Stock Pick from Other Elect.Equip./ Prod Industry

HERE IS WHY:

• Higher margin segment, turnkey projects contribute around 65 per cent of order book
• Operating margin to improve by at least 100-150 bps to 10.5-11 per cent in FY16
• Venturing into high margin business of Extra High Voltage (EHV) Cables

KEI INDUSTRIES: Heading -  LiveWire

The wire and cable sector in India comprises about a quarter of the total transmission & distribution segment. Demand for wires is expected to register a 13 per cent CAGR over the next five years owing to the government’s investment in power and infrastructure, coupled with dynamic industrialisation and rapid urbanisation. Therefore, this time we were focusing on a company which is engaged in wires and cables industry. It has diversified product-mix, comprising 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.

KEI Industries order book stands at Rs 1700 crore as on 31st March, 2015, out of that around Rs 1100 crore are orders from turnkey projects where the company enjoys EBITDA margin of more than 15 per cent. For FY16, the company expects around 25 per cent growth in topline and operating margin is expected to improve by at least 100-150 bps to 10.5-11 per cent. The company has taken right steps by venturing into high margin business of Extra High Voltage (EHV) cables where it expects major growth coming from. Company already has order book worth of Rs 200 crore in hand from this business and expects to grow by another 30 per cent.

In FY15, the company reported around three fold jump in profit and was Rs 34.3 crore for FY15 as against Rs 11.6 crore in FY14. Total operating revenue in this full year has been Rs 2,030 crore, which is an increase of over 26 per cent against last financial year. Sales from the Cables segment grew 17 per cent to Rs 1710.98 crore and accounted for 79 per cent of sales. PBIT from the same segment grew 12 per cent to Rs 197.84 crore and accounted for 82 per cent of total PBIT. Sales from the stainless steel wire segment grew 12 per cent to Rs 105.23 crore and Turnkey division grew by around three times to Rs 356.65 crore. PBIT from stainless steel wire segment de-grew by 33 per cent to Rs 3.67 crore and through Turnkey division it reported PBIT at Rs 41.06 crore against a PBIT of Rs 4.03 crore last year same period.

The company’s total debt in books stand at Rs 451 crore at the end of FY15, last year it was Rs 470 crore. So the debt level has gone down by almost Rs 20 crore and going forward it aims to reduce debt equity ratio less than one by repaying more debt in the next two to two and half years.

Currently the stock is trading at a PE ratio of 15x with a EPS of Rs 4.46 of FY15.With the key growth drivers in place, we expect KEI Industries to register significant growth in profitability in the coming years. Hence we recommend buying this stock with expecting 25 per cent upside in the next one year.