Motilal Oswal has issued a "Buy" rating for KEI Industries Ltd. (KEII) with a target price of Rs 5,100, representing a 16% upside from its current market price of Rs 4,385. Despite recent challenges related to raw material (RM) volatility and lower earnings from its EPC (Engineering, Procurement, and Construction) division, KEI remains a strong performer in the cables and wires industry. With significant demand from solar energy, transmission sectors, and infrastructure projects, KEI is well-positioned for robust growth. However, the near-term impact of RM volatility and monsoon-related project delays should be considered by investors.

Q2 FY25 Financial Performance Overview

KEI Industries' second-quarter performance for FY25 was weaker than expected due to lower-than-estimated margins in its Cables and Wires (C&W) segment, stemming from raw material price fluctuations and a dip in EPC revenue.

Revenue: KEI reported revenue of Rs 22.8 billion, up 17% YoY, but only 1% above estimates.
EBITDA: The EBITDA stood at Rs 2.2 billion, a YoY growth of 8%, though 12% below expectations.
Operating Margin (OPM): The OPM contracted 80 basis points (bps) YoY to 10%, missing estimates of 11%.
Net Profit (PAT): KEI posted a PAT of Rs 1.5 billion, 8% lower than expected.
Despite these short-term setbacks, KEI's management remains optimistic, reiterating its full-year OPM guidance of 10.5-11% and expecting the volatility in raw material costs to stabilize over the next six months.

Segmental Performance: Cables, EPC, and Stainless Steel Wires

KEI’s diverse operations saw mixed results in Q2 FY25:

Cables and Wires (C&W): Revenue in this segment grew by 21% YoY to Rs 21.4 billion, with EBIT rising 17% YoY to Rs 2.2 billion. The EBIT margin, however, contracted by 30bps YoY to 10%.
EPC Business: The EPC division faced a significant decline in revenue, down 58% YoY to Rs 1.3 billion. The EBIT margin shrank by 80bps YoY to 9%. The monsoon season, which delayed right-of-way (RoW) approvals for projects, largely impacted this segment.
Stainless Steel Wires: This smaller segment saw flat revenue growth, with a 1% increase to Rs 598 million. However, EBIT fell by 21% YoY, and margins contracted to 5%.

Growth Drivers: Renewable Energy and Transmission Projects

KEI Industries is benefiting from strong demand from sectors such as solar renewable energy, transmission projects, and data centers. The company is also seeing healthy demand from thermal power projects, pump storage systems, and highway tunneling. The cables segment, which contributes the bulk of the company’s revenue, had a capacity utilization of 78%, highlighting the robust demand in the market.

KEI's focus on expanding its presence in the retail segment continues to show progress. As of September 2024, the company’s dealer/distributor network had grown by 5% YoY, with 2,038 active dealers.

Capex and Strategic Expansion

KEI has ambitious growth plans with a capital expenditure (Capex) strategy that will support its medium- and long-term expansion:

FY25 Capex: Rs 11 billion, including greenfield projects and brownfield expansions.
Sanand Project: KEI’s key investment, a greenfield plant in Sanand, Gujarat, is expected to start commercial production in Q1 FY26, with an estimated annual revenue potential of Rs 50 billion once fully operational.
Brownfield Expansions: KEI completed brownfield expansions at its Pathredi and Chinchpada plants during 1H FY25. These expansions will help support a 17% revenue growth target for FY25.
KEI is also focused on maintaining a debt-free status, supported by the board's approval for a fundraise of Rs 20 billion via QIP, which will provide financial flexibility as the company scales up.

Order Book and Future Revenue Outlook

KEI's order book remains robust, standing at Rs 38.5 billion as of Q2 FY25, compared to Rs 33.6 billion in the previous quarter. The order book mix includes:

Cables: 62% of total orders
EPC: 16%
EHV (Extra High Voltage): 8%
Exports: 15%
The company’s focus on increasing its export share to 12-13% of total revenue from 11% in 1H FY25 aligns with its broader strategy of diversifying its revenue streams. The domestic institutional cable business saw a 20% YoY growth, while domestic EHV sales fell by 57% due to capacity being redirected to medium- and high-voltage cable production.

Financials and Valuation Metrics

Motilal Oswal projects a 17% revenue CAGR for KEI over FY24-27, supported by a 22% EBITDA CAGR during the same period. The stock currently trades at 48x FY26E EPS, reflecting strong investor confidence.

Key valuation metrics include:

Sales: Expected to grow from Rs 81.04 billion in FY24 to Rs 94.34 billion in FY25 and further to Rs 128.31 billion by FY27.
EBITDA Margins: Projected to expand from 10.3% in FY25 to 11.9% in FY27.
Earnings per Share (EPS): Estimated to grow at a 20% CAGR, reaching Rs 112.1 by FY27.
Return on Equity (RoE): Expected to remain strong, improving to 18.4% by FY27.
P/E Ratio: The stock trades at 58x FY25E EPS, with an expected decline to 39x by FY27 as earnings increase.

Risks and Challenges

While KEI Industries is on a strong growth trajectory, investors should consider several risks:

Raw Material Volatility: Fluctuations in copper and aluminum prices can impact KEI's margins. The company expects this volatility to average out over the next six months, but near-term pressures remain.
EPC Revenue Decline: The sharp drop in EPC revenues, due to delayed project approvals and weather-related disruptions, could pose risks to overall growth.
Competition: KEI faces competition from both domestic and international players in the cables and wires market, which could affect pricing power and margins.

Conclusion: A Compelling Investment Case with Near-Term Volatility

Despite short-term headwinds from raw material volatility and lower EPC revenue, Motilal Oswal’s “Buy” recommendation for KEI Industries underscores the long-term growth potential driven by strong demand from renewable energy, transmission, and infrastructure sectors. With a target price of Rs 5,100, investors can expect a 16% upside from current levels. However, investors should remain cautious of the near-term risks related to raw material price fluctuations and project delays.