Capacity Expansion Will Drive Future Exports To US And Australia

Key Takeaways

• Capacity and export expansion initiatives, including significant CapEx and targeting higher-margin exports, are poised to boost revenue, net margins, and sales growth.
  
• Financial strategy through QIP aims to support expansion, reduce debt, and enhance balance sheet strength, potentially improving earnings and margins.
  
• Declines in EHV cable sales, export challenges, copper price volatility, and planned capital expenditures could strain revenue, margins, and financial flexibility.

Catalysts

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

• The recent completion of brownfield CapEx at Chinchpada and Pathredi 2 is expected to increase KEI Industries' capacity for wires and power cables, allowing for a projected volume growth of 16% to 17% in the current financial year. This should positively impact future revenue.
  
• A significant investment of ₹800 to 1,000 crore is being made in the greenfield expansion at Sanand, Gujarat, aimed at enhancing capacity for LT, HT, and EHV cables. This expansion is expected to drive a CAGR of 19% to 20% in volume terms, impacting future revenue positively.
  
• The company aims for a substantial growth in exports, particularly to the U.S. and Australia, targeting a 30% to 35% growth in exports next year. This will contribute to increased export revenues and may improve overall net margins due to higher-margin export markets.
  
• KEI Industries plans to achieve an export contribution of 15% to 17% of total sales within the next 2 to 3 years. This shift towards exports, which generally offer higher margins, is expected to bolster net margins and overall earnings.
  
• The company has raised ₹2,000 crore through QIP to fund the Sanand project and repay outstanding debt, which should lower interest expenses and strengthen the company's balance sheet, potentially boosting net margins and earnings per share.

KEI Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming KEI Industries's revenue will grow by 18.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.0% today to 6.9% in 3 years time.
• Analysts expect earnings to reach ₹10.5 billion (and earnings per share of ₹132.8) by about May 2028, up from ₹6.4 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as ₹11.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 62.7x on those 2028 earnings, up from 45.8x today. This future PE is greater than the current PE for the IN Electrical industry at 38.8x.
• Analysts expect the number of shares outstanding to grow by 2.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.79%, as per the Simply Wall St company report.

KEI Industries Future Earnings Per Share Growth

Risks

• There was a significant 78% decline in the domestic institutional extra-high-voltage (EHV) cable sales due to nonreceipt of permissions and clearances. This could impact revenue growth projections if such issues persist.
  
• Export sales have been affected by a decline in EPC (Engineering Procurement Construction) sales, notably due to the completion of the Gambia project. This could result in slower export revenue growth.
  
• Volatility in copper prices has been affecting the company, which may lead to inventory losses and affect net margins.
  
• The EHV segment showed weakness throughout FY '25 due to execution delays. Continued delays in this segment may lead to missed revenue and EBITDA opportunities in the short term.
  
• There is a planned substantial capital expenditure, which could strain cash flows. If the anticipated growth does not materialize, it could impact earnings and financial flexibility.

Valuation

• The analysts have a consensus price target of ₹4304.895 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 ₹5466.0, and the most bearish reporting a price target of just ₹2980.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹152.9 billion, earnings will come to ₹10.5 billion, and it would be trading on a PE ratio of 62.7x, assuming you use a discount rate of 14.8%.
• Given the current share price of ₹3061.65, the analyst price target of ₹4304.89 is 28.9% 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.