Numeric Power Systems

Those looking for an off-beat small-cap exposure can consider investing in the stock of Numeric Power Systems, a manufacturer of uninterruptible power systems (UPS).

After a year of poor performance in FY-09, the company has been steadily increasing its sales over the last three quarters; its entry into green energy businesses such as solar panel installations, light emitting diode (LED) and a planned micro wind turbines would, besides supplementing income, help the company augment its business in the power back-up/alternative power solutions space.

At the current market price of Rs 331, the stock trades at about eight times its expected per share earnings for FY-11. While the company may close FY-10 (results awaited) on a flat note, new initiatives, besides a pick-up in corporate spending, may boost earnings from 2011.

Investors may, therefore, require a two-three-year perspective to benefit in terms of improved earnings growth from the above businesses.

However, being a small-cap stock with a market capitalisation of Rs 342 crore, it would be subject to the vagaries of the market, especially in volatile phases. The stock, for instance, lost 15 per cent since the beginning of this month. Investors may, therefore, have to adopt a strategy of buying on declines linked to broad markets. Similarly, any sharp rallies of 15-20 per cent in the stock can be used as opportunity to book profits.

New initiatives

Numeric Power has traditionally been in the business of selling UPS, inverters and other power-conditioning solutions. This segment is reported to be witnessing a double-digit growth over the last few years, as a result of increasing data centre capacity (with IT and ITES driving the same) and worsening power situation. Numeric Power's sales have grown by 19 per cent annually in the last three years.

The company, claiming to have a market-share of about 20 per cent, has been combining its pure power back-up solutions with alternative energy solutions such as solar power.

For instance, the company's photovoltaic systems allows to bank solar power in a battery for future use. Its solar inverters and hybrid solar UPS systems all come with these options.

Solar panels that can be installed in the roof-top and can provide investment/tax incentives may well prove to be a high-volume business in India and abroad. Besides operating solar power projects for captive consumption in three of its units, the company has made over 200 installations to clients in India and abroad in sectors such as banks and telecom.

That the segment is quickly being ramped up is evident from the fact that it already contributes about 10 per cent to the top line.

UPS segment

Numeric Power has had a steady market in the UPS segment, thanks to the increasing power deficit in the country. Even as 2008-09 may have seen a cut in spending by corporates as a result of slowdown, Numeric Power's volume of UPS sold was 7 per cent higher than the previous year.

Aside of UPS traded, its own manufactured UPS volumes saw increased off-take of 14 per cent. Clearly, a peak power deficit (such as 12.7 per cent in March 2010) leaves very little choice for corporates but to spend on power back-ups and inverters.

However, the improved volumes came on the back of a marginal dip in realisations. That Numeric claims to have set up 80 per cent of the UPS in bank ATM networks in the country also indicates the demand for the product.

Numeric is also in talks for a tie-up with a US-based micro wind turbine company. Given the current incentives for alternative energy in the country, low-cost small-scale solutions may appeal to corporates. That banks such as SBI have resort to wind power indicates how corporates are looking at viable and efficient alternative power solutions.

While the green energy segment is unlikely to become a chunk of its overall business in the medium-term, it holds potential to drive profit margins.

Numeric Power's operating profit margins were 12 per cent for the December 2009 quarter as against 8.5 per cent a year ago. Revenue for the nine months ended December was Rs 322 crore while net profits stood at Rs 26 crore. The company has traditionally maintained low gearing and a return of net worth of about 20 per cent.

Business risk for Numeric Power arises from a large unorganised market for low-capacity UPS. The company along with players such as APC, Microtek, and Emerson reportedly account for a little over 50 per cent of the low-capacity UPS market.

It may, therefore, be inevitable for the company to upgrade itself to offering more high-end solutions catering to corporates.

via BL