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

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Kotak - Numeric Power Systems

Numeric Power Systems: Buy

Investors willing to consider small-cap stocks can think about the stock of Numeric Power Systems, a maker of uninterrupted power systems (UPS).

The steady financials, the improving margins, and the growth potential in the Indian and foreign markets add visibility to the earnings growth of Numeric Power. Further, it is also a unique listed play in the electronic power equipment segemnt.

At the current market price, the stock trades at seven times its likely earnings for FY-07 on a consolidated basis. Being in the small-cap segment, with a market capitalisation of about Rs 165 crore and relatively low trading volumes, the stock may be subject to volatility. This makes it suitable for investors with a high-risk appetite and a long-term perspective.

Numeric makes power protection products such as UPS used for computer or network protection and process automation.

The company has a wide range of products catering to IT and IT-enabled services, medical applications, financial and insurance sectors, small and medium enterprises, and homes.

Steady business

With more and more businesses (including telecom and critical care medical instruments) running on technology solutions, the need for power protection systems for reliability and quality has become vital. Given India's significant power deficits and the ubiquitous outages and voltage fluctuations, Numeric Power's products have significant market potential in the country. The IT and business process outsourcing boom in the country has further propelled the demand for such products.

The company has a dominant position in this segment and has clients such as Intel, Infosys and Veritas. Its ability to offer remote monitoring through customer IT networks and Web-enabled solutions has not only helped capture overseas market but has also facilitated cost-control through efficient servicing.

Further, Numeric Power Systems has about 156 sales and service offices across India to cater to various regions. Income from service, which stood at about 11 per cent of total revenue in FY-2006, can be expected to increase given the geographic reach that the company has. This is also likely to lead to repeat orders.

While Numeric's brand image may help draw clients in the corporate sector, it may not be easy for the company to fully tap the small enterprises and home needs. This space is dominated by the unorganised sector where pricing plays a dominant role.

This revenue segment, although not significant, has been expanding with the company's new range of digital plug-and-play UPS systems with communication possibilities. Further, its aggressive tie-ups with close to 1,000 channel partners may see an expanded market share from this segment.

The company's fully-owned subsidiary in Sri Lanka and an export-processing unit in Chennai cater to the overseas markets. Other subsidiaries in Singapore and Mauritius, which trade in the company's products, have enabled effective tapping of markets in Africa and the US directly and through partners. The Singapore subsidiary also acts as a sourcing point for batteries, which are fully imported for the end product.

Last year, the company implemented an auxiliary power systems project for Power Grid Corporation in the entire north-eastern States, in a turnkey effort involving design, supply and installation of total power conditioning systems.

With this, the company has elevated itself to an integrated player in power protection systems. This may well act as a reference point for more such projects in future.

Strong financials

Over the past five years Numeric Power's topline has grown 22 per cent annually on a compounded basis. Effective cost-rationalisation measures have, however, led to healthy top and bottomline growth for the nine-months ended December 2006.

This has also led to improvement in operating profit margin to 11.5 per cent for the latest quarter as against 9.5 per cent in the corresponding previous period.

The company's healthy reserves and low borrowed capital gives it the option of using internal accruals or further debt for any expansion purposes.

Risks

Numeric Power completely imports batteries used in its products and to that extent subjects itself to foreign currency risks. Steep increase in the prices of key raw materials such as lead, copper and steel could dent OPMs and also affect bottomline as it may be difficult to pass on the increases to the end-customer. Technological obsolescence is a key risk in such businesses.

However, the company's in-house R&D appears well-equipped to face the same and has made strides in products with improved efficiency and high-frequency design.