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Revenue guidance unaffected by commodity price correction

* KEI’s Q1FY23 revenue beat our estimates by 7%, with LT Cable/House Wires surpassing projections by 8%/11%. All product segments saw a 3-yr revenue CAGR in the range of 10-25%. The company’s C&W growth was the highest vs. peers on a 3-yr CAGR basis.

* C&W exports grew by 2.2x yoy on a favorable base and were up 62% qoq as well. B2C sales contributed 41.7% of total sales, up from 40% in Q4FY22. GM was slightly ahead of estimates at 23.5% (-411bps yoy), aided by lower sub-contracting expenses.

* Despite the sharp correction in commodity prices, management maintained FY23 revenue growth guidance of 16-17%. The distribution network is expected to grow by 30-35% in FY23. Net debt, after a significant reduction in Q1, should remain stable going forward.

* Reflecting the commodity price correction and management guidance, we have lowered FY23-25E revenue by 3%. But the cut in FY23 EPS estimate is restricted to 2%. Maintain Buy with a Jun’23E TP of Rs1,350. Our target PE is derived using a two-stage DCF model.

Strong revenue growth across C&W segments: Revenue grew by 53.8% yoy to Rs15.7bn (3-year CAGR: 13%). Growth was seen across all the segments, except for EPC, which declined by 2.3% yoy. Domestic Institutional C&W revenue rose 40% yoy, while exports were up 2.2x yoy. Dealer sales stood at Rs6.5bn (+68% yoy) and contributed 41.7% to total sales, up from 40% in Q4FY22 and 38.1% in Q1FY22. HW/WW saw 78% yoy growth, driven by price increases and a focus on network expansion (to 1,800 dealers from 1,650 a year ago). EBITDA grew by 40% yoy to Rs1.6bn. Margins contracted by 98bps yoy to 10.2%. Gross margins fell to 23.5% from 27.6% in Q1FY22, hit by commodity inflation. Employee expenses were up 11% yoy. Other opex increased 30.5% yoy. PAT was up 55% yoy to Rs1bn. Net debt (incl. acceptance) fell steeply to Rs320mn from Rs2.7bn in Q

Outlook: Management believes that distribution network growth (30-35%) and strong order book in other segments will help it achieve its FY23 revenue growth guidance of 16-17% despite the sharp correction in commodity prices. Management has also maintained its medium-term revenue growth guidance of 17-18%. Net debt is expected to remain stable, after falling sharply in 1Q, as working capital and capex needs are expected to be funded via cash generated. With secular tailwinds, such as increased government spending on infrastructure projects and higher private capex in select industries, top-line growth is expected to remain strong. The focus on B/S deleveraging, consistency in working capital delivery, and robust revenue growth with margin improvement should help sustain valuation re-rating. We estimate FY22-25 revenue/EBITDA/PAT CAGRs of 17%/23%/25%. Key risks: weak government spends on infra, power and other key sectors; delayed private capex recovery; market share loss; and commodity price volatility and INR deprecation.

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