RR Kabel Gets 'Buy' From Citi Research, Target Implies 16% Upside
RR Kabel's manufacturing facilities give it the ability to manufacture 100% of its requirements for wires & cables in house, it says.
RR Kabel Ltd.'s Ebitda margin is currently lower than the industry level, but it does not worry Citi Research amid growth expectations of the consumer electrical industry over the next three years.
The brokerage has initiated coverage on the stock with a 'buy' rating and a target price of Rs 1,728 apiece, implying a potential upside of 16.4%.
Citing Technopak, the brokerage said that in the last financial year, the total domestic market for wires and cables industry was estimated at Rs 748 billion and is expected to clock a 13% annual growth until fiscal 2027 to reach market value of Rs 1,200 billion. The drivers for this growth include public and private investment outlay in infrastructure, growth of real estate sector and transition to electric vehicles.
The company is set to capture a significant share of this growth, according to the brokerage, given its existing market share, brand recognition, diversified product portfolio, scale of operations, sizeable manufacturing facilities and infrastructure, and the reach of its distribution network.
The brokerage said RR Kabel's manufacturing facilities give it the ability to manufacture 100% of its requirements for wires and cables in house. It has extended its business strategy to export markets and is focusing on recurring business-to-consumer exports.
Not just wires and cables, the company is also well-positioned to capture growth in the fast-moving electrical goods segment due its wide portfolio of products, including fans, lighting and switches, and appliances, such as room heaters, irons, water heaters and coolers.
"Pursuant to its acquisition of the home electrical business of luminous fans and lights in May 2022, it added lights and premium & mid-premium fans to its portfolio, thereby expanding its presence in the FMEG segment," Citi said.
Margin Expansion
"We are not unduly worried about lower margins," Citi said, despite it being lower than industry peers.
Even as the company reported a 5.8% Ebitda margin in the last fiscal and 7.2% in the nine months of the current one, it has maintained strong pre-tax return on capital employed at around 18% due to its high asset turnover. "On the contrary, we believe it will be easier for RRK to catch up to industry average margins starting from a low base," Citi said.
The company is targeting margin expansion by not just operating leverage but also improving the contribution of higher margin cables to exports and contribution of power cables in the domestic mix, which is currently 85% capacity utilisation and more capacity on the way.
