Wires and Cables for retail as well as institutions
The simplest but most relevant analysis you will find on the Company. Read slowly, think carefully & you might agree !.... Do comment at the end for any clarification/ views.
An interesting small cap play. Working capital management should be monitored very closely.
- Seems like a reasonably well managed Company with a long track record.
- An indirect infra, real estate and consumer play.
- Stock delivered a CAGR of 26% and 31% in the last 10 and 5 years respectively. Infact, pre-covid the returns are much higher. Given Company’s still small current market cap (Rs 3,200 cr), the stock can potentially generate decent returns for the long term investors.
😐 Hot and cold. Consumer play is exciting but is linked with real estate. Institutional business always looks exciting but has it’s own issues especially related to the receivables.
🙂 Promoter driven business who seems focused, aware and cautious. Have a long track record and board comprises of people of repute.
😐 Diversified revenues, decent growth rates, sustained margins and well managed debt levels. Working Capital requirements have been volatile and hence also the cash generation.
🙂 Reasonably attractive in general as well as compared with the historical levels. Market seems to be discounting short term uncertainty and maybe logically so.
😐 After a fabulous run from 2013 to 2018, seems to be currently in consolidation phase.
😎 39% is held by prominent FIIs + DIIs. Many of those have bought it under long term oriented funds.
- Long established track record – started as a partnership way back in 1968
- Extensive product portfolio including – House wires, High & Low Tension (HT, LT) Cables, Extra-High Voltage (EHV) Cables, Submersible Cables, Stainless Steel Wires etc
- One of the selective Companies globally with capacity to manufacture EHV cables upto 400KV
- Diversified revenue lines including retail (29% in FY20), institutional (53%) and exports (18%). Weakness in one segment sometimes get compensated from the other.
- Reasonable brand presence in the retail segment and customer relationships in the institutional segment. Geographical touch points across 45 countries.
- Good business growth, maintained margins, decent returns on capital and consistently reducing debt levels.
- Receivable management challenges in the institutional business and hence unpredictable cash generation and debt levels especially over short periods. Though, if one look over the years, KEI seems to have managed it reasonably well as also demonstrated by it’s reducing debt levels.
- KEI’s business growth as such is linked with the growth in the real estate and infrastructure sector. Both of these can be highly unpredictable and have inherent challenges. However, KEI’s small size and diversified product lines does mitigate the risk.
- The biggest threat for me in the Company – receivables management. In every investor call/ PPT, management interview and press release this is what I would try seeking clarity on.
- Yes there are other threats like poor economic environment, Covid led disruptions, troubles in the real estate sector, reduced govt revenues impacting infra spending, competition etc. However, given Company’s diversified revenue lines and still not so large size of operations, I believe that it should be able to generate decent growth atleast over the next 3-5 years – leaving aside the short term fluctuations.
- KEI’s established brand in the consumer segment, dealer network (1650 distribution partners in FY 20), relationships with the institutional customers and touch points across other countries provides it with extensive opportunities to grow.
- Company is continuously putting in efforts to strengthen it’s positioning in all the segments through well coordinated sales and marketing efforts.
- Government spending led infrastructure push should continue providing KEI adequate opportunities to grow.
- KEI hopes to also benefit due to it’s unique capability to manufacture and supply EHV cables upto 400KV that is especially useful in underground cabling.
- KEI is mainly a promoter family driven organization with long track record.
- Mr Anil Gupta, the CMD, joined the Company way back in 1979. He is the key person responsible for the growth of the Company over the years.
- I could not find any major red flags on the management quality. They seemed cautious but also forward looking.
Auditors - M/s. Pawan Shubham & Co
Bankers - ICICI, HDFC, Kotak, SBI, Indusind, PNB & more
Credit Rating -
ICRA: A+ Stable, MA+, A1 CARE: A+ Stable, A1
Decent financials. Working capital management is the key.
- Given diversified revenue mix and small size of the Company, 15-20% topline growth should be achievable over the medium term.
- Operating margins in line with the past should atleast be maintainable at 10%.
- Company currently operates at about 60-70% of it’s capacity and continues to increase it gradually. For any major expansion, it has sufficient flexibility to increase the debt.
- Return on capital ratios have been good and should continue to be so.
- Cash flow from operations have been volatile and difficult to predict especially over short periods – more so in current Covid led disruptions. However, if one zooms out and sees the trend over the years, it seems that management manages them reasonably well.
- Debt levels declined over the years and due to Rs 500 crore QIP early this year, they are currently negligible. However, this can change quickly if working capital situation deteriorates or Company decides to incur significant capex.
- At CMP of Rs 354, the Company is trading at a trailing ‘normalized’ P/E of 12-15 x. This is on the lower side compared with it’s historical band and provides reasonable margin of safety.