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Capacity expansion to drive growth

We met with KEII’s management to gain insights into near-term industry trends and the company’s growth outlook. Management indicated that demand remains strong for cables, led by an increase in government capex activities. The demand for wires has also improved, supported by an improvement in real estate demand and higher copper prices, which are encouraging inventory stocking. The company has maintained its revenue growth target of ~18% in FY25E/26E and ~20% in FY27E. With rising demand from power transmission, industrial infrastructure, real estate, and data centers, KEII is strengthening its manufacturing capabilities through brownfield expansions and a new greenfield facility in Sanand, Gujarat. The company is also enhancing its backward integration efforts to improve cost efficiency and supply security. Additionally, management remains focused on expanding its retail presence, optimizing its product mix, and capitalizing on industry tailwinds to sustain long-term growth. Considering recent concerns around growth and RM cost volatility following reciprocal tariff announcements by the US, we have cut our EPS estimates by ~4%/8% for FY26/FY27. This revision reflects reduced margin estimates, as we now factor in stable margins for both cables and wires. KEII has corrected by ~25% in the past month, following announcements by UTCEM and Adani Group regarding their entry into the Cables & Wires (C&W) segment. The stock now trades fairly at 33x/28x FY26E/27E EPS. We maintain our Neutral rating on the stock and value KEII at 32x FY27E EPS to arrive at our TP of INR3,000.

Industry growth and KEII’s strategic positioning

* The Indian C&W industry is witnessing strong growth, with an estimated market size of INR900b. The market has clocked a CAGR of ~10% over the last 12 years, with organized players increasing their share from ~35% in FY15 to ~70% currently. The sector is projected to post a CAGR of ~11-13% over FY24-27, reaching INR1.2t by FY27E, driven by factors such as infrastructure expansion, increasing construction activity, and growing digital connectivity. Among key segments, power transmission cables hold the largest market share (28-30%), followed by building wires (21-23%).

* According to industry data, the revenue share of our coverage companies (HAVL, POLYCAB, KEII, and RRKABEL) increased to ~44% in FY24 vs ~26% in FY19. Considering historical data and various industry estimates (sectoral growth of ~13%), the industry size is projected to reach INR1.2b-INR1.3t by FY28, which is likely when UTCEM’s capacity will become fully operational. This implies ~5-6% of industry size at peak capacity utilization. Notably, UTCEM’s management recently indicated that there are no plans to increase allocated capex for the C&W segment in the near future.

* As one of the leading players in the industry, KEII is well-positioned to capitalize on this industry growth through strategic capacity expansion, backward integration, and operational efficiency. The company has significantly scaled up its production, with cable capacity increasing ~36% and wires capacity rising ~27% in 1HFY25, compared to FY24-end levels.

* Cable capacity utilization stood at ~83-85% in Q3FY25 and is projected to reach ~85% by Q4FY25. This expansion is driven by a mix of brownfield and greenfield projects, ensuring long-term scalability.

* KEII maintains high asset utilization (10x for brownfield projects) and a disciplined capex approach. With FY24 capacity utilization at ~71%, the company ensures steady RoCE and profitability.

* To enhance cost efficiency, KEII has implemented backward integration for PVC compound manufacturing, which is currently operating at ~70-75% utilization, with room for further expansion. Going forward, KEII has significant scope to increase its backward integration, thereby improving self-sufficiency, optimizing margins, and reinforcing its pursuit of ambitious growth targets.

* KEII expects a volume CAGR of ~17% over FY25-27E, with overall revenue growth of ~18% in both FY25 and FY26, and ~20% in FY27. Exports are expected to reach INR2b, driven primarily by ESP product shipments to the US.

Capacity expansion, marketing strategies, and key growth segments

* KEII continues to expand capacity in its wires segment with annual additions. Cable capacity expansion typically takes 1.5 years, with greenfield projects requiring about two years and brownfield expansions taking roughly one year.

* KEII is investing INR19b in LT, HT, and EHV cables, with an expected revenue potential of INR58b, while aiming to maintain RoCE in line with its established performance standards.

* The company’s upcoming Sanand plant is strategically located near key ports and copper suppliers in Gujarat, enabling optimized logistics costs and reduced raw material procurement costs.

* Chinchpada plant expansion: During 9MFY25, KEII incurred a capex of INR570m for the expansion of its Chinchpada plant. The brownfield expansions at Chinchpada and Pathredi have been completed, adding capacity for wires and power cables. Following the expansion, capacity utilization improved across key segments—with cables at ~85%, house wires at ~69.7%, and stainless steel wires at ~91%. This investment is expected to drive volume growth of 16-17% in FY25. To support this growth and improve production efficiency, the company has installed new equipment, including a 32-wire multi-wire drawing machine, additional bunchers, and machines for HT and LT cables.

* Key growth drivers: a) industrial segments (cement, fertilizers, etc.) rely on robust cabling infrastructure for manufacturing and operations. Demand is supported by capacity expansions, modernization, and higher industrial capex; b) the rapid growth of cloud computing and digitalization is driving significant investments in data centers, which require specialized, high-performance cabling solutions. KEII is well-positioned to cater to this high-growth segment; c) the transmission sector plays a critical role in India's power value chain, ensuring efficient energy flow from generating stations to demand centers; d) with increasing rural development, demand for additional electrification is expected to rise. Government programs continue to support the extension of power networks. With increasing infrastructure development and electrification projects, demand for extra high voltage (EHV) and high-tension (HT) cables is rising. KEII’s increased focus on these segments positions it well to capture growth opportunities.

* KEI’s top 10 customers contribute ~12-14% of total revenue, while dealers hold 15-20 days of inventory. Retail prices are adjusted every 15-20 days to reflect raw material fluctuations. However, KEI’s effective cost management minimizes the impact on annual profitability. The company aims to increase the retail segment's share to ~50% by FY26 (from ~47% in FY24). To support this goal, KEII has expanded its dealer network to over 2,100 in FY25 (from 1,990 in FY24).

* For smaller projects, ~50% of revenue comes from retail, 22-23% from wires, and the rest from LT and medium tension cables, ensuring a balanced product mix. For institutional orders, the company typically maintains 3-4 months of inventory to ensure smooth execution.

Valuation and view

* KEII has corrected by ~25% in the past month following announcements by UTCEM and Adani Group regarding their entry into the cables & wires segment. We had anticipated a negative reaction for C&W companies and subsequently downgraded our rating on KEII and RRKABEL to Neutral, expecting a de-rating in valuation multiples following the announcement of entry by sizeable players in this business (Link). That said, KEII’s business fundamentals remain strong, and we do not foresee any financial impact over the next two years, as: 1) UTCEM’s plant is expected to be commissioned by Dec’26 (Link), and 2) Adani Group has not yet announced its capex plans in this segment (Link).

* We have reduced our margin estimates and now factor in stable margin for cables in FY26E/27E, resulting in a 4%/8% EPS reduction for FY26E/27E. We expect KEII’s EPS to clock a 16% CAGR over FY25-27E. The stock now trades fairly at 33x/28x FY26E/27E EPS. We maintain our Neutral rating on the stock and value KEII at 32x FY27E EPS to arrive at our TP of INR3,000.

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