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RM volatility and lower EPC revenue hurt margins

Obtains Board approvals for fundraise with an aim to remain debt-free

* KEI Industries (KEII)’s 2QFY25 earnings were below our estimate due to a lower-than-estimated margin in the Cables and Wires (C&W) segment led by RM cost volatility and lower EPC revenue. EBITDA was INR2.2b (est. INR2.5m), while OPM came in at ~10% (est. ~11%). PAT stood at INR1.5b (est. INR1.7b).

* Management indicated the volatility impact of RM costs will average out on a six-month basis, and it maintained its OPM guidance of 10.5-11.0% for FY25 (OPM was flat YoY at ~10% in 1HFY25). The decline in EPC revenue was due to heavy rainfalls across the country, due to which right-of-way (RoW) approvals were not available. KEII intends to remain a debt-free company and has obtained Board approvals for a fundraise of up to INR20b via QIP.

* We cut our EPS estimates for FY25-27 by ~3-6% as we factor in lower EPC revenue and reduced C&W EBIT margin by ~20bp. We estimate an EPS CAGR of ~20% over FY24-27. We value KEII at 50x Sep’26E EPS to arrive at our TP of INR5,100 (vs. INR5,300). Reiterate BUY.

Revenue/EBITDA up 17%/8% YoY; OPM down 80bp YoY to ~10%

* KEII’s revenue/EBITDA/Adj. PAT stood at INR22.8b/INR2.2b/INR1.5b (up 17%/8%/10% YoY and up 1%/ down 12%/8% vs. our estimate). OPM margin contracted 80bp YoY to ~10%.

* Segmental highlights: a) Cables and Wires: Revenue rose 21% YoY to INR21.4b and EBIT was up ~17% YoY to INR2.2b. EBIT margin contracted 30bp YoY to ~10%. b) EPC business: Revenue declined 58% YoY to INR1.3b and EBIT dipped 61% YoY to INR121m. EBIT margin contracted 80bp YoY to ~9%. c) Stainless Steel Wires (SSW): Revenue was up 1% YoY to INR598m, while EBIT declined 21% YoY to INR29m. EBIT margin contracted 1.3pp YoY to ~5%.

* In 1HFY25, revenue/EBITDA/PAT grew 16%/14%/17% YoY. EBITDA margin was flat YoY at ~10%. The C&W EBIT margin expanded 1pp YoY to ~11% during 1HFY25. The company’s operating cash outflow stood at INR3.1b vs. OCF of INR1.2b in 1HFY24. Capex (including purchase of land and building) stood at INR3.1b vs. INR2.2b in 1HFY24.

Key highlights from the management commentary

* Demand continues to remain strong from solar renewable energy and transmission sectors. Thermal power projects, pump storage projects, data centers, and highway tunneling projects are also driving demand.

* Capacity utilization was ~78% for the cable segment, ~71% for the house wire division, and ~93% for the stainless wire division during 1HFY25.

* Capex in FY25/26 will be INR11b+/INR6-7b (including maintenance capex of INR500m every year). Receivables days will be at 2.1 months in FY25. Inventory days should fall to 2.25 months vs. 2.4 months at present.

Valuation and view

* KEII is focused on improving its retail sales in total revenue to ~50% from ~47% in FY24. To increase its retail sales, KEII is also expanding its dealer/ distribution network (active dealer count rose ~5% YoY to 2,038 as of Sep’24). Further, the company targets to improve its export share in total revenue to ~12-13% from ~11% in 1HFY25.

* We estimate a revenue/EBITDA/EPS CAGR of 17%/22%/20% over FY24-27. The stock currently trades at 48x FY26E EPS. Considering the strong demand outlook and robust earnings CAGR, we value KEII at 50x Sep’26E EPS to arrive at our revised TP of INR5,100 (earlier INR5,300). Reiterate BUY.

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