KEI Industries Ltd Q2 FY2023 Concall Summary

Key Takeaways

• EHV disruption masked strong core growth: EHV cable sales collapsed to ₹46 crores from ₹154 crores YoY on inspection delays, dragging institutional growth to ~15% even as domestic institutional wire & cable grew 38% and retail surged 31%.
• Retail engine firing on all cylinders: B2C sales grew 31% YoY in Q2 and 46% in H1, active dealers reached ~1,900, and the dealer/distributor contribution to revenue hit 44%, closing in on the 50% target that would allow the intentional 4–5% price gap on house wires to narrow.
• Balance sheet transformed to net cash: The company swung from net debt of ₹270 crores in March 2022 to net cash of ₹109 crores by September 2022, using operating cash flows to slash trade payables by ₹247 crores, while finance costs halved.
• Volume growth held at ~20% in Q2 despite a ~10–11% price correction pass-through from falling copper and aluminum, confirming management’s view that wire & cable demand is not discretionary and dealer destocking narratives overstate the risk.
• What to watch next quarter: Whether EHV clearances resume in H2 as guided, whether the Silvassa brownfield expansion comes online within Q3, and whether the land acquisition for the next capex cycle clears in the promised 2–3 months.

EHV Disruption: The Quarter’s Drag

• ROW issues froze clearances: Utilities delayed manufacturing approvals and inspections on EHV orders because of right-of-way problems on their project sites, a bottleneck management called incidental rather than structural.
• Full-year recovery promised: Management expects the disruption to normalize over the full year, with the EHV run rate returning in H2, implying a sharp sequential rebound is built into the second-half outlook.
• Institutional growth understated: The 15% overall institutional sales growth masks 38% growth in domestic institutional wire & cable, meaning the core B2B franchise outside EHV remained strong.

Anil Gupta: "So, sometimes it is incidental that they delay the approval of manufacturing clearances in many orders because of ROW issues, right of the way issues, and also delay the inspections because of these ROW issues."

Retail & Distribution: The Growth Engine

• Dealer network deepening: Active dealers reached ~1,900, up from ~1,700 earlier, with a three-way strategy driving sales: more distributors, more retailers under each distributor, and higher retailer throughput via monthly electrician meets in every city.
• Contribution marching toward 50%: Dealer/distributor contribution reached 44%, with a target of 45% by year-end and 50% next year; the intentional 4–5% price gap on house wires versus peers is being maintained until that 50% threshold is reached.
• Dealer inventory fears overblown: Dealers hold only 25–30 days of inventory, so any deferral during price volatility is limited to that window; quarterly buying ultimately averages out, making the destocking narrative a temporary optics issue rather than a demand problem.

Rajeev Gupta: "In your world, that is destocking. I earlier also explained to everybody that on an individual level, each and every dealer distributor holds only 25 days to 30 days inventory. They are not holding more than that. So they can defer only for 20 to 25 days inventory, but ultimately, in a quarter, they have to buy. Ultimately, average comes out the same."

Exports: Strong Half, Lumpy Quarter

• H1 exports up 74% YoY to ₹386 crores, though Q2 growth slowed to just 7%, reflecting the lumpy nature of project clearances where client delays in listing cables can shift revenue between quarters.
• No distribution play abroad: KEI deliberately avoids overseas distribution because distributors load excessive margins that crush KEI’s pricing; the strategy is to secure direct project approvals and sell to EPC contractors.
• Substantial growth expected to continue both this year and in coming years, per management, though quarter-to-quarter volatility will persist.

Anil Gupta: "No, we don't plan to start the distribution in the other countries, because what our observation is that if you sell through the distributor, they load too much of margins on our prices, and we are crushed."

Margins & Input Costs

• Input cost correction of ~22%: Copper, aluminum, and stainless steel wire rod prices fell across the board, with management estimating a ~25% average correction from peak levels and declaring the inflation effect largely over.
• Price pass-through is gradual by design: Q2 price correction was ~10–11% because of a 3–4 month order backlog and existing inventory in depots and dealer shelves; sudden price cuts would inflict losses on the channel.
• Inventory drag on profitability: When commodity prices fall, the ~₹100–₹150 crores of finished goods inventory in depots impacts profitability by 0.5% to 1% in that quarter, an effect that reverses when prices rise and averages out over the full year.
• EBITDA margin guidance held at ~10.5% for the full year, with management expecting margins to improve in future quarters now that commodity prices have stabilized.
• Gross margin is a misleading lens: KEI sells 400+ product types with widely varying gross margins; contracts are priced and sold on an EBITDA margin basis, making the blended gross margin figure less meaningful than the ~10–11% EBITDA range.

Rajeev Gupta: "Any contracts, whenever we are selling, is on the basis of the EBITDA margin. Because gross margin, in a clubbing of the sale, because we sell aluminum cables, we sell copper cable, we sell EHV export, 400 type of products we are selling in a year. So gross margin of each product is different."

Demand Environment & Order Book

• Private capex demand broadening: Good demand visible from data centers, cement, steel expansions, and pharma, adding to the government infrastructure pipeline of railways, metros, roads, ports, and airports.
• T&D sector tailwind: New orders from distribution utilities funded by REC and PFC for T&D infrastructure and rural electrification are expected to drive significant demand increases in coming months and next year.
• Order book steady at ₹2,500–₹3,000 crores: Order inflows roughly match sales outflows each quarter, with the book staying range-bound; retail and B2C orders are never included in this figure, so it understates total forward coverage.
• Real estate uptake is creating new opportunities for demand growth, per management.

Anil Gupta: "And whosoever is buying wire and cable that is not a discretionary spend, these are the essential spends. So it is not something where the demand elasticity can be high."

Capex & Capacity

• Silvassa brownfield on track: ~₹35–₹40 crores invested in a new low-tension power cable line at Silvassa, adding ~₹500 crores of capacity, expected to be ready within Q3 FY23.
• Growth bridge secured: The brownfield capex is sized to support 16–17% growth in the coming year, matching the ~17% growth guided for the current year.
• Land acquisition for next capex delayed: Procurement from farmers is taking longer than expected but management expects clearance in the next 2–3 months, after which the capex cycle resumes; Gujarat’s defined process means it "will not be a problem."

Rajeev Gupta: "So as we have earlier guided that in this financial year, we will grow close to 17% in this financial year. Because lots of orders we are having and the current industrial scenario, and in the coming year also, we will be taking care for 16% to 17% growth with this brownfield Capex."

Guidance & Commitments

Key Metrics