KEI — earnings call

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Prepared remarks

Moderator · Conference Operator

MR. RAHUL DANI – MONARCH NETWORTH CAPITAL LIMITED KEI Industries Limited October 21, 2022

Thank you, very much.

We will now begin for the question-and-answer-session.

Anyone who wishes to ask a question, may please press star and one on your touchtone phone.

If you wish to remove yourself from the question queue, you may press star and two.

Participants are requested to use handsets, while asking a question.

Ladies and gentlemen, we will wait for a moment while the question queue assembles.

Participants may press star and one to ask a question.

The first question is from the line of Rahul Agarwal from InCred Capital.

Please go ahead.

Rahul Agarwal

Firstly, one clarification.

On EHV, you said sales were low because of delay in inspection by utilities.

Could you please elaborate what is really wrong with that?

Anil Gupta

See, normally, these are very specific orders from transmission utilities of electricity transmission companies.

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.

The clearances, there the execution is to be done.

So this leads to disruption of supply sometimes and the quarter-on-quarter performance.

Rahul Agarwal

Got it.

These are domestic orders, right?

Anil Gupta

But overall, on a full year basis, it will be a normal sale and will be with a growth.

KEI Industries Limited October 21, 2022

Rahul Agarwal

I understand, sir.

These are India specific orders, right, you're referring to?

Anil Gupta

Yes.

These are Indian utilities.

Rahul Agarwal

Okay, got it.

So the INR 500 crores, INR 550 crore run rate for the full year should come back sometime in second half, right?

Anil Gupta

Yes.

Rahul Agarwal

Okay.

Got it.

Sir, second question was more on the industry, not specific on KEI, what we understand is B2B has improved purely post-COVID in terms of demand for cables, but B2C discretionary spending has been relatively soft in first half due to inflation and higher pricing, and lot of other issues.

Obviously, for KEI, you have gained market share in B2C housing wires, and hence, your number growth is pretty high.

But I wanted to get your thoughts on the industry, do you think after this festive season, once that gets over, November, December, the B2C demand should hold up purely from an industry perspective?

Or you think the inflation is still catching up on demand and hence, the softness might come back?

Anil Gupta

See, I don't think -- I'm sure that it will catch up and so far as inflation is concerned, actually, there is already heavy correction has taken place in the metal prices and polymer prices.

All the input costs have been corrected by close to on an average 25%.

So I think the inflation effect has already gone.

Now if you compare the price what it was two years back and what it's now, so we can see it is an inflation.

But I don't think that those levels will come back which were two years back.

Rahul Agarwal

Right.

So entire whatever RM benefit we are getting -- in cables obviously, it's more pronounced that is all passed through both in wires.

But discretionary spend I don't think so much of benefits have been passed through, right?

The price cuts have not been very significant?

Anil Gupta

From our end, we are always passing through the price corrections whenever it is lowered or whenever it goes up.

So from our side, we are always passing through the prices.

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.

Moderator · Conference Operator

Ladies and gentlemen, the participant has left the queue.

We'll take another participant whose name is Akhilesh Bhandari from ICICI Prudential.

Please go ahead.

Akhilesh Bhandari

Sir, can you just give us the volume growth data for the quarter and for the first half?

Rajeev Gupta

In the first half, the volume growth is close to 25% with respect to metal, copper and aluminum both.

KEI Industries Limited October 21, 2022

Akhilesh Bhandari

And specifically for the quarter?

Rajeev Gupta

For the quarter, approximately 20% range.

So overall our complete growth in H1 is 25%.

Copper volume has grown by 26% and aluminum volume has grown by 24%.

Akhilesh Bhandari

Copper volume has had 26% growth and aluminum?

Rajeev Gupta

Aluminum was 24%, average is 25%.

Akhilesh Bhandari

Average is 25%.

Okay.

Sir, in quarter two, can you also call out what has been the broad price correction which you have taken in both the B2B as well as B2C segments?

Rajeev Gupta

In quarter two, also 23.69% volume growth.

Anil Gupta

No. The price correction comes gradually.

Because there is always a backlog of orders for last three to four months and similarly, inventory is also there.

So the price correction may be around 10% to 11% in quarter two.

Akhilesh Bhandari

10% to 11% in quarter two.

Anil Gupta

Correct.

Rajeev Gupta

Actually, it doesn't seem to have a lag effect, but every 15 days may have to be prices correction, upper and lower both sides.

Lag effect is not big.

Akhilesh Bhandari

And quarter one has seen a destocking impact in the channel now, can you just comment on what is the inventory level according to you at the dealer level?

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.

Anil Gupta

No. But when there is a lot of volatility, they defer the purchases for some days thinking that the prices will come down, and they even advice the customers maybe to hold on it if they can hold for 10, 15 days or 3 weeks.

That's it.

Rajeev Gupta

That’s it.

That's why our growth is there, no.

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, the line of Rahul Agarwal has been connected back.

May I request Mr. Rahul to proceed with his question?

KEI Industries Limited October 21, 2022

Rahul Agarwal

The question I had was on Capex.

We did about INR 26 crores in first half.

Does this delay impact KEI in any way in terms of meeting its growth guidance?

And why is there so much delay?

I thought we would end up spending like INR 200 crores to INR 250 crores this year?

Rajeev Gupta

Actually, this land which we are procuring from the farmers, so that is getting delayed.

So in the meantime, what we did is, basically we have created a new brownfield Capex by investing around INR 35 crores to INR 40 crores in our Silvassa new plant, wherein we are adding approximately INR 500 crores of capacity for low-tension power cable, which will be ready within this quarter only, third quarter only.

It will take care of the growth for the next financial year.

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.

In the meantime, next two, three months, that will also clear for the land part.

So that, again, will be on track.

Rahul Agarwal Got it.

Sir, this helps.

And last question, sir, capacity utilization, if you could help on cables, housing wires, and stainless steel.

That would be all from my side.

Wish you guys very happy Diwali.

Anil Gupta Thank you very much for the Diwali greetings.

The capacity utilization on an overall basis is around 75% to 78% at the moment.

Moderator · Conference Operator

Thank you.

The next question is from the line of Rahul Maheshwari from Ambit Asset Management.

Please go ahead.

Rahul Maheshwari

I have two questions.

We have seen or heard from the past peers that during the quarter, there was a judicious price revision that had taken place.

The same has applied for you guys also that the passing of the prices to the dealers and because of cutting the raw material price has been lower as compared to what it should be, first thing?

And second thing, can you give some color on the channel financing, which has happened on the active dealers, which is there?

That's all.

Rajeev Gupta

Yes.

Channel financing, we are doing almost 55% to 60% dealer/distributor.

And as of today, INR 113 crore is the recourse.

But otherwise, our total utilization is close to INR 250 crores.

Anil Gupta

So far as price, you're saying that price reduction was lower.

Price reduction is always gradual.

There are two reasons.

One, we are always having inventory in our depots and stocks.

So we can't lower the prices immediately.

Number two, even dealers are KEI Industries Limited October 21, 2022 having inventories in their shelf.

If the prices are lower suddenly, they will also incur loss.

Rahul Maheshwari

Yes.

Rajeev Gupta

Yes, that is a trade practice that is going on actually.

On the trade sectors, we are doing it.

Rahul Maheshwari

And also on the active dealers, can you give color how much the growth rate is there and what is the internal guidance which you are taking on the geography side?

Rajeev Gupta

Yes, close to 10% number of dealer/distributors we are increasing year-on-year business.

Anil Gupta

But besides increasing the number, we are strengthening the existing dealers in terms of their size and helping them to grow.

Rahul Maheshwari

And can you give throughput of the dealer?

As you said, every 15 days, prices getting revised, the dealer has to buy it because of the inventory days.

What kind of throughput improvement you have seen during the years for the mature dealers, which is there.

Rajeev Gupta

Without increase of throughput of the dealer, how can we grow our sale of 31%...

Rahul Maheshwari

No, no. I'm not doubting on the throughput.

I'm just asking the number in the project.

Rajeev Gupta

Because each and every individual dealer/distributor sales is also getting increased as our approach is a 3-way approach.

We are working on the retailers, we are working on the electrician and we are working on the dealer/distributor.

So while we are holding the electrician meet every month in each and every city of the country.

So the electrician goes to the retailers.

Each month, the retailer sales, we are getting increased.

Then we are also working to increase the number of retailers under each distributor.

And the third front, we are increasing the number of dealer/distributors.

As you said that earlier we were having close to 1,700, now we are having 1,900.

So it's a 3-way strategy, increasing number of distributors, increasing number of retailers under each distributor, and increasing the sale of retailer month-on-month through the electrician.

Rahul Maheshwari

And just to follow through this, earlier, you had said that 4% to 5% was the price gap between you and the peer on the wire side -- wires and cables on the retail side.

How much that price gap has been taken care or still it remains the same?

KEI Industries Limited October 21, 2022

Rajeev Gupta

Still that price gap is there.

And we said that until the next year, we will maintain that price gap.

Once we achieve our internal target to reach 50% contribution from the dealer/distributor segment, which we have achieved right now 44%, and by the end of year, target is to be 45% in this year and next year by 50%, then only we will be going through that.

Anil Gupta

But there is no price cap so far as cables are concerned.

The price gap is only in the wires, yes, which are sold through trade.

Rahul Maheshwari

Only house wires?

Anil Gupta

Only house wires.

Rahul Maheshwari

And just -- sorry for extending the question, apart from the transmission and distribution utilities company, any private sector demand revival?

Any color you are witnessing on many of the segments, whether it's data center, etcetera?

Anil Gupta

Yes.

We are seeing very good demand from data centers, which are coming up all over the country.

Secondly, the demand from cement industry is coming good.

And some steel industries are also expanding.

But miscellaneous industries are also there where we get, be it in pharma or very miscellaneous industry, I can't name, any industry which grows...

Rahul Maheshwari

Overall, private demand which is there, not segment to segment, but what could be the kitty you have identified through these segments which you have told?

Anil Gupta

I think that there is a good demand coming up from private Capex in the industry.

Moderator · Conference Operator

The next question is from the line of Akshay Kothari from Envision Capital.

Please go ahead.

Akshay Kothari

Sir, our exports would be mainly on the institutional side?

Rajeev Gupta

Yes.

Export is mainly for institutions.

Akshay Kothari

So do we have any plans to increase the distribution presence on the export side?

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.

So our strategy is to directly get our approvals from the projects and sell to the EPC contractors over there.

So we don't sell it to any intermediary over there.

Sir, the Capex, are we acquiring agricultural land and then we'll convert it to NA?

KEI Industries Limited October 21, 2022

Rajeev Gupta

Yes, that's right.

Akshay Kothari

So we won't face any headwinds, because there are sometimes clearance delays to convert to NA, so they take lot of time?

Rajeev Gupta

So it will take some time, because in Gujarat, there is a defined process.

So that will not be a problem.

Akshay Kothari

Okay.

And sir, some of the competitors, though they are not that much significant, they are coming with the e-beam facility.

So is there any significant advantage which e-beam wires have over the traditional ones, which we are...

Anil Gupta

No. In some segments like railway coaches or engines, they are subscribing that process has to be e-beam.

So that is on.

Otherwise, in solar wire, we are selling a lot of solar wires, which has to be TUV certified, whether it is manufactured on CV lines or on PV.

So we are not losing that market at all.

Akshay Kothari

And sir, on the geographical distribution you have given.

So I guess we had expanded a lot of distributors on the Eastern side, though the revenue contribution in the quarter is still 15%, which used to be that.

So are there any headwinds which we are facing on the eastern front or something like that, because we are expanding our distribution network, but it is not getting reflected in our revenue.

Rajeev Gupta

Actually, we are appointing distributors not only the eastern side, but also in the southern side, because our contribution from both the markets are low as compared to North and West.

So we are now appointing, which will be resulting in the coming years.

But at the same time, our North and West is so strong, because the contribution there are also increasing equal amounts.

So that's why the contribution is not increasing.

So even on the higher base from the North and West, we are still growing in the same way.

Akshay Kothari

And sir, I think Anil sir did explain this point in the last call, but still I have a little bit of conundrum regarding this.

The gross margins, if I look around five years back, were around 30%.

And today, it's around 25%, owing to the EPC contribution and some price volatility.

But sir, going forward, is it like the operating leverage which we are deriving will be compensating it in our gross margins and gross margins would reduce.

So to grow, in a way, we'll have to reduce our gross margins, but it won't affect our EBITDA margin.

So is there something like that you go by the gross margins?

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.

But while it is combining, so it is looking like different actually.

But on an EBITDA KEI Industries Limited October 21, 2022 level, it is almost same, close to 10% to 11% range count.

So that is basically focusing and our focus is also there only.

Akshay Kothari

Sir, my question is, if our gross margins stabilize at this level and considering the...

Rajeev Gupta

Gross margins are I said, for different products are different.

So that's why, while we are publishing the results, it is on average, it is combined.

But for each product, the margins are different, gross margin, because if you talk about wires, there are only three products like PVC compound, copper, that's it.

But if you would talk about cable, then there is aluminum, there's galvanized steel wire, there's lead.

So it is not comparable actually.

While the product is getting change, these things will get changed rapidly.

Akshay Kothari

Okay.

Thanks a lot, and wish you happy Diwali.

Anil Gupta

Thank you, wish you happy Diwali.

Moderator · Conference Operator

The next question is from the line of Shrinidhi from HSBC.

Shrinidhi Karlekar

Congratulations on good set of numbers.

Sir, my first question is on the guidance front.

Would it be possible to update us, sir, on revenue and margin guidance for the full year '23?

And you have guided for...

Rajeev Gupta

Revenue guidance.

Our earlier guidance said that we will grow close to 17% in this current financial year and our EBITDA level will be close to 10.5% on a full year basis.

Shrinidhi Karlekar

And we are retaining that guidance, right, sir?

Rajeev Gupta

Yes, we are retaining.

We are quite hopeful that we can.

Shrinidhi Karlekar

Yes.

Second, sir, I want to understand this export business appears like -- well, overall revenue has surprised us, but export business appears like a bit soft and sequentially, it has gone down.

So any reason for that?

Anil Gupta

Actually, this year, export business is increasing substantially.

The first half sale is close to INR 366 crores, which is 74% up from last year, and present order going is very, very good.

And we will be able to maintain a substantial growth in exports in this year compared to last year and even in the coming years.

There is a jump of 74% in first six months compared to last year.

Shrinidhi Karlekar

Yes, sir.

I know, but I was asking more on a sequentially, is it like some of the order shipments got impacted, something like that?

Or it is expected to be a bit lumpy, like some quarter will be very strong and there could be some softness.

I just want to understand that.

KEI Industries Limited October 21, 2022

Anil Gupta

All this happens because, as I mentioned, we are exporting our products to overseas countries to the projects.

So sometimes, in some quarters, the projects clearances are stronger, in some quarters, due to delay in listing the cables by the client or some other issues, it may be lesser.

But overall, we expect a very substantial growth in this year.

But I have said that 74% is this, and we should be able to maintain this momentum in this year.

Shrinidhi Karlekar

Okay, sir.

This is really helpful.

And sir, I have one more question on order book.

I know you shared order book numbers.

Sir, is it possible to share what are typically order inflow numbers for a quarter?

Like, I know we went from, I think, 2,017...

Rajeev Gupta

Jitne Order aate hain utne hi order chale jaate hain, jaisa agar aap last quarter dekhein, us mein bhi order book position isi level par thi, 2500 se 3000 crore par.

Iska matlab jitna sale ho gaya utne naye order aa gaye.

That is how it is.

Shrinidhi Karlekar

It is an institutional business, right?

I should just take the institutional...

Rajeev Gupta

Jitna dealer distribution business hota hai that is not covered in the order book.

Anil Gupta

Yes.

The retail orders, which is through B2C, are never included in the order book.

Shrinidhi Karlekar

Okay.

Yes.

And sir, in the INR 3,000 crores order backlog we have, typically, what percentage of order backlog will have a passthrough of commodities?

Rajeev Gupta

Of course, only 10%, 15% orders, which we have from the government side, that is only the price variation class.

But otherwise, institutional orders are under natural hedge, because these orders are to be supplied within three to four months' time since they are having inventory up two to 2.5 months' time.

So practically, it is almost under natural hedge, little bit impact is there, but otherwise natural hedge.

Shrinidhi Karlekar

Understood, sir.

And last one, if I may, sir.

I think you had guided for some INR 100 crores release of retention money.

Has that been earned in H1?

Rajeev Gupta

Yes.

From EPC division because last year, we collected additional INR 150 crores.

That's why it is reflecting in the slowing side of the receivable also, which has gone down substantially.

Again this year, close to INR 100 crores additional will be coming from EPC division, whatever it is due.

So again, the receivables also will be going down from 2.9 months' time, which was last year, the receivable period, which will go down this financial year write-off at the end of balance sheet, close to 2.4 to 2.5 months.

Shrinidhi Karlekar

Okay.

And sir, last one, I just want to understand, there's a bit of divergence in the profitability of cable companies, right?

And I understand it comes from business tactics and it comes from the way copper is procured, whether it's derivative embedded or not.

Just want to understand, in KEI Industries Limited October 21, 2022 case of KEI, we don't do hedging.

And in that context, is it fair to say that in first half of this year, probably our retail distribution-driven business would have suffered on profitability a bit.

Rajeev Gupta

Yes, a little bit, because of the inventory.

If prices are going down, whatever inventories close to INR 100 crores, INR 150 crores finished goods inventory we are carrying on in depots.

So it's around 0.5% to 1% in that particular quarter.

But as I said in the past also, when price goes up also, goes down also.

So ultimately, on a full year basis, it is average.

That's why we are saying that now the prices are stable.

And we are quite hopeful that on a full year basis, we will be maintaining 10.5%.

So this means the EBITDA margin in future quarters will go up.

Shrinidhi Karlekar

Right.

And the same phenomenon is much less pronounced in the institutional business, right?

Rajeev Gupta

Institutional business, it is a pass on business, no, because we are having order book of three to four months, and we are having inventory also.

So that is under natural hedge actually.

Moderator · Conference Operator

The next question is from the line of Harsh Shah from Jefferies.

Please go ahead.

Harsh Shah

Could you please provide the interest cost breakup for the quarter?

Rajeev Gupta

Interest cost for this quarter is very less, but I'm giving that to you.

So you can note down the figures.

For this quarter only?

Harsh Shah

Yes, for the quarter.

Rajeev Gupta

Quarter, the term loan interest is INR 0.17 crores.

Working capital interest is close to INR 5 crores.

And LC interest is not there.

And bank charges on LC is INR 0.25 crores.

Bank charges on bank guarantee is INR 1.67 crores and other banks charges like processing fee, etcetera, is INR 0.43 crore.

So the total is INR 7.6 crores.

Moderator · Conference Operator

The next question is from the line of Devansh Nigotia from SIMPL.

Please go ahead.

Devansh Nigotia

Sir, can you just give an overview of the demand scenario right now?

We have been guiding 17% for the guidance of sales growth.

But overall, how do you see the demand environment right now?

Rajeev Gupta

See, Anil Ji has explained the demand from the transmission, distribution, railways, road, metro rail projects, solar projects, refineries, cement projects, and underground cabling projects.

So these are the few.

Apart from this, now government is more focusing on the PLI scheme.

Lots of manufacturing companies are coming to India.

So then now government is focusing on airports almost in all the B class cities.

So these are the few indicators and few industries, which is leading to the demand actually.

KEI Industries Limited October 21, 2022

Devansh Nigotia

Okay.

And how would there are working capital days in the institutional cable business?

Rajeev Gupta

See, in the receivables side linked to institutions, it is close to 2.5 months.

But while we are selling to the retail, because of channel financing, it is hardly 0.5 months.

Devansh Nigotia

Okay.

Less than 15 days.

Okay.

And in retail wiring, how do you seeing the demand?

Rajeev Gupta

In retail, as we have guided that we will grow close to 30% to 35% on a full year basis.

We don't see any change for that.

Moderator · Conference Operator

Thank you.

Reminder to all the participants anyone who wishes to ask a question may press star and one on their Touchstone phone now.

The next question is from the line of Nikunj Somani, an Individual Investor.

Nikunj Somani

I need one clarification on your institutional segment.

In this segment, you sell your products directly to the customers or through channels?

Rajeev Gupta

Institutional side, we are selling directly.

It's a tender-based business.

It's a high entry barrier case.

Lots of approvals are required while we are selling to institutions.

Anil Gupta

Directly to the customers, either to the utility or the industry or to the EPC contractors.

Moderator · Conference Operator

Thank you.

Anyone who wishes to ask a question may press star and one on their Touchstone phone now.

The next question is from the line of Chirag Fialoke from RatnaTraya Capital.

Chirag Fialoke

Sir, wish you a happy Diwali and congratulations on a great set of numbers.

Just one clarification, sir.

This quarter, given the price correction in the commodity side, could you quantify what kind of inventory write-down would have happened?

Or is it minimal?

Rajeev Gupta

There is no question of inventory write-down, because in the same quarter, whenever price goes down, so the next month, after the price correction, inventory gets sold.

So it is automatically reflected to the sales side.

Chirag Fialoke

And that's basically because overall we only keep two months of inventory.

So within a quarter, we have the overall turnover of...

Rajeev Gupta

Automatically, it did gets adjusted.

That's why the 5% margin gets impacted, no.

Moderator · Conference Operator

Ladies and gentlemen, that was the last question for today.

I would now like to hand the conference over to the management for closing comments.

Anil Gupta

Yes.

So thank you very much for joining this conference call.

So I would like to wish all our investors a very happy Diwali and a very prosperous New Year.

So if you still have any KEI Industries Limited October 21, 2022 questions, you may reach out to us for any clarifications.

Thank you very much for sparing your valuable time to talk to us.

Thank you.

Rajeev Gupta

Thank you very much.

And wish you a happy Diwali to all.

Moderator · Conference Operator

On behalf of Monarch Network Capital, that concludes this conference.

Thank you for joining us, and you may now disconnect your lines.

Thanks.

Questions and answers

15:50:34 +05'30' · Research Analyst

“KEI Industries Limited