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Fundamental Analysis of KEI Industries: Polycab India and KEI Industries have given multi-bagger returns to their shareholders in the last five years. Both companies are in the power cables and wires industry. Is there more to the returns for investors? They say the second-largest company trades at a better valuation than the market leader. Time to find out.

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In this article, we take a deep dive and perform a fundamental analysis of KEI Industries, the largest wires and cables manufacturer after Polycab.

Fundamental Analysis of KEI Industries

In this article, we shall perform a fundamental analysis of KEI Industries Ltd. We’ll start by getting ourselves acquainted with the history and business of the company, followed by an industry overview. Later, a few sections are devoted to revenue growth, return ratios, and debt analysis. A highlight of the future plans and a summary conclude the article at the end.

Company Overview

KEI Industries Ltd. was founded 54 years ago in 1968 as a house-wiring rubber cables manufacturer. Over the years, the company has emerged as a leading player providing holistic wire & cable solutions. 

Its 5 manufacturing plants produce a broad range of cables and wires: extra-high voltage (EHV), medium voltage (MV), and low voltage (LV) power cables for both institutional and retail/housing segments.

The company’s ventures into the EHV cable segment and engineering, procurement & construction (EPC) services for projects in different industries have been fruitful. It has taken multiple institutional projects from key clients such as Power Grid Corp., Delhi Metro, Tata Power, and more.

KEI has a wide network of over 1,800 dealers/distributors. It is run by a strong workforce of over 5,385 employees across various roles. It operates 38 branch offices and 21 warehouses across the nation. The cable manufacturer exports its products to 50+ countries.

We now have a pretty good understanding of the business and the scale of operations as part of our fundamental analysis of KEI Industries. For a company of such scale, a closer look at the business segments deserves a separate section.

Business Segments

The products of KEI Industries find their applications in diverse industries such as power, oil & gas, railways, automobiles, cement, steel, real estate, fertilizers, and more. In FY22, the top 10 customers accounted for 22% of the company’s revenue, making it well diversified in terms of income source.

As for the product-wise breakdown, low tension (LT) power cables brought 38% of the sales in FY22 followed by a 26% share of house wires. The image below presents the product-wise revenue mix of KEI Industries.

Fundamental Analysis of KEI Industries - business segments
Source: KEI Industries Ltd. Annual Report FY 2021-22 

In addition to this, we mentioned that the company exports its cables and wires to over 55 countries worldwide in the previous section. 

Taking it forward, we can note that India as a geographical segment generated 90% of the sales and the rest 10% was earned overseas from exports. Segregating it further, retail at 41% and institutional sales at 49% together brought the said 90% domestic sales for the company.

Source: KEI Industries Ltd. Annual Report FY 2021-22 

Industry Overview

India’s wires and cables market expanded by 20-25% in FY22 on the back of inflation-led higher realizations. This means that growth was primarily price-led and not volume-led. The sharp rise in the prices of copper, aluminum, and PVC compounds used for insulation prompted the industry as a whole to resort to the price increase. 

Overall, the domestic wires and cables market is valued at Rs 60,000-65,000 crore, accounting for roughly 40-45% of the nation’s electrical industry. 

That is a fairly large market. But what are the broad product segments?

Extra-high voltage (EHV) and high voltage (HV) power cables are used for the transmission and distribution of electricity from power plants to sub-stations and further to residential, commercial, and industrial units.

Electrical power or process control systems make use of the control and instrumentation cables.  Housing wires and winding wires find their use in the retail/housing space, including various types of appliances. Telecom cables and optical fiber cables are used for the transmission of information. 

Housing, commercial, power, petrochemicals, mining, steel, non‑ferrous, shipbuilding, cement, railway, and defense are the major industries that contribute to the demand of the power cable industry.

Going forward, increased renewable power generation, expansion & modernization of transmission and distribution infrastructure, higher investments in metro railroads, smart grid initiatives, and upgrades to power transmission and distribution networks are expected to bring growth in the wires and cables industry.

So far we read about the company’s business and the industry landscape as part of our fundamental analysis of KEI Industries. In the sections ahead, we look at revenue growth, net-profit growth, profit margins, and more.

KEI Industries – Financials

Revenue & Net-Profit Growth

Barring FY21, the operating revenue of KEI Industries has consistently grown at a CAGR of 10.33% in FY18 to Rs 5,727 crore in FY22. During the same period, its net profit compounded at 21.06% every year to Rs 377 crore. 

The table below presents the operating revenue and net profit of KEI Industries for the previous five financial years.

YearOperating Revenue (Rs Cr)Net Profit (Rs Cr)
20225,726.5376
20214,181.5269
20204,887.8256.2
20194,230.9180.7
20183,503.1144.7
5-Yr CAGR10.33%21.06%

Along with analyzing revenue and profitability, we must also study profit margins. Thus, we look at the company’s operating profit margin and net profit margin in the next section as part of our fundamental analysis of KEI Industries.

Margins: Operating Profit & Net Profit

The table below shows the operating profit margins and the net profit margins of KEI Industries for the last five years. 

YearOPM (%)NPM (%)
20229.566.56
202110.16.53
20209.355.24
20199.784.27
20189.124.17

We can note that the operating margin has largely remained the same over the years pointing at the company’s ability to transfer the increase in the cost of raw materials to the customers. 

Furthermore, the revenues have increased without a decline in the margin, implying that the company has strong demand, brand, and pricing power for its products.

We can also note that the net profit margin has improved over the years. This is because the company reduced its debt and decreased its interest expense. For instance, interest charges which were Rs 112 crore in FY18 were only Rs 40 crore in FY22.

Good, the company has lowered its debt and interest charges. But how much? To answer this, we take a closer look at the debt-to-equity ratio and interest service coverage ratio of the wires and cables manufacturer in the next section.

Debt/Equity & Interest Service Coverage

The cable manufacturer has repaid its debt over the last few years. We can see in the table below that the debt-to-equity ratio of KEI Industries has decreased to a low of 0.16 in FY22 from 1.41 in FY22. During the same period, it also increased its interest service coverage ratio multi-fold to the high of 13.56 times in FY22.

YearDebt/EquityInterest Coverage
20220.1613.56
20210.177.29
20200.253.54
20190.773.05
20181.412.83

The reduction in debt levels has been very impressive for KEI Industries. Let us see how its return ratios have changed over the years in the section.

Return Ratios: ROCE & ROE

A casual observer may point out that the company’s return on capital employed (RoCE) and the return on equity (RoE) have declined over the years. 

However, taking into account our findings from the previous section, the decline in RoCE and RoE is because of the fall in financial leverage and expansion in the equity base. The company’s reserves and surplus balance has increased considerably in recent years on the account of higher profits and low dividend payout.

The table below highlights the RoCE and the RoE of KEI Industries for the last five fiscal years.

YearRoCE (%)RoE (%)
20222419
20212116
20202822
20192926
20182724

Future Plans Of KEI Industries

So far we looked at only previous years’ figures as part of our fundamental analysis of KEI Industries. In this section, we read about what lies ahead for the company and its shareholders.

  1. The management has earmarked investments of Rs 800 crore towards expanding the manufacturing capacity over the next four-five years.
  2. Additionally, it commented that retail businesses from the dealer network will be a focus area of the company. Within two-three years, the revenue contribution from the segment has been targeted at 50%.

Fundamental Analysis of KEI Industries – Key Metrics

We are now almost at the end of our fundamental analysis of KEI Industries. Let us take a quick look at some of the key metrics of the stock.

CMP₹1,586Market Cap (Cr.)₹14,500
EPS₹47.50Stock P/E33.4
RoCE24%RoE19%
Face Value₹2.00Book Value₹260
Promoter Holding38.0%Price to Book Value6.10
Debt to Equity0.16Dividend Yield0.16%
Net Profit Margin6.56%Operating Profit Margin9.56%

In Conclusion

We have reached the end of the fundamental analysis of KEI Industries. The company has truly been a long-term multi-bagger story with rising operating revenue and debt reduction. And through this, it has kept the operating margins at the same levels. The stock has compounded at an annual rate of 32.71% every year in the last five years. And that’s a lot!

However, the promoters of KEI have reduced their shareholding by 7.6% in the recent September 2022 quarter from 37.99% in 2019. In your opinion are the promoters selling out as the business is maturing? Is this too big a red flag to drop the stock altogether? How about you let us know your thoughts in the comments below?

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