A Smallcap Proxy Stock Riding the Rise of Wind Energy in India

The earnings season is in full swing.

At a time when valuations are pricey and markets remain greedy, a small slip up in earnings can lead to sharp correction.

Similarly, impressive quarterly performance can lead to sharp runup in the stock.

Overall, the earnings have been below expectations. As per the media, it's going to be raining downgrades.

Dig deeper by all means, but do not base your long term investing decisions on the basis of the quarterly show.

Long term investors should take interim earnings performance with a pinch of salt.

As Warren Buffett has said...

• "Businesses do not meet expectations quarter after quarter and year after year. It just isn't in the nature of running businesses.
  
  And, in our view, people that predict precisely what the future will be are either kidding investors, or they're kidding themselves, or they're kidding both.
  
  Charlie and I have been around the culture, sometimes on the board, where the ego of the CEO became very involved in meeting predictions which were impossible, really, over time.
  
  And everybody in the organization knew, because they were very public about it, what these predictions were and they knew that their CEO was going to look bad if they weren't met. And that can lead to a lot of bad things.
  
  You get enough bad things, anyway, I mean. But setting up a system that either exerts financial or psychological pressure on the people around you to do things that they probably really don't even want to do, in order to avoid disappointing you, I mean, I just think that it's a terrible mistake. And, you know, we'll try to avoid it.

That said, earnings season and management commentaries offer some great opportunities for long term investors.

If you zoom out a bit, a lot of interesting insights can be gathered in the earnings call to establish the trends in the industry.

We are going to dig deeper into one such trend - the rise of wind energy.

The installed wind power capacity stands at 47 GW (Gigawatt) as of June 2024. 80 GW of wind capacity is expected to be added over 8 years, making it a decadal growth trend.

A look at Suzlon's performance, that has a cumulative 32% market share in India, can give good indication on the prospects of the sector. And wind energy enthusiasts have reason to cheer.

Suzlon posted a net sales growth of 48% and net profit growth of 96% YoY in the September quarter.

For the half year, the corresponding growth numbers were 49% YoY and 147% YoY respectively.

But beyond these interim numbers, it is the orderbook trajectory that deserves a mention. The wind order for Suzlon is up by over 3x times in one year. It stands at the highest ever level of 5.1 GW.

Inox India too has reported highest ever orderbook. Both these leading firms will benefit from the rise of wind energy in India.

However, both stocks are trading at exorbitant valuations.

So riding this trend would require you to look beyond the leading players.

Which brings me to Sanghvi Movers.

It is the largest crane rental company in Asia, and fourth largest in the world.

The company caters to core infra segments, of which Wind energy is the largest. Crane rental and EPC in the wind segment accounted for 57% of revenue in the first quarter. Steel, cement, mining, refineries, and gas, power etc. make up the rest.

A muted quarterly performance and guidance in the first half, and rising share of low margin EPC (engineering, procurement and construction) in the order book seem to have spooked the market. The stock has witnessed a sharp correction of over 45% from its peak this year. It trades at 19 times price to earnings.

You see, the operating profit margin in EPC could range from 12-15% as against 54-62% in crane rentals. So overall margin dilution is likely.

That said, unlike rental business that is capex intensive due to the investment in the cranes, the EPC business does not need capital infusion.

EPC business comes with high working capital need to be sure. But being in the crane rentals, there could be synergies leading to better utilisation of cranes. It also gives the company better control on its working capital cycle.

Now do note that the discussion here does not imply any view on the stock. Equity investments are inherently risky and need due diligence.

But after a correction of over 45%, this is a stock that deserves to be on your watchlist.

If you are interested in more such opportunities in smallcap space, subscribe to the Profit Hunter.

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure
Equitymaster Research Private Limited (formerly Equitymaster Agora Research Private Limited) (Research Analyst)