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Consistent and visible retail ramp-up

Impressive 65%-plus YoY growth vis-a-vis 2Y average in retail house wires for Q2FY22 implies an uptick in the share of pure retail business for KEI. While revenue beat in C&W lags peers, KEI managed GM far better. Directional transition/focus towards retail augurs well for KEI.

Despite a marginal EBITDA miss (GM-led), KEI’s rising focus on retail business is clearly leading company-level growth with pure house wires at a healthy 26%-plus of sales in H1 (versus 22% in FY21). The retail focus is in line with favourable sectoral consolidation and also driven by increased on-ground sales force presence as per our dealer feedback. Retain ‘BUY’; we maintain KEI among our top sectoral picks.

Q2/H1 qualitatively better; marginal miss on EBITDA not a worry KEI’s Q2 reflects two key aspects: benefit of sharpening retail house wire/cable presence by the company and a consistent market share shift in house wires (35– 40% unorganised) to top three–four players. This reflects well in retail house wire revenue growth of 51% versus 2Y average (FY19–20) for KEI in H1. In comparison with Havells/Polycab, KEI in our view managed GMs far better in the C&W business given its highly cyclical business model. On balance sheet, while CFO fared weaker at negative INR1.5bn (versus INR0.3bn) led by higher WC (payables paid), overall debt (cum acceptance) stayed broadly flat.

Key ask for 12–24 months; relevant parameters to watch out for

Management guidance of 60%/25% growth in house wires/overall revenues (FY22E) and 30–35% sustainable growth in dealer-based business seem to be fairly achievable given improving demand (real estate, infra), better ground presence for KEI and ongoing market share shift, in our view. A comprehensive strategy to expand retail/branded business (FMEG) over coming years remains key to KEI’s re-rating. Commensurate improvement in returns/cash flow remains key for investors as retail growth leads apart from capex execution. However, for FMEG strategy, greater clarity is needed given no track-record so far, and will depend on wires scale-up.

Outlook and valuation: Retail ramp-up encouraging; retain ‘BUY’

KEI’s life cycle journey from cyclical to a structural growth opportunity seems well on track, and is focused. Execution of the current strategy remains key to long-term expansion to compatible-FMEG range. Retain ‘BUY/SO’ with a revised TP of INR1,150 (versus INR900) as we are raising FY22/23E EPS by 4/9% rolling forward to Mar-23E.

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