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Powering the Indian growth story

Strong demand prospects to boost earnings momentum

* The Indian electrical industry (at ~INR1.8t in FY23) likely to post 10% CAGR: The Indian cables & wires industry, along with FMEG products, is estimated to be ~INR1.8t in FY23. The industry offers huge growth potential and is estimated to report ~10% CAGR over the next few years, led by increased traction in the infrastructure and real estate sectors. The cables & wires industry constitutes ~39% of the electrical industry and forms a crucial part of construction and infrastructure activities.

* Higher exports and market share gains to support organized players: The industry should benefit from the rising exports of cables from India, as exports have clocked a 16% CAGR vs. ~8% CAGR for imports over FY17-23 (~15% YoY growth during 9MFY24). The organized players are also anticipated to benefit from the rising demand for branded products due to their safety features and quality. As per industry estimates, branded players currently constitute ~74% of the industry (vs. 61% in FY14), which is expected to improve to 80% by FY27.

* Polycab, KEI, and RRKABEL, among the leading players in cables & wires: Polycab, KEI, and RRKABEL are the leading players in the cables & wires industry, with a combined market share of ~50% among the organized players (35% of the entire industry). They are favorably placed to gain from the rising infrastructure spending. A strong distribution network and higher capex, with a focus on backward integration, will drive growth for these companies.

* Initiate coverage with a BUY rating: We initiate coverage on Polycab, KEI, and RRKABEL with a BUY rating as we expect them to benefit from the favorable industry trends and report healthy earnings growth over FY24-26. We believe these companies will maintain their premium valuations. We value: Polycab at 50x FY26E EPS to arrive at our TP of INR7,500, KEI at 50x FY26E EPS to arrive at our TP of INR5,000, and RRKABEL at 40x FY26E EPS to arrive at our TP of INR2,200.

* Key downside risks: a) a rise in commodity prices; b) higher competitive intensity in the sector; and c) demand impact due to an economic slowdown.

Infra/real estate spending, rising exports, & market share gains to drive growth

* The Indian cables & wires industry, along with FMEG products, is estimated to be ~INR1.8t in FY23. Strong traction in the real estate and infrastructure sectors would drive higher growth for the industry, and we estimate the industry to record ~10% CAGR.

* The cables & wires industry constitutes ~39% of the electrical industry and forms a crucial part of the construction and infrastructure activities of the government and private players. Intensifying focus on infrastructure, a strong traction in the real estate sector, an increase in electrification of villages, and rising nuclear families are expected to spur cables & wires industry growth.

* The cables & wires market reported ~8% CAGR over FY14-23 and it is estimated to clock 12-14% CAGR over FY23-27 (INR1.2-1.3t). Our analyzed companies have seen a combined revenue CAGR of ~13% over this period, which should continue over FY23-26E. The share of branded players has increased to ~74% in FY23 from 61% in FY14 and is expected to improve to 80% by FY25.

* Exports of cables & wires have been on a rising trend, and companies such as KEI, RRKABEL and Polycab have increased their export revenues over the years. Exports clocked a 16% CAGR over FY17-23; whereas, imports posted an ~8% CAGR over the same period. During FY21-23, exports delivered a 36% CAGR as against 15% CAGR for imports. India is now a net exporter of cables & wires.

* Exports revenue of Polycab, KEI and RRKABEL delivered a CAGR of 54%, 7% and 25%, respectively, during FY19-23. Exports contributed 9.8%/8.1% to Polycab’s total revenue in FY23/9MFY24. For KEI, exports contributed 10.3%/14.5% to the revenue in FY23/9MFY24. For RRKABEL, exports contributed 22.5%/27.1% to the revenue in FY23/9MFY24.

Polycab, KEI & RRKABEL – leading companies in the cables & wires segment

* Polycab, KEI and RRKABEL are the leading players in the cables & wires segment, with an industry market share of 18%, 9% and 7%, respectively. These companies command 31%, 16% and 12% market share among our analyzed companies, respectively, which represents 58%/83% of the industry/organized market.

* Polycab has gained market share by 150bp over FY14-23 among the companies that we have analyzed. KEI gained 330bp market share over FY14-23 within our analyzed companies, which was primarily due to the start of cable production above 220KV+ (among the three players in the industry with the capability to manufacture cables above 220KV). RRKABEL also gained market share by 500bp over FY14-23 within our analyzed companies.

* Polycab has been on an expansion spree and cumulatively spent INR22.3b (for cables & wires) over FY14-23. This was ~3.9x higher than the nearest competitor, KEI, which spent INR5.6b over this period. Polycab has plans to commence manufacturing EHC cables above 220KV+ by FY26E and it has entered into an agreement with a leading Swiss cable manufacturer, Brugg Cables, for this purpose. KEI will spend ~INR13b over the next 3-4 years on its capex plans. RRKABEL has planned a capex of INR5b each year over the next two years which will help it to increase capacities for both cables & wires.

* Polycab has 4,300+ authorized distributors and more than 0.2m retail touchpoints. KEI expanded its dealer network to 1,975 as of Dec’23. RRKABEL has a pan-India distribution network consisting of 3,598 distributors and 3,781 dealers.

Initiate coverage with a BUY rating on PolycabKEI and RRKABEL

* We initiate coverage on Polycab, KEI and RRKABEL with a BUY rating as we believe these companies will benefit from favorable industry trends and report healthy earnings growth over FY24-26E.

* We expect Polycab’s EBITDA and EPS to post a CAGR of 14% and 15%, respectively, over FY24-26. We expect KEI’s EBITDA and EPS to clock a CAGR of 25% (each), over FY24-26. We expect RRKABEL’s EBITDA and EPS to clock a CAGR of 39% and 43%, respectively, over FY24-26.

* We estimate Polycab’s RoE/RoCE to be 20%/21% in FY26 vs. ~19% in FY23. Its RoIC would be 27% in FY26E vs. 26% in FY23. We estimate KEI’s RoE/RoCE to be ~19%/20% in FY26 vs. ~18% in FY23. Investments in the new Greenfield unit will restrict a significant improvement in RoE for KEI. We estimate RRKABEL’s RoE/RoCE to be ~25%/24% in FY26 vs. ~14%/12% in FY23.

* We expect these companies to retain their premium valuations. We value Polycab at 50x FY26E EPS to arrive at our TP of INR7,500. We value: KEI at 50x FY26E EPS to arrive at our TP of INR5,000, and RRKABEL at 40x FY26E EPS to arrive at our TP of INR2,200.

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