Jitendra Kumar Gupta Moneycontrol Research
Swelect Energy Systems wears its smallcap credentials lightly. Yet, the Chennai-based company has been one of the early birds to cash in on the boom in the renewables energy space. In 2011, it forayed into the alternative energy space, building on its 20-year experience in the power business.
The following year, the company sold its inverter or UPS business to France-based Legrand group for Rs 829 crore. Even after paying Rs 135 crore as tax and another Rs 150 crore by way of dividend, Swelect is still sitting on a cash and cash equivalent of over Rs 400 crore on an equity of Rs 700 crore.
Huge Cash but Cautious Deployment
Thankfully, the company is in no hurry to use up its cash. With every intention of deploying the cash judiciously, the company, in 2013, made a small acquisition of Rs 22 crore (49 percent stake with management control) in HHV Solar Technologies, which is a solar module manufacturer based out of Bangalore. Swelect, which was until then present in EPC (or engineering, procurement and construction) business, expanded its offerings to include solar panels. Over the years HHV has reaffirmed its faith in the bet. HHV had an annual installed capacity of 40 MW, which after commissioning the third line of production in Q3FY16, has been expanded to 100 MW.
Foundry Losses on Wane, Solar the Bright Spot
While solar energy systems and services (EPC) account (FY17 revenue Rs 282 crore) for close to 80 percent of the revenue, it is also present in the foundry (iron casting, machines, alloy casting) business. However, the latter is making losses.
While this may be a drag on the business, as an investor, the comfort comes from the fact that this business employs only 10 percent of the total capital employed in the overall business. Moreover, this business is now being restructured and the losses of this business are falling.
In recent times, the company has amalgamated the two different units of the foundry business to leverage business synergies and bring down the overall costs. In the foundry business, as against an EBIT loss of Rs 2.72 crore in FY16, the loss was down to Rs 1.81 crore in FY17.
Moreover, barring foundry business, the solar business is starting to show good results. In Q4FY17, the company reported standalone (87 percent of business) sales of Rs 79 crore, which was up by 95 percent on a year-on-year basis and 180 percent increase compared to its December 2016 quarter. Since the business enjoys huge operating leverage, its profits jumped to Rs 13 crore.
Valuations
On a conservative basis, even if 80 percent of Q4FY17 profitability of Rs 13 crore is achieved for the next four quarters, the company should be reporting a profit of close to Rs 40 crore in the next fiscal year.
One useful valuation matrix is enterprise value to operating profit or EBITDA. With cash of close to Rs 327 crore (taking conservatively 80 percent of the mutual fund investments of Rs 251 and cash and bank balance of Rs 158 crore reported in FY17) and market capitalisation of Rs 483 crore, the enterprise value works out to Rs 156 crore which is about 5 times its FY17 core operating profit. On a consolidated FY17 sales of Rs 247 crore and net profit of Rs 21.63 crore, this looks like an extremely reasonable valuation for a company that is debt free and operates in a growth industry.
All eyes are now on how the company plans to use its cash. Today, the market is not ascribing any huge value to its core business (trading close to its cash in the books). If the company fails to deploy this cash well, it could turn out to be a huge value trap.
However, it is a relief that its books are audited by one of the large audit firms SR Batliboi. We also take note of the fact that promoters own over 64 percent of the company. Hence, rational use of capital will also be in the interests of the promoter. Amongst the well-known investors who have reposed faith in the company are the likes of Anil Kumar Goel and HDFC Mutual Fund.
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