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Switching gears for momentous growth

Salzer Electronics Ltd (SALZER) is a proxy play on the burgeoning demand given the strong outlook for electricity generation and related infrastructure development. The demand for electrical components and switchgears is bound to rise due to the replacement of low KVA transmission lines with high KVA lines, electrification of railways, development of industrial corridors, Metro Rail projects and SMART City development

SALZER is the largest manufacturer of CAM operated rotary switches (market share of 20%) and wire ducts (market share of 25%) in India and is a preferred supplier to marquee capital goods and EPC companies (including L&T, Schneider Electric, BHEL, Nuclear Power Corp, Indian Railways, ABB, General Electric, Honeywell, Siemens, etc). The switchgearssegment contributes 45-50% to the overall revenue, while the rest comes from the copper wires & cables business (40-45%), building materials (5- 10%) and energy management (less than 5%).

We initiate coverage on SALZER with a BUY for a price target of INR 388 per share (FY24 EV/EBITDA of 7.5X), implying an upside of 97% from the CMP of INR 197. Over the period of FY21-24E, we expect SALZER’s revenue/ EBITDA/ net earnings to grow at a CAGR of 21.2%/ 24.1%/ 38.4% to INR 1,078 cr/ INR 118 cr/ INR 55 cr, respectively, while EBITDA and net margins are expected to improve by 76bps (to 11.0%) and 168bps (to 5.1%), respectively. Subsequently, return ratios – RoE and RoIC – to improve by 626bps (to 12.5%) and 495bps (to 13.9%) respectively by FY24.

SALZER has also entered into two strategic JVs in electric vehicle (EV) space:

* JV with Kostad Steuerungsbau GmbH, to manufacture DC Fast charging stations for EVs.

* JV with E-March LLP, to manufacture electric conversion kits for scrapped 3Ws, which will be a kind of a re-birth for a diesel vehicle into an EV.

These JVs offer significant business potential; however, we have not considered it in our forecast. Risk to our estimates: 1) low promoter holding and 2) downturn in economic activity

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