Recommendation from Electric Equipment

This section gives a recommendation of a stock having a stock price below Rs 150 with sound fundamentals and expected to give handsome returns over a one-year time horizon.

HBL POWER SYSTEMS: POWERED TO PERFORM

HERE IS WHY
✓Strong presence in the defence sector
✓Debt-free status
✓Impressive cash flow

Investing in companies increasing their operations in the sunrise sector is always rewarding. HBL Power System is one such company that is diversifying its operations into high-growth sectors. The company is engaged in manufacturing different types of batteries and other products. The firm is one of India’s largest manufacturers of industrial batteries. Its battery vertical accounts for 64 per cent of the revenue. It manufactures batteries for the telecommunications, UPS, railways, solar, oil and gas and power industries.

It produces lead-acid, tubular gel, pure lead thin plate (PLT) and nickel-cadmium batteries. It also set up a pilot plant for the production of lithium-ion cells in FY22. HBL Power Systems has a foothold in the railway electronics vertical, which accounts for 10 per cent of its revenue.

Its defence vertical has shown sustained growth. It currently accounts for 24 per cent of the total revenue. The company offers a wide range of items to the Indian defence industry, including specialised batteries used in high-stress applications such as fighter aircraft, unmanned aerial vehicles, submarine propulsion systems, torpedoes, battle tanks, missiles and artillery fuses. Electronics and defence verticals are high-margin spaces for the company. In FY22, the company started supplies of Type I batteries for kilo-class submarine and advanced heavyweight anti-submarine torpedoes.

It also supplies Type IV batteries for Scorpene class submarines for the Indian Navy. In its electronics vertical, the company has won a contract from Eastern Railway for deploying TCAS over 260 km and 120 locomotives on the Delhi-Howrah route in FY23. HBL Power Systems has a global presence in over 80 countries. Through its subsidiaries, it has a presence in America, Europe and the Middle East. The company now owns and runs six manufacturing factories in Telangana and Andhra Pradesh. Its recent diversification has helped it in leveraging its engineering strengths, which has led to new businesses in precision manufacturing, spun reinforced concrete and green technology products.

For the TTM ending June quarter, the company reported sales of ₹1,325 crore. In FY22, the company’s revenue was at ₹1,236 crore. Its operating margin increased considerably in FY22, rising from 7.4 per cent to 11.2 per cent primary owing to change in product mix as defence contribution has increased in the last one year from 11 per cent in FY21 to 24 per cent currently. The company continued to strengthen its balance-sheet and became debt-free last year and was negative in FY22. Its capital work in progress rose from ₹43 crore to ₹81 crore in March 2022.

In the June quarter of FY23, its operating profit increased by 130 per cent to ₹35 crore from ₹15 crore in Q1FY22 due to improved operating margins. The company’s cash flow statement also stands solid. In FY22, it generated ₹62 crore from its operations. The company has delivered good profit growth of 18.4 per cent CAGR over the last five years and it has been maintaining a healthy dividend payout of 38.1 per cent. The company’s average ROCE and ROE are 14.6 per cent and 11.16 per cent, respectively. Currently the stock is trading at a PE of 26.6 times. Looking at the company’s strong fundamentals, well-diversified operations and attractive valuation, our recommendation is to BUY.