Monday, March 2, 2015

Why KEI Industries is a Unique Play in Power Sector - Interview with Anil Gupta, Chairman

Anil Gupta, Chairman & Managing Director, KEI Industries
StockExplain interviews Anil Gupta, Co-Founder, Chairman & MD, KEI Industries Ltd., which has been an impressive growth story during the current fiscal in the smallcap power goods sector.

By Ram NN, Assistant Editor:
Monday, 02nd March 2015, 09:23 PM IST:

KEI Industries Ltd (BSE: 517569, NSE: KEI), closed today's trading at RS. 60.30 on NSE, up by 7.49%. Meanwhile, benchmark Nifty closed up by around 55 points or 0.62%, CNX Midcap was up by 1.56%, and BSE Smallcap was up by 0.93%.

Today’s up-move in KEI is likely due to fresh buying interest created by the significant power sector growth plans outlined in Union Budget recently. In his second budget, Finance Minister Arun Jaitley has proposed 24x7 plug n' play electric power for all households by 2022. 

According to FM's plan, five new Ultra Mega Power Projects (UMPPs) will play a central role in this scheme to reach power to 300 million Indians across 20,000 Indian villages remaining to be electrified. The five new UMPPs will be of 4000 MW each, totalling to 20,000 MW, and will entail an investment of Rs. 1 lakh crore. 

While this is quite ambitious for the private sector to invest in and PSU banks to extend finance, unlike earlier UMPPs the new ones will have all clearances and fuel allocations ready before being bid out, to ensure timely completion.

The FY'2016 Union Budget also has an alternate plan in the power sector, of pushing 1,75,000 MW of renewable energy projects by 2022, dominated by solar, wind, hydroelectric, and biomass projects. While this initiative too remains quite ambitious, with no clear funding routes yet, the move to include off-grid projects may prove to be a game-changer here.

KEI Industries, being a manufacturer of electrical cables including Extra High Voltage (EHV) cables, will be a clear beneficiary of this power sector push, even if only a reasonable fraction of these ambitious plans by the Government comes into fruition.

New Delhi headquartered KEI Industries is a unique smallcap player in the electrical cables industry, in that it is also active in the electrical contracting side as an Engineering, Procurement, & Construction (EPC) player. Additionally, it also has a consumer facing business, with it being a noted brand in household wires.

This EPC business as well as the EHV cables business are the relatively newer activities of KEI Industries, whereas its conventional businesses include electrical cables and wires / flexible wires.

KEI, which exports its products to more than 20 countries including developed markets in the Middle East like UAE, has been on a steady comeback trail during the current fiscal, in fundamental performance. In the nine-monthly or three-quarterly period for which financial results are available, the company has grown its sales by over 21%, and profits by an impressive 196%.

The KEI stock outperformed during this same period based on this fundamental performance, appreciating from a 52-Week Low of Rs. 11.10 to a 52-Week High of Rs. 61.70 in less than 12 months, which is a 5.56 times price appreciation.

Fiscal 2015 was the year in which KEI's Chairman & Managing Director Anil Gupta's strategy of focussing on expanding higher margin businesses like EHV Cables and EPC projects finally started bearing fruit. 

Though the firm has run up a moderately high debt level for past capex rounds, it is offset by the potentially high operational leverage due to low capacity utilization in its higher margin EHV cables, as well as its pre-qualification for the EPC business. The buzz around KEI is also driven by the likely rebound in power sector growth.   

StockExplain interviews Anil Gupta, Chairman & Managing Director, KEI Industries Ltd, to understand the future prospects of this unique products-cum-infra-development play in the power sector:

The past five quarters - Q3 FY’14 to Q3 FY’15 - has been a period of significant improvement for KEI Industries. From a purely sales perspective, what all started working for the company, starting from Q3 FY’14 and through these recent five quarters? How much of that topline growth would you attribute to a pickup in demand in your broad segments like cables and EPC?

The sales growth during these past five quarters in KEI Industries was driven mainly by increase in EHV Cable sales and increase in EPC sales. The sales in our other segments like wires and cables also witnessed a steady up-tick, which was due to our strategy of increasing our network of dealers and distributors. The increase in demand by the industry was contributing more on the margin side.

This same period of five quarters have witnessed an even better performance from KEI, on the bottomline, with your quarterly net profit levels doubling or even more, on a YoY basis. What were the key margin drivers for this performance?

As I mentioned, increase in overall industry demand was one factor contributing to better margins. Other major factors were KEI’s better product mix and higher capacity utilization. Focus on higher margin businesses like EHV Cables and EPC helped in bettering the overall margins and profits.

On your products side, how much would be the current capacity utilizations, in different segments like house wires, flexible wires, cables, EHV cables etc? Do you foresee significant operational leverage in any of these segments, going forward?

Our lowest capacity utilization currently is in our EHV Cables which stands at 35%. Next comes the wires & flexible wires business where capacity utilization stands at 65%. KEI’s highest utilization is in the cables business where utilization stands at 80%. There will be operational leverage in all segments going forward, especially in EHV Cables and Wires & Flexible Wires. KEI Industries’ EHV Cable business will be driven by our successful pre-qualification criteria, and we expect capacity utilization in this segment to reach 90% from the current 35%. The Wires & Flexible Wires category will be driven by expansion of the dealer network as well as induction of new sales force, and we aim to improve capacity utilization to reach 90% from the current 65%. KEI’s Country Cables business will also improve driven primarily by industry demand, thereby incrementally increasing capacity utilization to 90% from the current 80%.

When do you expect to reach full capacity utilization? Even if there is a slack in demand for more quarters than anticipated, are there any strategies in place to carve out a larger market share in the product segments that you operate in?

In financial year 2015-16 we will reach 90% capacity utilization overall, and in fiscal 2016-17 we expect KEI Industries to reach 100% capacity utilization. 

Coming to the EPC side of the business, are you sharply focused on only electrical projects, or are you eyeing a broader portfolio? Margin-wise, does the EPC business fare better than products business, and what would be the key margin drivers in EPC?

We are mainly doing EPC projects where there is cable requirement. Our focus at KEI is to undertake EPC business worth Rs. 500-600 crore per year. The margins are better in EPC compared with products.

Are there any synergies between your products and EPC businesses? Are there any strategic plans to further augment these synergies?

There are synergies between these two businesses as we are preferring EPC projects where our cable requirement is 30-35%. By combining our own cables and our own execution capabilities, we believe that our margins in this business can be better, going forward.

How many countries do you sell your products currently, and in how many countries do you work on EPC projects? Which are your main markets (apart from India) in these two categories? What would be the total percentage of exports in your sales, and what would be the margin profile of your exports business?

Our EPC business is currently only in India. However, on the products side, KEI Industries is exporting its products to more than 20 countries including developed Middle East markets like UAE, and several African nations. Exports currently constitute 8% of the total products business. Though margins in exports are more or less the same, we have the advantage of better cash flow in exports due to secured payment terms.

How would you size up the emerging opportunity in India in both cables and EPC businesses, if India were to grow its GDP at 8-9%? What would be the current market share of the organized sector and what would be the current market share of KEI?

The current market share of KEI Industries is approximately 10%. Obviously, there is room for improvement.

Despite your share price and market cap running up by 6X times within the last 12-13 months, KEI Industries’ valuations (likes mcap to sales and mcap to net current assets) continue to lag, leaving the share reasonably attractive. Apart from debt, are there any issues that you feel as contributing to the lower valuations?

Lower capacity utilization and higher debt have caused lower profitability in the past. But that will change as capacity utilization increases and debt comes down. Other than these, there are no other issues weighing down the stock.

Focusing on the debt side, KEI has been building up debt for expansion during the past few years. Is that cycle finally over, and what would be the roadmap for debt to be reduced to a manageable degree so that the bottomline improves substantially from the current levels?

The term loans will be repaid in next 3-4 years. Working capital loans will remain as it is, at the current levels.

Will you be requiring capex for the next couple of fiscals? Are you confident of utilizing more internal accruals and less debt for the next round of capex when it happens?

We have not planned any capex for current year as well as for the next year.

What would be the main margin drivers for you going forward? Will it be more branded products through dealer sales or will it be more about growing higher margin businesses like EHV cables?

Both these strategies will be pursued for margin expansion. KEI Industries will go for better brand building and push higher sales through the dealer network in all applicable products. In the EHV Cables business, we are targeting higher sales, and will go in for higher capacity utilization that will increase margins. Generally, increase in market demand too will lead to increase in margins.

(Price When Posted: Rs. 60.30)

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