Ashika Research - Equities

HBL Power Systems Ltd.

February 02, 2015

Company Description

Ashika Stock Broking Limited

HBL is a research oriented company and the promoter is a

Technocrat. The company started its business by successfully
developing Aircraft batteries and eventually offering the worlds
widest range of specialized batteries, with larger pie from lead
acid batteries for telecom towers. The company mainly
manufactures specialized batteries and operates in niche
segments like telecom, defence, railways, aviation and other
industrial batteries. These segments are highly concentrated by
organized players owing to high entry barriers in the form of
rigorous & lengthy approval processes and high engineering and
technical complexity. HBL markets its batteries, such as industrial
electronics, defence electronics, and railway electronic signaling.

Recommendation

Buy

Closing price

Rs. 34.9

Target price

Rs. 55

Potential upside

58%

Company Information
BSE Code

517271

NSE Code

HBLPOWER

Bloomberg Code
ISIN

932

Outstanding shares(Cr)

25.3

52-wk Hi/Lo (Rs.)

Diversified Product Base

Face Value(Rs.)

HBL Power System Ltd offers a wide range of products. The broad
head of its products includes batteries, power electronics,
engineering solutions and green products. Batteries segment
consists of various types of batteries for telecom, defence,
aviation and industrial application. Its products include lead acid
batteries, NiCad battery cells, silver zinc battery cells, lithium
battery cells, nickel cadmium pocket plate batteries, electronic
chargers/rectifiers, battery operated vehicles, solar photovoltaic
module, defense electronics, manufacturing of PSB, genset
pumps, diesel battery, silicon gel, railway battery, power
electronics, project for technology development, anti collision
device for railways and others products. HBL also has presence in
Solar panels and it manufactures Pumpsets and converters.
Company convert solar energy into electrical energy and store it
in battery and for that company has in house research facilities.
Company is engaged in R&D of anti collision device for Indian
Railways since 2005. It is developing this product in its own
manufacturing facilities and expecting the revenue to come from
FY16 onwards. It is a niche segment and there are only 3 players
including HBL. With this well diversified product base we believe
that the company has poised itself well and the company can
manage to positioned itself to face turbulent situations.

Book Value

FY13

FY14

FY15E

1281

1500

1700

Growth (%)

9.9%

7.0%

17.1%

13.3%

150

156

213

258

12.5%

12.2%

14.2%

15.2%

20

45

45

136

1.7%

3.5%

3.0%

8.0%

0.8

1.8

1.8

5.4

Net Profit
PAT Margin (%)
EPS (Rs)

495,476
1
22.2

Relative performance chart (one year)

FY16E

1197

EBITDA Margin (%)

40.85 / 8.85

Avg. daily volume (1yr. on NSE)

Net Sales

EBITDA

INE292B01021

Market Cap (Rs. Cr)

Investment Rationale

In Rs. Cr.

HBPS IN

Estimate: Ashika Research

1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com

Ashika Research - Equities

Investment Rationale Cont

Revenue Driver and Market Share
HBL Power System mainly derives its revenue from Lead Acid battery which is the
main contributor to the revenue and accounts around 62-65% of total turnover. Lead
acid battery is widely used in Industrial purpose, railway and retail. Industrial use
segment contributes about 80% of turnover with telecom battery contributing
maximum at 80% followed by Power batteries 7-10% and UPS 10%. Railway and
Retail battery contribute 10% each to the lead acid segment. Telecom batteries
contributes maximum revenue in lead acid battery segment as HBL is the market
leader in telecom batteries with market share of 50-55%, followed by Amaraja having
a market share of 25%. Nickel Cadmium is the second biggest revenue contributor
with 20-25% contribution towards turnover which is widely used in Power, aviation
and defence sector. Defence battery contributes about 5% of total turnover. Lithium
thermal battery use in autopilot ejection and defence, contributes about 5% to
revenue. In some segments like batteries for aircrafts, there are only 2-3 players
globally including HBL.

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The Macroeconomic Effect

The lower per capita use of battery in India is a huge opportunity for battery
manufacturers to witness unprecedented growth in long run. Currently it is estimated
that the battery use per capita in India is around USD 1.6/ per annum as against a
world average of USD 10.1/ per annum and US consumption of USD 48.7/ per annum.
In raw materials, lead account about 60% of total manufacturing costs, thus decline in
lead prices amid slowdown in global commodity prices would be margin accretive for
HBL. Going ahead, it is expected that the revival in domestic economic growth would
drive the demand for battery primarily due to higher power and technology intensive
development and increase in renewable energy requiring storage of power. Further,
rebound in telecom sector could be the key revenue driver for HBL, as telecom
batteries accounts major part of the revenue. Defense battery contributes about 5%
of total turnover, however management is very upbeat on the prospect of the sector
post NDA government increased FDI ceiling in defense from 26% to 49%. Indian
defense sector usually import batteries from overseas markets but now it can be
expected that new reforms implemented in the sector would lead Indian defense
industry to rely on domestic battery suppliers. Moreover, the margin is high in the
segment with 30-35%.

Order Book and Margin Expansion

Company receives order from telecom sector through bidding and negotiations.
Recently, it has received order from Reliance Jio and the management is expecting
revenue of Rs 150-180 crore in current fiscal year (FY15) and Rs 400 crore in FY16,
from Reliance Jio itself. Further the company believes that pricing power is coming
back in lead acid batteries and telecom sector improving will aid growth in future and
they are seeing traction in orders. HBL generally receives order in the segment (Solar
panel) through bidding or from government agencies. Currently company caters to
Rajasthan, Andhra Pradesh and Telengana states and it is registered with MNRE
(Ministry of New and Renewable Energy). The company caters to esteem clients
including US airforce, Israel Aircraft Industries, Ministry of Defence India, Montreal
1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com

Ashika Research - Equities

Railways , Canada, Ametek, USA and Etisalat, Dubai. In September 2014, company has
revised its lead acid battery price by 10%, which would reflect in 3rd and 4th quarter
of FY15 earnings. Company expects 2nd half in lead acid battery segment to be much
better. Going ahead, company is expecting better pricing in per ampere hour thus
improving the margins of the company. Currently the company has to incur average
cost of Rs 10-15 per ampere hour. In raw materials, lead account about 60% of total
manufacturing costs, thus decline in lead prices amid slowdown in global commodity
prices would be margin accretive for HBL.

Key Risks

As lead accounts for about 60% of total manufacturing cost, increase in lead
prices may adversely affect the margins of the company.

High working capital requirement.

Outlook & Valuation

Ashika Stock Broking Limited

With ample diversification of its product base to positive macroeconomic factors we

believe that HBL Power System is a favorable bet. The company has a high focus on
increasing market share and in increasing its margins. The expanding order book and
high barrier to entry are also few more catalyst for the company. The business is
turning around, pricing power is coming and raw material prices falling are the key
catalyst for the stock to outperform going ahead. On valuation front, the stock is
trading at a P/E of 6.7x of FY16 EPS of Rs. 5.4. So we recommend our investors to buy
the stock with a target price of Rs. 55 from 12 months investment perspective.

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1008, Raheja Centre, 214, Nariman Point, Mumbai-400 021, Ph- 022 6611 1700, Extn. - 704 www.ashikagroup.com