Unlocking Potential: A Deep Dive into HBL Power Systems Ltd.

Summary

HBL Power Systems Ltd., a small-cap powerhouse in India's dynamic market, specializes in batteries and electronic solutions for defence, railways, and industrial sectors. With a robust infrastructure and key collaborations, it boasts a market cap of ₹11,777 Cr and Q2FY24 revenue of ₹557 Cr. The company's strategic moves include entering India's EV market and addressing the Ministry of Home Affairs, with a future focus on Lithium-ion cells and Electric Drive Train. HBL Power Systems exhibits promising growth potential, underlined by its positive financials and forward-looking strategies.

Introduction:
In the dynamic landscape of the Indian market, HBL Power Systems Ltd. emerges as a small-cap powerhouse, strategically positioned in the defence and railway sectors, propelling its upward trajectory. Specializing in the design, development, and manufacturing of specialized batteries and electronic solutions, HBL Power Systems has established itself as a market leader in India, particularly in segments like railway electronics, electric mobility, defence, and industrial batteries.

Key Metrics:
- Market Capitalization: ₹12,612 Cr
- Current Market Price (CMP): ₹425
- Price-to-Earnings (P/E) Ratio: 65.8
- Return on Capital Employed (ROCE): 13.7%
- Operating Profit Margin (OPM): 14.9%
- 3 Years Sales Growth: 7.83%

Business Segments:

Electronics:
- Railway Electronics: Flagship products include TCAS (Train Collision Avoidance System) and TMS (Train Management System).
- Electric Mobility: Developed Electric Drive Train Kit for retrofitting vehicles and electronic fuzes, serving as an electrical safety device.
  
Defense:
- Manufacturer of batteries for military applications, including submarines, torpedoes, missiles, and artillery fuses.
- Notable supplies include Type 1 batteries for kilo-class submarines and Varunasthra torpedoes.

Batteries:
- Industrial batteries for Telecom, UPS, Railways, Solar, Oil and Gas & Power.
- Diverse range includes Lead-Acid, Pure Lead Thin Plate, Tubular Gel, Nickel Cadmium, Torpedo, Missile, and Sintered Plate Nickel Cadmium Batteries.

Manufacturing Facilities:
HBL Power Systems operates five manufacturing facilities in Telangana and Andhra Pradesh, showcasing its robust production infrastructure.

Diverse Battery Solutions and Defense Capabilities

1. Telecom Tower Batteries:
   - HBL pioneered in-house technology for Valve Regulated Lead Acid batteries.
   - B2B procurement by private operators and tender-based processes with BSNL.
   - Market dynamics: Consolidation with three major players, led by Amara Raja, Exide, and HBL.
   - Anticipated demand increase with 5G tower additions and battery replacements.

2. Rail & Metro Coaches / Loco Batteries:
   - HBL supplies Lead Acid and Nickel Cadmium Alkaline Batteries globally.
   - Second-largest producer of Industrial Nickel Cadmium Batteries.
   - Selected by Siemens for RRX coaches, exported to Siemens America for coaches in Canada.

3. Batteries for Oil and Gas and Utility Industries:
   - Nickel Cadmium Pocket Plate Batteries crucial for industries prioritizing reliability and safety.
   - HBL's long-standing partnership with Reliance Industries in the Jamnagar Refinery.
   - Successful export track record spanning three decades.

4. DC Power Back up Systems:
   - HBL's Pure Lead Tin batteries designed for high-power applications, including data centers.
   - Sole producer in India, second globally, with technology developed in-house.
   - Presence in the Lithium-ion battery packs and Energy Storage Systems market.

5. Torpedo Batteries:
   - HBL, one of two suppliers for Torpedo Propulsion in India, also exporting in limited quantities.
   - Contracts from NSTL/DRDO for advanced Al AgO Torpedo Batteries, a rarity globally.

6. Missile Batteries:
   - HBL leads in designing, developing, and manufacturing Missile Batteries in India.
   - Exporting to Israel and UAE due to limited global manufacturers in this niche.

7. Aircraft Batteries:
   - HBL's significant contribution to the Indian Air Force with Sintered Plate Nickel Cadmium Batteries.
   - Global certification for Boeing 737 and Airbus 320, with ongoing exports to Bombardier and Israel Aerospace Industries.

8. Submarine Batteries:
   - HBL and Exide major players in supplying "Tubular plate flooded lead-acid" batteries for submarines.
   - Contract for prototype modules for Li-ion batteries for submarine applications.

9. KAVACH (Train Collision Avoidance System):
   - HBL's pioneering role in developing and supplying TCAS systems for railways.
   - Ongoing contracts and expected growth in demand for the next decade.

10. TMS (Train Management System):
    - HBL's certified TMS system for railway control centers, a unique offering in India.
    - Inauguration of HBL's TMS System by the Eastern Railway in 2023.

11. Electronic Drive Trains For Trucks:
    - HBL's venture into the development of Motors and Controllers for Electric Drive Trucks.
    - Plans to convert old diesel trucks to electric, without subsidies, starting in FY 2025.

12. Grenades with Electronic Fuzes:
    - HBL's approved grenades for paramilitary forces with electronic fuzes.
    - Anticipated sales to the Ministry of Home Affairs from FY 24.

13. Electronic Fuzes for Guns, Rockets, Bombs:
    - HBL's 100% in-house technology for electronic fuzes, a reliable alternative to mechanical fuzes.
    - Expected eligibility for bulk supply by the end of FY 24, with potential global exports.

14. HBL Capability in Defence Electronics:
    - HBL's proven capabilities in manufacturing complex Defence Electronics.
    - Examples include Digital Control Harness and Integrated Platform Management System for submarines.

Revenue Mix:
- Product-wise (Q2FY24): Industrial Batteries (64.18%), Electronics (25.14%), Defence & Aviation Batteries (4.6%), Others (6.08%).
- Geography-wise: India (83.98%), Rest of the world (16.02%).

Collaborations:
- Collaboration with Ericsson for LTE communication infrastructure and deployment of LTE networks for the Indian Railways.

Shareholding Pattern:
- Promoters: 59.11%
- FIIs: 2.23%
- DIIs: 0.08%
- Retailers: 38.58%

Q2FY24 Financial Highlights:

• 
  - Revenue from Operations: ₹557 Cr (Up 19% QOQ, 77% YOY)
  - Operating Profit: ₹101 Cr (Up 29% QOQ, 206% YOY)
  - Profit After Tax: ₹68 Cr (Down 31% QOQ, Up 240% YOY)
  - Basic EPS: ₹2.48 (Up 244% YOY)
• 
• In the last 3 years, company revenue grew by 8% CAGR, whereas profit grew by 62% CAGR.
• With rising exposure to growing segments, as per management estimates, revenue can grow up to 2,900 Cr with 18% EBITDA worth ~500 Cr.

Industry Outlook and Future Prospects:
- Positive outlook for Industrial Batteries with an expected CAGR of 9% during 2023-28.
- Defence & aviation batteries poised for growth with the Ministry of Defence targeting ₹1.75 lakh crore turnover in aerospace & defence by 2025.
- Union Budget 2023-24 allocates ₹2.40 lakh crore for Indian Railways' growth and infrastructure improvement.

Future Outlook:
- Strategic move to convert diesel trucks to electric drive positions the company for India's EV market.
- Sales to the Ministry of Home Affairs (MHA) expected to commence in FY24 with rapid growth anticipated.
- Debt/Net worth ratio estimated to be around 0.2 at the end of FY24.
- Dividend policy aims for a yearly increase of 5%.
- R&D expenditure expected to decrease, while working capital would increase in the next few years.
- Capex for FY24 amounts to ₹90 Cr.
- Plans to establish a manufacturing facility in Mahbubnagar, Hyderabad, for Lithium-ion cells and Electric Drive Train (EDT).

Conclusion

In conclusion, HBL Power Systems Ltd. emerges as a promising player in the Indian market, leveraging its diversified product portfolio and strategic positioning in key sectors. With robust financials, a forward-looking approach, and a commitment to sustainable growth, HBL Power Systems stands poised for an exciting future in the evolving landscape of India's industrial and technological sectors. With 90 Cr of capex, company is expected to deliver ~1500 Cr worth of revenue and ~500 Cr of EBITDA by FY26, which give strong visibility of 2900 Cr worth of revenue across segments.

HBL Power emerges as a stalwart in the field of battery solutions, strategically positioning itself amidst critical national priorities. Its role as a provider of replacement products for essential infrastructure ensures a stable demand that remains resilient to economic fluctuations. The company's proactive approach to electronic signaling for railways, commitment to defense indigenization, and contribution to electric mobility underscore its vital role in national security and energy efficiency initiatives. Financially, HBL demonstrates a robust position, with a negative debt status and a prudent approach to investments, reflecting a commitment to long-term stability. As HBL Power navigates the dynamic landscape of evolving technologies and national imperatives, its diversified portfolio and strategic foresight position it as a key player in driving innovation and reliability in critical sectors.