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Published on 3/10/2022 1:52:26 PM | Source: LKP Securities Ltd

Buy Schneider Electric Infrastructure Ltd For Target Rs. 236 - LKP Securities

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Long runway for growth, outlook positive

Schneider Electric Infrastructure Ltd (SEIL) is engaged in the business of Manufacturing, Designing, Building and servicing technologically advanced Products and Systems for Electricity distribution including products such as Distribution Transformers, Medium Voltage Switchgears, Medium Voltage Projection relays and Electricity Distribution & Automation equipment. SEIL also specializes in providing solutions for Smart Grid. SEIL’s solutions are used by electrical distribution (utilities) and power generation companies along with electro-intensive industry. SEIL is poised to perform well ahead given 1) GOI power sector reforms along with initiatives like grid modernization and investments in sustainable energy (renewables). 2) Company’s strong presence in Infrastructure, Power, Building, Industry and IT segments, coupled with its ability to offer Services cutting across these segments, provides a distinctive advantage to serve its customers, further supported by strong parental support to help SEIL leverage its experience 3) Strong order book provides healthy revenue visibility going forward.

Government initiatives to aid order inflows: GOI power sector reforms along with initiatives like grid modernization, investments in sustainable energy and Make in India to result in favorable business environment for SEIL. In the past few years, the Ministry of Power has taken massive initiatives and transformed the country from being a power deficit nation with schemes like Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), Ujwal DISCOM Assurance Yojana (UDAY), and Integrated Power Development Scheme (IPDS). The Indian Electric Equipment market is expected to increase by USD 33.74 billion from 2021 to 2025 to reach USD 70.69 billion. The sector’s growth momentum is expected to accelerate at a CAGR of 9% and it contributes 1.5% to India’s overall GDP. Some of the triggers expected to play out in next 5-8 years being 1) Renewable Energy (RE) capacity rising 82% by FY26-27 & 2.8x by FY30; 2) Thermal capex revival; 3) Transmission capex CAGR of 15%+ vs less than 5% last 5 years; 4) Make in India initiative along with new domestic sourcing norms for the power sector are providing a fillip to the electric equipment sector; & 5) Green Hydrogen ramp-up. These factors along with expansion in industrial activity and 24x7 Power for All opens up immense opportunities across sectors for power and power equipment companies. Concurrently, substantial investment by Government should result in fresh inflow of funds thereby leading to healthy orders across the value chain.

Beneficiary in Smart City tendering activity: While government has identified ~110 cities to be upgraded as smart cities, concrete plans for integrating multiple systems are being finalised. Currently, ordering for Smart City capex is done on piecemeal basis and ordering activity is expected to pick-up, as bids for finalisation of Project Management Consultants (PMC) and vendors seem to be getting issued. Initial demand is expected to come from Supervisory Control and Data Acquisition (SCADA) systems & products, although aged infrastructure with major DISCOMS can act as a major hindrance in exploiting the full potential of Smart systems. Tendering for Smart City capex is to be done by state government backed agencies, which are in process of assigning system integration responsibilities.

Energy rebound initiatives and solar power to be new growth levers: As a part of the energy rebound initiative, SEIL continues to shift from Engineering to order (ETO) to Configuration to order (CTO) model, which is resulting in lowering manufacturing time from 3 months to 3 weeks. Intention to prototype products like RMU’s, Relays, SCADA equipment, etc. by standardising around 4-5 models can be an important factor driving SEIL’s growth prospects. Additionally, SEIL can benefit from constant increase in commissioning of solar power in India. SEIL had earlier powered 2 GW of solar power through its inverters, transformers and medium voltage equipment.

Turnaround expected while PAT turns black: Management focus from last few quarters has been to improve the profitability of the company. Initial turnaround in business seen with strong performance witnessed across its Topline with PAT turning black in FY22 further substantiated by strong performance in Q1FY23 after a long period of negative PAT while the order book remains strong providing healthy revenue visibility ahead. Company’s changing strategy with selective bidding across different projects, changing revenue mix with higher share targeted from service and transaction-based business, which entail higher margins, risk mitigation by bidding with EPC across Smart city based projects had led to the change in performance and expected to be on the similar lines with a gamut of opportunities providing healthy pipeline across power, data centres, RE etc. provide scope for order inflow ahead.

Outlook and Valuation

Overall outlook remains positive for the segments that drive the growth for the company. The power sector in India continues to remain one of the government’s primary focus areas, as increasing number of reforms involving digitalisation are expected to be implemented in the next few years. In the long term, reform is also expected to take place at the distribution level, including privatisation and a shift towards renewables, in which India has committed itself to an ambitious target. In the transportation sector, the development of the metro lines across India, the modernisation of the railways, and focus on building more and better airports indicate that these are up for expansion in the near future. Oil and Gas are also expected to undergo a period of transition as the case for renewables becomes undeniably stronger. Company’s performance for FY22 and Q1FY23 was strong wherein execution have remained strong after a long hiatus reaching ?15,000 million in one year for the first time while PAT turned black after 10 years. Company strategy remains aligned to prioritise cash and margins. Overall company remains cautiously optimistic in the short to mid-term with support from the government in the form of investment, reforms and policies. We initiate coverage on SEIL with TP of ?236.

 

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