Power Behind Power

KEI Industries Limited is engaged in the business of manufacturing and marketing powercables Low Tension, High Tension and Extra High Voltage, control andinstrumentation cables, specialty cables, rubber cables, flexible and house wires,submersible cables, PVC/poly wrapped winding wires and stainless steel wires.

Ranked amongst the top three cable manufacturing companies in India, the companyaddresses the cabling requirements of a wide spectrum of sectors, such as power, oilrefineries, railways, automobiles, cement, steel, fertilizers, textile and real estate,amongst others. Through EHV cables, KEI is geared to service mega power plants,transmission companies, metro cities where underground cabling is underway, large realtyprojects IT Parks, residential townships, etc.

KEI has a diversified and de-risked business model characterised by a significantpresence in both the domestic and international markets, servicing both the retail andinstitutional segments, catering to both private and public sector clients and offeringboth one-stop products basket and services.

The company has, over the years, invested in building flexible manufacturing facilitiesand expanded its capacities through which it is well-poised to garner opportunitiesemanating from the power utilities, core infrastructure, industrial and building andconstruction projects across the country.

The companys prudent foray into the EHV cable segment and EPC services for powersector projects further expands the opportunity horizon.

ECONOMIC OVERVIEW

1. Global economic overview

Economies around the world were seriously impacted by the global financial crisis in2008. Since then the economic growth trend has improved, though in most advancedeconomies, the recovery is expected to remain sluggish by past standards. In contrast, inmany emerging and developing economies, activity driven by buoyant internal demandwitnessed early recovery.

Global GDP, which declined by 2.2% in 2009, is expected to grow 2.7% this year and 3.2%in 2011. Prospects for developing countries are for a relatively robust recovery, growing5.2% this year and 5.8% in 2011 - up from 1.2% in 2009. World trade volumes, which fell bya staggering 14.4% in 2009, are projected to expand by 4.3% and 6.2% this year and in2011.

2. India economic overview

Indias gross domestic product (GDP) in 2008-09 was 6.7%. However, the wide rangeof timely policy measures abated, to a large extent, the negative fallout of the globaleconomic slowdown in India. Over the span of the last fiscal year, the Indian economy hasposted a remarkable recovery, which came around in the second quarter of 2009-10, when theeconomy grew by 7.9%. As per the advance estimates of GDP for 2009-10 released by theCentral Statistical Organisation (CSO), the economy was expected to grow at 7.2% in2009-10. However, the economic growth, beating all forecast and estimate projections, grewby 7.4% in 2009-10 on the back of the strong performance of the manufacturing sector andpositive agricultural growth.

Industry grew a robust 9.3% compared to an earlier estimate of 8.2%, while the servicessector grew by 8.5%. Farm growth was revised upward for a year that saw a drought to 0.2%(against advance estimates of a 0.2% contraction).

The size of the Indian economy is estimated at Rs. 62.31 trillion (USD 1.31 trillion)and per capita income at Rs. 44,345, a growth of 10.5% over the previous year.

The downside from the global financial developments and domestic inflationary pressuremay challenge policy makers. The government and the Planning Commission expect the Indianeconomy to grow at 8.5% in 2010-11 and 9% in 2011-12.

INDUSTRY STRUCTURE, DEVELOPMENTS & OVERVIEW

Cables are classified as Extra High Voltage (66 kV to 132 kV, 220 kV, 400 kV and above)which are used in transmission of power and medium voltage (6.6 kV to 33 kV) & LowVoltage (500 volts to 3.3 kV) used for the distribution of power.

Wires are generally used for domestic purposes.

KEI Industries manufactures and markets power cables Low Voltage, Medium Voltageand Extra High Voltage, control and instrumentation cables, specialty cables, rubbercables, flexible and house wires, submersible cables, PVC/poly wrapped winding wires andstainless steel wires that address the cabling requirements of a wide spectrum of sectors.

a. Global cable industry overview

It is estimated that there are around 1,000 cable making companies across the world, ofwhich around 18% are located in North America, 26% in Europe, 13% in Asia and 43% in restof the world.

In 2008, the cable market was valued at USD162 billion, up 7% y-o-y. Due to thedepressed global economic environment, it is estimated that the global cable and wiremarket in 2009 witnessed near stagnation and almost negative growth. The global cablemarket is expected to reach USD176 billion in 2011 (CRU forecasts), demonstrating a CAGRof 4.7% from 2003 to 2011e (The global cable industry was pegged at USD123 billion in 2003at current exchange rates).

The global industry has grown at a rate of only 0.39% p.a. in 2007-09, affected by theeconomic downturn, but the annual growth rate over 2009-11 is expected to reach a level of7.68%.

The prolonged economic slump delayed numerous projects in North America and Europe andnegatively impacted cable demand in those regions. In 2010, it is anticipated that thecable market will steadily rebound in North America while an incremental recovery inEurope in the second half of 2010 is forecasted.

However, across Southeast Asia, growth continued apace, thanks to China (up 15%) andIndia (up 5% to 10%). Major government investment plans are already in place forinfrastructure, construction, industrial development, transportation, renewable energy,etc. In terms of industrial capex, China and India are also expected to lead the way withlarge infrastructural investment plans underway.

China alone accounts for two-thirds of consumption of cables in the Asia region and 21%of total world consumption. Demand is stimulated by major electrification programmes toextend energy networks. The high consumption in Western Europe and North America stemsfrom the need to replace aging lines and to inter-connect the electricity networks inthose regions.

Globally, due to the relatively lower production costs in emerging markets, power cableproduction is migrating away from developed markets. According to CRU in 2001, developedmarkets accounted for 40% of global production, as compared to 33% in 2007, which wasfurther reduced to 31.5% in 2009.

At the same time, to capitalise on opportunities in emerging markets, global playersare signing joint ventures or mergers and acquisitions with the major regional players.

Companies in emerging markets are benefiting in particular from the growing regionaldemand for power cables and are therefore tending to focus on the energy cable segment.

b. Indian cable industry developments & overview

The market size of the cables and wires industry in India was estimated to be around Rs150 billion in FY09, of which cables would be approximately Rs. 95-100 billion. It isestimated that approximately 70% of the industry is organised, while the remainingaccounts for the unorganised and regional level players. The wire industry in Indiatouched approximately Rs. 50-55 billion in FY 09. It was estimated that the 8-year CAGR forthe wires and cables industry was 12%.

In India, the overall growth for cable industry was less than 5% in FY09-10 against therobust growth witnessed in FY08-09. FY09 was a challenging year for the industry, mainlydue to liquidity crunch by end industry user sectors, leading to reduced demand faced dueto delay in implementation of both ongoing and new projects.

However, the expansion plans which were on hold earlier due to recessionary trends arenow either completed or in process of execution, leading to excess capacities in theinterim. Now, as the economic scenario changes, the significant pile-up in executableorder backlog has cleared and demand uptick is forecasted. Offtake of cables in largeinfrastructure orders commences normally after project execution begins and reaches aparticular stage in the lifecycle of the project.

The demand for the incremental cables supply which is now prevalent in the industry (inform of large, ongoing infrastructure, power and industrial projects) is expected to flowfrom the following quarter in the next fiscal. Cables demand forms a part of everyindustrial capex project. However, the requirements and orders for cables normally accrueonly after 50% of the industrial capex project is complete. Hence, given that mostindustrial expansion plans resumed only after the new government took over and aftereconomic stability returned from H2 FY09-10, the demand for cables is likely to start fromthe second/third quarter of the next fiscal, which will augur well for companies like KEIwho have completed their expansion plans and can leverage the boom awaited.

However, irrespective of the stage of the project, based on the sheer strength of orderbacklog in the infrastructure and power sector space, given an overall improvement in thefunding scenario and with the overall economic scenario gaining accelerated momentum,robust growth over the next few years across the cable industry in India is expected.

From the December 2009 quarter, the industry has already witnessed demand growth, afterposting a declining sales trend for the last four quarters. The growth in demand and saleswas driven by higher volumes. The building wire segment is also seeing an overallimprovement in demand from the construction sector.

On the retail side, demand for house wires continued to be firm, remaining largelyinsulated from the difficult period witnessed in the institutional side.

Moving forward, considering back-ended orders from power segment to achieve 11th Plantargets, coupled with a broader pick-up in the economic activity, the cable industry isexpected to post better growth-oriented numbers.