As we see our world is witnessing
radical changes. We can easily feel that major shift is going to happen in our
world. Development, innovation and improvement is a perpetual phenomenon and
most of the times development follows compounding growth rate not linear
because knowledge base of 10 things/aspects can’t promote 20 stories out of
them but a base of 100 can create the scope for 50 new stories because the
knowledge of many of these aspects will intertwine and offer more scope for
something new and vast. And we are literally at that phase of growth…look at
energy sector alone. Our knowledge base in last 10-20 years has expanded from
oil/gas/coal to oil/gas/coal/solar/wind/Hydrogen/battery and so on. So now we
can intertwine all these and offer new innovative solutions.
Further, radical breakthrough
inventions are always few and in most of the cases initial fundamental
breakthrough never serve much to the mankind. The more beneficial innovations
are process improvements which provide much higher benefits to humanity as a
whole. In economics term, Industrial innovations providing news ways of
manufacturing like using new materials (Normal minerals in place of rare earth,
3D printing), process improvements (Like IOT) etc. are much more critical for
an economy than strong R&D culture in the country. This is the reason that
in spite of so much brain capital (India is the R&D center of global
giants) India is still not being able to achieve the much deserved success in
manufacturing especially in electronics goods.
Till now, we have made breakthrough
inventions like power, Automotive but in our mad run of nowhere-ness we have consumed
enormous resources foolishly and now the situation is getting worse day by day
(not year on year). So I feel, now will be the era of optimization and
conservation and we’ll see emerging technologies like Artificial intelligence,
IOT, Drones, 3D printing etc. which will result in optimal use of natural
resources. This will also take care of another ongoing catastrophic epidemic-Pollution
of all kind. Sometimes, after seeing the gigantic scale of pollution, I feel
whether this proves the existence of Satan?
And this correction and
conservation process is a big business opportunity like power consumes (and
wastes) maximum of natural resources and our lust to use power is limitless so
no doubt power industry will witness big activity in all dimensions whether it
is generation, transmission, distribution, use, substitution (EV). And where
there is business opportunity there is the hunt for next big in stock market.
This revolution is in initial phase and at present we can’t guess but at
least we can sniff. So today’s stock we are going to analyze is more a sniffing
and those who get cold easily should not venture into this.
Bharat Bijlee:
Path is visible?
Bharat Bijlee (BB) deals in power
transformers, Electric motors, Variable speed drives, Permanent magnet Gearless
machines for Elevators. Its earlier avatar was more of Transformer player but
off late it is getting more into electric Motors, drives and this is what I
find exciting. Transformer industry as a whole has faced difficult time in last
4-5 years due to low investments in power transmission and distribution segment
as State Electricity boards(SEB) had/still has poor financial health and this
imperfectly aligned with the huge investments made for capacity expansions by
Transformer players after seeing the huge growth in power generation capacity
in India but the dream came crashing into ground hard and all the transformer
players were fighting for lower business at even lower margins.
It means that BB should have
most of the financial indicators pointed towards wrong directions so it is best
that we should ignore them as this will also lead us into wrong direction. But
the road is not muddy and full of pitfalls as BB garnered NP of 26 cr on a
turnover of 800 cr in 2017-18 which is good and this will appear much better
considering the difficult recent times. This is partly due to the fact that BB
has good clean balance sheet and net debt is almost nil (Interest cost is
evened out by Interest income), conservative management has enabled BB to
weather out the tough phase calmly.
Let’s check its various businesses
to see if it makes long term business sense and scope of scale:
A)Electric
Motors:
Electric motors convert the
electrical energy into usable mechanical force and carry out diverse tasks.
Industries basically run on electric motors day and night and that’s why
electric motors are regarded as workhorses of the industry. Industry consumes
40 percent of all the energy that is produced, with motors consuming roughly
65-70 percent of this share. So we can see manufacturing is all about electric
motors….or better to say “Efficient” electric motors. The efficiency of an
electric motor is the ratio of mechanical output power to electrical input
power.
The more efficient an
electric motor is lesser is the wastage/consumption of power and we can
immediately visualize why the cost of production is higher in India. Indian
industries on average consumes around 30% more power as compared to advanced
manufacturing nations like China, USA and this is the most
detrimental aspect which Make in India initiative needs to correct first of
all.
The more efficient electric motors
are graded as IE1, IE2, IE3 and IE4 with IE4 being categorized as super
premium. Motors below IE1 levels are called sub-standard motors. At present most of the electric motors used
in Indian industries are either IE1 or lower grades which consume more power so
no surprise that our manufacturing is sub-standard as manufacturers try to
match the high power costs by savings in other much essential parts of a
product which lowers the quality of the product. Around
90% (20 GW) of industrial electric motors in India are not energy efficient. So
this inefficiency is cutting badly but bleeding is from two sides-first from
higher costs and second from higher pollution as more power usage means more
power production which itself is a pollutive affair.
IE2 and IE3 motors involves higher
costs upfront but energy savings and lower repair and maintenance costs over
the life time of the motor are much higher than the initial higher cost. These
high efficiency motors save energy during their life time which is valued
around 10-20 times of the initial higher cost. Indian Industries are now
gearing for changing its old low efficient electric motors as they usually have
a life of 10-15 years and most of the Indian industries with continuous running
plants have electric motors older than 10 years. Repair and maintenance of
these low efficient motors during their life time further reduce their
efficiency by 10%-15%.
So as we can see that there is
clear cut case for Indian Industries to shift to higher rating electric motors.
And after the success of Led Bulbs in India, Indian Government has set out the
task for creating the right environment for the shift towards higher rating
motors in India. First, Indian Government has banned any motors below IE2
rating from Oct-2017. But most importantly it has
given the responsibility to implement the shift to Energy Efficiency Services
Ltd (EESL). EESL is a joint venture between NTPC Ltd, Power Finance Corp. Ltd,
Rural Electrification Corp. Ltd and Power Grid Corp. of India Ltd.
Task of energy
efficient Motors cut out for EESL
It was EESL who has successfully
ventured the installation of LED bulbs across the nation. As per studies, the
usage of LED bulbs has resulted in lesser load of around 10 GW (10000 MW) on
the power grid which indirectly means the saving in generation capacity of
10000 MW which costs anywhere around 70000 cr!! The cost of LED bulbs during
this time (from 2014 to 2016) came down to 40 from 310!!
The success of LED bulbs initiative
has proved the capability of India to successfully carry out the world’s
largest energy efficiency programmes. The story of EESL is very encouraging and
a case study for International Energy Agency. EESL is growing very fast in last
few (100% growth rate) years. Its turnover in 2017-18 was 1400 cr with net
profit of 39 cr. It is targeting
turnover of 3000-4000 cr this year and an IPO is planned in nest 2 years. It is
issuing bonds for funds and already ventured out to UK and Malaysia and is
planning an acquisition in UK which will take its topline to 4000 cr!!
Electrified performance indeed. Amid
doubts and criticism of the much debated rural electrification programme, the
success of EESL is a relief for Modi Gvernment.
The secret of EESL is creation of
demand by providing low cost product (Most of the times free of cost and
earning money from the associated savings) and it procures product at low costs
because of very large orders which ensures the economy of scale for the
producers.(I remember our wagon manufacturers
Texmaco/Titagarh who are requesting such bulk orders from Indian Railways and
this year finally IR has woken up and is giving large orders as IR has also its
task cut out to be ready to serve the coming huge business after Dedicated
freight corridor…don’t forget to pick Texmaco, Gateway distriparks, Concor and Hind rectifiers).
EESL is implementing the same policy
here. EESL is implementing the National Motor Replacement Programme (NMRP) under
which the EESL would work with industries to replace all inefficient motors
with energy efficient IE3 motors with innovative financing models resulting in
substantial benefits to the industry and to the nation. While India have
prescribed IE2 as the minimum standard but developed nations across the globe
like China, USA, European union are already having IE3 minimum standard.
Energy efficiency market
across the globe is a big market valued around USD 20 Billion while USA, UK and
china garnering 90% share of it and 80% of this market is supported by Govt
subsidies. But EESL is implementing something very unique without any subsidy
and that’s why I feel that the scale envisioned in the electric motor programme
is achievable. When implementing these programmes, EESL works like an
aggregator and improves the system and generate the return by eliminating the
inefficiencies and ensuring the scale of operations.
Can you guess the scale
for motor replacement? It is gigantic 1.5 crore inefficient electric motors!! By
replacing all these motors with IE3 it is estimated that India will save around
6500 Billion electricity units per year reducing 57 million tonnes of CO2
emission per year. These are Indeed Big numbers. IE3 motors use 7%-23%
lesser energy apart from other associated benefits of low cost maintenance. At
present the target is of replacement of 120,000 electrical motors in the range
of 1.1 kW to 22 kW by September 2018. The focus is on pumps, fans, blowers, and
compressors using motors which are more than 10 year old, low efficiency. After
this, next target is of replacing 500,000 motors in 1.1 kW to 75 kW range by
2020. EESL will provide the motors free of charge to
industries and will recover the costs plus margins through the financial
benefits generated from energy savings or there will be upfront payment model
also. It is estimated that IE3 motor will pay back the extra costs in
12-18 months through energy savings.
For first phase of
120000 motors, EESL has set aside 220 cr for this and they have finalized
Siemens, CG and Bharat Bijlee as suppliers for the first phase and this to me
is a great news for Bharat Bijlee. BB
secured the order for Rs. 39 cr in the first phase and this will pave the way
for the grand success in the future stages of the programme. In the
first phase, EESL has been able to bring down the costs of motors by 30% and
resulted in an average of 15% lower electricity usage. Actually the status of
usage of electric motors in Indian Industry is so poor that there is vast scope
for the elimination of inefficiencies and this will reflect in marked
improvements in financial metrics and so there is a role for institutions and
innovations like EESL…just like a Doctor treating a patient.
Bharat Bijlee has great reputation
in Indian electric motor segment and has one of the high tech facilities in
India. In fact, when India is yet to incorporate IE3 motors in its schema, BB
has introduced IE4 motors (under SynchroVERT brand) in India. IE4 range motors
have a payback period of less than a year, and the life time saving for a
typical 15 kW motor is Rs. 11.7 lakh for an incremental investment of Rs.
50000. IE4 is the next frontier for the
Indian Industry and most of the high tech players competing in global markets
are already replacing their existing electric motor systems with IE4. These
motors also do not need a Variable Frequency Drive for operation. Bharat Bijlee
has also filed for a patent for the Line Start Permanent Magnet Synchronous
Motor (LSPMSM) technology used in the design of SynchroVERT.
Electric motors have been one
segment which has not yet garnered the attention which it deserves because if
we can see they are everywhere. Some 20% of total energy consumed by
Agriculture sector in India is consumed by electric motors, 10% of commercial
sector. As India now is aiming high for “Make in India” the scope of scale of
electric motors has become even bigger. Rural electrification, rise in the
income levels of farmers means more demand for electric motors. Your fridge has
this, your AC has this. Energy efficient AC’s are fast becoming the norms now
in India as upfront cost of AC is not a factor anymore…India is getting
rich…the factor is the running costs so energy efficient systems plays big role.
Agriculture Pump
Replacement programme:
Along with NMRP, EESL is also
working on agricultural pump replacement programme under AgDSM. The pilot phase
of the AgDSM programme has been rolled out in Andhra Pradesh, involving
replacement of one lakh old pumpsets with BEE five-star rated energy efficient
pumpsets along with smart control panels. India has around 2 cr such
inefficient agriculture pumps which will be replaced in stages and will be
provided free of cost to farmers with five years warranty. No doubt the savings
will offset the initial costs big time. These sub-standard pumps are a big drag
on electricity which is born by government in the form of subsidy.
Actually anybody, who knows the
nonsense nature of free electricity subsidy, can understand the big business
sense in agriculture pump replacement programme. Farmers know that electricity
is free so he opts for cheap pump (which is of low quality) and even when it is
due for replacement farmers are happy to spend some money to make it workable
because they know that at the most it’ll waste electricity which is free/heavily
subsidized (some states charge fixed charges on the basis of motor/pump
capacity but low quality pumps waste much more energy) to them but it is not to
the nation. So there is a big opportunity for savings for India.
So quality Pump players
will benefit from it (Also every pump has an electric motor in it) but state Discom will be the major
beneficiary of this initiative as they loose big time in power supply to
farmers and as per estimates high rating pumps will save 25% of the current
power supply to farmers which they can supply to other paying users. Taking the
case of a 5 HP pump which at present consumes electricity worth Rs. 45000/- per
year but this will come down to 34000/- with new pumps and this will greatly
improves the financials of DISCOM and this is the reason they are also funding
the pump replacement programme.
Financially sound Discom
will be able to support another business of Bharat Bijlee which is transformers
which in the recent past fell into trouble due to sorry state of finances of
State Discoms.
Further, even if we leave
NMRP of EESL still the direct demand from industry for IE2 electric motors will also be huge due to
ban on lower rating motors by the Indian government and BB is going to garner
good share of it.
Electric Motors
and Electric Vehicles:
This is one of the most important
thing which has been completely ignored by the market in the heat of looking for
battery playout candidates. Most of the people think that the range of an
Electric vehicle will be decided by the capacity of the battery alone but this
is not the reality as the stored power in the batteries will be used by none
other the humble ELECTRIC MOTOR. So if we’ll see much advanced version of
electric motor in the EV then there will marked improvement in the range capacity.
Apart from Electric motors, there
are other parts of an EV where India has a local manufacturing prowess. The
charging system of the battery is another major component because the fast
charging will be the key to successful penetration of EV’s and this fast
charging involves rectifiers ( For converting AC power into DC as batteries
store DC power) and we have Indian players in this segment which can step up
the game…same is for capacitors, electrical contacts. But India has fairly
advanced capacity in electric motor manufacturing which India can use for its
EV targets.
India tried to set targets for 100%
EV penetration by 2030 which is beyond reach even in dreams. I got very
skeptical as I took it as a “Shout good” political gimmick but now sanity has prevailed
and India is focusing much real target of 20-30% and it is none other than EESL
who has been assigned the task for making it a success and it is already on the
job after procuring 10000 EV’s from Tata motors and Mahindra for Government
use. These steps will lay the foundations for the future EV programmes for
general public as well and will create and upgrade the existing capacities.
EV’s are still beyond the
understanding of most as it is a Muscle which is more like a computer on wheels
and its cost structure are still a mystery but most analysts are of the view
that costs are falling even faster than their imagination and very soon they
will disrupt the scene. The main reason for falling
cost is that an EV has just 24 moving parts while our conventional cars have
some 150 moving parts. This efficiency is due to humble and very simple electric
motors.
These 24 moving parts
ensure the low maintenance costs over the life of the vehicle wherein our
conventional vehicles’ gearbox and clutch have high maintenance requirements
once the vehicle run for 150000 KM.
EVs convert about 59%–62% of the
electrical energy from the grid to power at the wheels. Conventional gasoline
vehicles only convert about 17%–21% of the energy stored in gasoline to power
at the wheels. An electric motor typically is between 85% and 90% efficient. Some
big electric motors can now turn 97-98% of the electricity put into them into
mechanical energy. Even the best internal-combustion engines can manage only
about 45%.
Internal combustion engines (ICE) have
been around for about 140 years but electric Motors have been around for almost
250 years. It was only the cheap oil discoveries in the 19th century
that paved the way for ICE but now with the costly damage in the form of
pollution is posing existential dangers to the humanity it is expected that
electric motors will get their dues now.
Now along with batteries the focus
is also on advanced electric motors for increasing the range of EV’s and
Permanent magnet motors are being touted as a viable alternative for the
conventional AC Induction motors. The key difference is that AC induction
motors have to use electricity to generate the magnetic currents inside the
motor, which cause the rotor to spin, whereas a permanent magnet motor doesn’t
require that additional current since its magnets are always powered. (PMM are created
from rare-earth materials which may be another high growth space for India since
China is trying to manipulate this industry and India has huge scope for rare
earth minerals).
PMM are more efficient because they
don’t need to expend any energy to generate the field magnetic poles, as they
are permanently magnetic. So this always powered PMM lowers the discharge from
batteries and thus improves the range. Even Tesla has used PMM for its model 3.
PMM are more relevant for lighter EV’s since high performance cars will need AC
Induction motors for generating high power which is the limiting factor of PMM.
The permanent magnet motors are
more expensive (due to using rare-earth elements in their magnets), but they are
more efficient, weigh less which is very crucial for smaller vehicles like
small cars and electric bikes. But this weight penalty of AC Induction motor
becomes insignificant as vehicles get larger (for example trucks and buses).
Still there is intense research on reducing the use of expensive rare earth in
PMM and increasing their efficiency even more and this will make them even
better for EV.
Why this is relevant for Bharat
Bijlee? Because apart from very advanced technology in AC induction motors it
is a leading player in PMM in India which at present it is catering for
elevators but it has recently increased the capacity of PMM and it is ready for
other uses offered by PMM and EV’s will be one of this. Management of BB is
very conservative and they are taking small steps towards the bigger. But there
is nothing that should stop BB to venture into EV market also in India because
this is the future of mobility and this will create the new Auto ancillary industry
in the form of electric motors, Charging components, Capacitors etc.
B) Permanent
Magnet Gearless Elevator Machines:
This is the area which I think can
be a surprise package because elevators and escalators are going to see huge
growth in India. Growing urbanization
especially in Tier 1 and Tier 2 exerting pressures on land prices and land
availability resulting in the vertical growth (Sky-scrappers) along with smart
city mission, rapid expansion in the residential and commercial real-estate
sectors, Mall culture, Metro rails and Airports will increase the demands for
elevators and escalators.
India’s elevator segment is growing
around 12% for last decade and the current size of Indian elevator market is
around 55000 units. Indian market was just 6500 units in 1996 so quite a growth
in itself. India is the second-largest elevator market after China but here the
gap between India and China is also vertical as china market is around 450000-500000
units per year which at one stage was 6 lac units per year!! By the end of 2015
china has around 40 lac elevators while India has figure of somewhere around 5
lac.
But this Gap points only
towards one thing-the huge growth potential of Indian market. At present, It is
valued at around Rs 10,000 cr with the likes of KONE India, Johnsons Lifts and
Schindler India together having market share of close to 60 %. By 2020-21 the market
is expected to grow 35-40 per cent crossing 70,000 elevators per annum mark.
Recently, some analysts
were doubting the growth of realty sector in India after the RERA , demonetization
and high land prices. Although I think RERA will result in much higher growth
for quality players and the inefficient players will either leave the market or
partner with much better quality players like Oberoi realty, Mahindra life
space, Godrej etc. But if one is to look for the signs then elevator market is
the first sign of the coming revival.
And the Sign is-Massive
expansion plans of Indian Elevator giants like Kone, Johnsons and Schindler India.
They are investing around 800 cr for their capacity expansions and to meet the
demand for much better, energy saver and green elevators. Their recent
expansions will be ready to serve the market by 2019.
Like other sectors consuming
significant power to save power costs, elevator sector is also witnessing the demand
for energy efficient machines. Gearless permanent
magnet motors are the most efficient ones and these can cut energy consumption
by up to 30 per cent compared to conventional geared machines. These have
a regenerative drive feature to further reduce energy consumption by up to 15
per cent. Bharat Bijlee is already a significant player in conventional geared
space.
BB also offers India's
first permanent magnet synchronous motors for gearless elevators under brand GreenStar. BB has
been witnessing strong growth in domestic industry and export market. Bharat
Bijlee’s new plant for permanent-magnet (PM) elevator machines at its Airoli,
India, campus commenced operations in May. The 950-m2 plant is a green building
for which certification from the Indian Green Building Council is expected
soon. The current production capacity of 700 PM
machines for elevators per month is scalable for further expansion by the
modular design and layout. The company said the plant furthers its strategy for
continued domestic and export growth in its GreenStar range of elevator
machines and caters to new applications of PM machines going forward.
These Gearless motors has
efficiency levels of 93% as compared to 65% of conventional machines and they
save some 40% energy and a single Elevator can provide the savings of some few
thousand Kwh per year which are significant.
Of Global elevator market, 70%
market is for new installation and 30% is towards highly profitable maintenance
market. India has around 5 lac elevators and around 17000 escalators so there
will be huge demand for modernization of these elevators into new age, much
safer, high speed, energy efficient machines. Maintenance market will also see
high growth in India.
Around 80% of Indian elevators work
at a speed of less than 1 metre/second while the highest-speed elevator
installed at Burj Khalifa works at 10 mps developed and installed by Otis.
However, now the demand for 2-3 MPS elevator is rising in India.
I think, Bharat Bijlee
may be the only listed one catering to this high growth sector (Leaving out the
wire players). This is a small business for BB comprising a turnover of 24 cr
in 2017-18 but they are expected to grow fast this year as last year realty
sector witnessed some major glitches in the form of Demoney, Rera and GST.
C) Variable speed
AC drives
Variable speed AC drive is an
electronic controller that
adjusts the speed
of an electric motor by regulating the power being
delivered and provides continuous control,
matching motor speed
to the specific
demands of the
work being performed. In other words, it converts
Alternating current (AC) of one frequency to another frequency which gives an
opportunity to run the AC motors in variable speed and provide an opportunity
for saving energy on many industrial applications like water pumps where a
mechanical throttling device such as a mechanical valve or electro mechanical
valve is used extensively to control flow of water but a fixed AC supply is
used to run the motor. Although this method is an effective means of control,
it leads to wastage of energy.
These Drives offer soft start,
lower the mechanical and electrical stress on the motors and reduce the maintenance
and repair costs and extend the motor life. All these factors are resulting in
high growth for AC Drives in Indian market.
Take the example of Normal Air conditioners
and the recent Inverter AC’s. In normal AC’s the compressor runs at a
particular pace all the time. Whenever a particular room temperature is achieved
the compressor motor is shut down and AC switches of but when the temperature
rises then again Motor runs at full power. But Inverter AC runs on a variable
frequency drive and when target temperature is achieved then in does not
completely switch off but it reduces its speed/cooling in order to just
maintain the targeted cooling which results in AC working only at 25% to 30% of
the total power making invertor AC more energy efficient. A censor in the
invertor adjusts the power according to the temperature in the room, lowering
the electrical consumption and saving energy.
These Drives are most appropriate and beneficial where motors are subject to variable work loads and in some cases these have shown to save 65% of energy consumed by a motor without Drive!!
These Drives are most appropriate and beneficial where motors are subject to variable work loads and in some cases these have shown to save 65% of energy consumed by a motor without Drive!!
The AC market in India is of 50 lac
units and Invertor AC’s are just 10% of it while they should be at 90% level
just like the much advanced countries like USA, China, Japan etc. Again, not a
surprise that EESL is again working in this area to promote the use of Invertor
AC’s in India.
So the use of Variable speed drives
is going to see high growth. Just like Gearless Machines for elevators, Drive
business of BB is also small as compared to Transformer and electric motor
business. Drive business has turnover of 27 cr in 2017-18. Bharat Bijlee offers Variable speed
AC drives in partnership with KEB Germany.
D) Transformer
Business
It is quite surprising that we are
covering the biggest business of BB at the last. No doubt stock markets are the
most democratic places of the world where legacy and size gets no separate
treatment. Transformer business is covered last because this is quite
commoditized as compared to other businesses of BB along with the fact that if
things work out well in the future then other businesses will grow at much
faster pace.
Electric power (expressed in watt)
equals current (expressed in ampère) multiplied by voltage (expressed in volt).
So, a certain amount of power can be produced either by a low voltage with a higher
current or by a high voltage with a lower current. Higher voltages minimize the
losses from the inductance or resistance in the wire during the transmission
process so power is transmitted over long distances using high voltages. AC power
is preferred over DC mainly due to its higher efficiency over long distances
transmission.
AC transformer is the device
(Invented in late 1800s) which steps up the voltage in order to carry power
over long distances, and then step it back down again for local use.
As mentioned earlier, Transformer
industry as a whole has faced difficult time in last 4-5 years due to low
investments in power transmission and distribution segment as State Electricity
boards(SEB) had/still has poor financial health and this imperfectly aligned
with the huge investments made for capacity expansions by Transformer players
after seeing the huge growth in power generation capacity in India but the
dream came crashing into ground hard and all the transformer players were
fighting for lower business at even lower margins.
India, during 2005-2010, made big
investments in power generation capacity but we ignored the equally important
power transmission and distribution segment which requires equal investments
(around 7 cr per MW). Poor financial position of State electricity
boards/Discom made the situation even worse. So now the situation is very
strange as at one hand are the power producers who are grappling with the low
plant load factor (60-70%) and then on the other hand there is rural India which gets power for few
hours per day, Industries like cold storage which finds high power charges a
big drag for the farmers to opt for cold storage.
Rural India can be a big demand
boost factor and keeping the same in view 100% rural electrification plan was
launched and it has achieved mixed success and response because as per the
scheme a village is considered electrified even if 10% of the houses including
school etc. are electrified. So now after the “Village electrification” the
focus is on “Village houses” electrification.
Since transformers play a key role
in the power sector so the opportunities for transformer industry in India out
of rural electrification programme are huge. Government is already working on
improving the financial health of Discom and the schemes like UDAY are leaving
marked improvement already. Project UDAY has resulted in the turnaround of
some of the worst loss making Discom of Chhattisgarh, Haryana and Gujarat.
BB is already a big player in
Indian transformer sector and with the recent turnaround of the sector after
the consolidation in the sector as small and inefficient players has moved out
of the game mainly due to strict quality control measures adopted by the Discom
in the recent transformer procurements.
E) Financials and
conclusion:
BB has strong balance sheet. Its turnover
of 800 cr is comprised mainly of two segemnts-Transformer business had around
60% share and Industrial systems had some 40% share in 2017-18. But the same
has been changed to 53% and 47% respectively in June-18 results which I think
is due to high growth in areas like Electric motors, Elevator machines and
Drive business. BB has turnaround big time in last 2 quarters witnessing high
growth both in topline and bottom line. But june-18 quarter has shown stunning
results-Turnover at 196 cr vs 149 cr last year and PBT excluding other income
at 9 cr vs -10 cr last year. Turnover of transformer segment was at 104 cr and
industrial segment was at 92 cr however profit before Interest and tax was 9 cr
for Transformer business and 12.5 cr for Industrial business which shows the
huge scope for industrial business in the future.
BB has debt of around 214 cr (Short
term working capital) but it has liquid corporate deposits of 174 cr so it is
virtually debt free. However it has investments in the shares of Siemens (200
cr), HDFC bank (100 cr) etc. the market value of which is 330 cr plus 17 cr of
mutual fund. The cost of investments in stocks was just Rs. 4 cr. Its market
value at CMP of 1350 is 750 cr so investments of 350 cr means that its main
business is available at a valuation of 400-500 cr at a PE of around 10-15 which is
way cheap for a strong reputed business house having the expertise and exposure
to the some of the highest growth segment of the Indian economy. I have just made a crude calculation of forward PE on the basis of recent June-18 quarter results, annualized EPS will be around 100 although taking into account the strong growth in the top line (Recent 2 qtrs were good so we can take it as revival) and the impact of operating leverage in the bottom line can take the EPS much higher.
There may be views that BB has
marked these investments as Non-current means that these are not for sale but
still they provide the strength and safety to the business. BB has ventured
into new emerging businesses which if succeeded will require investments for
expansion and BB will surely touch these at that time. It is fully expanded in
transformer business and the capacity usage will only grow from hereon. Also,
its dividend income was at 8 cr last year which in 2017-18 was at 2.4 cr mainly
due to reduction in the dividend declared by Siemens from Rs. 34 to Rs. 7 due
to exceptional income in 2016-17. But I think that in the next 1-2 years it
should settle around 6-7 cr.
BB used to pay Rs. 25-30 as
dividends (payout ratio around 20%-25%) during 2008-2012 when it was earning
good from its transformer business. So we can expect similar distributions from
it in the future also which at present valuation makes it a yield of 2% which
is good. Voltamp is another strong player in transformer business available at
reasonable valuation of 1012 with strong balance sheet with nil debt liquid
investments but it mainly deals with transformer business so I have left it for
the time being but in case there is some growth catalyst then we’ll cover this
one also.
I started studying it at 950 in jan-2018
but after Dec-17 results it just ran out of reach too fast and touched 1750 but
the recent fall provided good entry point and I made my first entry at 1280 in
last week. I have invested around 50% of my target amount and I’ll be investing
more after sep-18 results and at every growth catalyst like its significant move
in any of the emerging businesses like EV and Elevators and it getting more
orders for electric motor business even at the levels of Rs. 1500, 1700 or 2000. CMP is 1350 and it is a good buy at this price and at every fall if any happens in the future.
As one can see most of the growth
avenues for BB are pointing towards future so it is more like a concept stock
although the economic realities around these emerging businesses provides
reasonable level of surety that BB will achieve success in these emerging
ventures but still I think it is prudent to consider it as moderately risky
investment although we are getting the comfort from its established and
profitable business in transformer and electric motor business and its cheap
valuations at 10-15 PE, strong liquid investments also provides the margin of
safety.
PS: Bharat Bijlee is not a PSU.
PS: Bharat Bijlee is not a PSU.
(Views
are personal and should not be taken as a recommendation for buying or
selling a stock. Stock markets are inherently risky so kindly do your
Due Diligence before investing. I am not a certified Sebi Analyst and
holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).
