Quality Power Electrical Equipment Ltd (Avoid)

Highlights

Quality Power Electrical Equipment Limited (QPEEL) incorporated on 2001 is engage in the business of servicing global clients in critical energy transition equipment and power technologies. They provide voltage electrical equipment and solutions for electrical grid connectivity and energy transition.

QPEEL is a technology-driven company specializing in the provision of power products and solutions across power generation, transmission, distribution, and automation sectors. Additionally, they offer equipment and solutions tailored for emerging applications such as large-scale renewables.

The company is among the few global manufacturers of critical high voltage equipment for High Voltage Direct Current (HVDC) and Flexible AC Transmission Systems (FACTS) networks. QPEEL offerings include reactors, transformers, line traps, instrument transformers, capacitor banks, converters, harmonic filters, and reactive power compensation systems.

The company offer a range of technology-driven products, comprehensive system solutions, and professional services tailored for the power sector. The customers they cater to run their operations across multiple key areas, including (i) power transmission, providing effective transfer of electricity over distances, (ii) power distribution, ensuring the delivery of electricity to end users, and (iii) power automation, integrating advanced technologies for efficient power management.

Out of the total proceeds of Rs. 8,587 mn, ~Rs. 1,170 mn would go towards payment of the purchase consideration for the acquisition of Mehru Electrical and Mechanical Engineers Private Limited, Rs. 272 mn would go towards funding capex, Rs. 808 mn would utilize towards funding inorganic growth through unidentified acquisitions and other strategic initiatives and general corporate purposes. Rs. 6,337 mn would go towards existing selling shareholders of the company.

Key Highlights

• The energy transition equipment and power technologies market is poised for significant growth in the coming decades. As governments and businesses around the world intensify their efforts to decarbonize the energy sector, the market for energy transition equipment will continue to expand, driven by technological advancements, supportive policies, and increasing public awareness of the need for climate action.
• With supplies across 100 countries, QPEEL cater to various industries like automobiles, oil and gas industries, cement, chemical, renewables, traction & locomotives, steel & metal industries, power utilities in different markets spanning across 6 continents, thereby enabling them to be a global player.
• Their products and solutions are subject to, and measured against and quality standards and rigorous product approval systems with stringent design, engineering and use specifications, which act as significant entry barriers for new players. Their products have a typical life of over 15 years and are used in long term critical energy projects. Any change in the vendor of the product may require significant time and expense on part of the customers, which acts an exit barrier and disincentives any such changes for them.
• QPEEL also entered into a MoU with a U.S. based company to establish a collaborative partnership to address the requirements of transformers for the market in Northern America, apart from collaborating in other electrical product segments of mutual interest.
• Company’s upcoming factory in Sangli is pivotal to strengthen their strategy to meet the escalating demand for products, both domestically and globally. With a surge in orders from Indian customers, the company is witnessing an unprecedented rise in demand, necessitating rapid equipment delivery.
• QPEEL key growth strategies includes (i) Focus on growth through organic and inorganic acquisitions (ii) Continue to focus on R&D and engineering capabilities to develop innovative systems and solutions, as well as improve manufacturing efficiencies. (iii) Expand operating facilities and increase operating capacity. (iv) Harness industry growth in the energy transition sector and grow operation.
• The company’s sales/EBITDA/profit has grown by 28.31 pct/27.87 pct/14.68 pct CAGR Over FY22-24. During FY24, company reported sales of Rs. 3,006 mn which grew by 18.70 pct YoY while EBITDA rose by 17.82 pct YoY to Rs. 381 mn as EBITDA margin contracted by 09 bps in FY24. As of FY24 the company reported profit of Rs. 555 mn against profit of Rs. 399 mn in FY23. As of H1FY25 company registered sales/EBITDA/Profit of Rs. 1,557 mn/Rs. 314 mn/ Rs. 501 mn.

Key Risk

• QPEEL is dependent on the performance of the market for HVDC and FACTS, which in turn is dependent on a range of social, economic and regulatory factors beyond company’s control.
• In order to retain some of existing customers the company may also be required to offer terms to such customers which may place restraints on QPEEL resources. Their inability to maintain customer network in India and globally, and attract additional customers may have a material adverse effect on their business.

Financial Performance

Peer Comparison Based on FY24 Financials

Valuation

QPEEL is a technology-driven company specializing in the provision of power products and solutions across power generation, transmission, distribution, and automation sectors. At the upper end of the price band of Rs. 425 the issue is priced at a PE of ~32.9 its FY25E annualised earnings. The issue looks fully priced.

Disclaimer: The views shared in blogs are based on personal opinions and do not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Investing using the app is the sole decision of the investor and the company or any of its communications cannot be held responsible for it.