Capex plans, robust demand may keep KEI Industries charged up

KEI Industries Ltd is preparing to carry out its enhanced capital expenditure (capex) guidance. The cable and wire company recently completed a fundraise of ₹2,000 crore through a qualified institutional placement (QIP) at ₹3,800 a share. These funds are expected to help its balance sheet and support its greenfield expansion at Sanand in Gujarat, where it has plans for ₹1,800-1,900 crore of capex (in phases) to increase its cable capacity. This increased capacity is expected to generate additional revenue of ₹5,000 crore by FY28.

In the half year to September (H1FY25), the company expanded its cable & wire capacities meaningfully across many facilities. “Its cable capacity increased about 36% and wires capacity 27% in H1FY25 compared to FY24-end capacity,” said a Motilal Oswal Financial Services report dated 27 December.

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KEI commissioned brownfield facilities at Chinchpada and Pathredi in H1FY25, which it believes will facilitate revenue growth of 16-17% for FY25. This is in keeping with its 17% year-on-year revenue growth in FY24.

Motilal Oswal expects KEI’s cumulative capex to outpace its cumulative operating cash flow over FY25-27 and estimates free cash outflow of ₹630 crore and ₹21.6 crore in FY25 and FY26, respectively, with free cashflow of ₹170 crore in FY27.

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Meanwhile, volatile copper prices adversely impacted the Ebitda margin in Q2FY25, which contracted about 70 basis points year-on-year to 9.7%. Ebitda is earnings before interest, tax, depreciation and amortisation. Still, management retained its Ebitda margin guidance of about 10.5-11% for FY25 in the Q2 earnings call.

Robust long-term outlook

As such, the long-term outlook is robust thanks to public and private capex on overall infrastructure development. The company’s retail business appears promising, contributing about 54% of sales in H1FY25, aided by a strong distribution network.

Amid this, KEI’s shares are up 33% so far in 2024. The stock trades at 46 times estimated FY26 earnings, showed Bloomberg data, which leaves little room for sharp near-term upside. While robust demand in the sector augurs well, sharp volatility in copper prices and a delay in capex are key threats.

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“Revival in extra-high-voltage cable and exports (Q2 revenue down 51% and up 7% year-on-year, respectively) are key monitorables in H2FY25,” said a report by Systematix Institutional Equities dated 24 December. Adjusting to enhanced equity share capital (around 6% dilution) and the revised capex plans, Systematix expects a 18% and 20% compound annual growth rate (CAGR) in revenue and Ebitda over FY24-27E (FY19-24: 14% and 14% CAGR).