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Thursday, October 29, 2009

KEI Industries Ltd:Future growth prospects and outlook

Scripscan:KEI Industries Ltd

Story:KEI's FY09 profits were marred by sudden drop in demand in H2FY09, sharp erosion in the value of inventories and excessive volatility in both raw material prices and currency exchange rates. We expect these concerns to abate with demand picking up from H2FY10, low raw material prices and stable dollar-rupee, leading the company on a strong growth path. We expect the company's revenues to grow at CAGR 17.0% through FY09-FY11E.Benefit of expansion to accrue from FY10E KEI completed setting up of HT (High-Tension) capacity of 2600 km at Chopanki and upgrading upto 132 kV) its existing facility (upto 33kV) at Bhiwadi in March 2009. The benefits of these expanded and upgraded capacities will accrue from FY10E. We expect the volumes (cables) to grow by 10.0% YoY and 18.8% YoY in FY10E and FY11E respectively.The expansion towards HT cables coupled with upgrading of Bhiwadi facility to manufacture EHV (Extra High Voltage) cables (132 kV) will change the product mix towards high value added cables where the margins are higher. Also, with raw material cost expected to come down, we believe that the EBITDA margins of the company will increase to 9.7% in FY11E from 3.4% in FY09.The company has made inroads into the EPC space by executing two turnkey projects for 400 kV power sub-stations. We expect the company to consolidate its pre-qualifications to winlarger EPC projects enabling the company to diversify its business model going forward. We expect the contribution from this segment to grow from 0.2% in FY09 to 0.3% in FY11E.With exports constituting almost 16.7% of the company's revenues, KEI is putting a greater thrust on exports to further expand its global footprint. With the commissioning of 100% Export Oriented Unit (EOU) in Chopanki, we expect the export revenue to touch INR 2.5 billion in FY11E, contributing 19.0% to the total revenue of the company.The company witnessed a 43.6% YoY fall in realisations in House-wires segment in FY09 on account of fall in demand in the realty space. KEI has embarked upon an aggressive brandbuilding exercise to make its house-wires brand a credible name in the domestic market. With housing segment witnessing a pick-up in demand, we expect the realisations and consequently revenues to improve by 20.7% and 50.7% in FY10E and FY11E respectively.The overall growth for cable industry was mere 4.5% in FY09 against the growth of 16% in FY08. Reduction in growth was mainly due to liquidity crunch and reduced demand due to delay in implementation of both ongoing and new projects. However, considering back-ended orders from power segment to achieve 11th Plan targets coupled with a broader pick-up in the economic activity, we expect the cable industry to grow by ~20% in FY11.With capacity expansion in place, growth in infrastructure investments, we expect KEI to returnon a strong growth path. We expect the EPS of the company to be at INR 6.1 in FY11E from INR 0.2 in FY09. The company is currently trading at 4.9x and 4.6x its FY11E PE and EV/EBITDA respectively. We rate the stock as BUY with a target price of INR 49.0.

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