HDFC Securities isssues a ‘buy’ on battery maker HBL Power Systems

HDFC Securities has come out with a bullish report on HBL Power Systems, an Indian company specializing in power solutions and defense electronics. The report highlights the company’s strong growth prospects driven by rising opportunities in railways signaling, defense electronics and stable demand in industrial batteries, and predicts the stock to rise to Rs 322 in 6-9 months.

Established in 1986, HBL Power Systems manufactures industrial batteries, defense batteries, electronics and engineered products for challenging applications. Headquartered in Hyderabad, the company has five manufacturing facilities across Telangana and Andhra Pradesh, and is valued at Rs 268/share now.

HBL serves key sectors like telecom, railways, UPS, defense, oil & gas with its wide range of batteries and power solutions developed in-house. The company derives 74% of revenues from industrial batteries, 13% from defense and 10% from electronics segment.

While industrial batteries remain the growth engine, HBL is working to reduce dependence on telecom batteries and tap opportunities in railways and defense electronics. The company has built capabilities to manufacture advanced products like train collision avoidance systems, electro-optic devices, grenades and more. Its strong in-house R&D has resulted in differentiated offerings.

Significant Orders for Railways’ Collision Avoidance System

HBL has received major contracts from Indian Railways and rail coach manufacturers for KAVACH – an indigenously developed train collision avoidance system. KAVACH helps avert train accidents by automatically applying brakes if it senses another train on the same track within a 1.5 km range.

As the lead partner with Siemens, HBL bagged the first KAVACH tender in Eastern Railway. It also has orders from Integral Coach Factory for fitting the system in Vande Bharat trains. Further orders are in the pipeline from West Central and Western Railway.

The government plans to deploy KAVACH across 30,000 km of railway tracks by 2026. With only 3 approved suppliers and large market potential, HBL is poised for strong growth in coming years. Installation of its train management systems across railway networks also offers steady revenues.

Foray into High-potential Defense Electronics Segment

HBL has developed and supplied advanced products like electronic fuzes, grenades and electro-optic devices to defense sector based on its R&D strengths.

Its grenades fitted with indigenously built electronic fuzes are approved by Ministry of Home Affairs for paramilitary forces. Bulk orders are expected from defense by end of 2023 once Army approvals come through.

HBL’s technology for electronic fuzes has cost and integration advantages over imported supplies by competitors. Its partnership with Tonbo Imaging will further augment technological capabilities in night vision and targeting systems sought by defense organizations.

Stable Growth in Industrial Batteries

While new segments hold strong promise, HBL’s industrial batteries business is poised for stable medium-term growth. Telecom batteries will benefit from 5G tower expansion and replacement demand from 2023. Railways, defense, data centers are driving demand for specialized batteries. With strong client relationships and cost competitiveness, HBL expects to sustain leadership in industrial batteries.

Attractive Valuation

HBL Power Systems has charted an impressive recovery after pandemic-led disruption in FY21. Revenues grew 35% in FY22 followed by 11% growth in FY23 to reach ₹1,369 crore. Profitability has witnessed sharp uptick with EBITDA margins expanding from 6.8% in FY21 to 11.2% in FY23.

HDFC Securities expects the company’s growth momentum to accelerate in coming years driven by rising contribution from high-margin electronics and defense verticals. Its forecast indicates revenues growing at 27% CAGR over FY23-25 to ₹2,121 crore and PAT growing 57% CAGR to ₹244 crore by FY25. This translates to EPS of ₹8.8 by FY25.

HDFC Securities has assigned a 1-year target price of ₹295 per share based on FY25 EPS estimate of ₹8.8 and P/E multiple of 33.5x.

While industrial batteries lend stability, emerging business verticals would turbocharge growth and profitability. The company’s strong balance sheet, asset light model and focus on high-value orders bode well for medium to long term investors.