HBL Power: Signs of change

KAVACH’s financial opportunity.


Notes from yesterday’s AGM:

Chairman’s speech

  • Co’s vision – HBL wants to be a high margin business not focussed on top-line. To be in businesses with limited competition within the industry – achieve this by developing niche technology within the company across different product lines (which provides necessary diversification and stability).
  • Current net margins are low as defence and railway are long lead items in India from R&D to commercialization - the fruits of which should come in years to come. FY 24-26 should see results of years of efforts in electronics, defence and mobility. FY 23 Sales should be similar to that in FY 22 and profitability marginally better than FY 22.
  • We now have a strong balance sheet, with negative debt after so many years.
  • Key opportunities for this year
    • TCAS
      • Announced orders for TCAS in last 2 months
      • Electronic rail signalling is an engineering intensive business largely occupied by MNC cos earlier– HBL started work on TCAS technology in 2007 – got developed by 2012 – But did not get commercialized as they were a monopoly then – waited for 4 years for competitors to join in – finally got rolled out starting 2020
      • Today there are 3 players, and may be 1-2 players will join in few years
      • Product quality and delivery performance of HBL has been excellent
    • Thermal batteries for missiles
      • HBL supplies batteries for most missiles made in India
      • DRDO - Agni 5 missile powered by HBL battery – performed very well – appreciated by DRDO. Now also exporting these batteries
    • Batteries for submarine propulsion
      • Won against Exide in 3 successive tenders, who is a monopoly in this business. Also exploring export business
    • Electric mobility
      • Not in mass market – buses, 2-wheelers
      • Technology gap existed in motors and electronics for these vehicles which was being imported from China (earlier Canada)
      • Plan to convert old trucks into electric vehicles – Viability will increase as diesel price increases - no other company in India doing this
    • Telecom
      • Long period of decline, now customers coming back for battery replacement to ensure satisfactory performance, 4G/5G rollout might help too

Question and answer session

  • R&D spend over last 10 years across products c. 300 crs which was mostly taken through PnL (not capitalized) – huge R&D spend gives them a competitive advantage – they expect payback to commence now
  • TCAS
    • Government plans to implement TCAS on 50,000 kms over 10 years c. 5000 kms / year i.e. 3000-4000 crs of industry size / year – with 1.5-2.0 year execution period
  • Lithium ion
    • HBL is working on LFP technology for lithium-ion cells – HBL has an order from DRDO for underwater applications – HBL has set up first lithium-ion cell plant in India – Don’t want to sell OEMs as low margin business.
  • PLT batteries / data centres
    • HBL and Enersys are only 2 cos commercial selling PLT, Developed 20 years ago
    • PLT batteries started as an engine starting battery, HBL was selling to Cummins regularly
    • Data centre market grew in last 4 years – PLT batteries are efficient w.r.t. charging time (10 mins for PLT vs 20 mins is industry norm currently), occupy lesser space. No competition in 10 mins charging time category.
    • HBL export PLT batteries for engine starting - to use in battle tanks. Can export for data centres too but building global customer trust takes time. We are selling to Indian office of few foreign cos and that should open doors for other global cos. Had expanded nickel cadmium batteries in similar manner.
    • On PLT vs lithium for data centres – Cost differences are huge c. 3x – lithium may not be sustainable given higher payback, and higher space requirements (as lithium needs BMS)
    • HBL’s PLT cost is c. 20-40% lower than that of Enersys depending upon the application
  • TMS
    • HBL did DFC Corridor work with Siemens last 2-3 years
    • Competition – No Indian approved vendors in TMS, only MNC cos – HBL is much cheaper than MNC cos
    • TCAS had taken priority and therefore TMS was moving slow. Expected to pick up momentum in FY 24.
  • Electronic Interlocking system
    • In EI, HBL has a 2 out of 3 architecture while all other cos including MNCs are 2 out of 2 architecture
    • Commercial orders expected from FY 24 – product development / field trials
  • Capital allocation
    • More conscious of amount we spend on RnD – not like how we did last 10 years
    • Conscious of return on capital employed – currently at 13%, aim 18-20% in 5 years
    • Not making capital intensive investments – In batteries other cos are making investments to the tune of 5-10k crs, we limiting ourself to 100 crs for now.
  • Overall visibility
  • Overall sales should atleast double in 5 years 1200 – to 2000-2400 crs
  • Existing set up - Total batteries are 65% of turnover, Defence 25% and Electronics 10% – In 3 years Batteries c. 40%, and balance defence, electronics, mobility
  • Lithium-ion is a specialized product for military, not huge in size
  • PLT will grow, lot of potential
  • Telecom – Lead acid battery is coming back- competitive with Chinese – with volume can give decent margin as overheads get absorbed – from 8% to 10-12% in 2 years – so no incremental investment
  • Defence – we are a leading supplier with no competition – every defence product needs batteries – missile tanks, artillery guns, radar systems etc. - huge scope of growth
  • Overall intend to invest less in battery business, invest more in electronics (for industrial and defence usage)
  • Defence
    • Scaled up well from c. 100 crs in FY 21 to c. 300 crs FY 22
    • Integrated Communication System for Tanks – HBL had executed large orders for tank ICS around 2017. Every armoured vehicle that will be produced over next 10-20 years will be fitted with HBL system – but production capability for armoured vehicles in India right now is very low – overall a stable low volume business – with no competition
    • No presence in Brahmos supply chain
    • Command console for submarines - P75 / P75 I – projects running delayed – All cos bidding – But not a core area as HBL wants to focus on decent volume products.
    • Artillery fuse – Approved by Ministry of Home Affairs for fuses for grenades by ARDE who has given Development cum production partner status–got it earlier this month – HBL has no competition in this space – Only competitors were BEL, BCIL who were majorly importing (c. 60%) main components so far and assembling in India
    • High working capital requirements in defence cos 12-24 months – HBL’s WC cycle in defence is less than 4 months.

Disclosure: Invested