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EQUITY RESEARCH: HBL POWER SYSTEMS LTD
HBL Power Systems Ltd is engaged inside the commercial enterprise of manufacturing batteries. The Company's segments comprises Batteries and Electronics. The Batteries and Electronics segment includes various forms of merchandise for defense, aviation, telecom and commercial application. Its merchandise consists of batteries, which include Lead Acid Batteries, Nickel-Cadmium Batteries and Specialized Defense Batteries; Power Electronics, which incorporates Thyristor Battery Charger, Switch Mode Rectifiers, Battery Monitoring System and Earth Leakage Monitor; Concrete Products, including Spun Concrete Poles, Spun Concrete Poles, Spun Concrete Poles and Hollow Core Slabs; Renewable energy, which incorporates Off-grid Solar Systems and HBL Green Products Division, and Engineering Solutions, which incorporates Training Simulators and Railways, consisting of Data Loggers, Audio Frequency Track Circuit, Electronic Interlocking System, Train Collision Avoidance System, Train Management System, SPAD Alert System and Rail System Unit.
ABOUT:
In 1986, Dr. A. J. Prasad popularized HBL. Over time, Dr. Prasad developed significant expertise in the company's industry and conducted in-depth research in the battery and associated industries. He has spent about thirty years connected to the business. The business operates five manufacturing plants in Telangana and Andhra Pradesh where it produces batteries, electronics, and engineered goods based on proprietary technology. In addition to serving specialized industries including telecom, UPS, solar, defense, and railways in India, HBL's products are sold in more than 80 other nations. Through its subsidiaries HBL America Inc. and HBL Germany GMBH, HBL has a presence around the world in the Americas, Europe, and the Middle East.
Business Segment:
Telecom Tower Batteries
Most telecom batteries today are Valve Regulated Lead Acid. HBL developed the technology in-house. This is a B2B procurement by private telecom operators; and tender based by BSNL. There are now only three firms in the Telecom market in India, versus six firms about 10 years ago. Amara Raja has the highest share, followed by Exide and then by HBL. ARBL and Exide both expanded capacity only to find that the demand had ee This excess capacity depressed prices and the margins are still OW. The addition of 5G towers and return to normalcy on replacement schedules of batteries for older towers (which was deferred when the operators were impacted by JIO) will increase demand with effect from FY 24.
Rail & Metro Coaches / Loco Batteries
Every rail/ metro coach needs a battery. These are made as Lead Acid or Nickel Cadmium Alkaline Batteries. HBL has been a recognized supplier in India and in export markets of both types. HBL is the second largest producer of Industrial Nickel Cadmium Batteries, globally. Siemens — Germany has selected HBL as the OEM supplier for their new generation of coaches, called RRX. Siemens—America has bought HBL batteries for coaches they sold to Canada.
Batteries for Oil and Gas and Utility Industries
There are many industries where Nickel Cadmium Pocket Plate Batteries are used because reliability and safety are of paramount importance. Oil and Gas is one such industry. Reliance Industries Jamnagar Refinery has been using HBL batteries since its inception. HBL has been successfully exporting these batteries for thirty years.
DC Power Backup Systems
Pure Lead Tin batteries are Lead batteries designed to deliver higher power (more than automotive) for short durations. They are being used for stationary engine starting (Cummins resells HBL-made batteries under its brand). Also used for Tanks, Army trucks operating at -30°C temperature, etc. These batteries are now also being preferred for Data Centers. HBL is the only producer in India and the second in the world, based on in-house development of technology. HBL also has export markets. Lithium lon battery packs, Energy Storage Systems (ESS) supplied with imported cells and HBL-made Battery Monitoring Systems (BMS) are a market where the HBL brand has value.
Torpedo Batteries
HBL is one of two suppliers in India that have been supplying batteries for Torpedo Propulsion to the Indian Navy. HBL also exports these batteries in limited numbers. HBL has two contracts from NSTL/ DRDO for the development of state-of-the-art Al AgO Torpedo Batteries. Only two companies in the world make such batteries today.
Missile Batteries
Most of the Missile Batteries used in India are designed, developed, and manufactured by HBL. Including for the Agni V. HBL exports Missile Batteries to Israel and UAE. There are very few manufacturers of such batteries globally.
Aircraft Batteries
HBL took six years from 1977 — 1983, to develop technology for Sintered Plate Nickel Cadmium Batteries. Today, HBL supplies almost all the batteries used by the Indian Air Force. Globally, there are perhaps four other companies in this market. The FAA and EASA had certified HBL batteries as acceptable for Boeing 737 and Airbus 320 series of aircraft. But sales have not yet occurred, because companies insuring aircraft want OEMs to approve the batteries used. However, OEMS are indifferent to the cost savings by buying from HBL. The company also received the clearance certificate for its product induction in PILATUS, P8-I, and V5 aircraft. The company continued to export batteries to Bombardier for use in Global 7500 aircraft and to Israel Aerospace Industries (IAI) for use in UAVs.
Submarine Batteries
All submarine propulsion batteries in India are “Tubular plate flooded lead acid”. HBL and Exide supply the same types of batteries. Tenders decide who gets the business. The average life of a submarine battery is four years; and the indicative cost is about Rs. 15 crores. The market in India is small but should grow. HBL also has export opportunities because there are less than ten companies globally, making such batteries. HBL has been awarded a contract by NSTL / DRDO to develop prototype modules for Li lon batteries for Submarine application. HBL achieved the type approval process for Type-ll batteries meant for use in HDW German (Shishumar) class submarines securing manufacturing clearance.
KAVACH (Train Collision Avoidance System)
HBL pioneered the system with help from RDSO; the demo trial occurred in October 2012 at Tandur, SCR. The Railways announced that they will install Kavach (TCAS) over at least 30,000km of track in ten years. There are now three companies approved for supply of TCAS. Interoperability among the three designs has been established. New suppliers must also be interoperable with the current suppliers and this is a time-consuming process. HBL has four EPC contracts on hand for Rs. 686 crores. The EPC part is subcontracted. The TCAS part varies from Tender to Tender. For tenders on hand, the TCAS part averaged at 70%. Each contract needs around two years to complete. The expected service life of a TCAS system is 15 years. Electronics systems need maintenance, and railways pay for this annually (after the first few years).
TMS (Train Management System)
A Train Management System is a master control centre where a huge display panel shows the status of all trains in the territory of that system. There are very few systems in use today in India; a few are imported and two are from HBL. HBL is the only approved and proven Indian company for TMS. HBL’s TMS System is certified for SIL - 2 by Bureau Veritas Spain. HBL’s Train Management System (TMS) was inaugurated by the General Manager of the Eastern Railway in the Sealdah division of Eastern Railway on August 31, 2023. Demand is expected to slowly grow from FY 2024. Compared to TCAS, the value of a business is small; at most 200 crs per year. A typical price per system would be 40 to 50 crs.
Electro-Optics — Equity investment
HBL has committed to invest in the equity capital of Tonbo Imaging India Pvt Ltd, as informed earlier. So far Rs.86.67 crs has been invested in Tonbo group. Tonbo Imaging is an Indian company that indigenously designs and manufactures electro-optics and imaging systems for surveillance, reconnaissance, and targeting. Electro-optics and imaging subsystems are “the eyes” and “the brain” of surveillance platforms and weapon systems. Over the last 10 years, Tonbo Imaging has built a large portfolio of products addressing the needs of land, air, and missile systems. It counts among its customers, global military forces, special forces, and international Tier | defense manufacturers.
Electronic Drive Trains For Trucks
Apart from Li lon cells, India currently imports motors & controllers for most EVs made in India. HBL has been investing in in-house development of all parts of the technology for Motors and Controllers since 2017 and plans to test products on the highways in 2024. The business plan is to convert old diesel highway trucks to Electric Drive using HBL-made motors and batteries. The solution does not need a subsidy. The benefit to the operator varies based upon his use conditions. Customers will be by invitation. Sales may begin in FY 2025. The number of old trucks is very large, but the HBL solution will only be viable for a small percentage of them. Even so, the scope is huge. At this time there are no competitors because there is no subsidy for electric trucks.
Grenades with Electronic Fuzes
Under a “Development cum Production Partner” contract with ARDE/ DRDO, grenades made by HBL have been approved by the Ministry of Home Affairs for use by the paramilitary forces. Sales to MHA are expected to begin FY 24 and increase rapidly. Electronic Fuzes are essential for reliability and safety. HBL is the only Indian supplier for the Electronic Fuzes, and can also supply to other firms making the rest of the grenades. Approval of the Army for their needs of Grenades is expected during FY 24. HBL has facilities and licenses for handling explosive materials.
Electronic Fuzes for Guns, Rockets, Bombs
A fuze is a complex device that ignites ammunition. Electronic fuzes are preferred to mechanical fuzes because they are much more reliable. Over the last 15 years, HBL has developed 100% in-house technology for Electronic Fuzes for grenades and other ammunition, including Artillery guns. HBL is the only Indian company with 100% indigenization. ECIL (DAE) and BEL (MoD) have been supplying Electronic Fuzes for artillery, with import content of about 80% of Bill of Materials. MoD says it wants Atma Nirbhar. HBL fuzes have already been tested on army guns many times. Eligibility for bulk supply is expected end FY 24. The market is huge and there are very few companies in this area globally. So, exports are expected.
HBL Capability in Defence Electronics
HBL has proven capability for manufacturing complex Defence Electronics products. This capability is illustrated below:
SHAREHOLDING PATTERN
FINANCIALS
The quarter's revenue increased 46.2% YoY to Rs. 467 Cr from Rs. 320 Cr in Q1FY23. Defense and aviation batteries brought in Rs. 32 Cr (-54% YoY) in revenue, Industrial batteries brought in Rs. 325 Cr (+51% YoY), and Electronics brought in Rs. 80 Cr (+199% YoY). Each segment's contribution was 69%, 7%, and 17%, respectively. EBITDA for the quarter was Rs. 78 Cr versus Rs. 35 Cr, and the EBITDA margin increased from 10.9% in Q1FY23 to 16.7% in Q1FY24 by 576 bps. PAT totaled Rs. 52 Cr compared to Rs. 20 Cr in the same quarter last year.
KEY FEATURES
Experienced promoters:
HBL has been promoted by Dr A. J. Prasad in 1986. Dr Prasad has, over a period of time, gained substantial experience in the line of business in which the company operates and has undertaken extensive research in battery and related segments. He has been associated with the industry for over three decades. He, along with Kavita Prasad (daughter)- Director, and a team of experienced professionals, looks after the day-to-day operations of the company. HBL has been a well-known name in the industrial battery manufacturing industry. The company also has established a good presence in the electronics segment, and now has a diversified revenue base across multiple user industries. HBL caters to the requirements of core sectors like telecom, railways, and defence. The battery vertical continues to be one of the major revenue spinners for the company followed by electronics.
Improvement in financial performance during FY23 and Q1FY24:
The company has been witnessing healthy demand for its products, and the order book of the company also has been growing over the quarters. During FY23, the company reported a y-o-y growth of 10% in its TOI to ₹1,358 crores, backed by strong demand from the telecom sector especially in its electronic segment driven by telecom infrastructure post the 5G rollout. The demand from other segments, viz., railways, defence, etc., also witnessed steady growth. HBL registered a robust growth of around 45% in revenue during Q1FY24 vis-à-vis Q1FY23. The order book position as of June 2023 improved and stood at ₹1,607 crore (June 2022: ₹594 crore) providing medium-term revenue visibility.
Bagged contracts for “KAVACH”:
The first contract for the implementation of KAVACH (TCAS — Train Collision Avoidance System) over 260 km of track and 120 locomotives from Howrah to Pradhankhanta was signed on September 22 by HBL as the lead member of a consortium with Siemens. The contract will take 700 days to complete and costs Rs. 286.69 cr, of which HBL will contribute Rs. 205.88 cr. Vande Bharat trainsets, built by Integral Coach Factory (ICF), are intended to travel at 160 kph. ICF also gave HBL a purchase order for 46 sets of Kavach, to be fitted when trainsets are manufactured, for a total of Rs 31.66 crores. Deliveries were supposed to start on November 22 and end on July 23. According to management, the government intends to cover more than 30,000 km of railway rails with KAVACH by FY26. Given that the RDSO has only approved three OEMs (HBL Power, Kernex Micro, and Medha Servo drives), this creates a sizable addressable market for HBL.
Investment in Tonbo Imaging to enhance presence in defence electronics management
HBL and Tonbo Imaging India Pvt Ltd have agreed to invest up to Rs. 150 crore in CCPS, a leading developer of electro-optic solutions for defense applications. HBL will also contribute a little sum to Tonbo Singapore. The execution of agreements, spread over three tranches, coupled with the satisfaction of typical previous conditions as well as closing criteria, are conditions precedent to this investment. On final conversion, HBL will possess 35.96% at floor valuation and 34.46% at cap value, depending on the numerous factors that apply to the valuation requirements. Tonbo will be able to supply products to keep up with the rapid expansion in its order book thanks to HBL's extensive production infrastructure for electronics, mechanical systems, assembly, and testing.
KEY CONCERNS
Elongated operating cycle
The business operates in a sector with a high need for working capital and a long operational cycle. The business must keep its inventory on hand for a longer period of time, and it takes a while to collect its receivables. However, the business has been funding its inventories through internal cash flow and hasn't relied heavily on borrowing from banks.
Hazardous nature of lead-recycling operations
The main raw material used to make batteries is lead, an extremely hazardous and polluting substance. As a result, lead handling calls for adherence to pollution control standards. Environmental policy changes could also increase the company's expenses.
Volatility in prices of raw materials
Due to the market-driven and fluctuating nature of raw material costs, which have an impact on the firm's margins, the company is at risk of cost price escalation. Additionally, the company imports some raw materials, putting it at risk from currency exchange fluctuations.
Investment in associate entities
HBL has entered into an investment agreement with Tonbo Imaging, outlining a commitment to invest a sum of ₹150 crore. This investment forms about 15% of HBL's existing net worth base. Through this initiative, HBL is likely to leverage the intellectual
property strategy and development capabilities that Tonbo brings to the realm of defence electronics. HBL's potential to capitalize on the advantages of this investment is yet to unfold, and while this presents an opportunity for growth, the uncertainty
surrounding its outcome has an inherent element of risk. Further, an increase in the investment in group/associate entities and the ability of the company to generate commensurate benefits from the same, may remain critical from the rating and credit perspective.
The potential risk associated with lead-recycling operations
Lead, a substance recognized for its high toxicity and environmental impact, serves as the fundamental raw material in battery production. Enterprises involved in this industry are compelled to adhere to stringent pollution control regulations. As
environmental regulations continue to become more stringent and environmental advocacy gains prominence, businesses operating in this sector face inherent risks related to ecological considerations. Nonetheless, owing to HBL's extensive tenure
within this industry, the company has consistently maintained compliance with all requisite standards
VALUATION
The company has established a strong presence in the batteries market, which, while growing moderately, remains stable due to the regular replacement of batteries. The railway sector is prioritizing investments in electronic signaling and safety, offering growth opportunities for the business. Additionally, the company's in-house products will benefit from defense indigenization. The electronics division within the company is poised for rapid expansion and is expected to contribute 35% to 40% of total sales by FY24-26. This division is characterized by high profit margins. For the period between FY23 and FY25E, we anticipate a Compound Annual Growth Rate (CAGR) of 30% for Revenue, 60% for EBITDA, and 60% for PAT. In our assessment, over the next two to three quarters, the company's fair value is projected to reach Rs. 295.
SOURCE:
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I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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