Hercules Hoists Ltd: Warehousing Automation

Stock investing is all about value investing i.e. picking a stock at a price which is much lower than its intrinsic value (real worth). And most people think that this real worth is basically a handiwork of financial analysis which calculates Real worth of a stock based on earning growth, balance sheet strength etc. But this is just post mortem. The most important factor in the value investing formula given by Sir Benjamin Graham was not the evaluation of these financial parameters but it was the mysterious “g” in his formula which was the most important factor in the valuation matrix. This “g” denotes the future growth rate and this is where investing starts and ends. This growth rate is not a financial entity it is just represented as a financial figure.

To understand the growth prospects of a company requires thinking like a businessman. One has to understand the whole nitty-gritty of a particular industry-raw material, substitutes, strength of entry barriers, user industry, global competition, future threat or opportunities…and the list is endless but this concludes why stock analysis is so complex because it looks like dealing in finite numbers but it is most affected by infinite business/economic variables. This effectively means looking into the future demand supply trends and this is where creativity, intuition, wisdom and knowledge enlarge the vision to sniff the future much ahead of others and this is the most decisive factor in business and in stock investing.

Sometimes I feel that stock picking is getting increasingly difficult. In old times, there was information scarcity and only the privileged ones had the timely access to relevant financial and economic data affecting companies in stock market and so they could pick valuable gems cheaply and much early. But today most of the data is available freely and quantum of privileged data is very less (although that is still important). But this democracy in data availability means one has to expand his vision further to look far deeper into the future and gasp the coming economic trends.

We are also in our journey to understand what changes GST will bring into the business land scape of India. Logistics is no doubt one sector which is going to see revolutionary changes because in its earlier avatar it was most effected by fragmented structure of Indian taxation system where each state has its own set of taxes and businesses were taking investment decisions not from the point of view of operational and business sense but to save multiple state level taxes.

GST is a massive financial engineering and it is bound to change the way we were doing businesses. In an ideal economy, business decisions should be based on sound operational economics and efficiency rather than an exercise to fit the business operations into the tax or accounts regime. Tax/revenue authorities should keep the business economics in mind while framing tax laws rather than businesses designing their businesses to tax laws because taxes do not generate business profits rather businesses generate the resources for taxes.

Earlier, we have picked Hercules Hoist Ltd (Click here for earlier study) as one of the beneficiary of impact of GST on logistics. In the past one year after we picked Hercules Hoist things are looking in much better shape.

GST to revolutionize the warehousing in India

Supply chain and logistics is the most important function in the entire chain of production to final consumption and it requires huge resources. And warehousing is the most important part of the entire logistic function because excellency in warehousing implies low cost of warehousing, low inventory levels, low pilferage but earlier due to state level taxes like CST companies planned their warehousing just to avoid high taxes. Earlier, every state was a foreign territory as far as movement of the goods was concerned and each state levied a number of taxes on goods coming into their state from outside state. But amid this complex tax structure, some relaxations in taxes were given like when goods were moved inter state not out of sale but stock transfers no CST/Entry tax was charged. So companies, in order to avoid multiple level taxes, just operated small inefficient warehouses in each state and this along with other factors has resulted in higher logistics costs which are twice (14% of GDP) the cost in developed countries (7% of GDP).

So warehousing in India only meant “godowns” which were just a structure with no automation and did not provide any value added services. So companies operated small shabby warehouses in each state they operated which resulted in operational inefficiencies and huge resources were blocked in the form of high inventories, maintenance of large number of inefficient warehouses.

But all this has been going to change after the implementation of GST. After GST there are no state level markets and India is a one big market and no matter from where you operate the taxation is same. so now companies can plan their supply chain and logistics keeping in view the operational efficiencies rather than tax savings.

Earlier, the focus on tax saving resulted in small low tech warehouses and the average size was some 10000 sq feet and almost 90% of the warehousing space is controlled by small unorganized players. At this small scale it was not possible to invest in mechanization and automation. So there was no economy of scale, no control and overall inefficiency. But after GST, the average size of a warehouse has touched 1 lac sq feet and companies are investing big in mechanization and automation and so now the true worth and value of a good warehousing system will be realized. Warehouses of the size of 4 lac-5 lac sq feet are underway.

As one can see, it is impossible to manage these large scale warehouses without being equipped with smart mechanization and automation.

So these smart fully equipped warehouses present huge opportunity for Hercules Hoists which is one of the largest suppliers of material handling solutions in India.

Warehousing industry is undergoing great consolidation and increasing merger and acquisitions will take place and the sizes of warehouses will increase significantly to make possible the automation. This greater scale will also positively impact the IT cost of deploying Warehouse management system (WMS) and ERP systems which was not possible earlier and due to these technical advancements in warehousing entire supply chain will reap the benefits.

Apart from GST, there are other reasons which are creating the demand for large scale automated warehouses:

1) The growth in manufacturing due to “Make in India” initiative. High end large and smart Warehousing and logistics systems are required to support this scale of growth in manufacturing.

2) The warehousing and logistics sector has been granted the infrastructure status which means they can get funds cheaply with payment stretched much longer time.

3) The huge demand for high tech large scale warehousing from E-commerce sector. E-commerce is all about reaping the benefit of scale so large fully automated warehouses are the first thing they need to create value for themselves.

Hence, no doubt these large smart warehouses are going to save the costs of logistics of companies.

The most important factor is reduced inventory costs. Inventory consumes huge resources in the form of cost of production, storage costs, theft, damage, obsolescence etc. So optimal inventory levels are the ultimate aim of any supply chain as the same will maintain the overall efficiency of entire supply chain. Earlier, companies were always facing either the situation of excess inventory or low inventory leading to loss of business.

Infact, the efficiency of a supply chain system is gauged from the levels of inventory-how much capital is lying idle due to inventory carrying costs which can otherwise be used for other productive uses. So optimal inventory level is the prime aim of any supply chain manager.

Due to the use of hub and spoke model for inventory control across the entire supply chain, faster movement of goods due to fewer/no state border checks, lower number of warehouses, higher efficiency of warehouses due to automation etc. means companies can maintain pre-GST supply chain service levels with much lower levels of inventory as they can move the goods fast. So no surprise that inventory costs are coming down. As per recent studies, inventory levels have come down by some 30%-40% which are increasing the profitability.

Consumer durable industry is going to see almost 50% fall in warehousing costs while FMCG sector will see 25% fall. This is due to the fact that lead time for consumer durables are around 2 days so consumer durable players can easily supply the existing markets from fewer but larger warehouses like from Haryana warehouses they can cater to Punjab, Uttarakhand, UP and Himachal Pradesh easily which are major consumption centers in the country.

The stock turnaround time for FMCG is much lower (24 hours) due to reasons like small scale of distributors/retailers, availability of substitutes in the form of other brands so they are required to maintain more warehouses as compared to consumer durables but still due to operational efficiencies their cost will fall some 25%.

So as we can see the investments in smart warehousing will be more than offset by the savings in the cost of carrying inventories.

Also, small and low key warehousing further takes away the scope of movement of cargo by rail due to short distances as railway frieght is cheaper by some 30-40% in long distance cargo. I feel, with the coming of dedicated freight corridor warehousing and logistics will be further benefited.

Further, there will not be much consolidation in clod chain logistics as they are very capital intensive to build and so it is not easy for companies to leave some capacity just like that which they can do for low key warehousing where their investments are low.

The warehousing sector is witnessing big activity

Earlier, due to small size and small opportunity, large organized players and PE investors have avoided warehousing sector. But now this is one of the most sought out sector. In the last 4 years, investors have put around $3 billion in warehousing and this accounted for around 26% of the total private equity funding in the real estate sector during this period.

Demand for Grade A warehouses (Large automated) is growing and going to cross about 300 million sq feet by 2022 from approx. 140 million sq feet in 2018. So as we can see, this requires massive investment in capacity in the coming 3-4 years.in the next 2 years, investments of around Rs. 45000 cr are going to be made in grade A/B warehouses and some 100 Million Sq feet of warehousing space will be created.

Grand opportunity for Hercules Hoists Ltd

So, this gigantic scale investments and activity in large format warehousing is going to create high demand for material handling equipment for warehousing and this is where Hercules Hoists ltd comes into picture.

Hercules Hoists has established itself as most trusted brand in Indian material handling market and cater to almost all of the manufacturing industries including logistics and counts leading manufacturers as its customers. It operates under “Indef” and Hercules “Hoists brands”.

The scope of its products for material handling systems in warehouses is enormous. Like, its electric wire/chain hoists can be used for overhead material handling in the warehouses. Overhead material handling in the warehouses increases productivity, enhance safety, improve ergonomics and maximize available floor space. It has many other innovative products like iCranes and iStacker which are created for logistics sector. I do not see any reason why Hercules should not be able to benefit from high demand for warehouse mechanization and automation.

Although, Hercules Hoists provides material handling solutions to a number of manufacturing industries but I think its high growth phase is coming now due to growth in warehousing and further due to the revival of investment cycle in other industries. Indian industries were slow on capital expansions due to high debt levels in the past, high interest costs, bank NPA’s resulting in banks not providing loan to industries. But now after a long period of consolidation the investment cycle is going to pick up.

Recent financial performance points towards revival

Its operational performance in the recent 2 quarters points towards revival in its fortunes. In sep-18 quarter results, its turnover increased to 30 cr from 17 cr in sep-17 while its PBT excluding other income was at 3 cr vs 20 lac. Similarly, in Dec-18 quarter results, its turnover increased to 25 cr from 17 cr in Dec-17 while its PBT excluding other income was at 2 cr vs 70 lac.

I think, companies were waiting for more clarity on GST laws/rules before going ahead with their investment plans in warehousing etc. So it was not that they started investing in warehousing right after GST in July-17 instead they waited for the clarity and common sense. I think 2018 was the year of action and from now on the pace is only going to increase so it is possible that we may see high growth in the topline of companies related to this space like Hercules Hoists.

I am waiting for mar-19 quarter result for Hercules and I think it should see some 80%-100% growth in the topline. Further, Hercules does not need any capital investment so soon as I think it can sustain the topline levels of 300-400 cr without any capacity expansions so it implies we are going to see the major impact of this growth in the scale of operations for Hercules in the bottom line as it is also nil debt company. Further, as a nil debt and Bajaj group company there will be no shortage of funds in case it needs investments in capacity expansion in the future.

At present, i care more about the growth in top line than bottom line because there is huge scope of growth in scale of operations. And at current low scale of operations bottom line anyway is not relevant. But still even at such a low scale of operations, at CMP of 115 it trades at PE of 28 (If we take into account the recent performances then the same will around 20-23) which is good because at this juncture i could not have cared even if it was in losses. But this better financial performance is due to conservative and superior use of capital.

I am buying this one regularly and picked good quantity when it fell below 100. Few days back, picked at 115. CMP is 115. This one is good high quality Tier 3 stock (Risky) and I think this may turn out to be another Nelco for us.

But this being Bajaj group stock, nil debt and investments in its books provides high margin of safety and even I put it as Tier 3 but this riskiness is not due to its books/balance sheet weakness but due to the fact that most of its valuation will come from future growth only.

Further as explained in the earlier post that  it is having stocks of various Bajaj group companies like Bajaj Finserv, Bajaj Auto, Bajaj Holdings and Bajaj Electricals and MF valuing some 250 cr, has 2 acre vacant land in Mulund in Mumbai (I think it should get around 70-80 cr). So out of 400 cr market cap, some 320-330 cr (80%) belongs to Investments and land. So we are getting the rest of the company with one of India’s best material handling brand for just 20% (80 cr). It earns around 10-12 cr as dividends from these investments which provides the stability to the bottom line.

Apart from Hercules Hoists, I think Redington, which is my another favorite stock, is going to be benefitted from GST due to low cost of inventory for its distribution business and its focus on third party logistics business. Other large scale Logistics players like Mahindra logistics and Future supply chain will also be the key beneficiaries. 

Also, these giant scale warehouses need Pre-fabricated steel/material and Pennar Engineered building solutions and Everest Industries can be the beneficiaries as these two are one of the biggest but I have not studied these two in detail so not in a position to offer any further view.

In the end, I am going to touch something about the high standards of Bajaj group and this is why I think even after being a small company Hercules is still a safe bet for us.

Something about Bajaj group

Let me share something of my opinion about Bajaj group. Bajaj group is one of the best professionally managed group. Their family members start the job right from the shop level and they have to prove their mettle. Nothing is based on the family ownership quite unlike other promoter owned companies. Very few people know the strong family roots of Bajaj brothers. They are incredibly smart and choose the best person to run the business keeping apart their egos and family ownership.

Rahul bajaj is the current patriarch of the family/businesses and he is an institution in himself. He came to the small town Akurdi in 1965 (Bajaj Auto) and he still stays in this small town in factory colony. I have great respect for Rahul Bajaj and I think he was and is way ahead of the likes of Munjals, Ambanis. There was a time in 1970’s when there was a 10 year waiting for Bajaj scooter but still Rahul never tried to profiteering (as people were dying to offer much more than the market price) but still Rahul offered the best scooter and authentic price.

Bajajs are very down to earth people. The founder Jamnalal Bajaj had two sons- Kamalnayan and Ramkrishna Bajaj. Both were ardent followers of Gandhi and Jamnalal donated everything to Gandhi. Both sons were the real force behind the growth of the empire.

Now let me come to the bigger story-The current leader Rahul is the son of Kamalnayan and Shishir was his brother and a sister Suman. Ramkrishna has three sons- Shekhar, Niraj and Madhur. But for the entire world they were five brothers…there was nothing like cousin brother between them and the most able of them was running the best companies…in fact Bajaj Auto was created by Rahul so he was the leader. But still entire family shared everything…they have pocket money, leaves etc. in equality. However in 2000’s there was a fight between brothers and Rahul was shocked when one of 5 brothers wanted separate business. He along with other 4 tried hard to persuade him to stop demanding. You’ll be surprised to know that it was Rahul’s real brother Shishir who was fighting and other 4 were together and Rahul was leading them. Shishir’s son Kushagra was over ambitious albeit with great abilities but he wanted to build something on his own.

So brothers parted (Only one) and Shishir got Bajaj Hindustan and Bajaj Corp (I think they own some big power plants also). But rest of the 4 brothers are still together and running the other giant group companies. Rahul’s sons Rajiv and Sanjiv are running Bajaj Auto because they have proved their ability. Even Rahul had many differences of opinion with son Rajiv (like stopping scooter production which Rahul did not want) but still he never interfered and Rajiv has his own style. But Rahul has always praised him for his toughness and leadership.

Shekhar Bajaj runs the other Bajaj house biggie-Bajaj electrical. Many times Rahul has told that his younger brother Shekhar has never doubted and wanted a place in Bajaj Auto as he knows that Rahul is running the best show and Shekhar is doing the best in Bajaj electricals. Bajaj electricals is one of the best electrical goods company enjoying great brand strength (one of my investments, Study posted at this blog also). So as you can see there is nothing like bad managing in Bajaj group…the best of them will lead the show. I think the other brothers Niraj and Madhur are associated with Bajaj Auto. So it is still a close knit family…true Indian joint family…sharing everything among them.

This is why I have so much faith in Bajaj group.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).

Bharat Bijlee Ltd: Electrifying Future!!!

As we see our world is witnessing radical changes. We can easily feel that major shift is going to happen in our world. Development, innovation and improvement is a perpetual phenomenon and most of the times development follows compounding growth rate not linear because knowledge base of 10 things/aspects can’t promote 20 stories out of them but a base of 100 can create the scope for 50 new stories because the knowledge of many of these aspects will intertwine and offer more scope for something new and vast. And we are literally at that phase of growth…look at energy sector alone. Our knowledge base in last 10-20 years has expanded from oil/gas/coal to oil/gas/coal/solar/wind/Hydrogen/battery and so on. So now we can intertwine all these and offer new innovative solutions.

Further, radical breakthrough inventions are always few and in most of the cases initial fundamental breakthrough never serve much to the mankind. The more beneficial innovations are process improvements which provide much higher benefits to humanity as a whole. In economics term, Industrial innovations providing news ways of manufacturing like using new materials (Normal minerals in place of rare earth, 3D printing), process improvements (Like IOT) etc. are much more critical for an economy than strong R&D culture in the country. This is the reason that in spite of so much brain capital (India is the R&D center of global giants) India is still not being able to achieve the much deserved success in manufacturing especially in electronics goods. 

Till now, we have made breakthrough inventions like power, Automotive but in our mad run of  nowhere-ness we have consumed enormous resources foolishly and now the situation is getting worse day by day (not year on year). So I feel, now will be the era of optimization and conservation and we’ll see emerging technologies like Artificial intelligence, IOT, Drones, 3D printing etc. which will result in optimal use of natural resources. This will also take care of another ongoing catastrophic epidemic-Pollution of all kind. Sometimes, after seeing the gigantic scale of pollution, I feel whether this proves the existence of Satan? 

And this correction and conservation process is a big business opportunity like power consumes (and wastes) maximum of natural resources and our lust to use power is limitless so no doubt power industry will witness big activity in all dimensions whether it is generation, transmission, distribution, use, substitution (EV). And where there is business opportunity there is the hunt for next big in stock market. This revolution is in initial phase and at present we can’t guess but at least we can sniff. So today’s stock we are going to analyze is more a sniffing and those who get cold easily should not venture into this.

Bharat Bijlee: Path is visible?

Bharat Bijlee (BB) deals in power transformers, Electric motors, Variable speed drives, Permanent magnet Gearless machines for Elevators. Its earlier avatar was more of Transformer player but off late it is getting more into electric Motors, drives and this is what I find exciting. Transformer industry as a whole has faced difficult time in last 4-5 years due to low investments in power transmission and distribution segment as State Electricity boards(SEB) had/still has poor financial health and this imperfectly aligned with the huge investments made for capacity expansions by Transformer players after seeing the huge growth in power generation capacity in India but the dream came crashing into ground hard and all the transformer players were fighting for lower business at even lower margins. 

It means that BB should have most of the financial indicators pointed towards wrong directions so it is best that we should ignore them as this will also lead us into wrong direction. But the road is not muddy and full of pitfalls as BB garnered NP of 26 cr on a turnover of 800 cr in 2017-18 which is good and this will appear much better considering the difficult recent times. This is partly due to the fact that BB has good clean balance sheet and net debt is almost nil (Interest cost is evened out by Interest income), conservative management has enabled BB to weather out the tough phase calmly.

Let’s check its various businesses to see if it makes long term business sense and scope of scale:

A)Electric Motors:

Electric motors convert the electrical energy into usable mechanical force and carry out diverse tasks. Industries basically run on electric motors day and night and that’s why electric motors are regarded as workhorses of the industry. Industry consumes 40 percent of all the energy that is produced, with motors consuming roughly 65-70 percent of this share. So we can see manufacturing is all about electric motors….or better to say “Efficient” electric motors. The efficiency of an electric motor is the ratio of mechanical output power to electrical input power.

The more efficient an electric motor is lesser is the wastage/consumption of power and we can immediately visualize why the cost of production is higher in India. Indian industries on average consumes around 30% more power as compared to advanced manufacturing nations like China, USA and this is the most detrimental aspect which Make in India initiative needs to correct first of all.

The more efficient electric motors are graded as IE1, IE2, IE3 and IE4 with IE4 being categorized as super premium. Motors below IE1 levels are called sub-standard motors.  At present most of the electric motors used in Indian industries are either IE1 or lower grades which consume more power so no surprise that our manufacturing is sub-standard as manufacturers try to match the high power costs by savings in other much essential parts of a product which lowers the quality of the product. Around 90% (20 GW) of industrial electric motors in India are not energy efficient. So this inefficiency is cutting badly but bleeding is from two sides-first from higher costs and second from higher pollution as more power usage means more power production which itself is a pollutive affair.

IE2 and IE3 motors involves higher costs upfront but energy savings and lower repair and maintenance costs over the life time of the motor are much higher than the initial higher cost. These high efficiency motors save energy during their life time which is valued around 10-20 times of the initial higher cost. Indian Industries are now gearing for changing its old low efficient electric motors as they usually have a life of 10-15 years and most of the Indian industries with continuous running plants have electric motors older than 10 years. Repair and maintenance of these low efficient motors during their life time further reduce their efficiency by 10%-15%.

So as we can see that there is clear cut case for Indian Industries to shift to higher rating electric motors. And after the success of Led Bulbs in India, Indian Government has set out the task for creating the right environment for the shift towards higher rating motors in India. First, Indian Government has banned any motors below IE2 rating from Oct-2017. But most importantly it has given the responsibility to implement the shift to Energy Efficiency Services Ltd (EESL). EESL is a joint venture between NTPC Ltd, Power Finance Corp. Ltd, Rural Electrification Corp. Ltd and Power Grid Corp. of India Ltd.

Task of energy efficient Motors cut out for EESL

It was EESL who has successfully ventured the installation of LED bulbs across the nation. As per studies, the usage of LED bulbs has resulted in lesser load of around 10 GW (10000 MW) on the power grid which indirectly means the saving in generation capacity of 10000 MW which costs anywhere around 70000 cr!! The cost of LED bulbs during this time (from 2014 to 2016) came down to 40 from 310!!

The success of LED bulbs initiative has proved the capability of India to successfully carry out the world’s largest energy efficiency programmes. The story of EESL is very encouraging and a case study for International Energy Agency. EESL is growing very fast in last few (100% growth rate) years. Its turnover in 2017-18 was 1400 cr with net profit of  39 cr. It is targeting turnover of 3000-4000 cr this year and an IPO is planned in nest 2 years. It is issuing bonds for funds and already ventured out to UK and Malaysia and is planning an acquisition in UK which will take its topline to 4000 cr!! Electrified performance indeed.  Amid doubts and criticism of the much debated rural electrification programme, the success of EESL is a relief for Modi Gvernment.

The secret of EESL is creation of demand by providing low cost product (Most of the times free of cost and earning money from the associated savings) and it procures product at low costs because of very large orders which ensures the economy of scale for the producers.(I remember our wagon manufacturers Texmaco/Titagarh who are requesting such bulk orders from Indian Railways and this year finally IR has woken up and is giving large orders as IR has also its task cut out to be ready to serve the coming huge business after Dedicated freight corridor…don’t forget to pick Texmaco, Gateway distriparks, Concor and Hind rectifiers).

EESL is implementing the same policy here. EESL is implementing the National Motor Replacement Programme (NMRP) under which the EESL would work with industries to replace all inefficient motors with energy efficient IE3 motors with innovative financing models resulting in substantial benefits to the industry and to the nation. While India have prescribed IE2 as the minimum standard but developed nations across the globe like China, USA, European union are already having IE3 minimum standard.

Energy efficiency market across the globe is a big market valued around USD 20 Billion while USA, UK and china garnering 90% share of it and 80% of this market is supported by Govt subsidies. But EESL is implementing something very unique without any subsidy and that’s why I feel that the scale envisioned in the electric motor programme is achievable. When implementing these programmes, EESL works like an aggregator and improves the system and generate the return by eliminating the inefficiencies and ensuring the scale of operations.

Can you guess the scale for motor replacement? It is gigantic 1.5 crore inefficient electric motors!! By replacing all these motors with IE3 it is estimated that India will save around 6500 Billion electricity units per year reducing 57 million tonnes of CO2 emission per year. These are Indeed Big numbers. IE3 motors use 7%-23% lesser energy apart from other associated benefits of low cost maintenance. At present the target is of replacement of 120,000 electrical motors in the range of 1.1 kW to 22 kW by September 2018. The focus is on pumps, fans, blowers, and compressors using motors which are more than 10 year old, low efficiency. After this, next target is of replacing 500,000 motors in 1.1 kW to 75 kW range by 2020. EESL will provide the motors free of charge to industries and will recover the costs plus margins through the financial benefits generated from energy savings or there will be upfront payment model also. It is estimated that IE3 motor will pay back the extra costs in 12-18 months through energy savings.

For first phase of 120000 motors, EESL has set aside 220 cr for this and they have finalized Siemens, CG and Bharat Bijlee as suppliers for the first phase and this to me is a great news for Bharat Bijlee.  BB secured the order for Rs. 39 cr in the first phase and this will pave the way for the grand success in the future stages of the programme. In the first phase, EESL has been able to bring down the costs of motors by 30% and resulted in an average of 15% lower electricity usage. Actually the status of usage of electric motors in Indian Industry is so poor that there is vast scope for the elimination of inefficiencies and this will reflect in marked improvements in financial metrics and so there is a role for institutions and innovations like EESL…just like a Doctor treating a patient.

Bharat Bijlee has great reputation in Indian electric motor segment and has one of the high tech facilities in India. In fact, when India is yet to incorporate IE3 motors in its schema, BB has introduced IE4 motors (under SynchroVERT brand) in India. IE4 range motors have a payback period of less than a year, and the life time saving for a typical 15 kW motor is Rs. 11.7 lakh for an incremental investment of Rs. 50000.  IE4 is the next frontier for the Indian Industry and most of the high tech players competing in global markets are already replacing their existing electric motor systems with IE4. These motors also do not need a Variable Frequency Drive for operation. Bharat Bijlee has also filed for a patent for the Line Start Permanent Magnet Synchronous Motor (LSPMSM) technology used in the design of SynchroVERT.

Electric motors have been one segment which has not yet garnered the attention which it deserves because if we can see they are everywhere. Some 20% of total energy consumed by Agriculture sector in India is consumed by electric motors, 10% of commercial sector. As India now is aiming high for “Make in India” the scope of scale of electric motors has become even bigger. Rural electrification, rise in the income levels of farmers means more demand for electric motors. Your fridge has this, your AC has this. Energy efficient AC’s are fast becoming the norms now in India as upfront cost of AC is not a factor anymore…India is getting rich…the factor is the running costs so energy efficient systems plays big role.

Agriculture Pump Replacement programme:

Along with NMRP, EESL is also working on agricultural pump replacement programme under AgDSM. The pilot phase of the AgDSM programme has been rolled out in Andhra Pradesh, involving replacement of one lakh old pumpsets with BEE five-star rated energy efficient pumpsets along with smart control panels. India has around 2 cr such inefficient agriculture pumps which will be replaced in stages and will be provided free of cost to farmers with five years warranty. No doubt the savings will offset the initial costs big time. These sub-standard pumps are a big drag on electricity which is born by government in the form of subsidy.

Actually anybody, who knows the nonsense nature of free electricity subsidy, can understand the big business sense in agriculture pump replacement programme. Farmers know that electricity is free so he opts for cheap pump (which is of low quality) and even when it is due for replacement farmers are happy to spend some money to make it workable because they know that at the most it’ll waste electricity which is free/heavily subsidized (some states charge fixed charges on the basis of motor/pump capacity but low quality pumps waste much more energy) to them but it is not to the nation. So there is a big opportunity for savings for India.

So quality Pump players  will benefit from it (Also every pump has an electric motor in it) but state Discom will be the major beneficiary of this initiative as they loose big time in power supply to farmers and as per estimates high rating pumps will save 25% of the current power supply to farmers which they can supply to other paying users. Taking the case of a 5 HP pump which at present consumes electricity worth Rs. 45000/- per year but this will come down to 34000/- with new pumps and this will greatly improves the financials of DISCOM and this is the reason they are also funding the pump replacement programme.

Financially sound Discom will be able to support another business of Bharat Bijlee which is transformers which in the recent past fell into trouble due to sorry state of finances of State Discoms.

Further, even if we leave NMRP of EESL still the direct demand from industry for IE2 electric motors will also be huge due to ban on lower rating motors by the Indian government and BB is going to garner good share of it.

Electric Motors and Electric Vehicles:

This is one of the most important thing which has been completely ignored by the market in the heat of looking for battery playout candidates. Most of the people think that the range of an Electric vehicle will be decided by the capacity of the battery alone but this is not the reality as the stored power in the batteries will be used by none other the humble ELECTRIC MOTOR. So if we’ll see much advanced version of electric motor in the EV then there will marked improvement in the range capacity.

Apart from Electric motors, there are other parts of an EV where India has a local manufacturing prowess. The charging system of the battery is another major component because the fast charging will be the key to successful penetration of EV’s and this fast charging involves rectifiers ( For converting AC power into DC as batteries store DC power) and we have Indian players in this segment which can step up the game…same is for capacitors, electrical contacts. But India has fairly advanced capacity in electric motor manufacturing which India can use for its EV targets. 

India tried to set targets for 100% EV penetration by 2030 which is beyond reach even in dreams. I got very skeptical as I took it as a “Shout good” political gimmick but now sanity has prevailed and India is focusing much real target of 20-30% and it is none other than EESL who has been assigned the task for making it a success and it is already on the job after procuring 10000 EV’s from Tata motors and Mahindra for Government use. These steps will lay the foundations for the future EV programmes for general public as well and will create and upgrade the existing capacities.

EV’s are still beyond the understanding of most as it is a Muscle which is more like a computer on wheels and its cost structure are still a mystery but most analysts are of the view that costs are falling even faster than their imagination and very soon they will disrupt the scene. The main reason for falling cost is that an EV has just 24 moving parts while our conventional cars have some 150 moving parts. This efficiency is due to humble and very simple electric motors.

These 24 moving parts ensure the low maintenance costs over the life of the vehicle wherein our conventional vehicles’ gearbox and clutch have high maintenance requirements once the vehicle run for 150000 KM. 

EVs convert about 59%–62% of the electrical energy from the grid to power at the wheels. Conventional gasoline vehicles only convert about 17%–21% of the energy stored in gasoline to power at the wheels. An electric motor typically is between 85% and 90% efficient. Some big electric motors can now turn 97-98% of the electricity put into them into mechanical energy. Even the best internal-combustion engines can manage only about 45%.

Internal combustion engines (ICE) have been around for about 140 years but electric Motors have been around for almost 250 years. It was only the cheap oil discoveries in the 19^th century that paved the way for ICE but now with the costly damage in the form of pollution is posing existential dangers to the humanity it is expected that electric motors will get their dues now.

Now along with batteries the focus is also on advanced electric motors for increasing the range of EV’s and Permanent magnet motors are being touted as a viable alternative for the conventional AC Induction motors. The key difference is that AC induction motors have to use electricity to generate the magnetic currents inside the motor, which cause the rotor to spin, whereas a permanent magnet motor doesn’t require that additional current since its magnets are always powered. (PMM are created from rare-earth materials which may be another high growth space for India since China is trying to manipulate this industry and India has huge scope for rare earth minerals).

PMM are more efficient because they don’t need to expend any energy to generate the field magnetic poles, as they are permanently magnetic. So this always powered PMM lowers the discharge from batteries and thus improves the range. Even Tesla has used PMM for its model 3. PMM are more relevant for lighter EV’s since high performance cars will need AC Induction motors for generating high power which is the limiting factor of PMM.

The permanent magnet motors are more expensive (due to using rare-earth elements in their magnets), but they are more efficient, weigh less which is very crucial for smaller vehicles like small cars and electric bikes. But this weight penalty of AC Induction motor becomes insignificant as vehicles get larger (for example trucks and buses). Still there is intense research on reducing the use of expensive rare earth in PMM and increasing their efficiency even more and this will make them even better for EV.

Why this is relevant for Bharat Bijlee? Because apart from very advanced technology in AC induction motors it is a leading player in PMM in India which at present it is catering for elevators but it has recently increased the capacity of PMM and it is ready for other uses offered by PMM and EV’s will be one of this. Management of BB is very conservative and they are taking small steps towards the bigger. But there is nothing that should stop BB to venture into EV market also in India because this is the future of mobility and this will create the new Auto ancillary industry in the form of electric motors, Charging components, Capacitors etc. 

B) Permanent Magnet Gearless Elevator Machines:

This is the area which I think can be a surprise package because elevators and escalators are going to see huge growth in India.  Growing urbanization especially in Tier 1 and Tier 2 exerting pressures on land prices and land availability resulting in the vertical growth (Sky-scrappers) along with smart city mission, rapid expansion in the residential and commercial real-estate sectors, Mall culture, Metro rails and Airports will increase the demands for elevators and escalators. 

India’s elevator segment is growing around 12% for last decade and the current size of Indian elevator market is around 55000 units. Indian market was just 6500 units in 1996 so quite a growth in itself. India is the second-largest elevator market after China but here the gap between India and China is also vertical as china market is around 450000-500000 units per year which at one stage was 6 lac units per year!! By the end of 2015 china has around 40 lac elevators while India has figure of somewhere around 5 lac.

But this Gap points only towards one thing-the huge growth potential of Indian market. At present, It is valued at around Rs 10,000 cr with the likes of KONE India, Johnsons Lifts and Schindler India together having market share of close to 60 %. By 2020-21 the market is expected to grow 35-40 per cent crossing 70,000 elevators per annum mark.

Recently, some analysts were doubting the growth of realty sector in India after the RERA , demonetization and high land prices. Although I think RERA will result in much higher growth for quality players and the inefficient players will either leave the market or partner with much better quality players like Oberoi realty, Mahindra life space, Godrej etc. But if one is to look for the signs then elevator market is the first sign of the coming revival.

And the Sign is-Massive expansion plans of Indian Elevator giants like Kone, Johnsons and Schindler India. They are investing around 800 cr for their capacity expansions and to meet the demand for much better, energy saver and green elevators. Their recent expansions will be ready to serve the market by 2019.

Like other sectors consuming significant power to save power costs, elevator sector is also witnessing the demand for energy efficient machines. Gearless permanent magnet motors are the most efficient ones and these can cut energy consumption by up to 30 per cent compared to conventional geared machines. These have a regenerative drive feature to further reduce energy consumption by up to 15 per cent. Bharat Bijlee is already a significant player in conventional geared space.

BB also offers India's first permanent magnet synchronous motors for gearless elevators under brand GreenStar. BB has been witnessing strong growth in domestic industry and export market. Bharat Bijlee’s new plant for permanent-magnet (PM) elevator machines at its Airoli, India, campus commenced operations in May. The 950-m2 plant is a green building for which certification from the Indian Green Building Council is expected soon. The current production capacity of 700 PM machines for elevators per month is scalable for further expansion by the modular design and layout. The company said the plant furthers its strategy for continued domestic and export growth in its GreenStar range of elevator machines and caters to new applications of PM machines going forward.

These Gearless motors has efficiency levels of 93% as compared to 65% of conventional machines and they save some 40% energy and a single Elevator can provide the savings of some few thousand Kwh per year which are significant. 

Of Global elevator market, 70% market is for new installation and 30% is towards highly profitable maintenance market. India has around 5 lac elevators and around 17000 escalators so there will be huge demand for modernization of these elevators into new age, much safer, high speed, energy efficient machines. Maintenance market will also see high growth in India.

Around 80% of Indian elevators work at a speed of less than 1 metre/second while the highest-speed elevator installed at Burj Khalifa works at 10 mps developed and installed by Otis. However, now the demand for 2-3 MPS elevator is rising in India.

I think, Bharat Bijlee may be the only listed one catering to this high growth sector (Leaving out the wire players). This is a small business for BB comprising a turnover of 24 cr in 2017-18 but they are expected to grow fast this year as last year realty sector witnessed some major glitches in the form of Demoney, Rera and GST.

C) Variable speed AC drives

Variable speed AC drive is  an  electronic  controller  that  adjusts  the  speed  of  an  electric motor by regulating the power being delivered and provides continuous control,  matching  motor  speed  to  the  specific  demands  of  the  work  being  performed. In other words, it converts Alternating current (AC) of one frequency to another frequency which gives an opportunity to run the AC motors in variable speed and provide an opportunity for saving energy on many industrial applications like water pumps where a mechanical throttling device such as a mechanical valve or electro mechanical valve is used extensively to control flow of water but a fixed AC supply is used to run the motor. Although this method is an effective means of control, it leads to wastage of energy.

These Drives offer soft start, lower the mechanical and electrical stress on the motors and reduce the maintenance and repair costs and extend the motor life. All these factors are resulting in high growth for AC Drives in Indian market.

Take the example of Normal Air conditioners and the recent Inverter AC’s. In normal AC’s the compressor runs at a particular pace all the time. Whenever a particular room temperature is achieved the compressor motor is shut down and AC switches of but when the temperature rises then again Motor runs at full power. But Inverter AC runs on a variable frequency drive and when target temperature is achieved then in does not completely switch off but it reduces its speed/cooling in order to just maintain the targeted cooling which results in AC working only at 25% to 30% of the total power making invertor AC more energy efficient. A censor in the invertor adjusts the power according to the temperature in the room, lowering the electrical consumption and saving energy.

These Drives are most appropriate and beneficial where motors are subject to variable work loads and in some cases these have shown to save 65% of energy consumed by a motor without Drive!!

The AC market in India is of 50 lac units and Invertor AC’s are just 10% of it while they should be at 90% level just like the much advanced countries like USA, China, Japan etc. Again, not a surprise that EESL is again working in this area to promote the use of Invertor AC’s in India.

So the use of Variable speed drives is going to see high growth. Just like Gearless Machines for elevators, Drive business of BB is also small as compared to Transformer and electric motor business. Drive business has turnover of 27 cr in 2017-18. Bharat Bijlee offers Variable speed AC drives in partnership with KEB Germany.

D) Transformer Business

It is quite surprising that we are covering the biggest business of BB at the last. No doubt stock markets are the most democratic places of the world where legacy and size gets no separate treatment. Transformer business is covered last because this is quite commoditized as compared to other businesses of BB along with the fact that if things work out well in the future then other businesses will grow at much faster pace.

Electric power (expressed in watt) equals current (expressed in ampère) multiplied by voltage (expressed in volt). So, a certain amount of power can be produced either by a low voltage with a higher current or by a high voltage with a lower current. Higher voltages minimize the losses from the inductance or resistance in the wire during the transmission process so power is transmitted over long distances using high voltages. AC power is preferred over DC mainly due to its higher efficiency over long distances transmission.

AC transformer is the device (Invented in late 1800s) which steps up the voltage in order to carry power over long distances, and then step it back down again for local use. 

As mentioned earlier, Transformer industry as a whole has faced difficult time in last 4-5 years due to low investments in power transmission and distribution segment as State Electricity boards(SEB) had/still has poor financial health and this imperfectly aligned with the huge investments made for capacity expansions by Transformer players after seeing the huge growth in power generation capacity in India but the dream came crashing into ground hard and all the transformer players were fighting for lower business at even lower margins.

India, during 2005-2010, made big investments in power generation capacity but we ignored the equally important power transmission and distribution segment which requires equal investments (around 7 cr per MW). Poor financial position of State electricity boards/Discom made the situation even worse. So now the situation is very strange as at one hand are the power producers who are grappling with the low plant load factor (60-70%) and then on the other hand there is rural India which gets power for few hours per day, Industries like cold storage which finds high power charges a big drag for the farmers to opt for cold storage.

Rural India can be a big demand boost factor and keeping the same in view 100% rural electrification plan was launched and it has achieved mixed success and response because as per the scheme a village is considered electrified even if 10% of the houses including school etc. are electrified. So now after the “Village electrification” the focus is on “Village houses” electrification.

Since transformers play a key role in the power sector so the opportunities for transformer industry in India out of rural electrification programme are huge. Government is already working on improving the financial health of Discom and the schemes like UDAY are leaving marked improvement already. Project UDAY has resulted in the turnaround of some of the worst loss making Discom of Chhattisgarh, Haryana and Gujarat.

BB is already a big player in Indian transformer sector and with the recent turnaround of the sector after the consolidation in the sector as small and inefficient players has moved out of the game mainly due to strict quality control measures adopted by the Discom in the recent transformer procurements.

E) Financials and conclusion:

BB has strong balance sheet. Its turnover of 800 cr is comprised mainly of two segemnts-Transformer business had around 60% share and Industrial systems had some 40% share in 2017-18. But the same has been changed to 53% and 47% respectively in June-18 results which I think is due to high growth in areas like Electric motors, Elevator machines and Drive business. BB has turnaround big time in last 2 quarters witnessing high growth both in topline and bottom line. But june-18 quarter has shown stunning results-Turnover at 196 cr vs 149 cr last year and PBT excluding other income at 9 cr vs -10 cr last year. Turnover of transformer segment was at 104 cr and industrial segment was at 92 cr however profit before Interest and tax was 9 cr for Transformer business and 12.5 cr for Industrial business which shows the huge scope for industrial business in the future.

BB has debt of around 214 cr (Short term working capital) but it has liquid corporate deposits of 174 cr so it is virtually debt free. However it has investments in the shares of Siemens (200 cr), HDFC bank (100 cr) etc. the market value of which is 330 cr plus 17 cr of mutual fund. The cost of investments in stocks was just Rs. 4 cr. Its market value at CMP of 1350 is 750 cr so investments of 350 cr means that its main business is available at a valuation of 400-500 cr at a PE of around 10-15 which is way cheap for a strong reputed business house having the expertise and exposure to the some of the highest growth segment of the Indian economy. I have just made a crude calculation of forward PE on the basis of recent June-18 quarter results, annualized EPS will be around 100 although taking into account the strong growth in the top line (Recent 2 qtrs were good so we can take it as revival) and the impact of operating leverage in the bottom line can take the EPS much higher.

There may be views that BB has marked these investments as Non-current means that these are not for sale but still they provide the strength and safety to the business. BB has ventured into new emerging businesses which if succeeded will require investments for expansion and BB will surely touch these at that time. It is fully expanded in transformer business and the capacity usage will only grow from hereon. Also, its dividend income was at 8 cr last year which in 2017-18 was at 2.4 cr mainly due to reduction in the dividend declared by Siemens from Rs. 34 to Rs. 7 due to exceptional income in 2016-17. But I think that in the next 1-2 years it should settle around 6-7 cr.

BB used to pay Rs. 25-30 as dividends (payout ratio around 20%-25%) during 2008-2012 when it was earning good from its transformer business. So we can expect similar distributions from it in the future also which at present valuation makes it a yield of 2% which is good. Voltamp is another strong player in transformer business available at reasonable valuation of 1012 with strong balance sheet with nil debt liquid investments but it mainly deals with transformer business so I have left it for the time being but in case there is some growth catalyst then we’ll cover this one also.

I started studying it at 950 in jan-2018 but after Dec-17 results it just ran out of reach too fast and touched 1750 but the recent fall provided good entry point and I made my first entry at 1280 in last week. I have invested around 50% of my target amount and I’ll be investing more after sep-18 results and at every growth catalyst like its significant move in any of the emerging businesses like EV and Elevators and it getting more orders for electric motor business even at the levels of Rs. 1500, 1700 or 2000. CMP is 1350 and it is a good buy at this price and at every fall if any happens in the future.

As one can see most of the growth avenues for BB are pointing towards future so it is more like a concept stock although the economic realities around these emerging businesses provides reasonable level of surety that BB will achieve success in these emerging ventures but still I think it is prudent to consider it as moderately risky investment although we are getting the comfort from its established and profitable business in transformer and electric motor business and its cheap valuations at 10-15 PE, strong liquid investments also provides the margin of safety.
  
PS: Bharat Bijlee is not a PSU.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).