Last week I met the management of Shakti Pump, the stock has moved up 250% in last 6 months and there is a lot of hype as management has guided for sales growth of 70-80% in FY2018, Midcap Moghul kenneth Andrade’s entry at 476/Share via bulk Deal has made it a hot topic around the HNI Circle. The promoter has been aggressively buying from the Open Market for last 6 months.
Here i was meeting a company which had high Growth Expectations, Promoter Buying from the Market, Marqee Investors Getting in and a lot of momentum in the Stock. The Only Question i had is this really a Good business or the Promoter is selling Snake Oil.
These are the 5 key takeaways from the management meet.
1) Lets First understand the Business & History- Shakti Pumps was mainly into the export market till 2013-14 and had 65-70% of its revenues from exports, this small but aggressive management decided that they want to expand in the Indian Market and Hired Bollywood Super Star Amitabh Bachchan as their Brand Ambassador. Since then the middle east which was their main export market started facing problems in 2014 due to sanctions in Iran, the company struggled for 2 years though the Indian Market was picking up. Today the company’s 75% Sales comes from the Domestic Market whereas only 25% Sales comes from the Export Market.
Shakti Sells Stainless Steel Pumps in the Solar Pump Segment as well as to Industrial Segment.
2) The Opportunity Size and Revenue – I was curious about how would the company achieve 70-80% Sales growth and was the growth Sustainable? The management said they have have 50-60% market share in the Solar Pump Category and that the government gives 85% subsidy on it. The selling price of a Solar Pump is between 4-5 Lakh, whereas the company only makes the Pump, it outsources the other parts like solar panels from other vendors.
The management started by saying that NITI Ayog has planned to install 30 Lac Solar Pumps in next 3 years and tenders for 1.14 Lakh are already tender ready. In Value Terms it was a 1.2 Lakh Crore opportunity, which sounded insane but wait for it as there is always a catch.
The Company also supplies Stainless steel pumps which is ofcourse its main business where realization is 30,000-40,000/Pump and has marqee clients like Tata’s, Adani, Jain Irrigation. These clients also bid for solar pumps contracts by the government but they source the pumps from Shakti as its the leader in Stainless Steel Pumps
3) A comparison with Peer – I asked them why would they choose Shakti pumps over a global leader like KSB Pumps. Akhilesh Maru, the CFO told me that every company that install’s a Solar Pump has to give a 5 year Guarantee to the farmer. Now the installing company has two options, either to go with Iron Pumps which are not energy efficient as they rust over time or go with Stainless Steel Pumps of Shakti Pumps which don’t rust and are 5 Star rated on energy efficiency. The Pricing difference between Iron Pumps and Stainless Steel is about 20% but cast iron (KSB’s Products) rust over time. He went on to say that even though KSB has 1-2 models of stainless steel pumps, we at Shakti have 2000 SKU’s in Stainless steel pumps, from 250W to 250KW. Shakti Pumps has enjoyed higher operating margins of 15% v/s 11% for KSB Pumps.
4) Promoter Buying Reality or Fake? – Promoter has bought 2.1% Stake from the Market in last 5 months till about 400-450/Share. Interestingly ML Securities a company owned with a person who has the same surname as the promoter i.e. patidar sold 2.5% in the open market. I asked with a smile that how are we related to ML Securities, he smiled and answered that out of 800 employees at Shakti, 150 are patidars, ranging from a clerk to a manager. My Team at Stallion asset had already done some work which showed that there is a high probability of this being a related party and they also acquired warrants in Shakti Pumps at 176/Share.
5) Execution of Solar Pump Projects? – The whole story of Shakti Pumps depends on Solar Pumps order, which is largely a subsidiary based business, and a lot of government interventions. Devendra Fadnavis (Chief Minister of Maharastra) who was the biggest optimist of solar Pumps in 2015 lately said that we rather give subsidiaries on Small Solar Panel generation plants within a village rather than specifically for Solar Pumps for every farmer in a press interview 2 months back. Hence i asked about Execution risks, and they agreed that the business depends on government but they have guided only 500 crores for solar pumps of revenues out of which 250 Crores comes from government backed complete solar systems i.e. assuming 4.5 Lakh Average ticket size, they need to install only 5,500 pumps which is only 5% of the total tender book of 1.14 lakh Pumps. Since they have 50-60% Market Share in Stainless Steel pumps, they will also get orders from other bidders of the Solar Pump which will complete the other 250 Crores guidance.
Conclusion – The management has gone through tough times in 2014-2016 and has emerged strong. Mr Patidar seems to be an optimist and ambitious but we at Stallion Asset know that when it comes to government based orders especially where there are subsidies involved odds are the business will face a lot of turbulence time and again. Markets are pricing in that they will do 700 Crores of Sales and about 50-55 Crores of Profit in FY2018. The longevity of the business depends on the success of Solar Pumps and the business is in its initial stages, will it be a outright failure or a very large trend only time will tell, but we need to track this story carefully.
Disclosure – Amit Jeswani & Family have Vested Interest.
This is not a recommendation and please use this for education purpose only