Stock to buy: 41% upside likely on this consistent earnings compounder, says UBS

Foreign brokerage UBS has initiated coverage on consistent earnings compounder and the only pure play on cable and wires KEI Industries Ltd with a 'Buy' call, with a target price that suggests 41 per cent potential upside ahead. Calling it a leading beneficiary of electrification infrastructure creation, UBS said KEI's ramp up of branded wires would drive returns and cash generation. KEI Industries is directionally set to expand in compatible consumer electrical segment by FY27, the brokerage said while suggesting a target of Rs 6,150 on the stock.

At 11.15 am, shares of KEI Industries were trading 7.3 per cent higher at Rs 4,686 on BSE. In its bull case scenario, UBS suggested a target of Rs 7,450 on KEI, suggesting 71 per cent potential upside. The stock is up 47 per cent in 2024 so far and 86 per cent in the past one year.

UBS said KEI Industries' revenue grew 18 per cent compounded annually over FY14-24 against an industry average of 9 per cent. It diversified from B2B heavy business and now generates 50 per cent of revenue from the dealer channel, UBS said.

"Last three years' of valuation re-rating reflects KEI's growth potential and execution capabilities. Leveraging on its proven execution, we estimate an earnings CAGR of 31 per cent over FY24-27 (against 24 per cent for consensus). Our price target is based on 50 times PE on 12M froward earnings on July-25E (2.5SD above the five-year average and in line with our industrial coverage valuations), expensive valuation led by strong earnings growth," it said.

Global economic slowdown, slower domestic infrastructure creation, and delays in capex and securing product pre-qualifications are key downside risks, the brokerage said.

With enough headroom to grow branded house wires business -- KEI share at a 10 per cent, with almost $1 billion market still in the unorganized space, geographical distribution and manufacturing expansion, UBS expects KEI to see a healthy 22 per cent top-line CAGR over FY24-27E period, with upside potential from exports.

UBS said KEI can reach the branded wire sales of Rs 4,000 crore by FY27 against Rs 2,300 crore in FY24. Although a late entrant to the house wire segment (FY11), KEI has materially scaled up this business between FY19-24, led by focused approach to add distributors in South and North East India with low presence.

"Capacity expansion, distribution ramp up, investment in branding & sales promotions, a large unorganised market in our view will drive revenue from branded wires (higher cash generation and return accretive business) to Rs 4,000 crore plus by FY27E (20 per cent topline CAGR between FY24-FY27E)," it said.