annum. Annual capex is expected to be Rs. 200 crore-250 crore (including spending on new manufacturing facility at Baroda, Gujarat) over the next two-three years. The company also aims to explore FMEG opportunities in the near term, adding one to two products once retail sales reach about 50% of total sales.
Strong balance sheet; Margin improvement will be led by higher retail contribution
KEI's working capital cycle has improved over the years with increased contribution from retail to total revenue. In FY2022, retention money of ~Rs. 150 crore was received from clients for EPC contracts. This strengthened cash flows from Rs. 154 crore in FY2021 to Rs. 229 crore in FY2022. Improved cash flows helped the company in paying off its debt. As per our interaction, KEI is a net-cash company currently. The company expects OPM to be 10-10.5% for FY2023, post which margin could reach 11% by FY2024. Increasing contribution of retail sales would ensure better cash flows and lower working capital requirements, thus leading to better margins. Revision in estimates - We have maintained our estimates for FY2022-FY2024E.
Valuation: Retain Buy with a revised PT of Rs 1,765
KEI is on a healthy and sustainable growth trajectory as it is catering to diversified user industries, increasing its focus on retail, strengthening its high-margin EHV cables through capex, and focusing on improving exports. Management has provided strong demand outlook in both retail and institutional segments, driven by private capex and increased government spending, respectively. Improving working capital cycle owing to the increase in retail business and strong return ratios give us further comfort. "We expect revenue/PAT CAGR of ~18%/~24% over FY2022-FY2025E. The stock is currently trading at a P/E of ~21x its September FY2024E EPS. Therefore, we reiterate our Buy rating on the stock with a revised PT of Rs. 1,765 valuing the stock on its September 2024E EPS," the brokerage has said.
According to Sharekhan, the key risk is, "Volatility in input cost may adversely impact its margin guidance. A part of its revenue is generated from exports and any fluctuations in forex rates could affect the company's financials."
The stock has been picked from the brokerage report of Sharekhan. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.