Quality Power is a recently listed smallcap in the power transmission space. It is a bit different from the rest of the companies in the space because it doesn’t specialise in any one thing like most of the other Indian companies in this space - say in transformers or in cables or structures. QP has taken a different approach to build capabilities by acquiring. They have been on an acquisition spree from the very beginning but its accelerating of late. It is an unique approach, one fraught with risks but the company seems to have a method to the madness which may become apparent by the end of this post.
They seem to be acquiring with the primary objective of acquiring complementary capabilities rather than making immediately EPS accretive transactions. They do however seem to have a knack of making it work by being prudent in valuing, financing and executing to turn around the businesses quickly.
Right now the company is riding a combination of tailwinds. Lets have a look at each of them
The Tailwinds
HVDC
To understand HVDC it is important to understand some basics - the power we use everyday at home through a socket is AC or alternating current oscillating at a frequency (50 Hz in India. 60 Hz in other places). Most of electronic devices through run on DC so end devices convert this AC power to DC within the device (say a PC or TV). However, transmission is always AC for various technical reasons (do read up “Empires of Light” for the why) - primarily being easy to step-up voltage using a transformer and transmit over long distances.
However, over very long distances HVAC (High voltage AC) has significant losses due to inductance/capacitance losses, dielectric losses and AC’s inability to use full cable and also needing 3 cables (HVDC needs 2 or even 1 so has smaller footprint). HVDC is generally more efficient but is justifiable only > 600 kms due to expensive equipment needed to transmit in DC. A good primer to understand the components is this video. You will relate to Quality’s products better if you watch this one.
This is the entire value chain for HVDC. In this QP fits squarely in Tier 4 and so is about 10-15% of equipment for HVDC (1.9 lakh Cr is the est. HVDC opp till 2032).
Renewables
India has a 500 GW renewable target by 2030. Every solar park in remote areas without a strong grid would need STATCOMs (described later in this post) to ensure power quality at source at the point of interconnect. We have a lot of stranded/curtailed power as well (~ 40 GW) which is deployed but waiting for grid interconnect (specially in Rajasthan, Ladakh). The other important thing to understand is that renewables are generated in few solar/wind rich corridors but consumption is more spread out throughout the country. This means that for effectively using the produced power, we need strong evacuation and inter-state transmission. This is where HVDC is the only option to ferry power from say Rajasthan to UP. The current running HVDC projects are good examples of these
-
Bhadla-Fatehpur 6GW at 800 kV over 950 km (Rajasthan’s largest solar zone to UP’s industrial belt) developed by Adani as Adani Green Corridor. EPC by Hitachi/BHEL. Tech is LCC
-
Khavda-Nagpur 6GW at 800 kV over 1200 km (Gujarat’s massive solar park to Nagpur). PGCIL is the developer. EPC by Hitachi/BHEL is EPC again. Tech is LCC
-
Khavda-South Olpad 2.5 GW at 500 kV over 630 km. PGCIL is the developer. GE Vernova is the EPC. Tech is VSC
Like this over 2028-2032, there is 15,432 ckm of new HVDC lines planned to transfer over 32GW of power between FY28-FY32 alone. So it would be fair to say there is multi-fold growth on the medium-term horizon because Rajasthan and Gujarat are going to continue adding a lot more renewable capacity and South zone will also develop surpluses.
AI Data Centers
AI usage has been rising exponentially since the advent of Claude code which has been an inflection point of sorts since about Opus 4.6 or so. AI usage is currently picking up on 3D modelling, game development, law, drug discovery, hardware design etc. What is currently being pursued by enthusiasts will eventually seep into enterprises which require training and realignment. This will keep inflecting every few months from here with the biggest unlock to come when robotics and AI are integrated together which is definitely on the 5-10 yr horizon.
This has led to the construction of several GWs of DCs, 10-15 GW in India alone by 2030 and about 120-140 GW in the US. All these DCs would need specialised power equipment to regulate power quality and to manage power. QP makes dry-type shunt reactors, BESS PCS that could find extensive use in data centers. DCs connected to the grid might use instrument transformers, filters/banks as well. GIS based instrument transformers with Hyosung also has a good opportunity in DCs
BESS
BESS is our country’s next massive foray, sort of similar to how we ventured into solar module assembly. India has an ambitious 74 GW target for BESS by 2032. Our value-add today in BESS though is very low with most of the battery modules being imported (what Acme, GPIL etc do or plan to do). BESS is needed because renewables are intermittent and if we manage to store then we can use stored solar power in the night as well. BESS would get integrated with the grid and also several data centers would have their own BESS to use as backup to their primary (grid/btm). QP makes PCS (power converter systems) that would convert the battery’s DC to AC to connect to the grid. It would involve a software component as well to ensure power quality and for interacting with the power semiconductors.
The same way HVDC helps spatially move power, BESS temporally helps move power. In a way, all these tailwinds are linked - HVDC/BESS/Renewables/DC
The Basics of Transmission
The Grid
I think its important to understand some of the basics of the grid before we get into the products. One of the best books on the subject is “The Grid”. At least read the summary to get the gist. Having a mental picture of how the grid has evolved over a period of time from having production close to consumption, in isolated grids, primarily used for lighting to where we are today would help. Also worth knowing some basics like - every electron that is powering an appliance at this moment was generated at the same moment - the grid inherently doesn’t store anything. Different sources of power and how they are generated - Thermal, nuclear, hydro, wind all involve a rotating generator and so inherently generate a/c (with Wind having higher variations in voltage due to wind speeds) vs solar which only generates d/c.
Reactive Power
This is the crux of what QP does. It is important to understand Reactive Power in some depth before we proceed. Last year we had a massive blackout in Europe involving multiple countries due to issues with Reactive Power. To understand reactive power, we should have a firm grasp of inductance and capacitance you may have learnt in school. Long power lines tend to develop a capacitance and when lightly loaded tend to overcharge it (Ferranti effect) and when heavily loaded draw voltage down - grid operators must ensure Voltage and current stays stable and so need elements that can compensate for these and that’s where specialised components like reactors, capacitor banks, harmonic filters etc. come in. Incidentally, reactive power is measured as MVAr vs Active power measured in MW. MVAr is denoted usually as Q and I think that’s my most of QP’s equipment just carry Q as the logo like this (this is a Shunt reactor) - if it is, then its a nice touch.
Modern grids have to be capable of taking in variety of inputs sources of power, so require specialised equipment at the point of interconnect, esp for Solar and Wind (where QP equipment comes in) to ensure power quality. Solar and Wind especially doesn’t introduce reactive power as there is no spinning mass (though Wind is a/c generated, it is converted to DC to and then again to AC to regulate it, so behaves like power from an inverter for all intents and purposes). A spinning mass (of the turbine in a hydro/thermal/nuclear plant) maintains rotational momentum against spikes or drop in power and resists but a solar/wind has no way for it. Another thing is wheeling power over much longer distances than what the grid used to do - this also mean keeping previously isolated grids also in sync at 50 Hz (or 60 Hz) means there is a lot of reactors, filters required to do the job to maintain power quality.
I don’t think I have done a good job explaining any of this and suggest sitting with claude and ask questions until you grasp it, if interested. The TL; DR is modern grid requires a lot of QP’s equipment due to its unique challenges - to keep power phases synchronised across sources and transmission, to maintain reactive power, to maintain voltages in tight band and also to act as shock absorber to prevent blackouts like the Europe one last year.
Products
The key takeaway from this section is - though there are multiple products, most of them are at the core based on inductance and capacitance - mostly inductance. Inductance requries coils and so the Sangli expansion by 8x essentially means QP improves capacity for most of its products doing this as most are coil based. Its akin to a CDMO increasing reactor volume - it can make several molecules with it.
Reactors
Shunt Reactor - Used to prevent runaway voltage by regulating them down on lightly-loaded lines
Smoothing Reactor - Used on the DC side and smooths current ripple (remember the YT video above). QP product used on the Rihand-Dadri HVDC line
Series Reactor - Limiting fault current to protect switchgear
Filter Reactor - Used alongside a capacitor in Harmonic filters
Coupling Reactor - Used in FACTS systems in both SVC and STATCOM
Instrument Transformers
These step down the voltage down in substations to levels where relays and meters can read them. These are like sensors and so generally multiple ones are used. These are subsidiary Mehru’s speciality. Within this there is CT, VT and CVT but its enough to understand that they are used to measure voltage and current in HVAC substations and in HVDC converter stations
Line Traps & Line Tuners
Power lines are also used for communication (PLCC or power line carrier communication) - sort of similar to powerline adapters that you can use at home to use existing home wiring as ethernet cables to extend WiFi (super cool concept - do check out) primarily for protection and telemetry. But these signals need to be filtered out and this is where line traps and tuners come into play. Its used in HVDC stations as well as EHV substations
Capacitor Banks
These are used as standalone products to provide reactive power as well as with reactors to make harmonic filters and also in FACTS/SVC system
Harmonic Filters
Similar to how a guitar harmonics works (waves with exact multiples in frequency), power transmission lines also develop harmonics which can lead to blackouts (what caused the Europe outage). These are used to filter higher multiple frequencies which are undesirable. At the core its just a capacitor and inductor in series (maybe along with a resistor). Used in HVDC and FACTS/SVC projects and also in renewable projects at the point of interconnect
Converter-duty transformers
These are used in front of converter transformers in a HVDC substation and handle extreme amounts of stress before the conversion due to heavy harmonic heating.
Applications
HVDC Converter station
Of the 9 main product lines used in a HVDC converter station, QP has presence in 6 of them we have already seen above. The value of these could be 10-15% of HVDC equipment capex
The above is for a LCC converter station. a VSC converter station as well uses some of these components (DC smoothing capacitor instead of smoothing reactor) but since switching and reactive power is controlled by IGBTs (LCC uses thyristors), the components from QP should be lesser. However, most of India’s HVDC projects (including the two big ones today) use LCC technology. It is worth keeping an eye on this though to see QP’s value contribution from VSC vs LCC tech
FACTS - Flexible AC Transmission Systems
This not a single product but a system of products that allow grid operators to control voltage, current and reactive power in realtime using power electronics. There are two types of FACTS devices - SVC (thyristor based) and STATCOM (IGBT based). QP has presence in both through Endoks, their Turkish subsidiary
Every GW of Solar/Wind will need a STATCOM device at point of interconnect to ensure power quality and this is increasingly mandated by grid operators. Endoks rides on Europe’s renewable tailwind. QP is able to source power electronics for cheap in Turkey than here in India and at higher volumes, they will do much better margins as well (same thing in BESS PCS as well)
BESS PCS
As I earlier mentioned, most of India’s value-add in BESS today is negligible. QP’s PCS though is high-value add system based on power electronics and software. Its a product developed by Endoks. Its a 1725 kW power converter system designed for BESS systems connected to grid. Europe and US will not allow Chinese players in software interconnection for BESS. This is where QP has an significant edge over Chinese competition and can carve out a niche for itself. While margins initially might be low on PCS at 10-12%, at higher volume power electronics cost drops significantly and can lead to 17-18% margins once business stabilises. They already have a 152 Cr order for this product.
Data Centers
The dry-type shunt reactor (eco reactor) is already proven with the Finland DC order and another from a hyperscaler for 48 Cr. Over time though, I do see them make inroads in DC BESS as well once the BESS PCS product is proven and accepted. The GIS instrument transformer as well might find use in DCs due to its compact size and design. It depends on how well Hyosung is able to push these products. Hyosung itself has a much firmer presence in DCs especially ni 800V DC based roadmap with Nvidia. I am hoping QP can tie-up for selling rest of its product pf as well through Hyosung
Subsidiaries and Strategy
The subsidiaries and what they do is captured well in this one slide
It is important to note though that none of these are wholly owned and most are ~50%
They have also recently acquired 100% of Winwin speciality insulators business for 315 Cr recently to handle capacity crunch in insulators worldwide. This has a capacity of 18000 MTPA (Modern Insulators with a capacity of 26000 MTPA is valued today at 2600 Cr mcap for reference)
They also recently acquired Sukrut Electric company from machinefabrik reinhausen (JV with Yash). Sukrut makes complementary products and QP should be able to integrate and sell their portfolio alongside theirs.
Thesis
It is clear that acquisitions are for tech and to build capabilities they otherwise dont have. To continue down this path in the public markets would essentially mean continuous dilution but the way to see this is that as long as dilution is happening at good valuation and is capability accretive (and not essentially EPS accretive as analysts usually like to see) with potential to add to overall moat, financed without stress on the balance sheet, its not essentially bad perhaps. It helps the company and shareholders a lot if the valuation of the company stays high if financing is done through a share swap.
Due to the minority share in all the subsidiary companies, valuing this company also is a pain as the profits adjusted for minority shareholding drop significantly and the company trades at 80+ P/E right now. The closest businesses trade 100+ (GE Vernova at 105 and Hitachi at 153 - but these are QP’s clients mostly - though QP makes competing products, they keep out of each others’ way by focusing on diff markets) so you can argue its par for the course but to have a margin of safety, it might be better to pay much less - maybe around 50 P/E which would mean a market cap of 6000 Cr.
The company has a order book of 1400 Cr -
-
QP - 520 Cr (HVDC, Coil products for PGCIL, 200 Cr for Israeli client over 4 yrs)
-
Endoks - 430 Cr (152 Cr BESS - expandable to 292 Cr. 197 Cr FACTS reorder)
-
Mehru - 450 Cr
Guidance for this year is 15-20% growth with a 50% growth in FY28.
The company can become a mini Hitachi Energy from India in the long run if they continue doing what they have done so far.
Risks
-
Delays in India HVDC capex
-
Any changes in Europe’s renewable targets
-
Data center capex commissioning slowdown
-
Sangli coil expansion capex completion on time
-
Acquisition led growth has historically been risky for Indian companies - BS risk must be watched
Disc: I have positions bought around 1250. It is expensive, so sized accordingly in case it corrects. I am not an investment advisor and just a novice and this is an expensive unproven stock with unknown promoter quality. Please do your own due diligence.
Sources:
Aside from AR, PPT, Concalls, found this nice primer on twitter. I dont know the original creator. Its probably claude but its a useful doc to refer to. This is what opened my eyes to the opportunity and Quality’s place in it.
IndustryPrimer-HVDC.pdf (847.7 KB)
P.S. I am very disappointed with my inability to do justice in this post and have probably rushed to finish it since I have been researching this stock over a long period of time (started in March)
