KEI Industries Ltd - A consistent performer over the last decade

[alexander]

Note: Starting this thread as the previous thread is locked and the mods do not want to open it.

About the company:
“KEI Industries Limited is amongst India’s top three wire and cable manufacturers, with a comprehensive product portfolio ranging from housing wires to Extra High Voltage (EHV) cables. Leveraging our in-house cable production, we have strategically forward integrated into Engineering, Procurement and Construction (EPC) services for power and transmission projects. Our high-quality solutions have made us a trusted and preferred provider in the Retail, Institutional and Export segments.” - 2019 Annual report

Segmental Revenue & profit mix:
70% from cables, 25% from EPC and 5% from wires
54% sales comes from institutional, 33% from retail and 13% from exports

Firm has a long history. Looks like it has been a public company from 1992.
Manufacturing at 5 locations.
Bhiwadi (Rajasthan), Chopanki
(Rajasthan), Pathredi (Rajasthan),
Silvassa and Chinchpada (Dadra
& Nagar Haveli).

Retail segment - Has > 1.4k dealers pan India and focus is on expanding this and improve the brand also.
Institutional segment is dependent on government investment
Key exports market for the company are Australia, Middle East and through EPC contractors to Africa and LatAm.

They are currently running at low utilization as they have expanded capacities planning for future growth… Over the next few years, margins should increase further ideally as utilization improves. They have postponed expansion plans as of now

Raw material - Material costs are key here and form over 70% of costs… Decrease in copper, Al prices is a positive for them

PnL statement (from screener of course):

As seen above it has been consistently growing over the past decade.

Competition benchmarking:

Clearly Polycab India is the leader but KEI has managed to grow the fastest and if we extrapolate the trend, good things can happen

Some key financial metrics:

All these metrics seem seems positive to me…

Management:
Anil Gupta has been with the company for ~40 years. The board composition did not give me a lot of confidence to be honest. They have been paying dividends which is a positive. Salary of 14 Cr for Anil Gupta seems to be a little on the higher side… (He is the promoter also… no need to take such a large cut imo)
Some red flag - sebi: KEI Industries pays Rs 1.78 crore to settle 2 cases with Sebi - The Economic Times.

Pros:

• Good growth and ROCE with low valuation
• Current orderbook is at 3000 crores
• Decline in RM prices and maybe govt investment in infrastructure could be tailwinds
• Considering housing cables growth and growth in Power transmission etc in the coming years, the space is big and this company seems to be growing a lot…

Cons:
Not sure of the moat. Brand is not very strong still…
Some contingent liabilities to the tune of 1.5k crores are there
Promoter has sold 5% stake recently
Employees are not happy. Many complain of a bad culture (Glassdoor rating of 3.6 - KEI Industries Reviews | Glassdoor)

Discl:
Researching still. Don’t have a position. Not planning to buy till the market dips a little due to one or the other bad news (which imo should happen considering covid, india-china, results announcements etc)

[alexander]

Guys, if anyone is following this or invested, please comment with your valuable opinion. Doesn’t this seem like a decent growth stock?
Housing is going to grow, Transmission and Distribution is going to grow. This company seems aggressive and looking to capture a good percentage of that growth…

People invested in polycab also can probably throw some light on the industry dynamics.

[sahil_vi]

Disc: I have roughly 10% of direct stock PF invested in KEI.

Thanks for this great first post. In addition I will add the following:
Few Pros:

1. I think of KEI as a B type company (definitions are in the ART of valuation thread) that is transforming itself into a type A company. The management understands the importance of retail, which is growing at a breath-taking pace.
2. From the annual report " housing wires segment generates higher margins than conventional cables". So the management is able to recognize and understand the importance of moving into retail segment which is more granular, relatively less cyclical demand, higher margins. Towards this end, their spending on brand building is also increasing. From the annual report:
   
3. Here is a visual representation of the company’s earnings from screener:
   
   
   
   As we can see, earnings have been very consistent since last several years, which is quite fantastic given the overall growth slowdown in India in last 2 years. going over last few AR, IMO this has been possible due to the strength and diversity of the orderbook.
4. Current P/E multiples of 10-12 are quite low and possibly due to overall depressed state of midcaps and in general global equities.

Cons:

1. KEI is a pureplay Wires business versus competitor polycab which has a small and growing FMEG business. KEI has its own version which is “retail wires”. Time will tell which strategy will prove to be better. I could not find a fine-grained break-up in polycab report for each type of client (for example, power sector, retail sector) for the wires segment which is still 90% of revenue for polycab. Having said that, I believe polycab will get higher multiples than KEI since market will tend to value it like a havell’s due to the FMEG segment which is higher up in the Value-Chain.
2. KEI has a large dependence on cyclical industries such as Power, Auto sector. It is not very clear how long they will take to make Retail large part (80%+?) of the business (although that is the direction) but until they do, there is always a risk to their earnings.

PS1: I am not too worried about the trade payables and receivables: it seems to be high for all the companies in this sector.
PS2: I prefer KEI to polycab for 4 reasons:
(i) On some metrics like MarketCap/OCF or MarketCap/Sales KEI is 2x cheaper than polycab
(ii) It is smaller and hence larger room to grow
(ii) Retail is already ~50% of sales for KEI meaning it is well on its way to being a type-A consumer facing higher value-added company compared to polycab which only has 9% of its revenue coming from retail (which i could make out from 2019 AR page 15)
(iv) Much longer proven track record of growing earnings reliably for KEI (5-6 years) compared to polycab which has only been listed for 1 year publicly.

[Nroy]

Thanks @alexander and @sahil_vi for your insights on KEI. Here are my 2 cents:

Check on CFO to EBITDA:
This check is to find out how much of the EBITDA is converted into operating cash. The ratio is very erratic for KEI and varied widely across years, however the same is observed in two of its peers viz. Polycab and Finolex cable. The average, though, is almost identical within these companies with KEI slightly better than the rest.

Auditor Check:
From FY12 to FY17, the auditor was JAGDISH CHAND & CO. whereas for FY18 and FY19 the auditor was Pawan Shubham & Co. I was doing checks in Google but did not find anything adverse for both these auditors. The auditor’s fees did not increase significantly over years and is way lower than company’s profit growth. Hence, any possibility that the company is bribing the auditors to fudge the books, can safely be ruled out.

Remuneration of key managerial personnel
The compensation of the key managerial personnel is extremely high and they seem to utilise the maximum limit allowed under company act. Growth of the remuneration is almost similar to profit growth of the company. Apart from high compensation, no anomaly found.

The company delivered better ROCE and sales growth than its peers (Polycab and Finolex cables). Naturally, the CAGR growth of its share price exceeded that of Polycab and Finolex. Overall the company looks fundamentally alright. I could not figure out the moat of the company, seniors can throw more light on it. Why someone will prefer KEI over Polycab of Finolex cables is a question.

Per se, the domestic use of cable seem to be a limited growth driver for any cable manufacturer, and I think the non-retail and industrial market is the main contributor of the growth [my ancestral house did not undergo any meaningful electric wiring revamp in last 30 years]. Unlike a paint or an adhesive company, most likely, cables have more or less one time use in each household. Please correct me if this interpretation is wrong.

[sahil_vi]

Thanks for your indepth analysis going a step beyond everything which was already there. I find this information very very useful.

@Nroy

Per se, the domestic use of cable seem to be a limited growth driver for any cable manufacturer, and I think the non-retail and industrial market is the main contributor of the growth [my ancestral house did not undergo any meaningful electric wiring revamp in last 30 years]. Unlike a paint or an adhesive company, most likely, cables have more or less one time use in each household. Please correct me if this interpretation is wrong.

I think the key driver of growth is the housing and auto markets (their retail wires are used inside new homes and new cars constructed). What you’re referring to is the replacement market and as you rightly pointed out the replacement market is not big. But just the growth in first time home buyers and first time car buyers will be responsible for KEI retail segment growth.

I’m uncertain whether these wires can also be used inside consumer electronics such as geysers, irons, tv, refrigerator etc, I will try to dive deep and look into it.

[Killerswit]

Its a good read inline with the discussion going on in this forum.

KEI Industries offers value

[Ankit1]

@sahil_vi

I’m uncertain whether these wires can also be used inside consumer electronics such as geysers, irons, tv, refrigerator etc,

Please let us know if you find anything regarding this.

[Akshay_Lulla]

There has been a sudden huge rise in trade payables recently. What can be the reason for this for someone who has looked deep into this? If I am not wrong the rise in trade payables can help in aiding to shown an inflated free cash flow for the period which can be misleading?

[a0132256]

Last q4 may be one off for payable and receivable front for most of the companies as crucial year end where most of these settlement happened there is sudden lockdown. So it may be due to that we can wait and see next balance sheet or concal to get the proper answer

Regards
Sathish

[a0132256]

f2cac9ff-a211-4f8f-acb3-058a4bbe1c59(1).pdf (75.0 KB)

[a0132256]

Net debt level in increased by 200cr , will need to see is it because of working capital issue or anything else. As they have good qip money in hand and given that still debt increased is surprising.

[sahil_vi]

Thanks for sharing a few observations:

1. As against direct competitor (polycab)'s revenue being down 75%, KEI’s revenue declined only ,31% which is a much better performance. It demonstrates the strength of the order book.
2. The only document I have seen on quarterly performance is in a weird format. This is generally not how companies disclosure their performance. Do we know why KEI has provided info in this format? I’m still waiting for a detailed quarterly performance report.
3. Your point on debt is not something I am able to substantiate from the document you shared for 2 reasons:
4. The company mentions : “On standalone basis, financial charges of the company in 1st Quarter of FY 2020-21 was Rs.16.79 Crore as compared to last year same period of Rs. 32.96 Crore (Financial charges in terms of percentage has reduced to 2.25% from 3.05% of Net sales).” Which implies that the debt interest has gone down. Some of the fall in revenue due to domestic sales was compensated by a rise in institutional exports from 93cr to 160cr odd.
5. The company mentions that the QIP amount was fully utilised to bring down the debt.

Could you share where you read that the debt increased?

[a0132256]

5ebc2191-06c6-4b23-961f-1aab94f99b1f(1).pdf (243.3 KB)

[sahil_vi]

Thanks for sharing

Indeed the net debt has gone up since last quarter, this means that the cash is tied up somewhere. We’d need to look at the detailed balance sheet which they have not shared to understand why. I have emailed the company to better understand this.

[a0132256]

As per the concal mgmt paid 400cr for creditors which was due till q4 . At the same time debtors increased due to poor collection from instutional front. Now debtors increased around 300cr. Management expects debtors will normalise by Q3 onwards and debt will be go back to fy20 level from Q3 onwards.

[Pragnesh]

Screener is showing Contingent liabilities of Rs.1452.77 Cr.

What does mean
Guarantees against Performance / Security
Deposit / EMD
Kindlyexplain!

Screenshot_2020-08-11-07-49-58-93|281x500

[Nroy]

KEI Annual report 2019-2020

kei-annual-report-2020.pdf

[sahil_vi]

My notes on Annual report for 2019-2020

1. [Core business competency]: one of the few players in the world to embed manufacturing capabilities for EHV 400kV cables
2. [Value Addition]: Leveraging our in-house cable production, we have strategically forward integrated into the Engineering, Procurement and Construction (EPC) services for power and transmission projects.
3. [Product Mix]:

4. [Sales breakup]:

5. [Client Mix]: The company’s clients are in following sectors: Power, Oil refineries, railways, automobiles, cement, steel, fertilizers, textile, real estate. Products are exported to 45 countries.
6. [Financials]: Sales of 4884 cr in 2020. Sales growth of 16%, EBITDA growth of 14%. PAT growth of 40%. 69% growth in Exports. 130% growth in EHV segment. 1650 distribution partners across india (up from 1450 last year). As of may’20, order book size is 3200 cr.
7. [Operational details]: They operate through five state-of-the-art manufacturing facilities located in Bhiwadi (Rajasthan); Chopanki (Rajasthan); Pathredi (Rajasthan); and at Silvassa and Chinchpada (Dadra and Nagar Haveli). During the year, we have strengthened our manufacturing capacity for house wires through completion of our greenfield expansion pursuant to the setting up of a new unit at Chinchpada, Silvassa.
8. [Backward integration]: We have been able to backward integrate our services by setting up in-house manufacturing of PVC.
9. [Quality control]: Our products are tested as per international standards by: KEMA (The Netherlands), FGH (Germany), TUV (Rheinland), SGS, IRS, ABS, CEIL, BRE (UK), LLOYDS REGISTER, BVQI, DNV, KVERNER POWERGAS, CPRI, ERDA, IDEMI, EIL, PDIL and MECON. Our manufacturing facilities conform with the ISO 14001:2015 certification for environment management system, the OHSAS 18001: 2007 certification for occupational health and safety management and the ISO 9001:2015 certification for quality management system
10. [Retail segment]: Due to covid-19, retail sales were flat for the year. The nationwide lockdown in the last 10 days of March significantly dented our revenue collections, particularly for our Retail segment as that is when a significant part of the invoicing for the fourth quarter takes place at the dealer level.
11. [EPC segment]: We continue to be selective in undertaking EPC projects, bidding only for those that have a significant cabling requirement as that gives us a strategic advantage in earning better margins through the in-house supply of inputs.
12. [Order book]: The Institutional orders include supply of cables for a nuclear power project, several metro projects, fertilizer and refinery expansions and railway projects.
13. [Capex]: Keeping the uncertain times in perspective, we have also decided to defer all major capex till October 2020, when the external environment will be reviewed again. As we have built sufficient capacity, this postponement of capex will not impact our near and mid-term growth plans.
14. [Retail operational details]: Our Retail segment comprises house wires, winding and flexible wires, LT power cables and HT cables. Seminars, architect meets, electrician meets, retailer meets, dealer meets, direct mailers to institutional customers, exhibitions and one-to-one customer interactions are among the many ways in which we have been deepening our connection at the ground level
15. [Why Retail?]: We aim to grow our Retail segment with the twin goal of diversifying our revenue streams and strengthening cash flows as it offers higher margins and requires lower working capital due to faster realizations and lower inventory of finished goods requisition compared to other business segments.
16. [Industry tailwinds for Retail]: The retail demand for cables and wires is influenced by infrastructure development, housing construction, power distribution and transmission, affordable housing, healthcare and education. The increased availability of electricity owing to multiple Government schemes such as Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) augur well for the wires and cables industry. Rapid urbanization and rising disposable income will drive higher power offtake.
17. [Institutional EHV segment]: Our institutional segment comprises EHV cables, HT and LT power cables, turnkey projects and stainless steel wires. For HT and EHV cables, the manufacturing process is technology and capital intensive, posing high entry barriers. In the category of 400kV EHV cables, we face less competition currently as only few companies in the world have established the capability to manufacture such cables. Stringent requirements for meeting compliances and securing product approvals in EHV cables further make it difficult for new players to enter the market
18. [Why EHV?]: EHV cables offer significant advantages over conventional overhead lines for sub-transmission and distribution of power, including higher power density, lower transmission losses and efficient bulk-power delivery. Way back in 2010, we commenced the manufacture of EHV cables up to 200kV, in technical collaboration with Switzerlandbased Brugg Kabel A.G. In 2016, our technical collaboration was extended up to and including 400kV
19. [EHV EPC]: Our EHV business also benefits from forward integration into EPC project execution, as 75-80% value of the EHV EPC project / contract consists of the value of the product.
20. [EHV Order book]: Order book of EHV cables including accessories, erection and commissioning stands at Rs 716 Crores as on May 31, 2020
21. [EHV industry tailwind]: With underground power supply grid more secure and reliable than overhead network, the government’s thrust is on converting the overhead electric grid network infrastructure to underground infrastructure in certain cities.
22. [EPC segment]:We have, over the course of time, forward integrated our operations by providing EPC services through which, we largely focus on projects and assignments with significant cabling requirements such as overhead as well as underground power transmission and distribution systems and railway electrification / substation on turnkey basis.
23. [EPC client anecdotes]: We have completed marquee EPC projects under the Government flagship schemes of IPDS as well as DDUGJY. Our reputation as a trusted EPC player in power transmission and distribution positions us well to secure new Government projects.
24. [Exports segment client anecdotes]: Our products are focused at meeting the requirements of the oil and gas and other infrastructure focused sectors.
25. [Distribution chain]: We remain focused on entering new geographies while also strengthening our presence in key existing markets such as the Middle East, Australia, Sri Lanka, Bangladesh, South Africa, Nepal and Nigeria. Towards this objective, we intend to focus on building a new authorized dealer and distribution network in such markets with focus on both domestic and industrial cables and wires
26. [Historic financial performance]: While Net sales have doubled in 4 years, net profit has grown 4 times demonstrating the operating leverage at play.
27. [Share holding]: A bunch of mutual funds have built positions. MIT owns 2% of the company.
28. [Overall industry outlook]: The wires and cables sector is a direct beneficiary of development of power generation and distribution infrastructure, as the market comprises nearly 40% of the electrical industry in India. According to a CRISIL report, in volume terms, the domestic wires and cables industry registered a CAGR of 22% CAGR in last five fiscals to reach about 17 Million km in FY 2018-19.
29. [Market share]: KEI had 5.2% share in the total cables and wires industry and 7.3% in the organised cables and wires industry in FY 2018-19. Its diversified product mix is mainly sub divided into:
30. [Capacity Utilization]: During FY 2019-20, capacity utilization stood at 76% in cable, 68% in HW / WW & 91% in SS wires.

[sahil_vi]

My notes on Conference call Q1-2021

1. [Financials] Sales down due to lockdown. Throughout April, there were no sales. Margins are stable. Domestic Institutional sales down, but exports up.
2. Order book at 2900 crores.
3. [Capex] The ongoing CapEx at Silvassa in our – in new Chinchpada plant was INR 90 crore to INR 100 crore. The first phase was already operational last year. The second phase was to be operational in the first quarter of 2020/'21, but will now be operational in the second quarter – in this quarter, which is coming in. We have spent approximately INR 71.5 crore on this total project till July 31, 2020.
4. [Finance cost] During this year, Q1, finance cost has decreased to INR 16.79 crore as against INR 32.96 crore previous year’s same period. The percent of financial charges on net sales has decreased in this period to 2.25% from 3.05%
5. [Guidance for sales for FY21] the company should be able to maintain close to 85% of the sales of the pre-COVID level in the full financial year.
6. [On Working capital]: Current working capital requirement of stock, which was held in the March, has been reduced by approximately INR 200 crores. But the debtors which we were having close to INR 1,350 crore, that is remaining as on this June '20 is also the same level, close to INR 1,368 crore as of now. So now the institutional payments are coming because it was held up because of the lockdown. So slowly, slowly now the old payments, which were due, so now they are coming up. So we are quite hopeful that by October, everything will be normalized in terms of working capital.
7. [On private capex which drives sales]: it will be better if we give that guidance in our next conference call in October or because then we will have more clarity over how the private CapEx will be there. However, we see that there is a pickup in the CapEx from the government. And we have seen a number of tenders from transmission and distribution utilities in last 1 month. We are quite bullish on our exports: the markets where we are operating, we are getting very good new orders even now.
8. [Visibility of exports]: And we are getting now a good set of numbers from our export – of new orders from our export markets, mainly Middle East, Australia and Africa. we will be able to maintain the export level at the last year level.
9. [On reduction in interest cost]: interest was close to INR 7.5 crore to INR 8 crore, was reduced in the working capital interest. And balance INR 8 crore reduced in terms of the LC interest and the bank charges on bank guarantees. Because the sale is low, so that’s why the LC interest is low and the bank guarantee charge is low.
10. [Breakup of interest cost and comparison YoY]: Term loan interest was INR 1.4 crore in this quarter, last year was INR 3.74 crore. And working capital interest was close to INR 8.5 crore, which was earlier the INR 14 crore. And LC interest is INR 3.64 crore as compared to last year INR 7.18 crore and bank charges on LC is INR 0.98 crore, last year was INR 2.75 crore. Bank charges on bank guarantee is INR 1.67 crore, last year INR 3.35 crore. And other bank charges were INR 0.6 crore, last year was INR 1.81 crore.
11. [Level of debt]: you see as it was in the last year, by March, hopefully, we will end up with this kind of situation of debt. But as we earlier said, at the time of the QIP also because whatever we will spend on the CapEx, the same will be, again, debt will rise for – to that extent. Because our working capital will remain same. So whatever we will accrue in this financial year, we will deploy in the capital assets for next financial year. Because since this year, we are not going to do much CapEx, only in the fourth quarter, we will look how we will be doing the CapEx. And major CapEx will be only in the next financial year. So the debt level will be remaining as it was in the March '20.
12. [On trade receivables]: by October, it will be normalized because it will take another 3 months to get normalized because all the payments of the EPC, which is from government, they are now coming, like one large payments we have received in this month only by end of July. And we are quite hopeful that all these payments, which were delayed, it will be on time by October.
13. [Health of retail channel]: Channel health is good because all the collection from the dealer-distributor, that is now coming and it is up to the mark. Whatever we are selling, we are getting collected also. And in the month of July, if we are talking almost – dealer-distributor sale is almost, we can say 95% as compared to the year.
14. [Level of sales in July]: almost July sale is good and as good as close to last year’s sale.
15. [Segment wise performance in July]: Institution sales and export sales have done better. Although dealer sales has also gone up significantly, reaching around 95% level of the pre-COVID level. But I’m not giving the guidance that it will be – it will remain at that well because uncertain conditions are there in most towns about lockdowns. So July has been good. [ What will happen in ] August, I don’t know.
16. [Order book reduction from 4500cr in Q3’20 to 3000cr in Q1’21]: if we see orders whenever it comes, it comes in bulk, close to INR 1500-1600 crores. So a few orders are in the quotational stage. Will let you know when they materialize.
17. [On debt level not reducing despite capital raise]: The debt is basically because of the debtors. Because I think – and we have paid to our creditors around INR 400 crores. That’s why you see the acceptances level has decreased from INR 770 crores to INR 342 crores. Because these are the creditors for copper, aluminum and other materials. debtor collection was slow because of the lockdowns, and it is improving now. And we hope that working capital cycle should be regularized by October.
18. [Client profile for exports projects]: - the customers export profile in the export market is mainly in the Middle East, it is oil and gas companies and petrochemical companies. And other markets in Australia, it is mostly solar and wind projects. And also, we have bidded for metro projects in Sydney and some other cities. We are also supplying – we are also approved in Australia by many transmission and distribution utilities. So now we are doing a good amount of sales – we will be eyeing good amount of sales in other parts because in Australia, manufacturing is not there. So there is no internal manufacturing of wires and cables. In Africa, it is a combination of transmission and distribution projects, mostly distribution jobs, which contractors are carrying out and buying our cables. We are approved in many distribution utilities in Nigeria, Ghana, South Africa, and similarly many other states – countries of Africa. We are approved – we are supplying to many UNDP projects, United Nations Development Projects in Africa through EPC contractors operating there. This is our customer profile for the front end. And in surrounding countries, we are selling our cables to Bangladesh, to Nepal, to Srilanka and there the customer profile is mostly the distribution – power distribution utilities.
19. [EHV sales compared to last year]: See, last year itself, we had said that we had a very strong order book position in extra high-voltage cable. And even now also the order book in extra high-voltage cable is INR 627 crore. So in this – actually, the cable portion itself is around 65% to 70%. The value of the cable itself in these projects is – because it is major cables and joints. And then 10%, 15% is the execution portion. So it is – that is the reason that the cable sales in this segment is very strong and will continue – it will remain strong in the rest of the year. These orders are mainly from the power transmission utility
20. [On Competitors and Bid conversion Rate]: Normally in cables, our competition from India is very limited. Major competition we face from European companies. From India, only in Dangote, Polycab was there, which was – which took a good amount of share. But otherwise in our other export markets, we are competing with only international players. whatever we are bidding, we are almost getting around 35% to 40% of the orders.
21. [On the strength of demand]: In last 3 months, from May or probably June and July, we have seen very strong sales coming from B class and C class cities – and that too from the segment, where the smaller residential projects are there or where the people who are making their own independent houses. The demand from big developers is definitely very, very weak. And we feel that it will remain weak in the – throughout the year because of the obvious problems of labor and execution and maybe low demand. But the demand from B and C class cities and then 2 C class cities, the goods are going to rural areas, that demand is very strong. And that we have witnessed. And that has brought us very strong sale in June and July.
22. [Chinchpada CapEx]: We have already done a CapEx of INR 71.5 crore, around another close to INR 18 crore to INR 20 crore CapEx is pending, which will be done in next 2 to 3 months because we had slowed down on this CapEx because of these lockdowns. And since the markets were also closed, so we delayed the completion. But I think by September, the second phase will also be completed, and the investment will be over
23. [What proportion of demand is from tier 2-3 cities]: Pre-COVID, the C class cities was close to 41%. And again, it is also – it has improved by 3%, 4%. So it has gone to 44% now.

Disc: invested. Full portfolio here.

[sahil_vi]

People have expressed some concerns to me about trade receivables. My 2 cents is that trade receivables is not a concern if they are able to collect cash in 100 days. Sure, payments are delayed but eventually as long as accounting profits are converting into operating cash flow, we probably do not need to monitor whether all of sales were converted into collections inside of the FY or whether it created short term trade receivables assets. The only 2 metrics which should matter imo are:

1. Write offs/impairments against the receivables.
2. Conversion of accounting profits (earnings) into operating cash flow.

A ballooning trade receivables position by itself is not necessarily bad imo. It could definitely reflect aggressive terms with clients to gain market share. Absolutely nothing wrong with that imo. The only key monitorable is whether they are eventually collecting the trade receivables or not. And they are, as of right now. If they are unable to, then that would be a red flag for me.

Here is some data to back KEI’s position on both metrics:

Attribute/Company	KEI	Finolex	Polycab
Sales (in cr, FY20)	4355	2370	7726
Receivables	1365	202	1590
Receivable write-offs	17.9	15.75	156
Writeoffs/Sales	0.004	0.0066	0.02
Average Operating cash flow 5years (A)	191.432	227.4	470.8
Average Earnings 5Year (B)	147	330	405
Earning to Cash Flow Conversion (A/B)	1.302	0.689	1.162

While KEI’s receivables are high, they are able to actually collect their receivables and also convert accounting earnings into operating cash flows.

Edit (16/11/2020):
Disc: Planning to move out of this investment because I found a better use for my capital. Full Update on PF thread.