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Scaling up the smart meter business amid growing market demand

Kaynes Technologies (KAYNES) is rapidly scaling up its smart meter business to tap the huge 250m (INR750b) smart meter market over the next few years. The company has recently inaugurated its electronics manufacturing facility in Hyderabad for the production of smart meters, and has acquired its client Iskraemeco.

* Smart meters are gaining momentum due to India's RDSS scheme, which aims to replace 250m conventional meters by CY25. As of Sep’24, only 14.5m meters have been installed, but the installation rates are projected to rise, presenting a substantial INR632.8b opportunity for Advanced Metering Infrastructure Service Providers (AMISPs) and System Integrators (SIs).

* While KAYNES already manufactures smart meters for clients such as Iskraemeco and L&T from its Mysore facility, it has recently opened a large Hyderabad plant with a capacity of 4m meters annually. The company has also acquired Iskraemeco India (AMISPs/SI) for INR492.86m, enhancing its manufacturing and customer service capabilities. This acquisition enables KAYNES to offer installation and after-sales services while expanding into smart meters for other utilities (gas or water).

* KAYNES has launched a fully automated facility in Hyderabad, producing 3,000 smart meters daily (4m meters p.a.). The company’s plans to add another building next year thereby increasing the capacity to 10m meters annually, supporting future expansions.

Smart meters – a short-term boon

* Smart meters are gaining momentum following the Government of India's Revamped Distribution Sector Scheme (RDSS) launched in July’21, which focuses on replacing conventional meters with smart meters to reduce Aggregate Technical & Commercial (AT&C) losses and eliminate the cost-tariff gap for state distribution utilities (discoms).

* As of Sep’24, 222m meters have been sanctioned, of which 111.7m meters have been awarded to AMISPs or SIs.

* However, only 14.5m smart meters have been installed, falling far short of GOI’s target to replace 250m conventional meters by CY25.

* Despite slow progress, we anticipate a sharp increase in installations over the next two years. Additionally, tendering activity is expected to remain high in the near to medium term due to the pending award of 104.7m meters, offering significant opportunities for AMISPs and SIs.

* The total opportunity for AMISPs translates into ~INR632.8b, i.e. 207.9m meters (of the total 222m meters, 14.5m meters have already been installed) at a price of ~INR3,000 per meter (including the manufacturing cost of INR2,000-INR2,500 and the balance for services).

* Of the 111.7m awarded meters, KAYNES expects to gain substantial market share in this segment (~20m meters opportunity; INR60bINR65b over the next three to four years) as its customers include two of the best global companies.

* Further, KAYNES will have an additional revenue stream (post acquisition of Iskraemeco) in the form of a maintenance charge of INR100-INR125 per meter per month for 10 years, following the installation that AMISPs will charge to Discoms.

Strengthening its position in the smart meters universe

* KAYNES has been manufacturing smart meters from its Mysore facility in India for key clients such as Iskraemeco and L&T.

* With strong expertise in the EMS space, the company has also recently inaugurated a large facility (~46 acres in Hyderabad) dedicated to the manufacturing of smart meters (4m meters p.a.).

* To further strengthen its position in the fast-growing smart meter industry, KAYNES has recently acquired 100% stake in Iskraemeco India Private Limited for a purchase consideration of INR492.86m.

* Iskraemeco is engaged in the business supply, installation, operations, and maintenance of smart meters in India, with an annual turnover of INR654.2m in FY24. It is one of the AMISPs/SIs with an in-hand order book of ~3.5m meters from Power Grid Corporation of India Ltd (PGCIL) -Gujarat. This order is slated to be delivered over the next 1-1.5 years and would translate into a potential short-term revenue of ~INR10.5b for KAYNES.

* With this acquisition, KAYNES aims to become a full-fledged smart meter company, with offerings ranging from manufacturing to providing maintenance services. With this acquisition, the company will gain the technical know-how for smart meters (including the software part) and foray into the smart meter market for other end uses (gas or water).

* KAYNES, through Iskraemeco, has already received an order from PGCIL to install ~3.5m smart meters in Gujarat and is expecting more orders from other states such as West Bengal government.

* KAYNES will not only operate as an EMS company to manufacture smart meters for its clients but also provide installation and after-sales services for orders received through Iskraemeco.

* KAYNES expects to generate annual revenue of ~INR8b-INR10b from smart meters from FY26 onwards (i.e. ~17-21% of FY26E consolidated revenue), with anticipated revenue of ~INR4b-INR5b in FY25.

* The margins from this segment are better than the current margin profile of KAYNES, thus expecting to drive up overall margins going forward. ? The asset turn of this business will be 6-8x (mostly near 8x as it is a productfocused business) while working capital is ~90 days.

Advanced smart meter facility with potential for future growth

* KAYNES has set up a new facility in Hyderabad, which can produce 3,000 meters per day (one product to be made in every nine seconds) in one assembly line. The company will install two more lines going forward, taking the total capacity to 4m meters p.a.

* This is a fully automated facility with SMT lines, injection molding, and assembly units, involving minimal human intervention. Further, KAYNES uses robots to transport raw materials to the SMT line and pack the final products.

* The facility is only a small part of the large 46-acre land parcel that KAYNES owns and will incorporate further expansions going forward.

* The company plans to add another building next year, taking the total annual capacity to 10m meters.

Valuation and view

* KAYNES is a prominent end-to-end and IoT-enabled integrated electronics manufacturer with strong order book growth (85% CAGR over FY20-FY24) and a higher share of Box Build (~42% in FY24) and PCBA (~55%).

* We estimate a revenue/EBITDA/Adj. PAT CAGR of 57%/64%/71% over FY24- FY27, driven by a healthy order book growth trajectory and a better margin profile (increasing mix of high-value orders).

* We reiterate our BUY rating on the stock with a TP of INR6,400 (premised on 60x Jun’26E EPS).

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