Markets
Small-cap beneficiaries in the transmission capex supercycle
Summary
- Here's a small-cap market leader to put on your watchlist.
We all know that food, clothing and shelter are the necessities for human life. Now, think of the next basic need. One that you can't do without in today's world. For me, it's the access to power supply.
For any economy, especially the Indian economy, it's definitely among the topmost priorities.
An interesting development in energy space has happened recently. The National Electricity Plan (NEP) 2023-2032 for central and state transmission systems has been finalized.
It aims to expand the transmission network from 4,85,000 circuit kilometres (ckm) in 2024 to 6,48,000 ckm in 2032. The transformation capacity will rise from 1,251 gigavolt-amperes (GVA) to 2,342 GVA.
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The plan aims to integrate renewable and green hydrogen loads into the grid.
The opportunity is big, with expected investments worth over ₹9 trillion.
One sector that falls within the industry and could benefit from this is the transmission sector.
The first few names that come to mind include Power Grid Corp. of India, Apar Industries, Kalpataru Projects International and KEC International, among others.
The big opportunity
However, I want to discuss in detail one specific small-cap opportunity—Skipper Ltd. Skipper is the biggest supplier to PGCIL, the domestic leader in power transmission.
But there is a lot more to it.
Backed by in-house research and development, it is also the biggest transmission tower manufacturer globally and caters to over 60 countries.
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It is also the lowest-cost producer of transmission towers and poles in the world. That's because of backward integration. It has its own structure rolling, manufacturing, tower load testing station and transmission line EPC (engineering, procurement, and construction).
All this makes it a proxy play in your watchlist for power transmission growth.
The addressable market in transmission towers and EPC for the company is ₹3-4 trillion, according to the management.
The company can execute high-voltage power transmission and distribution projects where the competitive intensity is less and margins are better.
Apart from power transmission, the company also caters to the telecom sector and the water sector through its polymer pipe division.
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In the last 12 months, its revenue and profits have grown by over 80% year-on-year (y-o-y).
The management expects revenue of ₹320 crore in 2023-24 to grow at a 25% compound annual growth rate (CAGR) over the next two to three years. In five years, the target for the topline is ₹1,000 crore.
For the company, 2023-24 was the year of the highest-ever order inflow.
The order book in the transmission and distribution stands at ₹3,400 crore. The bid pipeline is ₹6,500 crore domestically and ₹11,500 crore internationally.
The operating profit margin has been at 9.5%, which the management expects to improve to 11% in two to three years.
This article does not imply any view of the company.
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Execution will require capital expenditures. Its balance sheet strength will also matter. At present, the net debt-to-equity ratio is 0.5 times. Any slowdown in tenders or capex could weaken the growth prospects.
Nonetheless, as the market leader in its niche and with diversified geographical exposure, this is a must-have candidate on your watchlist for the transmission capex supercycle.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.
