Robust Q3FY17 & 9MFY17 Results

BUY

KEI I ND U ST R I ES
HIGH VOLTAGE GAIN Retail Desk
10 April 2017
Rating Buy Company Description:
New Delhi-based KEI Industries was established in 1968 as a partnership firm,

CORP.
CMP (`) 191 Krishna Electrical Industries. It primarily manufactures house-wiring rubber
Target Price (`) 256 cables. KEI went public in 1995. With 400 products it is now established in EHV,
Upside (%) 34 MV and LV cables, addressing demand of more than 800 customers in different
sectors. It has also made a foray into engineering, procurement and construction
Key Data
(EPC) and was ranked one of the top-three cable-manufacturing companies in
BSE Code 517569 India. Anil Gupta is Chairman & MD of KEI.
NSE Code KEI KEI’s plants are located in Bhiwadi & Chopanki (Rajasthan) and Silvassa (D & NH).
Reuters code KEIN.BO It has over 800 employees, 310 workers and 2,000 contract labourers across the
Bloomberg Code KEII IN country, with installed capacity of 600km of EHV cables, 5,000km of HT cables,
Sensex (07/04/2017) 29706 67,000km of LT cables, 280,000km of winding and house wires and 4,800 tonnes
of stainless steel wire. KEI presently operates at over 82% capacity.
Face Value (`) 2
Mcap (` Cr.) 1480 Products Portfolio:
KEI’s diversified product basket comprises extra-high voltage cables up to and
52 week H/L (`) 199/95 including 220kV, high and medium voltage cables, low tension cables, control
2 Wk Avg Qty 84000 and instrumentation cables, specialty and rubber cables, winding, flexible and
Share holding, house wires, OVC/poly-wrapped winding wire, and stainless steel wire.
December‘16 Holding %
Engineering, Procurement and Construction (EPC):
Promoters 49.0 KEI marked its presence in EPC from FY08. The main services offered by it in EPC
Foreign 5.3 constitute execution of power transmission projects (of 66kV to 400kV sub-

LTD
DIs 17.7 stations) on a turnkey basis, EPC of EHV and HV cable systems, electrical
PCBs 6.1 balance-of-plant for power plants and electrical industrial projects.
Public 21.9 In-house manufacturing of EHV/HV cables gives KEI an added advantage since
Performance these cables comprise almost 30% of an EPC project value. Its EPC clients
(%) 3M 6M 12M comprise L&T, Siemens, ABB and Areva, etc. KEI has collaborations with Woosun
Stock-KEI 42.2 60.0 95.9 Electric (Korea) for power projects and with Cobra Engineers (Spain) for sub-
station execution.
BSE 200 12.8 6.1 25.6

(GMDV)
BSE 500 13.5 6.8 26.3 Key Financial: (` crore)
Year-March 9MFY17A 9MFY16A FY15A FY16A FY17E FY18E
Price Chart: (One-Year) Sales/OP Income 1886.88 1671.84 2020.06 2277.19 2665.0 3000.0
Other Income 3.12 2.62 4.99 5.35 NA NA
PBIDT 203.57 177.39 197.86 247.60 293.1 330.0
Interest 92.56 95.94 120.4 126.97 120.0 116.0
PBDT 111.01 81.45 77.47 120.63 173.1 214.0
Depreciation 20.08 18.61 24.59 25.29 26.5 28.0
PBT 90.93 62.83 52.88 95.34 146.6 186.0
Tax 23.92 20.91 18.63 33.14 48.4 61.5
PAT 67.01 41.92 34.25 62.2 98.2 124.5
Equity 15.5 15.5 15.5 15.5
Reserves 288.4 351.1 449.3 573.8
Book Value (`) 39.2 47.3 60.0 76.0
EPS (`) 8.6 5.4 4.4 8.0 12.7 16.1
http://www.kei-ind.com
CPS (`) 11.2 7.8 7.59 11.3 16.1 19.7
Vijay Dave PBDIT Margin (%) 10.8 10.6 9.8 10.8 11.0 11.0
vijaydave@sunidhi.com PAT Margin (%) 3.6 2.5 1.7 2.7 3.7 4.2
Ph: 91-22-6677 1681 P/BV 4.0 3.2 2.5
P/E 23.9 15.0 11.9

Technical Collaboration
Brugg Kabel for EHV Cables
Products Application
User Industries
Marquee Clients
Marketing Network
Q3FY17, 9MFY17 & FY16 Results
Sunidhi Research |
KEI Industries
KEI has technical collaborations with Woosun Electric Co., Korea for power
projects and Cobra Engineers, Spain for substation execution. Its entry into
the EHV segment was aided by technological collaboration with Switzerland-
based Brugg Kabel AG, which has over 100 years’ experience manufacturing
cables up to 550kV. This has enabled it faster entry into the EHV-cable
market with designs which are sought by end-users.
KEI is the third in India to commercially produce EHV cables (ranging from
66kV to 220kV). In November 2010 it commenced production at Chopanki in
Rajasthan. In the past, demand for EHV cables was met largely through
imports; however, technological collaboration with the Switzerland based
Brugg Kabel AG has enabled KEI to make its presence in EHV cables felt
faster.
Brugg has over 100 years’ experience and the ability to manufacture cables
up to 550kV. Brugg supports KEI by providing designs, process back-up –
services sought by end-users such as transmission companies, mega power
plants, metropolises, industries such as steel, cement, refineries,
petrochemicals, large realty projects such as IT parks, large residential
complexes, etc. At present KEI has more than Rs 2 billion of orders pending
for EHV cables. The normal execution time for the cable orders is 6—8
months.
Control Cables: Used for electrical distribution systems such as generating
stations, industrial application and indoor and outdoor projects.
Rubber Cables are used in mines, ships, aircraft, earth-moving equipment,
etc.
Power Cables: Used in underground as well as overhead transmission of
power in power plants, industries, projects etc.
Instrumental Cables: Used to transmit power from the main control room to
the machines.
Housing Wires: These have application in electrification of residential,
commercial and industrial establishments
Winding Wires: These are used for submersible pumps and electrical motors
Flexible Wires: Used in electrical panel wiring, consumer electrical goods,
etc.
Stainless Steel Wires: Wide application in graded house fasteners, weaving,
knitting and other industrial applications
KEI’s products are used in the automobiles, cement, customized use, oil
refineries, power, railways, real estate, steel, textiles, etc.
Jacobs, Holtec, Shell, ABB, Siemens, Alstom, Areva, Kobelco, Kverner,
Petrfac, Toyo, Mew Edd Bahrain, Sewa, Fewa-UAE, Nepco, PEC Yemen, JT
Metro (Dubai), Gasco UAE, PDO Oman, KNPC Kuwait, Qatar Petroleum, Sohar
Aluminium and Technip etc.
BHEL, NTPC, Tata Power, Indian Railways, Jindal Group, Hindalco, Punj Loyd
Group, Essar Group, HP, BP, IOCL, CPPL, ONGC, GAIL, SAIL, Tata Steel, Tata
Chemicals and many others.
KEI has a strong sales and distribution network in all metros, tier-I and tier-II
cities. It strengthened its retail business by adding 160 dealers in 9MFY17. In
Q3FY17, total dealers were 1,086. More focus on east and south India (will
be adding 110 dealers yearly), which will help it to increase its B2C revenue
share. New offices have been opened in Singapore, Nigeria, Kazakhstan apart
from existing office in Dubai/Abu Dhabi.
During Q3FY17, net profit rose 83% to `27.2 crore on 29% higher sales of `709
crore. Q3FY17 EPS is `3.5. During 9MFY17, net profit rose 60% to `67 crore
on 13% higher sales of `1887 crore. 9MFY17 EPS is `8.6. During FY16, net
profit climbed 82% to `62 crore on 13% higher sales of `2277 crore. FY16 EPS
was `8.0.
2
 KEI Industries

9MFY17 Takeaways LT and HT cable sales have seen a growth of around 14% in volume terms in
9MFY16. Export sales stood at `117 crore during Q3FY17 and were up by 312%
on YoY basis. For 9MFY17, export sales were up by 130% YoY and stood at
`304 crore.
Retail sales through dealer network have seen a 15% growth in volumes and
around 10% growth in value terms in 9 months ended Dec’16. Net sales
through dealer network, which now stands at around 1086 dealers, stood at
around `564 crore. During 9 months ended Dec’16, sales from EPC segment
stood at around `320 crore, up by around 36% YoY.
The EHV cable sales have seen a de growth largely due to disruption in the
current facility due to ongoing expansion, which got completed in Jan’17.
Working capital cycle got stretched in Dec’16 quarter so while term loan got
reduced, the benefit of lower interest cost was not seen in Q3FY17.
Management expects working capital scenario to improve going forward.
KEI’s cables are dominantly sold to T&D space, solar and wind power sector
and Metro space in India. Of the total project costs of Metros, Transmission
lines, Solar and Wind power sector, cables account for around 5% of total
project value, while in distribution space, its share is somewhere around 15%
of total project value.
Financial With equity capital of `15.5 crore and reserves of `351.5 crore, the book
value of the share is `47.3. With cash and loans/advances given, the net
debts of `361 crore give DER of 1:1 as at FY16. RONW of 16.9% is expected to
increase by 25% to 21.1% in FY17 & FY18. KEI has repaid `40 crore term debt
in 9MFY17; Will repay additional `20 crore in 4QFY17. With annual
repayment of `60 crore, KEI expects to pay off its term loan in 2‐3 years.
Exports KEI, being a strong and established player in the cable sector at home, has
also garnered a decent share of the export market. It has been setting up
offices all over the country to capture further orders to best ustomi the
increased manufacturing capacities. It has also set up offices in Singapore,
Nigeria and Kazakhstan besides offices in Dubai/ Abu Dhabi. Also, it operates
in Korea and Australia through agents.
Besides its dominance in its home market, it exports to about 45 countries.
FY16 exports stood at `191 crore. The exports margin of 2-2.5% is better
than domestic market and so also cash receivable. It sells a wide range of
cables: EHV (66kV to 220kV), MV (11kV to 66kV) and LV (<11kV). Also, it has
participated in international exhibitions to establish fresh connections in
order to expand operations in overseas markets. Competitive prices and its
ability to offer customized solutions have helped its export business
dramatically in the past two years.
Order Book KEI has pending orders of `3103 crore out of which `2052 crore including EPC
L1/LOI `50 crore); Substation `202 crore and EHV cables `236 crore; LT/HT
cables `613 crore and of this exports `110 crore). Bill-to-Book ratio is 1.36:1.
Widening Retail Presence KEI’s retail division, comprising household wires as well as LT and HT cables,
is moving up the value chain, backed by the company’s strong brand equity
and wide distribution network in India and abroad. Its brand has helped it to
position itself as a specialist cable manufacturer. It has a distribution
network of about 600 retail dealers and plans to add 200 every year. At
present, it is very strong in the north and west, and plans to strengthen its
operations in the east and south.
At present its distribution network covers most of India (metros, tier-I and
tier-II cities). It is vigorously marketing through brand promotion and
communication channels. KEI spent `7 crore in FY16 toward advertising in TV
and print. KEI has been vigorously promoting its brand through various ad
campaigns and outdoor advertising. These have led to increased house wire
sales.
Sunidhi Research | 3
 KEI Industries

Expansion & Diversification Expansion:

KEI commenced its new plant for the manufacture of EHV cables on 07
January 2016. Current capacity utilisation at the Chopanki plant is 35%,
which the company expects to touch 75% by end-Q4FY17.
Diversification Plans:
KEI aims to foray into other sectors like transmission line, infrastructure
projects in the area of SEZ, MRT/Airport, EPC of cement plants, power plant
and steel plant in the next 2-3 years.
Prospects Wires and cables form an integral part of all industrial Capex. The
government’s plan to spend $1trillion on infrastructure in the next five years
would help growth in this sector.
Based on some estimates, 3—3.5% of Capex cost is on cables and wires; in
power distribution, however, this goes as high as 10—12%. The size of the
cable sector is estimated at `25, 000 crore, which is growing at 12—15%.
Major expansion in steel, cement, oil & gas, energy, automobiles, highways,
ports, airports, SEZs, housing, IT parks, hotels, shopping malls and BPOs
would increase demand for cables. The wire and cable sector in India
comprises about a quarter of the total transmission and distribution
segment.
Demand for wires is expected to register a 13% CAGR over the next 7—8
years owing to the Government’s investment in power and infrastructure,
coupled with dynamic industrialisation and rapid urbanisation.
Increased budgetary support for the power sector reflects the government’s
focused agenda to improve the power sector. Government thrust on
modernising transmission and distribution systems and on renewable energy
also put the power sector in a favourable position.
Further, the target of electricity for all by 2019 has set the ball rolling for
unprecedented progress in the power sector.
Development of smart cities, modernisation in the railways, revival of the
real estate sector, and acceleration in infrastructure creation are other
factors that signal a robust demand for wires and cables and increased EPC
spend.
Great project execution skills and a strong product portfolio will empower
KEI to extract more value from this environment compared to industry peers.
Opportunity The growth prospects in the retail segment are based on the government
thrust on housing, easing of the home buying process through the recently
passed real estate bill, and other regulatory measures unveiled in the
Budget. These are expected to provide a tailwind to the real estate and
housing sector; that in turn should propel the demand for house wires in the
coming years.
Another strong opportunity in the retail business is the sustained government
investments in power, telecommunications and urbanisation. In this upbeat
scenario, KEI is assured of sizable growth opportunity. The engineering,
procurement and construction (EPC) sector is projected to be a multi-billion-
dollar industry due to the vast infrastructure opportunities arising.
Infrastructure development, power generation, and setting up of
transmission and distribution networks are accelerating. With government
focus on creating smart cities, increasing preference for underground cabling
as against overhead cabling across the country, the demand potential for
EHV cables is robust. KEI anticipates loads of opportunities from this
strategic augmentation.

Sunidhi Research | 4
 KEI Industries

Growth Triggers Indian Power Sector:

• Additional capacity of 85,000 MV of Power capacities in next 6 years
• Major policy investment initiative to achieve this growth
• Thrust on Non-conventional energy like Wind Power and Solar
• Total Investments of over US$165 billion in Generation, Transmission &
Distribution
• Additional Cable Demand of US$9 billion from this sector likely in next 6
years
Infrastructure, Housing:
• Major investments planned in Highways, Ports, Airports, SEZs
• Rapid growth in Housing, IT Parks, Hotels, Shopping Malls, BPOs
Power & Infrastructure:
 Infrastructure spending estimated at USD 1 trillion in the next five
years
 Estimated FDI in Infrastructure sector is USD 250 billion while USD
750 billion is expected to be mobilized locally
 Demand for cables estimated at USD 3 billion (including EHV, MV and
LV cables) used for transmission and distribution purpose
Engineering, Procurement & Construction (EPC):
 EPC industry is projected to be a multi-billion-dollar industry
 On the threshold of exponential growth due to gigantic scale of
infrastructure opportunities
 Industry estimates suggest, for every rupee invested in power
generation capacity, almost 60% is invested in equipment and EPC
work
 Consumption of cables in turkey EPC power project account for
nearly 70% of the total project cost
Building & Construction:
 Demand for Urban Premium housing set to grow to Rs 757 billion in
FY 20 from Rs 116 billion in FY 09
 IT/ITES and BFSI sectors will lead to increased net absorption of
office space
 Office space forecasted to grow at a CAGR of 29.5% from 19.6 million
sq ft in 2009 to 42.6 million sq ft in 2013
 Demand for wires is expected to register a CAGR of 13% over the
next 7-8 years
Cable Industry:
 Cables forms an integral part of every industrial Capex
 Cable requirement accrues only after 50% of the industrial project is
complete
 Demands are picking up with gradual recovery in expansion plans
Outlook KEI is to benefit from outsourcing to Asia due to the high cost of production
and closure of plants in Europe. It has SABS certification which will enable
inroads into the African markets, i.e., South Africa, Namibia, Botswana,
Zimbabwe, Zambia and Angola. The exports margin of 2-2.5% is better than
domestic market and so also cash receivable.
In the domestic market, the distribution network has been expanded to
minimize institutional sales and broad base sales through the distribution
channel. Sales through the distribution channel come largely from
construction, infrastructure and industries. There is a significant growth in
turnkey EPC projects this year. This was not there in the past two years.
Recognising that the retail segment has the potential to be a high revenue
generator – KEI intends to report 50% of its sales from retail over the next
three years – its plan is to nurture the strong association with its channel
partners and its target groups through aggressive branding and marketing.

Sunidhi Research | 5
 KEI Industries

EHV cables would have contributed 2.7% to sales. By FY17, KEI expects this
to jump to 8.2%. KEI expects revenue from EHV to register a 104% CAGR from
`60 crore to `250 crore. The boom in infrastructure, power, transmission and
distribution would be huge positives for growth in this segment.
Valuation & Recommendation The diversified product-mix, comprising extra-high-voltage cables (up to and
incl. 220 kV), high and medium-voltage cables, low-tension cables, control
and instrumentation cables, specialty and rubber cables, stainless steel wires
and winding, flexible and housing wires, makes KEI the leader in the
domestic cable and wire sector. Its recent entry into the EPC segment by
executing power-transmission projects (66kV to 400kV sub-stations) on a
turnkey basis has enabled it to gain a competitive edge.
With a well-established presence in several strategic overseas markets, a
diversified product portfolio at competitive prices, and consistently effective
customised solutions, KEI is in a strong position to fortify customer
relationships and raise export revenues. This segment is marked by faster
realisation of capital, which is why business growth here means immediate,
higher and concrete returns.
KEI now operates at over 80% capacity utilisation, which is likely to go up to
94-95% by FY18. Products are used in different sectors (power, oil refineries,
Railways, automobiles, cement, steel, fertilisers, textiles and real estate,
among others). Supported by growth in these sectors, cables are likely to
benefit, hence leading to growth in the company.
KEI continues to remain bullish for FY18 as well given strong order book and
visibility. EHV cable business will rise strongly in FY18, which will drive
further revenue and margin growth. In fact, in the EHV sub-segment, KEI is
expected to gain substantial market share in the next 2-3 years.
KEI is likely to post an EPS of `12.7 in FY17E and `16.1 in FY18E. At the
current market price of `191, the share is traded at a forward P/E of 15.0x
on FY17E and 11.9x on FY18E. We recommend BUY with a target price of
`256 at which the share will trade at a P/E of 16.0x on FY18E.
Key Risk Raw materials (copper and aluminium) constitute around 74% of its
expenditure. The inability to pass on the increase in raw material prices
could reduce margins.

Sunidhi Research | 6
 KEI Industries

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Sunidhi Research | 7