CMP = Rs 72 (as of Friday)
Price target: Rs 125
Result highlights
- The net sales of KEI industries Ltd (KEI) grew robustly by 85.4% year on year (yoy) to Rs 184.1 crore in Q1FY2008. The sales growth was in line with our expectation.
- The operating profit grew by 58.2% yoy to Rs 24 crore. The growth in operating profit was subdued as a result of pressure on the margins in the power cable business due to company's recent foray into the high tension (HT) power cables coupled with a change in the product mix. The operating profit margin (OPM) fell by 230 basis points to 13% in Q1FY2008.
- The interest cost went up by 155% to Rs8.6 crore while the depreciation went up by 37.3% to Rs 19 crore.
- The net profit grew by 57.3% (yoy) to Rs 11.93 crore mainly due to a high growth in the other income. The other income rose on account of the revaluation of the foreign currency convertible bonds (FCCBs).
- The power cable business reported a growth of 77.5% (yoy) in its revenues and a decline of 220 basis points in profit before interest and tax (PBIT) margins. The revenues from the stainless steel wire business posted an impressive growth of 113.6% while the PBIT margins for expanded by 30 basis points.
- The order backlog of the company at the end of Q1FY2008 was Rs 200 crore. KEI Industries is one of the largest players in the power cable business in India. The power transmission and distribution is going to attract huge investments In the XIth Five Year Plan (2007-2012) and we expect KEI to benefit from the same.
- KEI's forays into new areas of business and its capacity additions in the existing businesses compel us to believe further visibility in the earnings of the company. However, in the light of increasing raw material cost and the pressure on margins we are revising our FY2008E earnings downwards (-30%).
- The fully diluted earnings per share (EPS) for FY2008E now stands at Rs 6.9. Going forward we are also introducing our FY2009E earnings which on fully diluted equity is Rs 10.4 per share.
- I remain positive on the stock and maintain Buy recommendation with a revised price target of Rs 125.
