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KEI Industries Equity Research

HomeCompanyKEI Industries Equity Research

Date of Research – 19 January 2016

Price – Rs. 113.40

About the Company

KEI Industries Limited (“KEI” or the “Company”) makes electrical cables and house wires and stainless steel wires. The Company has grown exponentially over the past few years to emerge as a leading player in the electrical wires segment and in 2014-15, it was awarded the ‘Superbrand’ status.

The Company sells its products both in domestic and international markets. Going forward the Company plans to scale up its exports and retail market business (retail business currently contributes 25% to the total revenue).

Key Financial Figures

Standalone (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Total Income from Operations 1,658.35 1,618.91 2,030.95 2,351.02 2,836.65
Expenses 1,487.83 1,465.87 1,838.08 2,108.44 2,562.59
Earnings Before Other Income, Interest, Tax and Depreciation (Operating Profit) 170.52 153.04 192.87 242.58 274.06
Depreciation 20.44 20.97 24.56 25.33 28.04
Finance Costs 109.35 111.53 120.40 127.16 122.93
Other income 2.36 1.28 2.38 5.75 10.48
Exceptional items (2.61)
PBT 43.08 21.82 52.90 95.85 133.57
Tax 16.74 10.22 18.63 33.30 35.27
PAT (before Minority Interest and share of Associates) 26.34 11.60 34.25 62.55 98.30
Profit/ (loss) attributable to Minority Interest
Share of profit / (loss) of Associates
Consolidated Profit / (Loss) for the year 62.55 98.30

Profitability Analysis

Standalone (%)
Particulars FY 2013 FY 2014 FY 2015 FY 2016 FY 2017
Operating Profit Margin Ratio 10.28 9.45 9.50 10.32 9.66
Net Profit Margin Ratio 1.59 0.72 1.69 2.66 3.47

Operating profit margin is a measurement of the proportion of a company’s revenue that is left over after paying for production costs such as raw materials, salaries and administrative costs. Net profit margin is arrived at by deducting non operating expenses such as depreciation, finance costs and taxes out of operating profit and shows what is left for the shareholders as a percentage of net sales. Together these ratios help in understanding the cost and profit structure of the firm and analysing business inefficiencies.

Key Balance Sheet Figures

Sources of Funds / Liabilities (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016
Share Capital 14.05 14.75 15.45 15.45
Reserves & Surplus 241.52 258.33 288.40 351.53
Net worth (shareholders funds) 255.57 273.08 303.85 366.97
Long term borrowings 103.44 116.56 120.90 188.15
Current liabilities 805.44 835.48 890.26 892.69
Other long term liabilities and provisions 2.14 2.36 3.19 4.00
Deferred Tax Liabilities 10.56 16.04 23.54 36.24
Total Liabilities 1,177.15 1,243.52 1,341.74 1,488.05

 

Application of Funds / Assets (Rs. Cr)
Particulars FY 2013 FY 2014 FY 2015 FY 2016
Fixed Assets 311.47 314.32 302.47 357.52
Noncurrent Investments 3.08 3.09 3.14 3.11
Current assets 857.33 922.71 1,031.27 1,105.20
Long term advances and other noncurrent assets 5.27 3.40 4.86 22.22
Total assets 1,177.15 1,243.52 1,341.74 1,488.05

Efficiency Analysis

 
Particulars FY 2013 FY 2014 FY 2015 FY 2016
ROCE 47.50 39.28 45.41 43.70
ROE / RONW 10.31 4.25 11.27 17.04

Return on Capital Employed (ROCE) measures a company’s profitability from its overall operations by calculating the return generated on the total capital invested in the business (i.e. equity + debt). Return on Equity (ROE) or Return on Net Worth (RONW) measures the amount of profit which the company generates on money invested by the equity shareholders. In short, ROE draws attention to the return generated by the shareholders on their investment in the business. Together these ratios can be used in comparing the profitability of the company with other companies in the same industry.

Valuation Analysis

Standalone
Particulars FY 2013 FY 2014 FY 2015  FY 2016 FY 2017
Total Income from Operations (Rs. Cr.) 1,658.35 1,618.91 2,030.95 2,351.02 2,836.65
Growth (%) (2.38 %) 25.45 % 15.76 % 20.66 %
PAT (Rs. Cr.) 26.34 11.60 34.25 62.55 98.30
Growth (%) (55.96 %) 195.26 % 82.63 % 57.16 %
Earnings Per Share – Basic (Rs. ) 3.84 1.59 4.46 8.10 12.68
Earning Per Share – Diluted (Rs. ) 3.84 1.54 4.43 7.98 12.37
Price to Earnings 3.01 8.18 13.09 12.31 17.14

Dividend History

The Company has maintained a dividend yield of 1.04 % over the last 5 financial years.

Liquidity and Credit Analysis

Current Ratio

Higher current ratio implies healthier short term liquidity comfort level. A current ratio below 1 indicates that the company may not be able to meet its obligations in the short run. However, it is not always a matter of worry if this ratio temporarily falls below 1 as many times companies squeeze out short term cash sources to achieve a capital intensive plan with a longer term outlook. KEI’s average current ratio over the last 3 financial years has been 1.1 times which indicates that the Company is able to pay its short term obligations.

Long term Debt to Equity Ratio

Companies operating with high long term debt to equity on their balance sheets are vulnerable to economic cycles. In times of slowdown in economy, companies with high levels of debt find it increasingly difficult to service the interest on their borrowings as profit margins decline. We believe that long term debt to equity ratio higher than 0.6 – 0.8 could affect the business of a company and its results of operations.

KEI’s average long term debt to equity ratio over the last 3 financial years has been 0.4 times which indicates that the Company operates with high debt which is typical of companies in their growth stage.

Interest Coverage ratio

Interest coverage ratio indicates the comfort with which the company may be able to service the interest expense (i.e. finance charges) on its outstanding debt. Higher interest coverage ratio indicates that the company can easily meet the interest expense pertaining to its debt obligations. In our view, interest coverage ratio of below 1.5 should raise doubts about the company’s ability to meet the expenses on its borrowings. Interest coverage ratio below 1 indicates that the company is just not generating enough to service its debt obligations.

KEI’s average interest coverage ratio over the last 3 financial years has been 1.51 times which indicates that the Company may find it difficult to meet its debt obligations in case there is a business setback or the economic environment becomes weak.

Ownership pattern

In its latest stock exchange filing dated 31 March 2017, KEI reported a promoter holding of 46.59 %. Large promoter holding indicates conviction and sincerity of the promoters. We believe that a greater than 35 % promoter holding offers safety to the retail investors. Also the Promoters are consistently increasing their shareholding in the Company which is a positive sign.

At the same time, institutional holding in the Company stood at 1.41 % (FII+DII). Large institutional holding indicates the confidence of seasoned investors. At the same time, it can also lead to high volatility in the stock price as institutions buy and sell larger stakes than retail participants.

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

 

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