Expansion Into Renewable Energy And Infrastructure To Propel Revenue Growth And Margins

Key Takeaways

• Expansion plans and increased distribution network aim to drive significant revenue growth and enhance production capacity across various cable types.
  
• Financial strategies focus on debt avoidance and cash management, contributing to strong net margins and earnings stability.
  
• Increased costs and aggressive CapEx plans may pressure cash flow and profitability, with challenges in execution and declining export sales impacting revenue growth.

Catalysts

Manufactures, sells, and markets wires and cables in India and internationally.

• The expansion plans, including a significant greenfield CapEx of ₹900-1,000 crores at Sanand, aim to enhance production capacity for LT, HT, and EHV cables by FY '25-'26. This is expected to drive revenue growth by maintaining a CAGR of 15-16% per annum.
  
• Increased utilization of the dealer and distribution network has already shown a 36% growth in sales, indicating strong B2C demand that could continue boosting revenue in the future.
  
• With ongoing brownfield CapEx completed and capacity utilization nearing full potential, KEI Industries expects to achieve a 16-17% growth in the current financial year, which would impact revenues positively.
  
• The expansion plan accounts for significant growth in renewable energy, transmission, data centers, and infrastructure demand, hinting at sustained order inflows and revenue growth.
  
• Future debt avoidance and funding strategies ensure financial flexibility and availability of cash accruals for working capital, enabling the maintenance of strong net margins and earnings stability.

KEI Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KEI Industries's revenue will grow by 18.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.2% today to 8.2% in 3 years time.
• Analysts expect earnings to reach ₹12.0 billion (and earnings per share of ₹118.71) by about December 2027, up from ₹6.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 61.0x on those 2027 earnings, down from 64.3x today. This future PE is greater than the current PE for the IN Electrical industry at 23.8x.
• Analysts expect the number of shares outstanding to grow by 3.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.23%, as per the Simply Wall St company report.

KEI Industries Future Earnings Per Share Growth

Risks

• The decrease in EBITDA margins from 10.88% to 10.42% could indicate increasing costs that may persist, impacting net margins.
  
• Institutional and export sales have seen weakness, with exports declining from ₹249 crores to ₹241 crores, which could affect long-term revenue growth projections.
  
• The pending order book, especially related to EPC and EHV segments facing execution challenges, may lead to delays, affecting revenue realization and earnings timelines.
  
• The increased finance cost, with the percentage of financial charges on net sales rising from 0.44% to 2.63%, could further impact net income and reduce profitability.
  
• An aggressive CapEx plan of ₹1,800 to ₹1,900 crores with reliance on fundraises might place pressure on cash flows and lead to dilution of equity, affecting earnings per share.

Valuation

• The analysts have a consensus price target of ₹4899.81 for KEI Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6150.0, and the most bearish reporting a price target of just ₹4110.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹145.3 billion, earnings will come to ₹12.0 billion, and it would be trading on a PE ratio of 61.0x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹4446.8, the analyst's price target of ₹4899.81 is 9.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.