Hind Rectifiers (HRL), incorporated in 1958, manufactures power electronic equipment like traction transformers for locomotives and electrical multiple unit (EMU), converters, rectifiers, power semiconductors and railway transportation equipment like switch board panels, regulated battery charger, inverters, etc. In addition, it provides power supply unit for electro static precipitators that are used in processing plants like refineries, power plants. The company has manufacturing facilities in Mumbai, Nashik and Uttarakhand.
Triggers
Robust order book provide near to medium term revenue visibility
Indian Railways, HRL’s largest client, is on a significant capital investment spree. There has been strong momentum in tendering activity by Indian Railways over the past year. Continued order wins for HRL have resulted in a record high order book of | 300 crore (90% – Railways and 10% industrial segment), up 40% since July 2018, 1.2x FY19E revenues. Traction transformers for locomotives (6531 kVA – Freight; 7775 kVA – Passenger), auxiliary converters and switch board panels together are expected to form ~85% of HRL’s FY19 topline. Going forward, finalisation of large orders coupled with timely execution of existing orders remain key.
New products to boost HRL’s topline & improve profitability
HRL received substantial order wins in FY19E. A majority of these order resulted from new products HRL launched in the previous year. Some of the new products that are seeing some traction are
- Power supply unit for electrostatic precipitators – These find applications in any process plants: i.e. refineries, power plants, etc. power supply units with converter provide higher margins. With a sizeable global opportunity size, HRL aims to scale up its exports. It currently has a presence in Turkey, South America, etc
- 3*130 kVA auxiliary converter, regulated battery charger (used in LHB coaches), switch board panels, propulsion system for locomotives, etc
With focus on backward integration, HRL has been able to reduce their import cost for its products such as switch board panels, which has helped to boost its margins.
Change in product mix, improving utilisation, to aid margin, return ratios
On a product level, HRL derives sizeable revenue from supplying traction transformers (realisation per unit ~ | 80-90 Lakhs) to both locomotives and EMUs. However, margins are comparatively lower due to intense competition from ABB, Crompton Greaves, Bhel, High-Volt Electricals, etc. Hence, there has been a conscious effort on part of HRL to scale up its high margin new products. Also, robust execution rate is expected to improve utilisation levels. Both these factors are expected to expand EBITDA margins to 12.5% in FY20E. Higher margin and asset turns to boost return ratios, ROCE is expected to grow from 7.7% in FY18 to 18.6% in FY20E.
Valuation & Outlook
Continued momentum in tendering by Indian Railways & aggressive order wins for HRL, timely execution, change in product mix & scalability of new products are expected to drive the company’s profitability. Accordingly, we estimate topline growth of 2.4x with EBITDA growing 3.9x and PAT reporting multi-fold growth of 13.3x for HRL over FY18-20E. We value HRL at 14x P/E on an estimated EPS of ~| 10.6/share (FY20E) with a target price of | 150. We have a BUY recommendation on the company.
Key risk – Any material slowdown in tendering/finalisation of orders from Indian Railways could impact the company. In addition, deterioration in working capital cycle could lead to increased borrowings thereby impacting profitability.
Key Financial Summary
| (Year-end March) P&L | FY16 | FY17 | FY18 | FY19E | FY20E |
| Total Revenues (Rs. crore) | 94.5 | 121.1 | 127.5 | 244.8 | 305.5 |
| EBIDTA (Rs. crore) | 2.1 | 4.7 | 9.8 | 25.5 | 38.2 |
| Net Profit (Rs, crore) | (1.5) | (7.1) | 1.3 | 10.6 | 17.5 |
| Balance Sheet | |||||
| Equity (Rs, crore) | 3.0 | 3.0 | 3.3 | 3.3 | 3.3 |
| Net worth (Rs. crore) | 61.8 | 53.1 | 66.2 | 76.6 | 93.8 |
| Debt (Rs. crore) | 32.9 | 39.9 | 48.3 | 71.3 | 90.2 |
| Ratios | |||||
| RoNW (%) | (2.4) | (2.7) | 2.0 | 13.9 | 18.7 |
| RoCE (%) | 1.2 | 4.0 | 7.7 | 15.7 | 18.6 |
| RoIC (%) | 0.6 | 3.7 | 7.6 | 16.4 | 18.5 |
| Fixed Assets (Rs. crore) | 35.1 | 6.2 | 45.7 | 52.0 | 63.0 |
| Asset turnover (x) | 2.7 | 3.3 | 2.8 | 4.7 | 4.9 |
| Earnings per share (Rs.) | (0.9) | (4.3) | 0.8 | 6.4 | 10.6 |
| Dividend per share (Rs.) | – | – | – | – | – |
| EV/EBIDTA (x) | 105.2 | 48.4 | 24.2 | 10.1 | 7.3 |
| P/E (x) | (125.1) | (130.5) | 143.6 | 17.8 | 10.8 |
Source: ICICI Direct Research, Company
Exhibit 1: Select purchase orders – FY19
| Description | Qty | Unit | Rate (Rs Lakhs) | Amount (Rs. Lakhs) |
| Main Transformer 7775 KVA Type Lot 7500 for WAP7 & WAP5
| 24 | Set | 94.2 | 2.260 |
| Main Transformer 6531 KVA Type ABB Lot 6500 | 15 | Set | 88.2 | 1.323 |
| Main Transformer 7775 KVA Type Lot 7500 FOR WAP7 | 8 | Nos | 98.6 | 789 |
| Complete Filter Cubicle Alongwith All Equipments & Cabling to CLW | 34 | Set | 27.0 | 918 |
| IGBT based 3-Phase Drive Propulsion system & maintenance contract | 2 | Set | NA | 477.9 |
Source: IREPS, ICICI Direct Research
RATING RATIONALE
ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts’ valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;
Buy: >10%/15% for large caps/midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
