BUY: KEI Industries, target Rs84

Source: Sharekhan
Recommendation: Buy
Price target: Rs84
Current market price: Rs47

Price target revised to Rs84

Result highlights

  1. KEI Industries (KEI) has reported an increase of 24.6% in its revenues to Rs258.5 crore for Q4FY2008. The growth in its sales is in line with our expectations.

  2. During the quarter the company made provisioning for mark-to-market losses of Rs3.67 crore on its exposure to foreign currency derivatives made for the purpose of hedging currency and interest rate-related risks.

  3. Adjusting for the provisioning, the operating profit grew by 7.9% to Rs27 crore, translating into an operating profit margin (OPM) of 10.5%. Thus, in Q4FY29008 the OPM declined by 160 basis points year on year (yoy).

  4. The operating performance of the company is disappointing due to the steep increase in its employee cost. The employee cost as a percentage of its sales increased by 140 basis points to 3.3%, as the company amortised deferred expenses for employee stock options (Rs2.05 crore) and employee benefits (Rs0.43 crore).

  5. During the quarter, the depreciation charge rose by 107.1% to Rs2.4 crore as the company commissioned its Chopanki plant during January 2008.

  6. Consequently, the adjusted net profit declined by 21.2% to Rs8.9 crore, which is below our expectations. The reported net profit is down 42.9% at Rs6.5 crore.

  7. The company has an order book of Rs400 crore out of which orders worth Rs125 crore are for high-tension (HT) cables.

  8. We have revised our FY2009 earnings estimate as we expect the company’s margins to remain under pressure this year. Our FY2009 fully diluted earning per share (FDEPS) estimate now stands at Rs8.4. We are also introducing our FY2010 earnings estimate in this note. Our FDEPS estimate for FY2010 stands at Rs12.

  9. Though KEI enjoys a strong business outlook, the company has faced problems in managing its working capital. This has resulted in deteriorating cash flows. We have therefore revised our target multiple to 10x for the stock and downgraded our price target for KEI to Rs84 per share.

  10. At the current market price, the stock trades at 5.5x its FY2009E and 3.8x FY2010E FDEPS. We believe the valuations are attractive and reiterate our Buy call on the stock.

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Author: Austin Comments: 0 comments Date: 21 Jun 2008
Categories: Stock Calls Tags: , , , ,
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