Schneider Electric Infrastructure Ltd. looks strong for further growth with strong order book and diverse portfolio of manufacturing and services.

SEIL is a leading player in its field and 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.

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.

The government is in the process of finalizing detailed plans to integrate numerous systems, while also identifying approximately 110 communities to be upgraded as smart cities. Ordering for capital expenditures for smart cities is now done piecemeal, but it is anticipated to ramp up as bids for vendors and project management consultants (PMC) are starting to come in. Supervisory Control and Data Acquisition (SCADA) systems and products are anticipated to drive initial demand, but outdated infrastructure with significant DISCOMS can provide a significant obstacle to realizing the full potential of smart systems. Agency backed by the state government will be the ones to tender for capital projects related to smart cities; these agencies are currently delegating tasks related to system integration.

SEIL is continuing to move from the Engineering to Order (ETO) to the Configuration to Order (CTO) paradigm as part of the Energy Rebound Initiative. This is cutting the manufacturing time from three months to three weeks. One key element influencing SEIL's growth potential may be the company's plan to standardize on 4-5 models for prototype items such relays, RMUs, SCADA equipment, etc. The steady rise in solar power commissioning in India is also advantageous to SEIL. Through the use of its inverters, transformers, and medium voltage equipment, SEIL had previously generated 2 GW of solar power.

SEIL will benefit from the GOI power sector reforms as well as programs including grid modernization, Made in India, and investments in sustainable energy. With the implementation of programs like the Integrated Power Development Scheme (IPDS), Ujwal DISCOM Assurance Yojana (UDAY), and Deen Dayal Upadhyay Gram Jyoti Yojana (DDUGJY), the Ministry of Power has taken significant steps in the last few years to change the nation from one with a power deficit. From 2021 to 2025, the Indian market for electric equipment is projected to grow by USD 33.74 billion, or USD 70.69 billion. The sector adds 1.5% to India's GDP overall, and its growth momentum is predicted to pick up speed at a CAGR of 9%. 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.

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Industry Research:

GOI power sector reforms along with initiatives like grid modernization, investments in sustainable energy (renewables), Make in India to result in favorable business environment for Schneider. India’s power sector is forecast to attract investment worth ₹9-9.5 trillion (US$ 128.24- 135.37 billion) between FY20-FY24E. Renewable energy will play an instrumental role in meeting this incremental demand wherein Renewable Energy (RE) capacity rising 82% by FY26-27 & 2.8x by FY30. 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. India’s Power Equipment sector comprises of two segments – generation equipment (boilers, turbines, generators) and transmission & distribution (T&D). T&D Machinery comprises of allied equipment likes transformers, cables, transmission lines, switchgears, capacitors, energy meters, instrument transformers, surge arrestors, stamping and lamination, insulators, insulating material, industrial electronics, indicating instruments, winding wires, etc. The generation equipment sector is 28% and T&D equipment sector is 72% of the overall industry. 

According to the Ministry of Power (MoP), India’s cumulative installed power capacity grew by 1.9% YoY at 379.1 GW in year 2021. Thermal power (including Coal, Gas, Lignite and Diesel) continued to enjoy the lion’s share (61.4%) of India’s installed power capacity mix. However, due to the increased focus on cleaner and greener energy sources, India’s thermal power share continues to witness a downward trend (61.4% in FY2021 vs 62% in FY2020). On the other hand, India’s thermal power capacity marginally grew by 1.1% in FY2021 to 233.2 GW. According to the WEA 2021 report, the Indian government plans to ramp renewable power capacity (mainly solar and wind) by 5X by 2030 to around 420 GW, which will require the current grid to be scaled to handle 30-40 GW of annual installations. The IEA’s Energy Outlook 2021 projects India could add an incremental 900 GW of renewable capacity by 2040. The IEEFA recently estimated India’s expenditures to attain 450 GW of renewable energy capacity by 2030 would require half a trillion dollars: $300 billion spent on solar and wind infrastructure. The electrification of India’s transportation sector will impact vehicle segments consisting of two and three-wheeler models, given less expensive total costs of ownership (TCOs) relative to ICE vehicles, further underscored by a large number of recent venture capital deals in the space targeting “last mile” charging connectivity and infrastructure. India could potentially become a world leader in battery storage, with the IEEFA predicting India could add 140-200 GW of battery capacity by 2040 to achieve its climate goals.

In June 2021, the Cabinet Committee on Economic Affairs (CCEA) approved the marquee ₹3.03 trillion power distribution company (discom) reform scheme, wherein the Centre’s share will be ₹97,631 crore. The Scheme seeks to improve the operational efficiencies and financial sustainability of all DISCOMs/ Power Departments, excluding Private Sector DISCOMs, by providing conditional financial assistance to DISCOMs to strengthen supply infrastructure. The ambitious scheme aims to bring down India’s average aggregate technical and commercial loss from the present level of 21.4% to 12-15% and gradually narrow the deficit between the cost of electricity and the price at which it is supplied to ‘zero’ by 2024- 25. The reforms are also aimed at improving the reliability and quality of the power supply. A measure for achieving this is the migration towards having a higher ratio of high voltage to low voltage T&D networks, further pushing the demand for upgraded transmission lines. Under GEC III, estimated at ₹416.88 billion, the central government has approved transmission schemes for renewable energy zones with a potential capacity of 66.5 GW to be achieved by December 2023. Further, a renewable energy potential of 65.5 GW has been identified across eight states for commissioning between 2022 and 2025. The associated transmission system will involve an investment of ₹640.43 billion. India has joined the league of 15 global alliance which will work towards the ethical use of Smart City Technologies. The Government aims to construct 65,000 kms of national highways at a cost of ₹5.35 lakh crore (US$ 741.51 billion). The Government also aims to construct 23 new national highways by 2025. In February 2022, NHAI rolled out a plan to construct 5,795 kilometres of highways that will connect 117 districts. The plan was worth ₹1 trillion (US$ 13.09 billion). To boost rail infrastructure and make the Indian Railways network future ready, Indian Railways has identified 56 projects across the country in various zones to be completed by Feb-Mar 2022 and FY23. India is rolling out 400 Vande Bharat trains that is expected to bring ₹40,000 crore (US$ 5.24 billion) of business opportunity for the country. Under the Union Budget 2022-23, the government allocated ₹1,40,367.13 crore (US$ 18.40 billion) to the Ministry of Railways. Moreover, Indian manufacturers, under the ‘Atmanirbhar Bharat’ initiative, are being urged to develop an alternative to high-tech machines that are needed to build high-speed rail speedily for the country’s first high-speed rail corridor connecting Ahmedabad and Mumbai. As part of the National Rail Plan for 2030, Indian Railways is expected to create a future-ready railway system by 2030 to bring down logistics cost and ensure 100% electrification of broad rail routes by December 2023. 

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.

The unprecedented crisis created by the pandemic outbreak has propelled the Data Centre business providing an unexpected tailwind. Technology adoption and digitization across the sectors were fast-tracked globally and India also leap-frogged at least a decade in the past couple of years. India accounts for 14% of the world’s mobile subscriptions and 15% of the total mobile data traffic. This is likely to increase to 17% by 2027 as our economy is poised to grow despite a global slowdown and other economic headwinds. Hence, it is evident that a substantial volume of data will be generated that will require enhanced storage capacity. The data consumption per user per month has increased from 1.24 GB1 in Q2 2017 to 14.1 GB1 in Q2 2021 and 17 GB in 2022. The average traffic is estimated to rise to 50 GB per month per smartphone in 2027 (almost at par with estimates for China).

Investment Rationale:

On-going Power Sector reforms to propel company growth

The government has launched a number of programs, including the Deen Dayal Upadhyaya Scheme, the Integrated Power Development Scheme (IPDS), and the Ujawal Discom Assurance Yojana (UDAY), to stimulate the power industry. With an outlay of ₹3,03,758 crore over five years, from FY 2021–22 to FY 2025–26, the Central Government has approved the Revamped Distribution Sector Scheme, a Reforms–based and Results–linked Scheme, with the goal of improving the quality, reliability, and affordability of power supply to consumers through an operationally efficient and financially sustainable distribution sector. With the exception of Private Sector DISCOMs, the Scheme seeks to improve the operational efficiencies and financial sustainability of all DISCOMs/Power Departments in order to reduce AT&C losses to pan-India levels of 12–15% and the ACS-ARR gap to zero by 2024–25. DISCOMs/ Power Departments would be able to access funds under the Scheme for Pre-paid Smart Metering, System Metering and Distribution infrastructure works for loss reduction and modernisation. Concurrently, substantial investment by Government should result in fresh inflow of funds thereby leading to healthy orders across the value chain. We expect SEIL to reap benefits in the form of healthy order flow over coming years. We expect SEIL to benefit largely on account of government’s outflow. Furthermore, as GDP is projected to grow at the rate of about 7% over the next few years, power sector is set to be the biggest beneficiary of this growth.

Change in Product mix and operational efficiency to boost margins

In order to achieve profitable expansion, SEIL uses complementary business models for its products and solutions. While Solutions and Services allow the company to produce additional growth and profits, cut capital intensity, and assist mitigate cyclicality, the varied product portfolio helps SEIL attain scale and pricing power. We think SEIL has to use its technology to connect market-leading products in order to maintain growth and strengthen its leadership position.

System Business (72% of Revenues): Company’s system business provides holistic solutions which include complete systems for electricity network, including products such as transformers, switchgears, protection relays and electricity distribution management systems. Despite providing full-fledged systems, SEIL reports lower margin as the company compromises margins for bulky order wins. However, this scenario should change going forward. With the anticipated improvement in financial health of DISCOMs, we expect healthy order inflow into the industry as a whole thereby bringing healthy competition and expanding the pie for all the players to co-exist. Subsequently, this should imply better margins for the company in particular and the industry in general.

Transactional Business (17% of Revenues): As part of transactional business segment, company produces and supplies products like transformers, sub-stations and various equipment’s for distribution companies and OEMs. During Q1FY23, company’s transactional business contribution moved up from 17% in Q1FY22 to 21% in Q1FY23 and expected to maintain healthy growth pace and improving mix, thanks to the on-going sectoral reforms. We believe, significant improvement in order inflows should generate sizeable demand which in turn should drive the transactional business forward. Consequently, the company should report healthy margin in this particular segment.

Service Business (11% of Revenues): Company’s service business includes Annual Maintenance Contract (AMC) business which serves distribution companies and maintains their installed systems. Besides, SEIL provides Automation solutions like SCADA (supervisory control and data acquisition). Revenue contribution mix improved to 10% in Q1FY23 and expected to improve further on the back of demand for automation. We believe with industry shifting towards smarter technology, the need for automation services should be on the rise.

Improving liquidity in industry

An essential component of the Power Sector's overall operation is the Distribution Sector. But distribution companies have been seeing increasing worries about its financial stability in recent years. High financing costs for upcoming projects combined with complicated regulatory procedures cause cost overruns, which raise tariffs. The financial viability of state DISCOMs is impacted by populist tariff schemes that worsen operational inefficiencies and aggregate technical and commercial (AT&C) losses, which have stagnated over the last three years at approximately 21%. These DISCOMs are already struggling with massive debts totaling ₹3.89 trillion in FY22. Almost 20% of the losses are attributable to the distribution industry. An annual 10% decrease in distribution losses can increase the electricity supply by almost 100 BU. Since the new government has taken over, Power Ministry has been emphasizing on an efficient and well performing distribution sector and focusing on the improvement of financial health of utilities towards providing reliable and quality power supply and universal access to power by its UDAY (Ujwal Discom Assurance Yojana) programme. It also announced the Revamped Distribution Sector Scheme (RDSS) with an outlay of ₹3.03Tn with an estimated gross budgetary support from the central government of ₹976.3 bn – which seeks to improve the operational efficiencies and financial sustainability of all discoms/power departments (excluding private sector discoms) by providing conditional financial assistance. However, it is been observed that a settlement of past dues alone would not solve the basic problem faced by the SEBs. We believe, in order to facilitate the strategic goal of ensuring round-the-clock power for the entire nation, the government will have to take several initiatives such as smart grid, IT enablement and process automation, high-voltage distribution system (HVDS), demand side management (DSM), PPPs, power trading, and various energy efficiency (EE) initiatives. We expect these initiatives by government will lead to turnaround in the Distribution sector thereby improving financial liquidity in the power equipment industry. We further believe as liquidity position improves in the industry fresh flow of order will flow resulting into increase in order book. We believe Schneider’s offering in the form of wide range of products and solutions in the distribution segment positions it in a sweet spot.

Schneider’s smart offering bridges solutions

Technology integration into a strategic approach to sustainability, citizen welfare, and economic development is what defines a smart city. The Smart City's main goals are to maximize urban efficiency, do more with less, offer residents unique services, cut expenses, and increase revenue. Schneider Electric provides systems for commercial buildings, water, and energy that serve as the foundation for businesses. Cities can now achieve urban efficiency by managing all these systems holistically thanks to the company's integrated and collaborative approach. The company's strategy produces the immediate, quantifiable, visible, and low-investment outcomes that cities require today. The city will be able to monitor and manage various, dissimilar systems in real time thanks to the solution. This Urban Efficiency Platform has been combined with advanced sustainability reporting tools, analytics, operational control solutions and innovative applications to provide a truly efficient system of systems.

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. SEIL also intends to prototype some of products like RMU’s, Relays, SCADA equipment, etc. by standardizing 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.

Strong parental support to help company 

The Schneider Electric Group, a global leader in energy management, includes Schneider Electric Infrastructure Ltd. With revenue of 28.91 billion euros, more than 166,025 workers, 80 plants, 250 service centers, 51% of sales in new economies, and 1300 employees working in research and development, Schneider Electric is the second-largest company in the world. With operations in 100 countries, the group is a global leader in energy management and holds leadership positions in the non-residential building, data center, network, utilities, and manufacturing industries, as well as in the machine industry. By providing its clients with the full benefits of state-of-the-art goods, services, and solutions, Schneider Electric Infrastructure Ltd. is positioned in India to offer the full capabilities of the global infrastructure business and solidify its leadership position. We believe SIEL will be able to leverage and utilize group’s expertise going forward thereby helping SEIL consolidate its position in the market. We expect SEIL to largely benefit out of government’s agenda to make India an export hub and with Chairman of Schneider group committing to invest in India and expand its capacities, we expect the company to receive healthy orders from its parent. Additionally, we also believe SEIL to benefit from 20,000 patents which parent has across worldwide, thereby helping company to execute orders at an efficient rate.

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Balancesheet

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Cash Flow

Valuation & Conclusion:

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 Q1FY23 and Q2FY23 was strong wherein execution have remained strong after a long hiatus reaching ₹16,000 million in one year for the first time while PAT turned profitable after 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.

Key Risks:

1. The costs of the raw materials that company uses in its manufacturing process are subject to volatility. Increases or fluctuations in raw material prices may have a material adverse effect on its business, financial condition, results of operations and cash flows.

2. Any shortages, delay or disruption in the supply of the raw materials used in its manufacturing process may have a material adverse effect on the business, financial condition, results of operations and cash flows.

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