Markets
Two smallcap proxy stocks in the national smart meter theme
Summary
- These are the lesser known pick-and-shovel suppliers in the national smart meter theme.
Almost a decade ago, I stumbled upon a fascinating documentary called Katiyabaaz at the Mumbai Film Festival (MAMI). At the time, I had no idea what it was about. Later, I learned that the title translates to "electricity thief," a fitting description for its subject matter.
The film is set in Kanpur, Uttar Pradesh, where long power cuts and load-shedding lasting over 12 hours were common. The desperate need for electricity gave rise to people like Loha Singh, a local fixer who provided illegal connections by tapping into the official power supply. Singh became a local hero, a modern-day Robin Hood who risked his life to bring relief from the sweltering heat and power cuts, helping the less privileged. Of course, residents were more than willing to pay for his services.
Katiyabaaz was shot over two years, following real characters, including local fixers and officials from the Kanpur Electric Supply Co. (Kesco), who suffered significant financial losses due to these illegal connections. The film deservedly received glowing reviews, both in India and at international film festivals. It brought life to a dry subject—a nationwide issue—by infusing humor and candid conversations that resonated with anyone who has experienced daily power cuts in a tier 2 town.
Despite the attention the documentary brought to the issue, more than a decade later, not much has changed. India’s power industry continues to grapple with power theft and infrastructural inefficiencies, leading to significant losses for power and distribution companies and a frustrated public. The average annual technical and commercial losses are estimated at 34%.
Could smart meters be the solution to this persistent problem?
The slow march of smart meter adoption
Introduced in July 2021, the National Smart Metering Scheme aims to install 250 million smart meters by 2025. This initiative hopes to address these challenges and modernize the electricity infrastructure, with an estimated capital expenditure of ₹1.5 trillion. Smart meters offer real-time monitoring, power theft detection, and automated billing, which the government hopes will reduce, if not eliminate, losses.
However, progress has been slow. To date, only about 11 million meters have been installed. According to the management of Genus Power, a company that manufactures and provides smart metering on an EPC basis, between 60 to 70 million smart meters are expected to be installed this year. Realistically, it could take another four to five years to reach this goal due to the challenges of ground-level execution.
Several states, including Tamil Nadu, Karnataka, Rajasthan, Haryana, and Punjab, have yet to make significant strides in their smart meter journey. Gujarat has started but still has a long way to go. In states like Assam, Bihar, and Uttar Pradesh, the number of installed smart meters stands at 2 million, 4.5 million, and 2.5 million, respectively.
Overall, smart meter penetration in India is below 2%, compared to over 50% in developed nations. The potential for growth is enormous, with an average annual growth potential of over 68% CAGR in volumes if we assume a six-year timeline.
This scenario presents significant profit-making opportunities. The frontrunners in the national smart metering theme include companies like Genus Power, Salzer Electronics, and HPL Electric and Power, which are already well-known players in this space. However, today, I want to dig deeper into some lesser-known proxy players in the smart meter theme.
Hidden gems in the smart meter market
The government has mandated a minimum local content requirement for procuring smart meters, which boosts domestic manufacturing and presents a terrific opportunity for some lesser-known pick-and-shovel suppliers, or proxy players.
The first is Shivalik Bimetal Controls Ltd. The company’s products include shunt resistors and electrical contacts, critical components for smart meters. According to the management, Shivalik controls 80-90% of the market for these components in domestic smart metering, potentially accounting for ₹40 to ₹50 per smart meter. The company’s products, including bimetals, trimetals, shunt resistors, and electrical contacts, have applications in appliances, EVs, switchgear, energy devices, and battery management systems, making this story extend well beyond smart meters. Essentially, it's a proxy on electrification.
The second company is Permanent Magnets. It provides solutions for electrical components and assemblies based on current and speed sensing, magnetic shielding, and magnetic assemblies. It supplies to the top three electricity meter companies globally. Depending on the product, Permanent Magnets’ components range from ₹20 to ₹350 per smart meter.
Margins currently range from 10-20% depending on metal content, but there is potential for improvement as the company adds more products to serve a larger portion of the smart meter market. Beyond smart meters, Permanent Magnets supplies electrical solutions to 50% of tier 1 auto companies globally, in both EVs and combustion engine-based vehicles. Its new application areas include electrical, medical, aerospace, engineering, and computing.
While these are not stock recommendations, these small-cap companies are important names to watch in India’s energy transition.
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Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
