Buy HBL Power Systems Ltd with a target price of 80
HBL Power Systems Ltd (HBPS) was established in 1977 is one of the top three largest battery manufacturers in India. The company’s first product was aircraft batteries and now offers the country’s widest range of batteries with diverse specialized applications. HBPS has extended in to new businesses like railway electronics, defence electronics, power electronics and other engineered products.
The company has six manufacturing facilities across India and one R&D facility. Its products are marketed in India and 80+ countries. The exports account for nearly 15% of its revenues. During the last few years HBPS has embarked upon a restructuring plan in order to make it more competitive and efficient and has thus restructured its businesses into strategic business units – Batteries, Electronics and Defence.
HBPS manufactures a wide range of specialized batteries for a spectrum of applications using varied technologies–the broadest product range among the manufacturers in India. The Company has developed all these technologies in-house and is therefore free to export.
Battery segment contributed approximately 90% to its revenue which stood at Rs.1271 Cr for FY-17, a growth of 23% over FY-16 at Rs.1033Cr. The five year CAGR for the segment stood at 5.5% for the company. The lower long term growth was mainly attributed to muted demand in its largest sub-segment i.e. telecom during last few years. Following which the company has decided to diversify its business and re-orient itself strategically in FY-16 which was visible in FY-17 results.
HBPS has in short term embarked upon a consolidation plan which aims to fortify the position in larger telecom segment, enlarge the presence in UPS market invest in capacities and reach, aligned to scale and market penetration, increase business alliances with DG manufacturers with both PLT VRLA and PLT vented ranges, increase awareness of solar battery range among the integrators.
Over medium to long term, the factors contributing to the growth of company are new approvals from major OEM players, launch of new advanced batteries like 2V-VRLA, penetration into new markets like aviation and defence amongst others. The company has also initiated a plan to manufacture prismatic Lithium Ion cells and batteries for specialized applications. The project is likely to be implemented in the near term.
HBPS electronics business initially started off with the singular focus on developing products for Railways. Over the past 15 years the company has developed many products like TCAS (Train Collision Avoidance System), Electronic Inter locking System, permanent magnet alternators. The company’s Electronic Interlocking System is undergoing approvals and should be commercialized in the next 18-24months. The company lately is also developing products into new segments in order to reduce concentration from railways business. Currently HBPS has added two new product segment into its electronics business namely Electric mobility comprising of products like Brush Less DC Motors for e rickshaws and solar inverters for grid connectivity.
In its defence business HBPS offers its products for Army, Navy, Air Force and Civil Aviation requirements. It also has a long association with India’s defence R&D and production establishments. HBPS had been awarded a large contract for supplying Digital Control Harnesses for 6,800 army combat vehicles in past. Currently the company is working on many opportunities; one such large opportunity is in ammunition. Going ahead, the company plans to improve upon the existing business for Missile and Torpedo batteries while making sure its business in naval electronics is steady. The company has also got approval for its batteries for Kilo class submarines while undergoing testing for the Scorpene class submarine.
We expect HBPS to continue to maintain growth momentum witnessed in latest financial year ending Mar-17 going ahead and grow at a CAGR of around 16% in next two years. The sustained growth for the company is due to commercialization of its newly developed products in both its railways and defence segment followed by improvement in exports and overall market.
On margins front, we expect company to moderately improve its operating margins next year and a higher improvement in the following year. The improvement in margins at both operating and PAT levels are due to increase in efficiency and lower interest burden on the company.
With positive growth expected in Indian battery market of more than 10% and increase in value addition by the company through new product launches. HBPS presents itself with a promising growth prospects. At CMP of Rs. 55the stock is trading at 16x times FY18E earnings and 12x times FY19E earnings. We advise investors to buy HBL Power Systems Limited with a target price of Rs.80 per share for six months period.