Recommendation from Other Elect.Equip./ Prod Industry

Here is why:

• Make in India’ initiative by the NDA government to boost orders from the aviation and defence space.
• Reported a robust result in Q1 FY16.
• Decline in lead prices amid slowdown in global commodity prices would be margin accretive.
  

The demand for Indian lead acid batteries worldwide has increased manifold. Indian manufacturers are also expanding their operations to meet the high demand from the domestic market. The growth drivers for lead acid batteries include back-up power requirement for growing IT/ITeS sector; widening BFSI network and ATM expansion; rising automation across business enterprises; mounting power deficit, enhancing the need for back-up batteries in critical equipment and processes; and burgeoning enterprise solutions. Therefore, we have picked up a stock from this space, which is expected to show steady growth during the coming years.

HBL Power Systems (HBL) manufactures a wide range of specialised batteries for industrial electronics, defence electronics, and railway electronic signaling. The company’s products cater to aviation, defence, railway, telecom, power utilities, and oil and gas markets. Additionally, the development of valve-regulated lead-acid (VRLA) batteries (tubular plate gel lead acid battery) is also driving market growth. These batteries are virtually maintenance-free and because of their sealed construction, they can be mounted in any orientation, thus making them a feasible option for integration into UPS systems.

The ‘Make in India’ initiative by the NDA government will boost orders from the aviation and defence space. Six months ago, nickel-cadmium batteries developed by HBL Power Systems were approved by the regulator.

In terms of financials, in Q1 FY16 the company posted a net profit of Rs 6.71 for the first quarter ended June 30, 2015 as against a loss of Rs 17.34 crore for the first quarter ended June 30, 2014. The net sales income rose by 6.53 per cent at Rs 304.21 crore during the period under review as against Rs 285.57 crore for the same quarter last fiscal. The operating profit jumped by 146 per cent to Rs 35.67 crore due to EBITDA margin having increased by 371 bps to 11.72 per cent in Q1 FY16. For the full FY15, the company posted a net profit of Rs 14.62 crore as well as an income of Rs 1,330 crore during the last fiscal ended March 31, 2015.

Going ahead, the company has a high focus on increasing its market share and is expecting better pricing in per ampere hour, thus improving the margins of the company. In raw materials, lead account for about 33 per cent of the total manufacturing costs of the company and therefore decline in lead prices amid slowdown in global commodity prices would be margin accretive for HBL. From the last five years the company has been paying consistent dividend. Its institutional holding has increased from 3.08 per cent as on December 31, 2014 to 5.58 per cent as on June 30, 2015. Given the growth momentum and the steady margins, we are positive about the prospect of the company. We recommend taking an exposure in the stock with an expectation of 30-35 per cent growth in the next one year.