KEI Industries Shares Fall After Goldman Sachs Initiates Coverage With 'Neutral'
High capacity utilisation is likely to limit the company's growth in the near-term despite a lower base, Goldman Sachs said.
Shares of KEI Industries Ltd. fell over 3% on Wednesday after Goldman Sachs initiated coverage with a 'neutral' rating.
The brokerage stated that the company was well-placed for growth, but it was limited by capacity. It has set a price target of Rs 2,730 apiece on the stock.
The second-largest player in the cables and wires industry captures an 8% market share across the country. The growth in electricity consumption in India will aid the company, as it is one of the few players with an extra high voltage cable offering, according to Goldman Sachs.
The brokerage expects increased focus on exports and offerings in the EHV segment to drive revenue growth higher than the industry. However, high capacity utilisation is likely to limit its growth in the near term, despite a lower base, after which growth could accelerate, as per a note by the brokerage.
It expects KEI to increase its focus on the retail segment by growing its market share in house wires from 5% to high single digits over the next two to three years.
Key Risks: Upside
Acceleration Of Global Corporates’ China +1 Strategy
While India has become a net exporter of cables and wires since 2020, it has taken away market share from China. The acceleration of global corporates’ China +1 strategy could benefit Indian cable and wire manufacturers, according to Goldman Sachs. KEI has all the requisite approvals to export to markets such as the U.S. and Europe.
Unorganised To Organised Shift
The unorganised share in the overall cables and wires market has reduced from 43% before FY15 to 30% in FY22, due to technological innovations, increasing complexity in use cases, especially in sunrise industries like renewables, EVs, etc., and a longer reach, especially in rural areas, through branded players’ distribution network. Any improvement in this would benefit KEI, as it is the second-largest branded player in the Indian cables and wires market, according to the note.
Improved Regulatory Compliance
Currently, the regulations and technical standards in developed markets, such as the U.S. and Europe, are quite stringent, resulting in low levels of approval by Indian players. Any elevation in the standards required in the domestic market would benefit players like KEI, as it has one of the highest number of certifications in the industry.
Key Risks: Downside
High Volatility In Commodity Prices
Commodity price risk is built in as KEI aims to increase sales and needs to gauge raw material procurement as per the demand. This could potentially result in the company taking risks in periods of high volatility, as it will be unable to pass on the price fully to its dealers, as per the note.
Significant Slowdown In Capex
This could result in a reduction in overall demand, and as a result reduce the overall industry growth rate, according to the brokerage.
Higher Than Expected New Capacity Addition
Currently, most cables and wires players are operating at peak capacity utilisation, and are setting up new capacities, which is expected to come onstream in the next 2-3 years. Any incremental new capacity addition announcements by industry players may result in a situation of oversupply in the near term, affecting pricing and in turn, profitability, Goldman Sachs said.
Shares of KEI Industries Ltd. fell as much as 3.51%, the lowest since Nov. 21, before paring some loss to trade 3.03% lower at 10:36 a.m.
Of the 16 analysts tracking the company, 11 maintain a 'buy' and five recommend a 'hold', according to Bloomberg data. The average 12-month consensus price target implies a downside of 1.3%.