Shakti Pumps: An alternative play on India’s Solar ambitions

I don’t quite remember how I came across Shakti Pumps. When I began to type this post I tried hard to recollect but I couldn’t. Despite, it holds a notable milestone in my investing journey.

It was in Shakti Pumps when I first started using channel checks. Not as fancy as hotshot funds, who employ industrial detectives and third-party agencies to query suppliers, speak to customers, do factory visits etc. But in my own little way by reaching out to relevant analysts and doing scuttlebutt research. Since then, it has been an integral part of my research process.

Alright then let’s talk about Shakti Pumps.

Founded in 1982, headquartered in Madhya Pradesh, Shakti Pumps has four decades of experience in manufacturing pumps and motors. Its wide range of products find use in various applications such as irrigation, domestic, commercial and industrial water supply.

Shakti owns and operates 2 manufacturing units in Pithampur (MP) with a capacity of 5 lakhs pump p.a. ?The Co. regularly spends on R&D and has received 15 patents as of Q2 FY25.

Earlier in March, the company had raised an institutional round of 200 crores by way of QIP. Marquee MFs like SBI and LIC had invested in the same. The proceeds would be primarily used to expand the capacity of their manufacturing units and general corporate purposes (read: to be used for working capital purposes).

The company however does not have diversified mix in recent years (in contrast to the below caption), with >65% of revenue coming from government projects, particularly the KUSUM scheme.

In the past, every time I heard the central government announce a new “PM XYZ Scheme”, the silent sirens in my head went off. The same rhetoric plays out: lot of optimism, price of some stocks juggle, and then gradually the fizz wears out. The actual execution has always been elusive.

I wouldn’t say this time is different. But… ?

The KUSUM scheme makes a lot of sense. It is a central government scheme launched in 2019, intended to provide energy efficient, renewable energy-based power solutions to farmers. The idea is to provide subsidies and get farmers to convert a whole bunch of diesel / electric grid connected pumps into solar. How many pumps??About 3.5 million.

It severs the dependence of farmers on the DISCOMs. These distribution companies are required to provide electricity on a sustainable basis to power the motors which draw water from the ground and irrigate the same.

In 2020, more than 30 million agricultural pumps were installed, with nearly 10 million being diesel or kerosene-based and the rest being electric or grid-connected. Electrifying the 10 million diesel-based pumps would be a lengthy process. Meanwhile, the 21 million electric pumps consumed a significant ~18% of the country's total annual electricity consumption.

A little more on the scheme

The scheme has three components: A, B & C

Component A enables farmers to start a solar power plant between capacities 500 kW and 2 MW and sell the electricity generated to the grid. This benefits farmers by giving them access to an extra source of income. However, an estimate from CSE showed that the upfront cost are prohibitive enough for it to be accessible to majority of the farmers (pg. 10). And as expected the scheme has been slow to take off.

Component B: targets small farmers who are currently dependent on the erratic main grid agricultural supply. The farmers can opt for standalone solar water pumps replacing their electric/diesel pumps, which would lead to savings in terms of operational costs such as amount spent on purchasing diesel or paying electricity bills. This is where Shakti earns the majority of its revenues.

Component C is divided into two sub-components. The first is individual pump solarization (IPS), which involves setting up grid-connected solar water-pumps on farmers’ lands. The second sub-component, feeder level solarization (FLS) entails farmers with land located at a 5-km distance from the nearest substation to start a microgrid and sell power to the substation and power their agricultural feeders.

Why would farmers take up this scheme? One word… Subsidies

• “Solarization” of Off-grid / Diesel Pumps:?To install standalone solar agriculture pumps of capacity up to 7.5 HP. 30% Central Financial Assistance, 30% State Government Subsidy,?40% by the farmer.

• “Solarization” of On-grid Pumps:?To solarize existing pumps with provision to sell excess power generated to DISCOMs at pre-fixed tariffs. 30% Central Financial Assistance, 30% State Government Subsidy,?40% by the farmer.

• In Northeastern states, Sikkim, J&K, Himachal, Uttarakhand, Lakshadweep and Andaman & Nicobar Islands - 50% Central Financial Assistance, 30% State Government subsidy,?20% by the farmer.

The Opportunity for Shakti Pumps

Shakti pumps had an explosive last 5 years with revenue shooting up from ~400 crores in FY20 to ~1370 crores as of FY24. PAT has also shown a similar trend, beginning with a loss of 14 crores in FY20 to a profit of 142 crores as of FY24. EBITDA has also increased from low single digits to almost 21% within the first two quarters of FY25, primarily owing to reduced raw material prices and higher realizations from individual pumps. Also, the company has a present order book of ~1800 crores as Q2 FY25.

But all that is in the past and has been accounted for in the stock price (~23 bagger in the last 5 years). We want to figure out if there is still steam in the engine especially because:

-?The company is trading at ~30x PE at the time of writing

-?The KUSUM scheme is on its last leg, with completion targeted at 31.03.2026 (basically within the next 6 quarters). Also given that the general election and the major state elections are over, the scheme is expected to run on turbo boosters.

Here’s my base case revenue estimations:

Component B: 5 out of 13.4 lac pumps have been installed as of 30.09.2024. That leaves 8.4 lacs pumps to be installed. SP has a present order book ~46,452 pumps for the upcoming 1 year. Given Shakti pumps have a 25-30% share in the KUSUM scheme component B, we can assume that a total of 155 k to 186k pumps are in sanctioned mode. This takes the total pumps (completed + sanctioned) to 6.5 lac pumps i.e. 50% of the total mandate as completed.

The remaining 50% i.e. 6.5 lac pumps sold at an average price of 3.1 lac leads to an order book of 20,150 crores. This must be completed by 31.3.2026 (read next 6 quarters). Given the government meets 80% of this target, the updated orderbook ~16k crore (80% of 20k crore). Given Shakti’s 25-30% share in the same; we can assume that the company has an opportunity to make 4000 – 4800 crores. Summing up the existing 1400 crores (component B’s share of the total) worth of pending order book, the company stands to clock a revenue of 5400 – 6200 crores in the next 6 quarters from Component B alone.

Component C: Under this both IPS & FLS segment has picked up pace with IPS increasing from 1.6% to 2.8% and FPS from 0.3% to 1% b/w June’24 to Sep’24. SP already has an order book of 139 crores. If we assume that the scheme expands at a rapid pace, we can estimate a 5x growth on a low base leading to 700 crores worth of revenue from Component C.

Export Revenue: Export revenue increased from 235 crores in FY23 to 286 crores in FY24 imputing a 22% growth. Assuming a 20% growth rate, we can assume revenues from exports to be at ~340 crores.

Other Revenue: which includes sales from retail, OEM & industrial customers, grew by 78% y-oy in FY24 to 200 crores. Assuming 20% growth we find that the company stands to make 240 crores in the next 6 quarters.

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A base case scenario of ~11% PAT margin (16% avg. in the last two quarters) on ~6300 crores of revenue, imputes an EPS of 232 which is a 65% upshot compared to FY24’s 142.

There are a few constraints in the revenue recognition though:

• At present the company has a capacity to make 2500 crores worth of revenue and as such it can be a bottleneck. When asked about this the management stated that it is adding some machinery in the next 3 months which can increase its existing capacity to 3000-3200 crores worth of revenue. The company is also on track to double its capacity in a year or so to 5000 crores. This can be a hindrance to achieving the projected 6300 crores of revenue within the next 6 quarters as the capacity cannot be up and running in such a short span.
• Second, the company has stretched its working capital cycle (receivables + inventory -payables) up to 4-5 months primarily owing to government contracts. So all the revenues will probably not be recognized in the next 6 quarters.
• Also, the company has a present order book of only 1800 crores to be executed within the next 12 months. It has to clock a significant uptick in its total orderbook to fulfill that figure by the next 2-3 quarters or else it won’t be able to generate the projected revenues. Additionally, the company has the majority of the orders from 4-5 states (owing to their network) and hence may have concentration risk.

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Some other important stuff

Related party transactions: The company has had 100 crores worth of RPT (excluding remuneration) which primarily consisted of purchase of components, assets, nuts and bolts, pipes and services from different promoter held companies. This is against a sale of 1371 crores, ~7% of sales. The same was around 57 crores (6% of sales) in the previous year, FY23. No major receivables or any sort of loan to promoters.

Contingent liabilities: Worth 260 crores, out of which 246 crores are related to unexpired letters of credit (probably for exports) and the rest owing to tax disputes with the authority.

Promoter salaries: Are high compared to profits with close family members having taken ~11 crores as of FY24 against a PAT of 142 crores. Notably there wasn’t much increase on the same compared to FY23 when profits were a meagre 24 crores.

Subsidiary: The company is starting an EV motors business owing to their existing expertise. The company’s operations in this segment are in a pilot phase where its engines are being tested by OEMs. We are particularly interested in checking whether their EV business has had major investments or jumps in operation. Shakti EV mobility is their EV subsidiary which had a balance sheet of 27 crores and profit of 7.34 lacs representing 3.57% and 0.05% of the company’s total assets and profits respectively. The majority of its profits from subsidiary comes from Shakti Energy Solutions which contributed 15 crores to profit (10% of overall profits) compared to 49 lacs in FY23. ?

Tax proceedings against promoter: The Director of Revenue Intelligence had issued two show cause notices to Dinesh Patidar in late 2019, both alleging wrongful evasion of the payments of custom duty to the tune of Rs. 5.2 crore & Rs. 1.4 crores plus interest. The company has appealed on both the matters, and they are currently pending.

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My Views: I have tracking position, and I am not buying more at current levels

At current levels, the valuations look on the expensive side, and the growth story seems oversold. The bottleneck in their manufacturing capacity presents an operational challenge to achieving the projected revenues in the given span of time. Plus, a reliance on government contract-based order books brings in a level of uncertainty to the whole case.

Personally, I am not comfortable paying over 25x PE for most companies. Although I have paid 55x PE for TIPs Music happily. I will keep tracking the company in the coming quarters and should an opportunity present itself, I may buy into it.

These are my views and not any buying and selling recommendations.

See you in the next one.