Basic analysis of the KEI industry | Daily News Byte

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KEI Industry Basic Analysis: Polycab India and KEI Industries have delivered substantial returns to their shareholders in the last five years. Both companies are in the wire and cable industry. Is there more return for investors? They say the second largest company trades at a better price than the market leader. Time to find out.

In this article, we conduct an in-depth and fundamental analysis of KEI Industries, the largest cable and wire manufacturer after Polycab.

Basic analysis of the KEI industry

In this article, we will conduct a fundamental analysis of KEI Industries Ltd. We will start by familiarizing ourselves with the history and business of the company, followed by an overview of the industry. Later, a few sections are devoted to revenue growth, return ratios, and debt analysis. Highlights of future plans and summary summarize the article at the end.

An overview of the company

KEI Industries Ltd. Established 54 years ago in 1968 as an in-house rubber band manufacturer. Over the years, the company has become a leading player providing integrated wire and cable solutions.

Its five factories manufacture a wide range of cables and wires: Extra High Voltage (EHV), Medium Voltage (MV), and Low Voltage (LV) for both institutional and retail/residential segments.

The company’s investments into the EHV cable segment and engineering, procurement & construction (EPC) services for projects in various industries have yielded good results. It has executed many institutional projects from major clients such as Power Grid Corp., Delhi Metro, Tata Power, etc.

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

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

Business section

The products of KEI Industries find their application in a variety of industries such as: energy, oil and gas, railway, automobile, cement, steel, real estate, fertilizer, etc. In FY22, the top 10 customers accounted for 22% of the company’s revenue, allowing it to diversify its revenue streams.

For product segment wise, low voltage (LT) cables brought in 38% of the sales in FY22, followed by home wiring with a share of 26%. The image below shows the income wise mix of KEI Industries’ products.

Basic Analysis of KEI Industry - Business Segments
Source: KEI Industries Ltd. Annual Report 2021-22

In addition, we mentioned that the company has exported its cables and wires to more than 55 countries around the world in the previous section.

Considering that, while India is the geographical part that has generated 90% of sales and the remaining 10% is received from foreign exports. Breaking it down further, retail sales at 41% and institutional sales at 49% together make up 90% of the company’s internal sales.

Source: KEI Industries Ltd. Annual Report 2021-22

An overview of the industry

Indian wire and cable market to grow by 20-25% in FY22 due to higher inflation. This means that the main growth is price led and not volume led. Rising prices of copper, aluminum, and PVC compounds used for insulation have prompted the entire industry to turn to price increases.

Overall, the domestic cable market is worth 60,000-65,000 million rupiah, accounting for about 40-45% of the electricity industry in nation wide.

That’s a pretty big market. But what is the broad product segment?

Extra High Voltage (EHV) and High Voltage (HV) power lines are used for transmission and distribution of electricity from power plants to substations and further to residential, commercial and industrial units.

Electrical power or process control systems make use of control cables and tools. Home wiring and winding find their use in retail/residential, including various types of appliances. Telecommunication cables and fiber optic cables are used for data transmission.

Residential, commercial, energy, petrochemical, mining, steel, non-ferrous, shipbuilding, cement, railways, and defense are the major industries that contribute to the demand of the power line industry.

Going forward, increased renewable power generation, expansion and modernization of transmission and distribution infrastructure, higher investment in subways, smart grid initiatives, and upgrading of transmission and distribution networks are expected to drive growth in the wire and cable industry.

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

Revenue & Net Profit Growth

Interrupting the year 21, the operating income of the KEI industry has grown steadily at a CAGR of 10.33% in FY18 to Rs 5,727 billion in FY22. During the same period, its net profit accumulated at 21.06% annually to Rs 377 crore.

The table below presents the operating income and net profit of KEI Industries for the past five years.

year Operating Income (Rs Cr) Net Profit (Rs Cr)
2022 5,726.5 376
2021 4,181.5 269
2020 4,887.8 256.2
2019 4,230.9 180.7
2018 3,503.1 144.7
5-year CAGR 10.33% 21.06%

Along with the analysis of income and profit, we also have to study the profit margin. Therefore, 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 margin and net profit margin of KEI Industries for the past five years.

year OPM (%) NPM (%)
2022 9.56 6.56
2021 10.1 6.53
2020 9.35 5.24
2019 9.78 4.27
2018 9.12 4.17

We can observe that most of the operating rates remained the same last year indicating the company’s ability to transfer the increase in the cost of raw materials to customers.

In addition, revenue has increased without a decrease in margins, meaning that the company has strong demand, branding, 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 reduced interest costs. For example, the interest cost of Rs 112 crore in FY18 is only Rs 40 crore in FY22.

Well, the company has reduced debt and interest charges. But how much? To answer this question, we take a look at the debt-to-equity ratio and the service interest rate of cable and wire manufacturers in the next section.

Debt/asset management and interest

The cable maker has paid off its debt over the past 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 the interest coverage ratio to a high of 13.56 times in FY22.

year Debt/Equity Interest management
2022 0.16 13.56
2021 0.17 7.29
2020 0.25 3.54
2019 0.77 3.05
2018 1.41 2.83

Debt reduction has been very impressive for KEI Industries. Let’s see how its return ratio has changed over the years in the section.

Return ratio: ROCE & ROE

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

However, considering our findings from the previous section, the decrease in RoCE and RoE is due to the decrease in financial leverage and growth in the capital base. The company’s reserves and surplus have increased significantly in recent years on account of higher profits and lower dividend payments.

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

year RoCE (%) RoE (%)
2022 24 19
2021 21 16
2020 28 22
2019 29 26
2018 27 24

So far, we’ve only looked at last year’s numbers 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. Management has set an investment target of 800 billion rupees to expand production capacity over the next 4-5 years. ahead.
  2. In addition, it commented that the retail business from the dealer network will be the company’s focus area. Within a few years, the sector’s revenue contribution has been targeted at 50%.

Basic analysis of the KEI industry – key indicators

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

CMP ₹1,586 Market Value (Cr.) ₹14,500
EPS ₹47.50 Stock P/E 33.4
ROCE 24% RoE 19%
Face value ₹2.00 Book value ₹260
Promoter Holding 38.0% Price per book value 6.10
debt 0.16 Dividends 0.16%
Net profit margin 6.56% Operating profit margin 9.56%

In conclusion

We have reached the end of the fundamental analysis of KEI Industries. The company has been a real story in the long term very bagger with an increase in operating income and a reduction in debt. And through this, it has maintained the operating margin at the same level. The stock has rallied at an annual rate of 32.71% every year for the past five years. And that’s a lot!

However, the promoters of KEI have reduced their shareholding by 7.6% in the last quarter of September 2022 from 37.99% in 2019. In your opinion are the promoters selling out because the business is growing? Is this too big a red flag to drop the stock altogether? Let us know what you think in the comments below?

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