RR Kabel Looks Set For Strong Profit Growth, HSBC Says; Upgrades Stock

(The Corner Office Journal) – Brokerage HSBC said RR Kabel Ltd. looks set to return to a strong profit growth trajectory, albeit from a low base, after an unexciting CY24.

The brokerage upgraded the Indian consumer electrical company to Buy from Hold, given its strong growth profile, healthy expected return ratios and undemanding valuations.

It retained its target price of 1,600 rupees per share on RR Kabel. The stock closed at 1,224.50 rupees the on the National Stock Exchange yesterday.

3QFY25 Review

HSBC said RR Kabel’s 3Q headline results were unexciting, with a 9% revenue growth and a 2% decline in EBITDA.

However, the EBITDA margin of 6.2% improved 150 basis points sequentially on the back of improvement in the wires & cables (W&C) business as well as a sharp reduction in losses in the fast-moving electrical goods (FMEG) business, it added.

“Sequential EBITDA margin improvement was sharper than we had expected and sets the company up well to resume strong profitable growth from 4QFY25 onwards,” HSBC said in an investor note.

Demand Recovery

HSBC said the demand environment for the domestic wire sub-segment was tepid and volatile through CY24. However, the demand is likely to recover in CY25 on higher tailwinds from residential construction in urban markets and favorable comparable, it added.

“This, coupled with scaling up of cable business in the domestic and exports markets, should result in acceleration of revenue growth for RR Kabel in CY25,” analysts Shrinidhi Karlekar and Sandesh Shetty said.

The brokerage noted the company’s revenue growth was softer than its larger peers in CY24, but a large part of this underperformance was likely due to RR Kabel’s business mix, i.e. a higher share of domestic and export wires business versus the cable business.

Profitable Growth

HSBC said despite a 13% growth in CY24 revenue, RR Kabel’s EBITDA declined by 9% in CY24 as volatility in commodity prices impacted EBITDA margin.

“The 3QFY25 EBITDA margin performance, particularly given the sharp reduction in FMEG business losses, improves our confidence about margin recovery expectations,” it added.

The brokerage said scaling up the cable business, growth in the higher-margin specialty cable business, and normalization of wires-business margins underpins its sharp margin recovery expectation.

HSBC projected that RR Kabel’s EBITDA margin will recover to 8.2% by FY27 from just 5.7% in CY24. It left its FY26-FY27 earnings forecasts unchanged and expects FY25-FY27 revenue and EPS CAGRs of 18% and 46%, respectively.

The brokerage said RR Kabel’s profit growth is likely to be materially higher than peers, albeit from a low base.

Conference Call Takeaways

HSBC said its key takeaways from RR Kabel’s 3QFY25 earnings conference call are:

=> The management expects W&C volume growth of around 15% in 4QFY25, implying a 10%-12% volume growth in FY25. The management also expect an 8% EBIT margin in 4QFY25 versus 7% in 3QFY25.

=> Tailwinds from cable demand in both domestic and exports markets, housing, and stable commodity prices should drive the expected revenue growth and margin recovery.

=> The management plans to incur 12 billion rupees ($139 million) in capital expenditure over the next three years (FY26-FY28), mainly for expanding capacity in the cables segment. The management expects this capex to generate incremental revenue of 40 billion-45 billion rupees.

=> The management reiterated guidance of achieving double-digit EBITDA margins in the W&C segment by FY28, with margin performance driven by improving product mix, higher exports and operating leverage.

=> The management expects the FMEG business to breakeven at the EBITDA level by 1QFY26 on new product launches, premiumization and expanding distribution network.

=> The management indicated that export performance is set to improve on the back of an improving demand environment in key end markets, expansion of geographical footprint, new product launches and easing of supply chain related challenges.

Buying Opportunity

HSBC said RR Kabel shares are currently trading at an FY27E PE of around 25x, while its target price implies a PE of around 33x.

“The shares are down 32% from their all-time peak and offer a good buying opportunity,” it noted.

Note: $1 = 86.6071 Indian rupees

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