Is Schneider electric an emerging player in electrical infrastructure?

“The distributor business has grown 50% in this period, which we are talking about from Q1 to Q3. Panel builders have grown substantially in terms of our license partners and our core component partners which sell our breakers, which are also up 30%. So we see good amount of traction in our transactional journey, thus increasing the reach of the organization across the country and also providing us with the necessary reach to new and new customers.”

– Mr Sanjay Sudhakaran, Managing Director

Stock Data:

Ticker	SCHNEIDER
Exchange	NSE and BSE
Industry	Electrical Equipments

Price Performance:

Last 5 days	-4.1%
YTD	+8.6%
Last 1 year	-5.07%

Company Description:

Founded in 2011, Schneider Electric Infrastructure, designs and manufactures products used for the electricity network including transformers and controllers. The company has manufacturing facilities in Chennai, Kolkata, and Vadodara. The company also offers asset advisory and maintenance services, which accounts for 10% of total revenue. 

Products:

The product portfolio of the company includes Transformers, Power Transformers, Switchgears (Primary & Secondary Switchgears), Medium Voltage Switchgear, Protection Relays, Differential Relay, Electricity distribution management systems, a software suite for self-healing smart grid, e-House & smart cities applications.

Clientele:

Schneider has served a number of reputed clients such as Tata Projects, Ultratech Cements, BEL, IOCL, Siemens among others.

Manufacturing Facilities:

The company has 4 manufacturing facilities at 3 locations wherein they hold two units in Vadodara, one unit in Kolkata and the other one in Chennai. Its key end markets include Power Generation, Transmission & Distribution, Oil & Gas, Metro, MMM and other Electro Intensive segments, etc. 

Orders:

Schneider has received orders worth INR 3,680 Millions in Q1 FY23. The order growth was driven by Cloud & Service providers & Mining, Minerals & Metal segments. 

Financials:

What we like:

1. Strong demand in end markets:

Power & Grid, Transportation, Minerals, Mining & Metals, and Oil & Gas are the company’s four most important segments, and they all are electro-intensive. The demand in the Power & Grid segment has a positive outlook owing to rising demand for electricity generation and distribution as India expands its digital footprint. The popularity of digital entertainment and education, as well as digital payments like UPI, will further boost demand for the company’s products in this segment.

The minerals, mining, and metals also stand to benefit from the positive trend in the construction sector, with housing construction and bookings rising from last month. Future orders should be solid as the capacities for steel and cement increase. For the next three to five years, we should continue to see investments in metros and airports because India trails behind in terms of transportation infrastructure. There have been numerous petrochemical facilities built in the Oil and Gas segment. However, compared to the other segments, the demand from the Oil & Gas segment is lower. The company’s revenue in the upcoming quarters should be driven by its strong ability to meet these end-market demands.

2. The company focus to generate recurring revenue:

The long-term strategy of SEIL is to focus more on services to generate recurring revenue and to become more digital by incorporating software products. Additionally, the business wants to accelerate its core markets, expand its coverage across the nation through licensee partner models, and bring green products to market.

As per the management, “Just to bring about a flavor of how we are going ahead and executing our strategy. Leading with software, I spoke about it as one of our key strategic priorities; we continue to stay invested here. Here is an example of an atomic R&D center in Vizag that we have just completed. It uses our EcoStruxure for grid platform, which is the EPAS platform to be able to provide instant fast load shedding to the customers. We work very intricately with the customer connecting all their medium voltage products and providing them with the relevant software interface to be able to take informed decisions.”

In terms of the service and recurring revenue, the company has already put it into practice by providing 24/7 monitoring and predictive maintenance to a leading government hospital chain, enabling them to make well-informed decisions. The graph below, however, shows that the contribution of services to total orders has not increased significantly. If the SEIL makes the necessary developments to this strategy, it ought to have a long-term beneficial effect on the expansion of the business.

3. Strong order book in FY23:

During the quarter, the company reported a drop in total orders to INR 2,988 Million, down by 3.2% YoY due to the shifting of some orders to the next quarter. However, total orders increased by 11.6% YoY to INR 6,668 Million in H1FY23.

Factors to consider:

1. Supply chain might remain under pressure:

The company is experiencing supply chain disruptions from the last few quarters. Resultantly, higher raw materials cost and increase in electronic prices which is leading to a lower margin and profit. It is further expected that input costs might remain high in the near term.

2. Rising debt remains a major concern:

The company’s long-term debt increased by more than threefold between March 2018 and March 2022, from INR 107 crore to INR 393 crore. However, from the below chart, it is clear that the company’s interest coverage ratio is getting better over time. Additionally, according to the management, no significant Capex has been decided upon as of yet. Over time, the amount of debt should decrease if the interest coverage ratio steadily improves and the company lowers borrowing for business expansion.

Industry Analysis and Conclusion:

According to WEO 2021, an expanding economy, population, urbanization and industrialisation mean that India will see the most significant increase in energy demand of any country by 2040. Even at a modest assumed urbanization rate, India’s sheer size means that 270 million people are still set to be added to India’s urban population over the next two decades. India will soon become the world’s most populous country, adding the equivalent of a city the size of Los Angeles to its urban population each year. To meet the growth in electricity demand over the next twenty years, India will need to add a power system the size of the European Union to what it has now. The resulting surge in demand for a range of construction materials, notably steel and cement, highlights India’s global manufacturing pivot. As India develops and modernizes, its energy demand growth rate is three times the global average

The company’s end markets are rapidly growing, which should in turn drive revenues. Additionally, SEIL is committed to their long-term plan, which will aid in the expansion of the business. Moreover, for the first time in the last four years, the interest coverage ratio exceeds 1. The continuous improvement in this ratio and no major Capex at this time should reduce the company’s debt burden.