UBS initiates coverage on KEI Industries with 'buy', sees over 40% upside

UBS on KEI Industries: KEI Industries is on UBS' radar as it has initiated coverage on the stock with a 'buy' rating. The global brokerage reckons that the electrical wires and cables manufacturer is the only pure play in the cable and wire (C&W) industry with 40 per cent market share in the domestic electrification market -- the highest among peers.

With a 12-month view and a 'buy' call on KEI Industries, UBS has given a target of Rs 6,150 per share, which implies a 40.8 per cent upside from Monday's (August 19) closing.

Further, the brokerage believes that the company will benefit as the growth of cables and wires could be sustained for a longer period which will increase its scope for market share gains in branded housing wires and cables. Additionally, export ramp-up and optionality to enter adjacent electrical segments such as switches and switchgear will also be key positives.

Following the report, KEI Industries share price today advanced 4.3 per cent intraday to hit a high of Rs 4557 per share on the NSE.

 

At around 9:24 AM on NSE, shares of KEI Industries were up 2.81 per cent or Rs 122.85 at Rs 4,490.2 apiece. The market capitalisation of the company was at Rs 40,520.21 crore. 

How will ramping up of branded wires benefit KEI Industries?

As per UBS, wires have a higher share of the unorganised market, which was around 30 per cent in FY24. This share is expected to fall to 15 per cent by FY28E, led by increasing awareness of the quality and safety of branded wires. Thus, KEI will get the benefit as it has ramped up its branded wire business from 16 per cent of revenue in FY18 to 29 per cent in FY24.

Furthermore, investment in building consumer brands is likely to benefit KEI Industries from consolidation in the wires market, structurally driving return on capital employed (ROCE) higher from 24 per cent in FY24 to 28 per cent in FY28E.

"With enough headroom to grow branded house wires business (KEIs share at a mere 10 per cent), geographical distribution and manufacturing expansion (Rs 4,000 crore additional revenue visibility from

new plant), we expect KEI to see a healthy 22 per cent top line CAGR over FY24-27E period, with upside

potential from exports," the UBS report noted.

How will KEI Industries expand in the switches and switchgear segment?

UBS reckons a stronger balance sheet, that is around Rs 3,800 crore in operating cash flow between FY25 and FY28E, and improving brand strength would make a case for the company to expand its product range to compatible segments like switches and switchgear, and small electrical products.

Moreover, KEI in FY14-24 has grown revenue by 18 per cent against nine per cent industry growth.

"Last three years' valuation re-rating reflects KEI's growth potential and execution capabilities. Leveraging on its proven execution, we estimate an earnings CAGR of 31 per cent between FY24-27," UBS said.

What are the downside risks?
 

Global economic slowdown, slower domestic infrastructure creation, and delays in capex and securing product pre-qualifications are downside risks that investors should consider.

KEI Industries share performance
 

Shares of the company, in a year, have gained 78 per cent as against Nifty 50's rise of 27.2 per cent. In a matter of five years, the company has given a stellar return of over 838 per cent against Nifty 50's rise of over 122.3 per cent.