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Company Background

Genus Power Infrastructure Ltd. (Genus), promoted by Mr. Ishwar Chand Aggarwal in 1994, is amongst India?s largest electricity metering solutions provider, with ~27% market share. It?s a market leader in various kinds of meters, including ‘smart meters’, with in house research. This IoT play is the future of the metering industry in India and a potential game changer for the Company. Genus is also engaged in ECC in power distribution, in which the Company is in a maintenance mode.

Investment Rationale

Witnessed lower capacity utilization (CU) due to semiconductors shortage

* During Q1FY23, Genus net sales increased by 43.5% y-o-y at Rs 1,870.4 mn, though it remained muted q-o-q due to lower capacity utilization on account of shortage of semiconductors and key electronic components. However, the Company has secured its requirement of semiconductors for FY23 and normalcy in supply chain is expected to be restored in next three months. Therefore, H2FY23 onwards we expect a healthy rebound in revenue on the back of a robust order book. Management highlighted that going forward, there will be sequential growth every quarter as the conditions are getting normalised.

* As of June 30, 2022, Genus reported an order book of Rs 18.55 bn, which includes recent order worth Rs 8.28 bn won by it. This order includes appointment of Genus as Advance Metering Infrastructure Solutions Providers (AMISP) including design of AMI system with supply, installation and commissioning of 1 mn smart prepaid meters, DT (Distribution Transformer) meter level energy accounting and FMS. Genus will start receiving peak recurring revenue of Rs 760 mn p.a. post-installation of 1 mn meters. Management highlighted that tenders worth ~Rs 20 bn have been quoted and participated and tenders worth Rs 180 bn are expected to be participated in next 3-5 months. Thus, the Company is anticipating a robust order inflow in FY23.

* In the light of improvement in business climate from Q3FY23 onwards, buoyed by a rise in economic activity and the Government?s thrust on lowering AT&C losses, we have built-in topline growth of ~56% in FY23E and ~32% in FY24E

EBIDTA Margins are expected to be in the vicinity of ~16.5% by FY24E

* Genus has witnessed a significant decrease in EBIDTA margin by 290 bps q-o-q at 7.7%, on the back of a steep rise in raw material cost which could not be passed on due to old fixed-rate orders executed by the Company and acute shortage of semiconductors. Lack of operating leverage due to lower CU also contributed to the low EBIDTA margin.

* From H2FY23 onwards, execution of new orders is expected to start which are bid on the basis of current raw material and semiconductor prices, expected to result in better margins going forward. Therefore, we expect EBIDTA margins to improve to ~12.5% and ~16% by the end of FY23E and FY24E.

Reforms Linked Result Based Revamped Distribution Sector Scheme (RLRBRDS)

* The GoI has recently approved RLRBDS to reform the Indian power sector with an objective of reduction of AT&C losses on pan-India basis at 12-15% by 2024-25, developing institutional capabilities for modern DISCOMs and improvement in the quality, reliability, and affordability of power supply to consumers through a financially sustainable and operationally efficient distribution sector. The scheme has laid an outlay of Rs 3 tn for five years (upto FY26) with Rs 1.5 tn dedicated for the installation of 250 mn prepaid smart meters. It is proposed to install ~100 mn prepaid smart meters by December 2023 during Phase-I.

* Unlike earlier schemes, it empowers the state utilities to customise the scheme as per their requirements. Management highlighted that 75% of tenders will be opex (operational expenses) based tenders under which capital expenditure will be borne by AMISP (industry players like Genus) which will be repaid by state utilities as a monthly rental over 6-8 years (in earlier schemes utilities had to make upfront payment). Rest 25% of tenders will be capex based. Money invested by the AMISP will be safeguarded through sovereign guarantee, escrow accounts and LC. Thus, it is a win-win scheme for both State Utilities and AMISP and can be a game changer for energy metering industry. It is expected that the scheme will gain momentum during CY22.

* Further, under the scheme, the GoI has divided states into two categories viz „special category? and „other than special category?. Under other than special category, the incentive is fixed at lower of Rs 900 or 15% of cost per consumer. Further incentive of Rs 450 is provided, if utilities are able to install these meters by December 2023. Special category states include NorthEastern States, Himachal Pradesh, Uttarakhand, Andaman & Nicobar Islands, Lakshadweep and Union Territories including Jammu & Kashmir and Ladakh. Under this category incentive is fixed at lowest of Rs 1,350 or 22.5% of cost per consumer with further incentive of Rs 675 if the utility adheres to above mentioned deadline. The impact of the scheme has been felt on the ground as majority of SEBs have come out with enquiries and floated tenders for installation of smart meters, some of which have already been decided.

* To scale up domestic electronic manufacturing, in Budget 2023, GoI has announced to calibrate customs duty on electronic items including smart meters, which augers well for Genus.

Valuation

Though the business climate is tumultuous, we expect Genus to emerge relatively unscathed due to its focus on technology upgradation and operational efficiency to serve its clients with long lasting relationships which have engraved its leadership position. In smart meters the Company will have good opportunities in terms of recurring revenue as the facility management system is also part of the contracts. Genus is specifically targeting recurring revenue to sustain its growth. We have currently valued the stock on the basis of P/E of 18x FY24E earnings of Rs 5.2/share, and recommend to 'Buy' the stock with a target price of Rs 94 per share (upside of ~26%).

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