Smallcap Beneficiaries in India’s Power Transmission Capex Boom

The demand for essential utilities like food, clothing, and shelter has always been universal. However, in today’s world, one more essential aspect stands out access to electricity. Reliable power supply is indispensable, and for a rapidly growing economy like India, ensuring consistent energy availability is a top priority.

India is at a transformative moment in its energy sector. With the recent finalization of the National Electricity Plan (NEP) 2023-2032, major changes are on the horizon. The plan focuses on expanding both central and state transmission systems to meet the country’s evolving energy demands, while also integrating renewable energy and green hydrogen into the grid. The planned expansion of the power transmission network will see significant growth, with an increase in transmission capacity from 4.85 lakh circuit kilometers (ckm) in 2024 to 6.48 lakh ckm by 2032. Additionally, the transformation capacity is set to nearly double from 1,251 GVA to 2,342 GVA over the same period.

The overall opportunity presented by this expansion is immense. With an estimated investment of over ₹9 trillion, the Indian power transmission sector is entering a capex supercycle. This provides ample opportunities for companies involved in the space to benefit from the surge in infrastructure spending.

A few months ago, I discussed the transformer sector in India While transformers are crucial, today, we will shift focus to the transmission sector and explore how certain companies stand to benefit.

Key Players in Power Transmission

The power transmission sector in India is poised to undergo substantial growth, and several companies are well-positioned to take advantage of this opportunity. Among the prominent players, names like Power Grid Corporation of India Limited (PGCIL), Apar Industries, Kalpataru Projects International, and KEC International stand out. These companies are all likely beneficiaries of the increased investment in transmission infrastructure.

However, in this article, I want to focus on a specific smallcap company that has the potential to emerge as a significant winner in this supercycle Skipper Ltd.

Skipper Ltd: A Smallcap with Big Potential

Skipper Ltd is one of the largest suppliers to PGCIL, which is India’s leading power transmission company. However, Skipper’s role in the industry goes far beyond just being a supplier. The company is the world’s largest manufacturer of transmission towers and caters to over 60 countries worldwide. This global presence, combined with in-house research and development (R&D) capabilities, gives Skipper a competitive edge in the market.

One of the company’s core strengths lies in its ability to produce transmission towers and poles at the lowest cost globally. This cost advantage is largely due to backward integration. Skipper owns and operates its own structure rolling and manufacturing facilities, has an in-house tower load testing station, and provides turnkey services in transmission line EPC (engineering, procurement, and construction). These capabilities make it a leading player in the transmission sector, offering a significant advantage as India embarks on this transmission expansion plan.

According to the company’s management, Skipper’s addressable market in transmission towers and EPC services is valued at ₹3-4 trillion. The company has the capability to execute high-voltage power transmission and distribution projects, where the competition is lower, and profit margins are better.

Skipper’s Diversified Operations

In addition to its core power transmission business, Skipper also serves the telecom sector and the water sector through its polymer pipe division. This diversified business model helps the company spread risk and capture opportunities in different industries, further solidifying its potential for growth.

Over the past 12 months, Skipper has demonstrated impressive financial performance. Both its revenue and profits have grown by more than 80% year-on-year (YoY). The company’s management has set ambitious targets for the future, projecting revenues of ₹3.2 billion in FY24, with a compound annual growth rate (CAGR) of 25% over the next 2 to 3 years. Over the next five years, Skipper aims to increase its topline to ₹10 billion.

FY24 has already been a landmark year for the company in terms of order inflows. The company’s current order book in the transmission and distribution sector stands at ₹34 billion, with a bid pipeline of ₹65 billion domestically and ₹115 billion internationally. These robust figures point to strong future growth prospects.

Improving Margins and Financial Strength

One key metric to watch with Skipper is its operating profit margin, which currently stands at 9.5%. Management expects this to improve to 11% within the next 2 to 3 years, thanks to increasing efficiencies and the scaling of operations.

However, as with any business, growth comes with challenges. The company will need to invest heavily in capital expenditure to execute its growth plans. Additionally, Skipper’s balance sheet will be crucial in determining how it navigates this expansion. Currently, the company has a net debt to equity ratio of 0.5 times, a manageable level, but one that could become more stretched if there is a slowdown in capex activities or tender processes. Nevertheless, as a market leader in its niche, Skipper’s strong geographic diversification and robust order book make it a compelling candidate for investors looking to capitalize on the transmission capex supercycle.

Conclusion: A Smallcap to Watch in the Transmission Capex Supercycle

The Indian power transmission sector is set for massive growth in the coming years, and companies positioned in this space are poised to benefit significantly from this supercycle. Skipper Ltd, with its leadership in transmission tower manufacturing, low-cost production capabilities, and diversified business model, stands out as a potential smallcap winner.

While there are risks to consider, such as the need for capital expenditure and the potential for slower-than-expected tender processes, Skipper’s strong financials and clear growth strategy make it a must-watch stock for investors looking to tap into the opportunities in the Indian power transmission sector.

As always, it’s important to conduct thorough research before making any investment decisions. The power transmission capex boom presents a range of opportunities, but execution and market conditions will ultimately determine which companies emerge as the biggest beneficiaries. For Skipper Ltd, the future looks bright, but staying vigilant on key financial metrics will be essential to navigating the opportunities and challenges ahead.