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Expanding retail reach

* KEI posted healthy performance in Q4 with 17% yoy EBITDA growth, beating our estimate by 7%. EBIT margins across segments were impacted by the reclassification of unallocable expenses and a related expense of Rs260mn pertaining to previous quarters.

* EBITDA margins in both the retail and institutional segments saw an improvement, and this is expected to sustain. Cable demand is holding up in Q1FY22, and management is confident about recovering the lost wire sales after current restrictions are eased.

* Working capital intensity rose to 120 days from 79 days in FY20. It should normalize after receiving Rs1.5bn of retention money in the EPC business. Going forward, the company will continue to purchase raw material supplies in cash to restrict rise in acceptances.

* In FY22, the management is targeting 25% growth in domestic institutional sale and 35%+ retail growth. We have raised FY22-23 EPS by 9-11% as we bake in 28-37bps higher EBITDA margins. Maintain Buy with a revised TP of Rs710 (14x Sep’23E EPS) vs. Rs554

All-round beat; PAT growth supported by lower finance charges:

Standalone revenues declined slightly yoy but came in 4% ahead of estimates, driven by better-than-estimated performance of stainless steel wires and turnkey projects business. The yoy dip was due to lower EPC revenues and the execution of a large order in FY20. EBITDA grew 17% yoy, aided by lower employee costs (down 27% yoy) and other opex (down 15% yoy), while EBITDA margin expanded 178bps yoy. Gross margin contracted 137bps yoy, in line with estimates. PAT saw a 47% increase yoy, boosted by a 55% reduction in finance cost. EBIT and EBIT margins in all the three segments were impacted by the change in GST policy regarding un-allocable expenses. HT cable, HW/WW and SS wire segments registered strong growth, while others saw a decline.

Outlook:

When compared with peers, KEI’s performance was weak in FY21 due to higher skewness toward the institutional business and a deliberate reduction of the EPC business. C&W is relatively less impacted as infra and other projects are getting executed and realestate activities are progressing despite ongoing lockdowns. Management reiterated its strategy of increasing retail sales, and aims to achieve 35% growth, driven by retail network expansion. It has already hired 100 new employees to aggressively push retail segment sales and to achieve 20% growth in dealer network in FY22. The company also aims to grow revenues by 25% in the domestic institutional business. Although working capital was impacted by the delay in receiving retention money, we believe that the focus on retail segment and reduction in EPC business should help it stabilize. The efforts to further reduce net debt and acceptances are also positive. Key risks: weak government spends on Infra, Power and other key sectors; delayed private capex recovery; market share loss; and continued commodity price inflation.

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