Shakti Pumps: Is a Potential Demerger on the Cards?

Shakti Pumps (India), a leader in solar and electricity-operated submersible pumps, is steadily expanding its horizons.

The company caters to farmers under the PM-KUSUM scheme while exporting water pumping systems and industrial motors to over 100 countries.

It's on a transformational growth trajectory, with a foray into the electric vehicles (EV) under its subsidiary, Shakti EV Mobility, and innovation in renewable energy.

Shakti Pumps Business Profile

Speculation about a potential demerger to unlock value is gaining traction, especially after the company announced a 5:1 bonus issue to reward its shareholders.

This move has fuelled expectations that the company may look to separate its solar pump and electric vehicle (EV) businesses, allowing each to operate more efficiently and tap into distinct investor bases.

Shakti Pumps derives its revenue from two primary segments: Its dominant solar pump business, which benefits from government schemes like PM-KUSUM, and its growing export and industrial pump segment, which caters to a global market.

Solar Pumps under the PM-KUSUM Scheme and Non-PM-KUSUM Sales

Solar pumps, supplied to farmers through various government programs (including PM-KUSUM Components B & C), account for the largest share of the company's revenues. This segment contributed 69% to the revenue, with an impressive 66.8% CAGR reported between FY 2020-24.

Shakti Pump's leadership in this space is bolstered by its approximately 25% market share under the PM-KUSUM scheme, making it a key beneficiary of the government's renewable energy initiatives.

Exports of Water Pumping Systems and Motors

Exports form 21% of total revenues. It includes water pumping systems, industrial motors, and pumps supplied to industrial clients, OEMs, and retailers.

This segment, which is present in over 100 countries, has grown at a CAGR of 22.3% between FY 2020-24, demonstrating its strong international footprint.

Financial Performance

Shakti Pumps has delivered a robust performance over the past few years, reflecting its solid market positioning and consistent demand, especially in the solar pump and export segments.

Shakti Pumps Financial Snapshot (2020-24)

	2019-2020	2020-2021	2021-2022	2022-2023	2023-2024
Revenue Growth (%)	-29.30%	141.30%	26.90%	-18.00%	41.50%
Operating Profit Margin (%)	4.30%	15.70%	9.90%	7.20%	16.70%
Net Profit Margin (%)	-3.70%	8.10%	5.50%	2.50%	10.30%
Return on Capital Employed (%)	-0.20%	29.10%	21.40%	10.40%	31.50%
Return on Equity (%)	-5.10%	25.00%	17.70%	6.00%	24.20%

Source: Equitymaster

Between FY20 and FY24, the company has reported a 5-year CAGR in revenue and net profit of 20.2% and 25.2%, respectively.

Shakti Pumps has significantly improved its Return on Equity (ROE) and Return on Capital Employed (ROCE), with ROE increasing from -5.1% in FY20 to 24.2% in FY24, and ROCE rising from -0.2% to 31.5%. These gains highlight the company's ability to efficiently utilise its capital and generate strong returns in recent years.

Shakti Pumps has reduced its debt-to-equity ratio from 0.73 in FY23 to 0.23 in FY24, signalling improved financial health while maintaining steady business growth.

A Bold Bet on EVs

Shakti Pumps isn't limiting itself to pumps and motors. In December 2021, it launched a wholly-owned subsidiary, Shakti EV Mobility, to tap into India's fast-growing electric vehicle (EV) market.

With the industry projected to grow at a staggering 49% CAGR between 2022 and 2030, reaching 10 million annual sales by the decade's end, Shakti is gearing up to make its mark.

The subsidiary is building a diversified product portfolio, manufacturing EV motors, charging stations, battery management systems, electric control panels and variable frequency drives (VFDs).

Backing this ambition is Shakti Pumps India Ltd, which has pledged Rs 1.1 billion (bn) over five years, with Rs 320 m already infused.

Shakti EV Mobility has started supplying components for two and three-wheelers while also developing solutions for wider applications. The company recently secured a patent for its "Stack Assembly for Permanent Magnet Rotor," aimed at boosting EV performance and efficiency.

Diversified Business Model

A Potential Demerger

With such diverse revenue streams, a demerger could help Shakti Pumps sharpen its focus and leverage its diverse revenue streams more effectively. The solar and industrial segments, known for providing stable cash flows, benefit from government incentives and growing international demand.

Meanwhile, Shakti EV Mobility, operating in a high-growth market, could attract investors drawn to clean-tech and innovation-driven opportunities. Splitting the businesses could enhance transparency and unlock greater valuations, particularly for the EV subsidiary with its significant growth potential.

That said, breaking up comes with its own set of risks. The company could lose synergies such as shared logistics, R&D, and economies of scale.

Additionally, while the EV business shows promise, it is still in its nascent stages and faces stiff competition. Ensuring both entities thrive independently will require flawless execution to navigate these challenges.

What Does This Mean for Investors?

Shakti Pump's financials are solid, backed by steady cash flows and moderate debt levels. Its recent bonus issue reflects management's confidence in the business, boosting shareholder returns while increasing liquidity.

For investors, a potential demerger offers an opportunity to benefit from the distinct growth stories of Shakti's segments. The solar business caters to long-term demand for renewable energy, while the EV segment aligns with the booming clean-tech revolution.

Though no official announcement has been made, the writing on the wall suggests that a demerger could be a logical next step. Whether or not this materialises, Shakti Pumps remains a compelling play, combining market leadership, global reach, and a strong bet on India's EV future.

For now, shareholders have every reason to stay pumped.

Capacity Expansion: Scaling Up for the Future

To support its growth ambitions, Shakti Pumps is expanding its manufacturing capabilities. The company is adding 200,000 units to its existing capacity, taking the total to 700,000 units per annum. This expansion will cater to both its core pumping business and the EV segment.

Additionally, Shakti Pump's heavy investments in research and development (R&D) are paying off. In FY24, the company secured four new patents, bringing its total to 15. These innovations, coupled with in-house manufacturing of critical components, gives the company a competitive edge.

Valuation

Shakti Pumps' stock has seen an impressive surge this year, nearly tripling in value from Rs 1,023 to Rs 4,999. The stock is currently trading close to its all-time high.

Shakti Pumps' rally has been driven by several key factors, with the business performing admirably. The company's annual revenue growth of 41.54% surpassed its 3-year CAGR of 13.62%, highlighting its strong momentum.

The rally was further fuelled by the company receiving two additional patents from the Government of India, recognising its innovative efforts.

A healthy order book also bolstered investor optimism, while profit margins saw improvement, due to economies of scale, supported by higher sales.

As of September 2024, the company's outstanding order book is strong, at around Rs 18 bn, reinforcing confidence in its continued growth.

At present, Shakti Pumps is trading at a price-to-earnings (P/E) ratio of 30x, which is above its 5-year median P/E of 24.4x. At its peak in late 2023, the stock was trading at a P/E of 127x, highlighting the premium investors placed on its growth potential in the solar and renewable energy space.

Conclusion

Shakti Pumps presents an intriguing opportunity for long-term investors. The company's dominance in the solar pump market, growing exports, and strategic foray into the electric vehicle (EV) segment position it as a key player in India's renewable energy and clean-tech narrative.

What makes Shakti Pumps even more compelling is the growing buzz around a potential demerger. Splitting its solar and industrial pump business from the EV subsidiary could unlock significant value for shareholders by allowing each entity to sharpen its focus and attract distinct investor pools.

While such a move remains speculative at this point, the logic is strong, given the vastly different growth trajectories and capital requirements of the two segments.

That said, investors should also factor in the risks. The EV business, while promising, is still in its early stages and faces stiff competition. Meanwhile, the solar pump segment's heavy reliance on government schemes like PM-KUSUM introduces an element of policy risk.

Shakti Pumps operates in sectors aligned with India's renewable energy and EV growth stories, which may appeal to those with a long-term interest in these industries.

However, whether the company decides to demerge or not, careful evaluation of its financial health, execution capabilities, and market dynamics is essential. As always, aligning investments with personal risk tolerance and goals is critical.

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