HSBC spots opportunity in Indian cable and wire OEMs; expects as much as 30% upside in these stocks

By: |
October 12, 2021 12:55 PM

India’s cable and wire manufacturing industry is being seen as an interesting play on India’s Capex revival story as well as an export opportunity.

Stocks to buyBoth KIE Industries and Polycab India stocks have zoomed more than 100% so far this year. (Image: REUTERS)

India’s cable and wire manufacturing industry is being seen as an interesting play on India’s Capex revival story as well as an export opportunity by analysts at HSBC. The global brokerage and research firm has initiated coverage of Polycab India and KEI Industries, expecting as much as 30% upside in the stock price, backed by their industry-leading position. Analysts at HSBC further said that they prefer cable and wire companies for their significantly higher revenue growth when compared to capital goods companies. Both KIE Industries and Polycab India stocks have zoomed more than 100% so far this year.

Growth trends favour cable and wire industry

The cable and wires industry was estimated to be worth Rs 60,000 crore in the financial year 2020. Although the industry has low entry barriers, analysts said that there has been gradual consolidation in favour of large branded players. Analysts further believe that the cable and wires industry will benefit from the growing demand for renewable energy, where cable demand is typically 3-4x higher for a 1 GW solar power plant than a conventional 1GW thermal power plant. Additionally, the brokerage firm highlighted that overhead electric transmission networks are moving underground in large cities, driving demand for cables. 

Stocks to buy

Polycab India – Buy
Target price – Rs 3,200

Polycab India is a market, cost and price leader in the segment and is also the largest exporter. The company has a large distributor base and 13-14% market share with exports to nearly 55 countries. Polycab India could be the best suited to meet growing demand with 23 manufacturing facilities and 52 warehouses and depots. “Based on our assessment, Polycab’s existing FMEG product portfolio has a total addressable market of Rs 50,000 crore in FY21 and we believe this market can grow at a 13% CAGR in value terms over FY21-26e,” HSBC analysts said. 

Key risks to the call include a sharp fall in commodity prices, higher-than-expected competition, and slower ramp-up of FMEG business and lower-than-expected margin improvement in FMEG. The target price translated to 26% upside potential from current levels.

KIE Industries – Buy
Target price – Rs 1,250

KIE Industries is the second-largest player in the industry. KIE Industries has its eyes set on the retail customers, expecting better growth prospects from the same. “KEI has significant capacity headroom to grow the business in most product categories. The company is looking to invest Rs 600-700 crore to grow capacity for LT, HT and EHV cables over the next five years. We think this will generate more than Rs 7,000 crore of revenue by FY24e at prevailing product prices,” HSBC said.

The brokerage firm expects KIE industries to post strong cash-backed growth in the coming years. HSBC said that KIE Industries will see more profitable growth as mix changes in favour of high margin retail business and drives improvement in ROIC. Retail business also has a shorter working capital cycle. Further KIE Industries is also expected to receive money from clients, that was kept aside as a safeguard for any defective or non-compliant work. The target price implies 29.6% upside potential.

(The stock recommendations in this story are by the respective research and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Please consult your investment advisor before investing.)

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