Power Equipment: Profit Generation on Capacity Expansion | CORPORATE ETHOS

Power Equipment: Profit Generation on Capacity Expansion

By: | August 29, 2017
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The rural electrification drive, massive capacity expansion in the past three years, and the growing demand and ease of getting new electrical connections, have led to more orders flowing into electrical machinery industry. The industry is broadly divided into three – transmission, distribution, generation machinery.

sreekumar-photoWith a Compounded Annual Growth Rate (CAGR) of 6.7% recorded in the past ten years, double digit growth was achieved in transmission, distribution and generation equipment industry. The market size is expected to reach US $100bn in 2022 from $24 bn in 2013.

With the 100% delicensing of electrical equipment industry in India, 100% foreign direct investment has been allowed. Now, with intense Chinese competition impacting local players, Indian Government is taking measures to make the bidding process more stringent to favour local players over Chinese.

Amidst these undercurrents prevailing in the industry, here is a look at the prospects of major players listed:

Bharat Bijlee Ltd (BSE:503960 NSE: BBL) Category: Small Cap

Bharat Bijlee Ltd, established in 1946, is a pioneer in electrical machinery industry. The primary business of the company is in transformers, projects, electrical motors, elevator systems, drives and automation. Headquartered in Mumbai, the company has manufacturing facilities in Airoli, Navi Mumbai with a working area of 50,000 sq meters. It has an employee strength of 1400.

In the June quarter, the net loss increased to Rs. 3.87 cr, a fall of 14.84% on annualised basis while sales rose 14.45% to Rs 148.35 cr.

Financial ratios present a mixed picture with return on equity comparable to peers at 6.71%, net profit margin of 2.95% while cash flow and liquidity ratios are in the red.

On a returns perspective, -15.13% on monthly, quarterly 7.1% and 32.63% on annualised basis makes it a good investment from a medium-term perspective. Trading at a price earnings (PE) multiple of 32.97, the scrip is valued moderately higher by the market.

On technical charts, Relative Strength Index (RSI) of 38.36 is bearish, while Average Directional Index (ADX) of 30.72 puts it on an uptrend while MACD line has seen a bearish cross over. While stochastic indicator of 24 denotes it is moving close to oversold territory. Prices are trending below the 50 DMA of 1294.

Despite the recent fall in prices due to poor Q1 results, the medium- term prospects are good enough to give double digit returns to investors.

Target: 1200   Duration : 4 weeks      Strategy: Hold/Buy

Tarapur Transformers Ltd (BSE: 533203 NSE:Tarapur) Category: Small Caps

Tarapur Transformers Ltd, established in 1988, has evolved to be a prominent player in the Indian power industry for repairs, refurbishing and upgradation of power transformers among others.

The company has improved its June quarter performance at a net loss of -0.94 cr, while sales fell 37.79% go Rs 2.61 cr. It is trading at a PE of -3.78 which indicates that it is negatively valued by the market.

On a returns perspective, Tarapur has been providing negative returns and fares poorly on financial ratios with return on equity, net profit margins, liquidity and cash flow ratios in the red.

On technical charts, RSI of 38 denotes bearishness while MACD line has witnessed a bearish crossover and continues to be in negative territory. ADX of 33 denotes uptrend while stochastic indicator of 22 denotes close to oversold position. It is trading below the 50 DMA of 6.99.

Target: Nil

Apar Industries Ltd (BSE: 532259, NSE: APARINDS) Category: Mid Cap

Apar Industries Ltd, established by Dharmsinh D Desai in 1958, has grown to become a US $850 mn diversified company with value added products in power transmission, power and telecom cables.It has become the fourth largest transformer oil manufacturer in the world. The company has a 23% market share in conductors and 45% market share in transmission oil. With the announcement of three new projects in India and UAE, it is set to expand its transmission oil business.

The company has reported a fall of 16.86% in net profit at Rs 38.96 cr for the June quarter while sales rose 19.18% to Rs 1304.35 cr. Earnings per share has fallen to 10.18.

Negative returns are seen on monthly, quarterly basis while 6-month returns are better at 5.07%. It has an impressive return on equity at 17.04, net profit margin of 3.65% and liquidity, cash flow ratios are negative. Promoters hold 57.96% stake.

With a PE of 16.74, the market seems to be undervaluing the scrip. On technical charts, RSI of 47.39 indicates neutral to bearish position while MACD line has witnessed a bullish crossover. ADX of 15 denotes tight range bound trading. Stochastic indicator of 74 indicates moving to over bought position. Prices are trending near to 50 DMA.

Target: 820   Duration : 6 weeks       Strategy: Sell/Hold

Emco Ltd (BSE:504008   NSE:EMCO)  Category: Small Cap

Emco Ltd was set up in 1964, and caters to the demands for  765 kv -800 kv generation, distribution, transmission equipment for power industry. It has 4 state-of-the art manufacturing plants. It has won several awards and accolades for its performance in the past. The company attracted investor interest when news about SSG Capital Management buying 5% stake in the company was reported in the press.

The company reported a net loss of Rs 15.77 cr, while sales also fell 37.61% to Rs 124.61 cr. EPS has fallen to -2.24.

On a returns perspective, Emco Ltd has been faring poorly compared to peers in the short to medium term. It scores dismally on financial ratios- return on equity, assets, profit margins, liquidity and cash flow ratios. Promoters hold 45.33 %.

power1On technical charts, RSI of 29.36 is bearish while MACD line has witnessed a bearish cross over, ADX of 30.27 indicates moving to uptrend. Stochastic indictors are suggestive of oversold position. Prices are trending below the 50 DMA of 22.42

Target : Nil

Summary

According to Index of Industrial Production (IIP) the negative growth was the highest in electrical machine manufacturing at -20.1% for June compared to May. Going ahead, electrical equipment manufacturers are likely to be beneficiaries of power capacity addition programmes announced by the government. The government is now trying to thwart Chinese competition in this sector, citing cyber security issues as malware can destroy the functioning of the power systems. Major Chinese firms have established supply and distribution business in 18 cities in India while domestic players have no reciprocal access in China markets.

We have excluded the major power supply equipment manufacturer Bharat Heavy Electricals Ltd, the public sector company from this review, as it is both into manufacturing and commissioning of power projects. However, 70% of the power generated in India comes from power equipment supplied by the company.