KEI INDUSTRIES Firing on all cylinders; growth visibility improving

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1 RESULT UPDATE KEI INDUSTRIES Firing on all cylinders; growth visibility improving India Equity Research Consumer Durables KEI Industries (KEI) posted strong turnkey revenue, leading to 17% revenue beat in Q4FY18. Bottom line also surpassed estimate ~30%. Key highlights: a) Q4 & FY18 cables volume grew ~18% reasonable in light of tepid housing demand attributable to KEI s diversified business, & is better than peers; and b) exports (up 21% YoY) & extra high voltage (EHV; up 65% YoY) helped KEI outpace peers, driving overall utilisation above 90%. We revise up FY19/20E EPS 4/6% factoring in higher growth. We believe, strong RoCE and earnings spurt will be complemented by rising B2C traction driving free cash flow over FY Maintain BUY with revised TP of INR580 (INR550 earlier). Volumes outpace peers; dip in term debt boosts PAT KEI s robust 17% revenue beat was driven by turnkey segment s 42% growth in Q4FY18 driven by higher execution. The cables segment s 19% growth was led by 17% volume spurt (peers 6-7%) coupled with pass through of higher input prices. Retail cables 42% sales growth was driven by higher ad spends (~1.75x versus FY17) to improve brand image. Management s focus on term debt reduction helped prune interest cost (down 4% in Q4FY18) and post 40% PAT growth. Read-across for the industry With KEI s cables segment posting strong volume growth, we anticipate Finolex and V- Guard to post healthy volume growth as well. However, they are unlikely to surpass KEI, as the latter has additional levers of EHV and exports (up 65% / 21%, respectively). Capacity expansion and improved brand image to propel revenue While it is heartening to see strong B2B growth (turnkey/ehv growth at 42/65% in FY18), we expect B2C expansion to drive incremental growth for KEI with cash generation. This, we believe, is achievable given capacity expansion (by 17%) of LT cables facility, focus on improving brand perception and distribution expansion. Outlook and valuations: Robust visibility; maintain BUY We believe, a gradual brand/distribution overhaul and capacity expansion will help KEI enhance its B2C business, which currently lags large peers. Also, focus on debt reduction will help post 32% earnings CAGR over FY We maintain BUY/SO. Financials (INR mn) Year to March Q4FY18 Q4FY17 % Chg Q3FY18 % Chg FY18 FY19E FY20E Net revenues 10,304 7, , ,588 41,926 50,309 EBITDA 1, ,384 4,182 5,174 Adjusted Profit ,446 1,827 2,504 Diluted EPS (INR) Diluted P/E (x) ROAE (%) Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. EDELWEISS 4D RATINGS Absolute Rating Rating Relative to Sector Risk Rating Relative to Sector Sector Relative to Market BUY Edelweiss Securities Limited Outperform Low Overweight MARKET DATA (R: KEIN.BO, B: KEII IN) CMP : INR 439 Target Price : INR week range (INR) : 472 / 198 Share in issue (mn) : 78.4 M cap (INR bn/usd mn) : 34 / 507 Avg. Daily Vol.BSE/NSE( 000) : SHARE HOLDING PATTERN (%) Current Q3FY18 Q2FY18 Promoters * MF's, FI's & BK s FII's Others * Promoters pledged shares (% of share in issue) : NIL PRICE PERFORMANCE (%) Stock Nifty EW Capital Goods Index 1 month (0.9) 3 months (0.9) 12 months Amit Mahawar amit.mahawar@edelweissfin.com Darshika Khemka darshika.khemka@edelweissfin.com Ashutosh Mehta ashutosh.mehta@edelweissfin.com May 18, 2018

2 Consumer Durables Q4FY18 conference call: Key highlights Performance: Volume growth in Q4FY18 of 17% and 18% in FY18 in the cables segment. Sales through dealer network grew 33%. Total number of active working dealers is 1,284, up 12%. Margin rose from 8.0% to % in the institutional business because of increase in demand and rose in capacity utilisation. Export sales jumped 21% during the quarter. EPC division sales at INR6.54bn versus INR4.23bn (net of cables) last year, up 55%. KEI s has a 90% capacity utilisation currently and the company is working on improving efficiency, which will further help improve capacity utilisation. Largest sales are to the power generation and distribution sector and also to Metro with sales of INR bn. Retention amount is INR1.6bn. Industry: The government s focus on affordable housing is expected to drive incremental demand for cables (instead of high-rise buildings) which is already visible. With its strong pan-india dealer network, the company should be able tap this demand. The shift to organised market is visible and is expected to grow with implementation of the E-way bill. Also, pick up in manufacturing activity in terms of private capex (steel, cement and refining segments - capacity expansion and quality improvement projects from BS-IV to BS-VI) is expected to drive demand for cables. Railway is undergoing the highest capex currently and KEI has been the leading supplier to Metro rail over the past 10 years. In EHV cables, Universal and KEI are the only manufacturers of EHV cables in India; balance is imported. Order book: INR25bn and L1 in INR2.32bn of EPC. o o Of this, EPC order is INR14.25bn. Cables order is INR11.45bn (including export order worth INR1.47bn & EHV cable order worth INR3.27bn). Guidance: 18-20% volume growth in FY19 given the improving outlook for the cables industry. Retail business growth: Besides growing the dealer network, KEI is also focusing on strengthening existing dealers. The EHV cables segment is expected to double its revenue (INR3.6bn in FY19 versus INR1.68bn in FY18) in FY19 with INR3bn of order book where margins are also high. EHV segment s peak revenue stands at INR bn. Exports are expected to grow 12-15%. Revenue from dealers is expected to grow 30%. 2 Edelweiss Securities Limited

3 KEI Industries EPC revenue of INR10bn. Margin can be >10% going forward. In FY18, provisions adversely impacted the margins and these will be done away with in FY19 thus improving margins. Normal cables earn % margin; management is expecting it increase to going forward. Capex: In cables is setting up a new greenfield facility for manufacture of LT cables (9,600km). Phase 1 has been completed and will start production by May 2018 (capability to generate INR3bn of additional revenue). Phase 2 for manufacture of HT cables will also be implemented in the same factory with capex of INR bn in FY19. Phase 2 should be fully operational by Feb-March Total capex of INR0.5bn for FY19. Debt: Debt: FY17 is peak debt and will not increase from there. Increasing WC capital needs to be met by internal accruals. The company already has a debt repayment schedule of INR0.6bn for FY19. However, because the WC rate of interest of 8.9% is higher and ECB s are cheaper in terms of interest, KEI issues ECBs, thus keeping debt constant and reducing the interest cost. Other comments: WC cycle has reduced by 0.42 months and NWC stands at INR1.89bn. KEI serves 700 customers in the institutional segment currently. Table 1: Product Wise Breakup Year to March Q4FY18 Q4FY17 % change FY18 FY17 % change LT HT EHV HW SSW EPC Total Mix (%) LT HT EHV HW SSW EPC Source: Company, Edelweiss research 3 Edelweiss Securities Limited

4 Consumer Durables Table 2: Break up by market Year to March Q4FY18 Q4FY17 % change FY18 FY17 % change Domestic Retail/Dealer business Exports Total Mix (%) Domestic Retail/Dealer business Exports Source: Company, Edelweiss research Table 3: Segmental performance Year to March Q4FY18 Q4FY17 % change Q3FY18 % change FY18 FY17 % change Revenue (INR mn) Cables 8,125 6, , ,265 22, Stainless Steel Wires (2.9) ,183 1, Turnkey Projects 2,494 1, , ,561 6, Inter segment revenue (7.5) 844 (26.1) 3,045 2, Total revenue 10,304 7, , ,964 28, Segment revenue mix (%) Cables Stainless Steel Wires Turnkey Projects EBIT (INR mn) Cables (4.2) 775 (6.9) 2,956 2, Stainless Steel Wires (8.4) Turnkey Projects (42.1) 1, Total EBIT (12.3) 1,104 (25.8) 4,038 3, EBIT margin (%) Cables Stainless Steel Wires Turnkey Projects Total EBIT Margin Source: Company, Edelweiss research 4 Edelweiss Securities Limited

5 KEI Industries Financial snapshot (INR mn) Year to March Q4FY18 Q4FY17 % change Q3FY18 % change FY18 FY19E FY20E Net revenues 10,304 7, , ,588 41,926 50,309 Staff costs ,468 1,776 2,070 Direct costs 7,157 5, , ,196 30,517 36,575 Other operating expenses 1, , ,540 5,450 6,490 Total expenditure 9,294 6, , ,204 37,743 45,135 EBITDA 1, ,384 4,182 5,174 Depreciation (2.8) EBIT ,062 3,818 4,789 Interest (4.4) ,113 1,106 1,090 Other income (6) 69 NA 73 NA Profit before tax ,042 2,748 3,765 Tax (26.8) ,261 Core profit ,446 1,827 2,504 Extraordinary items Adjusted Profit ,446 1,827 2,504 Equity capital(fv INR 2) No. of shares (mn) Diluted EPS (INR) As % of net revenues Direct costs Employee cost Other operating expenses EBITDA Adjusted net profit Tax rate Change in Estimates FY19E FY20E New Old % change New Old % change Comments Net Revenue 41,926 40, ,309 49, EBITDA 4,182 4, ,174 5, EBITDA Margin Adjusted After Tax Profit 1,828 1, ,504 2, Factoring in higher growth Net Profit Margin Capex Edelweiss Securities Limited

6 Consumer Durables Company Description KEI was established in 1968 as a partnership firm Krishna Electrical Industries with prime business of manufacturing house wiring rubber cables. It was converted into a public limited company with the corporate name KEI Industries in December In 1996, KEI acquired Matchless, a company under same management, which manufactured stainless steel wires. KEI has, over the years, invested in building flexible manufacturing facilities and expanded capacities. The company manufactures and supplies power and other industrial cables.the company operates through 3 segments cables, stainless steel wires and turnkey projects. It also focuses on EPC business. Investment Theme Government s infra push: Potent demand catalyst - Housing For All & improving power availability, in our view, will be key drivers of the domestic cables & wires industry. With the government sharpening focus on power generation, transmission and distribution, demand for cables as part of T&D equipment is expected to expand significantly. KEI s expertise in EPC projects and excellent track record has rendered it the preferred candidate for such projects. Huge scope to leverage cables business with forward integration in EPC - In EPC, KEI has the advantage of manufacturing (in house) EHV, HV and LT cables, which account for product pull through of 30%, leading to superior margin. Also, technological collaboration with Switzerland-based Brugg Kabel AG has helped the company gain faster entry in the EHV cable market with designs and process back up services sought by end users. Key Risks Cyclical nature of business - KEI s products are used primarily by power utilities, infrastructure, real estate and industrial segments. Any slowdown in these sectors can significantly impact demand for KEI s products. High competition - A majority of KEI s products are highly competitive in nature and face strong threat from other players. Raw material price fluctuation - Excessive volatility in prices of key raw materials copper and aluminium can severely impact profitability. Although KEI tries to recover rise in raw material prices either through hike in selling price of products or via hedging, there is no assurance that it can do so successfully or at all in the future. Currency fluctuation - With exports being a key contributor to the company s revenue, excessive volatility in currency rates can significantly impact profitability. KEI also imports raw material and extreme currency fluctuations can adversely affect costs of the same, in turn denting profitability. 6 Edelweiss Securities Limited

7 KEI Industries Financial Statements Key Assumptions Macro GDP(Y-o-Y %) Inflation (Avg) Repo rate (exit rate) USD/INR (Avg) Company Cables Stainless steel wires Winding Housing & Flexible Wires Cables (INR mn/km) Stainless steel wires (INR '000/kg) Winding Hsg & Flex. Wires (INR mn/km) Order Intake for Turnkey Projects (INR bn) Depreciation Tax rate (%) Income statement (INR mn) Income from operations 26,285 34,588 41,926 50,309 Materials costs 18,855 25,196 30,517 36,575 Employee costs 1,117 1,468 1,776 2,070 Other mfg expenses 3,622 4,540 5,450 6,490 Total operating expenses 23,594 31,204 37,743 45,135 EBITDA 2,690 3,384 4,182 5,174 Depreciation EBIT 2,406 3,062 3,818 4,789 Less: Interest Expense 1,244 1,113 1,106 1,090 Add: Other income Profit Before Tax 1,263 2,042 2,748 3,765 Less: Provision for Tax ,261 Reported Profit 938 1,446 1,827 2,504 Adjusted Profit 938 1,446 1,827 2,504 Shares o /s (mn) Diluted shares o/s (mn) Adjusted Diluted EPS Adjusted Cash EPS Dividend per share (DPS) Dividend Payout Ratio(%) Common size metrics Operating expenses EBITDA margins Net Profit margins Growth ratios (%) Revenues EBITDA Adjusted Profit Edelweiss Securities Limited

8 Consumer Durables Balance sheet (INR mn) As on 31st March FY17 FY18 FY19E FY20E Share capital Shareholders' funds 4,609 6,045 7,763 9,967 Long term borrowings 764 1,457 1,207 1,057 Short term borrowings 6,160 6,042 6,042 6,042 Total Borrowings 6,923 7,498 7,248 7,098 Long Term Liabilities Sources of funds 11,936 14,009 15,477 17,531 Gross Block 6,090 6,472 6,872 7,072 Net Block 4,052 4,070 4,106 3,920 Capital work in progress Non current investments Cash and Equivalents Inventories 4,989 5,556 7,265 8,665 Sundry Debtors 8,246 10,206 11,486 14,011 Loans & Advances Other Current Assets 1,234 1,259 1,384 1,523 Current Assets (ex cash) 14,512 17,075 20,193 24,259 Sundry creditors 6,933 8,046 9,757 11,624 Provisions Total Current Liab 7,020 8,157 9,879 11,759 Net Curr Assets-ex cash 7,492 8,918 10,314 12,500 Net Deferred tax Uses of funds 11,936 14,009 15,477 17,531 BVPS (INR) Free cash flow (INR mn) Reported Profit 938 1,446 1,827 2,504 Add: Depreciation Interest (Net of Tax) Others Less: Changes in WC 2,588 1,426 1,396 2,186 Operating cash flow 38 1,362 1,866 1,727 Less: Capex Free Cash Flow (585) 980 1,466 1,527 Cash flow metrics Operating cash flow 38 1,362 1,866 1,727 Financing cash flow 890 (633) (1,466) (1,541) Investing cash flow (621) (90) (364) (134) Net cash Flow Capex (624) (382) (400) (200) Dividend paid Profitability and efficiency ratios ROACE (%) ROAE (%) Inventory Days Debtors Days Payable Days Cash Conversion Cycle Current Ratio Gross Debt/EBITDA Gross Debt/Equity Adjusted Debt/Equity Operating ratios Total Asset Turnover Fixed Asset Turnover Equity Turnover Valuation parameters Adj. Diluted EPS (INR) Y-o-Y growth (%) Adjusted Cash EPS (INR) Diluted P/E (x) P/B (x) EV / Sales (x) EV / EBITDA (x) Peer comparison valuation Market cap Diluted P/E (X) P/B (X) ROAE (%) Name (USD mn) FY19E FY20E FY19E FY20E FY19E FY20E KEI Industries Finolex Cables 1, Havells India 4, Median AVERAGE Source: Edelweiss research 8 Edelweiss Securities Limited

9 Additional Data KEI Industries Directors Data Mr. Anil Gupta Chairman & Managing Director Mr. Rajeev Gupta Executive Director (Finance) & CFO Mr. K.G. Somani Non-Executive & Independent Director Mr. Pawan Bholusaria Non-Executive & Independent Director Mr. Vijay Bhushan Non-Executive & Independent Director Mr. Vikram Bhartia Non-Executive & Independent Director Mrs. Archana Gupta Non-Executive Director Mr. Akshit Diviaj Gupta Mr. Akshit Diviaj Gupta Auditors - Price Waterhouse Chartered Accountants LLP *as per last annual report Holding Top10 Perc. Holding Perc. Holding Gupta anil Projection fin & mgm Franklin templeton i 6.64 Subhlaxmi motels & i 4.44 Soubhgaya agency lt 3.99 Hsbc global inv maur 3.37 Mirae asset global i 2.81 L&t investment manag 2.08 Kei cables pvt ltd 2.01 Idfc sterling equity 1.93 *in last one year Bulk Deals Data Acquired / Seller B/S Qty Traded Price No Data Available *in last one year Insider Trades Reporting Data Acquired / Seller B/S Qty Traded No Data Available *in last one year 9 Edelweiss Securities Limited

10 RATING & INTERPRETATION Company Absolute reco Relative reco Relative risk Company Absolute reco Relative reco Relative Risk Bajaj Electricals HOLD SP M Crompton Greaves Consumer BUY SO L Electrical Finolex Cables BUY SO L Havells India BUY SO L KEI Industries BUY SO L Symphony HOLD SP L V Guard Industries HOLD SP L Voltas BUY SO L Whirlpool of India BUY SO M ABSOLUTE RATING Ratings Expected absolute returns over 12 months Buy More than 15% Hold Between 15% and - 5% Reduce Less than -5% RELATIVE RETURNS RATING Ratings Sector Outperformer (SO) Sector Performer (SP) Criteria Stock return > 1.25 x Sector return Stock return > 0.75 x Sector return Stock return < 1.25 x Sector return Sector Underperformer (SU) Stock return < 0.75 x Sector return Sector return is market cap weighted average return for the coverage universe within the sector RELATIVE RISK RATING Ratings Low (L) Medium (M) High (H) Criteria Bottom 1/3rd percentile in the sector Middle 1/3rd percentile in the sector Top 1/3rd percentile in the sector Risk ratings are based on Edelweiss risk model SECTOR RATING Ratings Overweight (OW) Equalweight (EW) Criteria Sector return > 1.25 x Nifty return Sector return > 0.75 x Nifty return Sector return < 1.25 x Nifty return Underweight (UW) Sector return < 0.75 x Nifty return 10 Edelweiss Securities Limited

11 KEI Industries Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai Board: (91-22) , Aditya Narain Head of Research Coverage group(s) of stocks by primary analyst(s): Consumer Durables Bajaj Electricals, Crompton Greaves Consumer Electrical, Finolex Cables, Havells India, KEI Industries, Symphony, V Guard Industries, Voltas, Whirlpool of India Recent Research Date Company Title Price (INR) Recos 16-May-18 Crompton Greaves Con. Elec. Regaining lost ground; bottom-line focus fruitful; Result Update 11-May-18 Havells India Core thriving; bigger transition in Lloyd anticipated; Result Update 09-May-18 Whirlpool India In-line quarter; riding on new product launches ; Result Update 230 Buy 548 Buy 1,533 Buy Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Buy Hold Reduce Total Rating Interpretation Rating Expected to Rating Distribution* * 1stocks under review > 50bn Between 10bn and 50 bn < 10bn Market Cap (INR) Buy Hold Reduce appreciate more than 15% over a 12-month period appreciate up to 15% over a 12-month period depreciate more than 5% over a 12-month period One year price chart (INR) May-17 Jun-17 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 KEI Industries 11 Edelweiss Securities Limited

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