India is fast moving towards electrification, electrifying everything from gadgets to cars! As a front-runner in global growth, India’s energy appetite is growing faster than ever before, thanks to its booming population, urban sprawl, and industrial revolution.
This run for electrification is not limited to India but has spread like wildfire across the globe. As a result, the global electrical component market is expected to reach Rs ~18.4 Lac Cr by 2030.
But wait, there’s more! The National Green Hydrogen Mission of India has been granted a substantial allocation of Rs 19,700 Cr to achieve its ambitious target of reducing carbon intensity by less than 45% by 2030 and achieving net-zero carbon emissions by 2070.
These pivotal developments are collectively acting as significant tailwinds for key sectors such as Automobiles, Smart Meters and Switchgears.
We all are aware of the ongoing frenzy and growth of the electric vehicles segment in the automobile industry, the EV scene is set for a rapid expansion, with forecasts showing a growth rate of 36% CAGR till 2026.
The smart meter market is on a robust growth trajectory as well, with India’s ambitious Smart Meter National Programme, aiming to swap out 25 Cr conventional meters for smart ones by 2025-26.
Lastly, the surging demand for power generation, fueled by a growing population and rapid urbanization, is significantly driving the switchgear market forward.
But, why are we buzzing about all this electrification?
There’s a stock at the heart of all these sectors, positioning itself as a critical player amidst these electrifying times.
Shivalik Bimetal Controls Ltd.
Riding the Growth Prospects of End-User Industries
Shivalik Bimetal Controls Ltd was established in 1984. The business was previously engaged in the manufacturing of cathode ray tubes (CRTs) but experienced major setbacks during FY11-14 as LED and LCD televisions rose to the occasion. This led them to rediscover themselves as a global player whose primary interest lies in manufacturing thermostatic bimetals and shunt resistors.
These products have applications in switchgear, smart meters, electrical appliances, automotive, and electronic devices.
They have three major segments:
Thermostatic Bimetals:
‘Imagine you have two different kinds of metal. One metal stretches out when it gets hot, and the other one doesn’t stretch as much. If you stick these two metals together side by side, you get what’s called a bimetal’. This is what ChatGPT said when asked explain to a 5 years old.
Shivalik makes this special metal, and it’s really useful because when it gets warm or cool, it bends a little because one side is stretching more than the other. This bending can help do things like turn switches on or off in machines automatically when it gets too hot or too cold.
These critical components are majorly used in overload protection devices. Dominating the Indian market, Shivalik holds an impressive market share of approximately 85-90% in the thermostatic bimetal segment. On the global stage, their market share is around 16%, with expectations to rise to about 22%.
According to the management, a significant 65% of the revenue from the bimetals segment is generated from switchgear and circuit breakers, while 15-20% comes from appliances, and 8% is attributed to smart meters.
Shunt Resistors:
According to ChatGPT again, ‘A shunt resistor is like a special gate in a park where electricity, like a crowd of people, runs through. It helps to count how much electricity is passing by, just like counting people through a gate. It helps us know how much power is being used.’
Shunts play a key role in regulating electrical currents. Shivalik’s niche lies in low-ohmic shunts, with a particular focus on those crafted through Electron beam welding—a technique not widely mastered.
The company stands out in the global market, being one of only four vendors capable of producing these specialized shunts. Currently, Shivalik commands a global market share of about 12-13%, with expectations of growth in the near term.
Revenue from the shunts business is diverse, with the automobile sector contributing 50-60%, smart meters about 15%, and energy storage systems 8-10%.
In the realm of electric vehicles (EVs), shunts find extensive use. EVs require 8- 16x more shunts than ICE vehicles, highlighting their importance in the burgeoning EV market.
Application of Shunt Resistors in Automobiles
*Source: Shivalik’s Q3 FY24 Investor Presentation. Click on the image to enlarge.
And with the electric vehicle revolution picking up speed, the demand for these shunt resistors is expected to skyrocket.
Electrical Contacts:
Electrical contacts are key components that are the connecting points when a switch is turned on or off.
Shivalik is into producing electrical contacts with a keen focus on specialized joining processes, finding its use cases in smart meters, switchgears, wire accessories, electrical appliances, and more.
Here’s a sneak peek into their end applications:
*Source: Shivalik’s’ Q3 FY24 Investor Presentation. Click on the image to enlarge.
The total global addressable market of Shivalik (~Rs 10,000 Cr as of FY22) is expected to grow to ~Rs 19,200 Cr by FY30 at ~9%CAGR.
Here’s a quick snapshot of how this growth is expected to unfold across different segments:
*Source: Shivalik’s Q3 FY24 Investor Presentation. Click on the image to enlarge.
Expanding Global Presence
Shivalik holds a significant position in the global market for thermostatic bimetals and shunt resistors. With a presence in over 38 countries and sales offices in 8 of them, the company has a wide-reaching international footprint.
Notably, its exports have increased from 52% of its revenues in FY18 to 65% in FY23, indicating a strong and growing global demand for its products.
*Source: Shivalik’s Q3 FY24 Investor Presentation. Click on the image to enlarge.
Below is a snapshot of the geographical diversification of revenue coming from different regions.
*Source: Shivalik’s FY23 Annual Report. Click on the image to enlarge.
The data highlights that in FY23, America emerged as a key growth driver for Shivalik in the bimetals business, while also maintaining steady growth in the shunts business.
On the other hand, Europe, Asia, and Australia exhibited consistent growth ranging from 16% to 25% for both business segments.
What changed in FY24?
*Source: Shivalik’s Q3 FY24 Investor Presentation. Click on the image to enlarge.
In the first 9 months of FY24, there has been a noticeable shift in trends for Shivalik. America, which was a significant growth driver until FY23, has shown a negative year-on-year trend in both the bimetals and shunts business.
Asia and Europe regions have shown significant growth in bimetals business, with Asia growing by 40% and Europe by 34%. In the shunts business, Asia has shown decent growth, while Europe’s performance remains relatively unchanged.
But, Why?
The management points to inventory destocking, a result of the pile-up over the last 2-3 years due to COVID-related uncertainties, as a primary factor for the negative trend. Additionally, a slowdown in the North American automobile industry, which constitutes a significant portion of Shivalik’s shunt revenue, has also impacted performance. Despite these challenges, the management is hopeful that demand will rebound by Q2 FY25.
Expanding Capacity as a Catalyst for Growth
With the positive momentum across various product segments, Shivalik is optimistic about increasing demand. The company has already invested Rs 75 Cr in capex from FY21 to FY23 and plans to allocate an additional Rs 20 to 30 Cr to optimize and enhance its production process over FY24 to FY26.
The management is confident that these expansion efforts will pave the way for a significant revenue increase, potentially quadrupling it to around Rs 1600 Cr in the future.
Currently, both the bimetals and shunts businesses are operating at 38-39% capacity utilization, showing significant room for growth. The electrical contacts business is operating at 100% capacity, with the construction of a new plant expected to be completed by Q2 FY25.
Here’s a fun fact: Shivalik boasts the world’s largest capacity and production of Electron Beam (EB) welded shunts, making them a heavyweight in this niche market.
*Source: Shivalik’s Q3 FY24 Investor Presentation. Click on the image to enlarge.
Acquisitions and Alliances
Shivalik has a history of engaging in joint ventures with businesses that have complementary strengths, to drive growth.
In 2006, Shivalik entered a JV with Checon Corporation (USA), aiming to leverage its expertise in crafting high-quality silver and silver alloy-based electrical contacts. By FY23, Shivalik acquired the remaining stake from Checon Corporation, making it into a wholly-owned subsidiary.
Shivalik has another such JV with Arcelor Mittal Stainless and Nickel Alloys, holding a 16.01% stake.
In Q3 FY24, Shivalik signed an MoU with Metalor Technologies International SA, a Swiss-based company and a member of Japan’s Tanaka Group. Metalor is a global leader in Precious Metals. This joint venture appears to be a calculated step to enhance their manufacturing capabilities for producing electrical contacts.
Marquee Customer Base
In its bimetals business, Shivalik has solid partnerships with industry giants like Schneider, LeGrand, and Siemens.
In the case of shunts, Shivalik primarily collaborates with Tier-1 OEM players such as Vishay and TT Electronics, which further supply their products to top-tier OEMs like TESLA and BYD. In the domestic market, Shivalik’s shunts are utilized by leading players like Tata and Mahindra.
Key factors behind their strong client relationships are Shivalik’s ability to provide customized products tailored to each client’s specific needs and the lowest lead time to meet its customer demands.
Moreover, Shivalik’s key customers have embarked on significant capital expenditure plans. Schneider Electric India has announced Capex plans of Rs 3,200 Cr by 2026, and Vishay intends to invest ~Rs 9,800 Cr over the next three years.
People Behind The Steering Wheel
Now that we’ve explored what Shivalik does and its role in the electrification wave sweeping across India, let us now understand who are the driving forces behind this business.
Shivalik was incorporated by the first-generation entrepreneur duo of Mr. S S Sandhu and Mr. N S Ghumman, both having significant experience of ~50 years. In FY23, their collective remuneration amounted to Rs 6.5 Cr, representing about 8% of the year’s profits—a figure that’s slightly on the higher side.
Recently, there’s been a noticeable shift in leadership dynamics, with a gradual transition of responsibilities to a new generation of professionals and family members. This transition is a positive indicator of the company’s commitment to a well-defined succession plan.
In a strategic move during Q2 FY24, Shivalik’s promoters reduced their stake by approximately 9.5%, bringing it down to 51.09%. This move was aimed at diversifying the shareholder base by welcoming Foreign Institutional Investors (FIIs) and Domestic Institutional Investors (DIIs). However, management said they do not plan for any further dilution in a recent AGM held.
All in all, the ongoing capacity expansion and strategies to enhance market share show a forward-thinking approach to position Shivalik in a favorable spot to capitalize on the opportunities presented by the electrification trend in India.
Growing Bottomline with Decent Margins
Shivalik’s revenues have consistently grown at ~24% CAGR from FY19-FY23. Despite a slight dip of around 3% in FY20, attributed to the challenges posed by the Covid pandemic, the company has bounced back with substantial growth.
The bimetals segment, considered relatively mature, has been a steady source of revenue for Shivalik. On the other hand, the shunt business has emerged as a key growth catalyst, driving the company’s overall revenue expansion.
*Click on the image to enlarge.
In FY23, Shivalik’s revenue pie was evenly sliced, with both the bimetals and shunt businesses each contributing a generous 45% to the total revenue. The remaining 10% came from the Electrical Contact segment.
*Click on the image to enlarge.
As mentioned earlier, FY24 has experienced a downward trend, primarily due to inventory de-stocking and a sluggish automobile market in North America. This has led to a decline in shunt revenue from ~Rs 157 Cr in 9M FY23 to ~Rs 151 Cr in 9M FY24. Despite this setback, Shivalik has successfully achieved revenue growth of around 9% during the same period, largely driven by the bimetals business, which saw an impressive revenue increase of ~23%.
*Click on the image to enlarge.
Shivalik’s EBITDA has followed a similar trend, expanding at an impressive CAGR of ~30% from FY19 to FY23. During this period, the EBITDA margin has also seen a notable increase of around 4%, reaching 23% in FY23. This growth trajectory indicates that Shivalik has been successful in not only boosting its sales but also in maintaining its profitability margins at consistent levels.
Now, let’s dive deeper and take a closer look at Shivalik’s bottom line.
*Click on the image to enlarge.
Shivalik’s PAT has exhibited strong growth, soaring from ~Rs 25 Cr in FY19 to ~Rs 79 Cr in FY23, marking a CAGR of about 33% during this period. The PAT margins have remained steady at around 17% in the last two fiscal years (FY22 & FY23), up from approximately 13% in FY19.
What do we like in Shivalik?
Dominance Through Superior Technology
Shivalik stands out in the market with its Electron Beam Welded (EBW) Shunts, a technological advantage that sets them apart from competitors.
But what makes this so special?
To start, Shivalik boasts the largest EBW shunt capacity in the world, with 7 machines already in operation and an 8th on the way. Their journey began with the purchase of their first EBW machine from Germany at off-the-shelf prices. However, showcasing their technical know-how, they then shifted to assembling their machines using parts sourced from various suppliers. This has made its machinery cost 1/4th of its peers.
For any new player entering the market, the hurdles are significant. They would need to acquire critical components, grasp the technical nuances, and seek customer validation, all of which demand substantial capital and time.
Moreover, Shivalik’s products are already considered an industry benchmark. This means that new entrants are often required to meet Shivalik’s quality standards first.
Improving Product Mix
In FY23, Shivalik experienced relatively muted volume growth in both segments, particularly in the shunts business. Despite this, the company managed to achieve higher revenue and sales growth.
But how did they pull it off?
The secret lies in their strategic shift towards a more refined product mix. Typically, higher-thickness products tend to drive higher sales volume, but it’s the lower-thickness products that usually bring in higher margins. Shivalik has been gradually shifting its focus towards these value-added products. This strategic move has been a key driver in boosting their sales value and profit growth, even in a year where volume growth was modest.
Best Lead Time
Shivalik stands out in the industry with its exceptional lead time, meaning it can fulfill customer demands much faster than its competitors. While others may take about 52 weeks to deliver complex products, Shivalik does it in just about 20 weeks. The secret sauce? A blend of manufacturing expertise, a seasoned production team, a deep understanding of equipment, and, most importantly, the advantage of having all competencies in-house in contrast to competitors often relying on outsourcing for various aspects, which can slow down the process.
Current Outlook and Valuation
Shivalik in the recent quarters (Q3 FY24) showed muted results:
- Revenues grew by ~6% YoY to Rs 126 Cr.
- EBITDA declined by ~12% YoY to Rs 25 Cr, while EBITDA margins contracted by ~4%.
- This further led to a decline in PAT by ~15% YoY to Rs 17 Cr.
The muted performance was primarily due to a downturn in the shunts business, which saw an 11% YoY decline in revenues. On the flip side, the bimetals business showcased a robust growth of 22% YoY.
The dip in the shunts segment can be attributed to inventory destocking and a sluggish automobile market in North America, as previously mentioned. However, this weak trend is anticipated to stabilize by Q2 FY25, setting the stage for a potential rebound in the shunts business.
Going forward, opportunities for the Shivalik look umpteen, with electric vehicles acting as a key catalyst for growth. Additionally, the switchgear and smart meter segments are expected to support this upward trajectory.
The rollout of 5G in India further positions Shivalik advantageously. The company played a crucial role in the 5G deployment in Europe, supplying Surface Mounted Device (SMD) shunts for a one-time requirement. Drawing from this experience, Shivalik is potentially poised to make a similar impact in India. The management in its recent AGM, indicated that they are in talks with Reliance Jio for the same.
Also, the management is strategically planning to forward integrate into current sensing modules (CSMs), a move that aligns naturally with their expertise in shunt resistors. This progression leverages their existing technological know-how, as shunts are a key component of CSMs.
Taking into account the tailwinds we’ve discussed, along with key customers like Vishay and Schneider ramping up their expansion, and the capacities established to meet anticipated demand, Shivalik is expected to reach ~Rs 1600 Cr revenue target in the next 4-6 years.
Now, let’s assess the current valuation of Shivalik.
The management anticipates a growth rate of 20-30% in the upcoming years, with the outcome depending on the recovery of the North American market. Additionally, they are targeting an EBITDA margin expansion of 2-3% during this period.
As of April 19 2024, the stock is trading at Rs 561, implying a PE of ~43 times TTM. Taking the above-mentioned growth into account, we are looking at an estimated PAT of 140 Cr and a forward PE of ~23 times by FY26E, which appears reasonable given the strong electrification tailwinds and Shivalik’s standing in the industry. Ultimately, it all boils down to whether Shivalik can effectively capitalize on the available opportunities as anticipated.
Understanding the Risks?
High Customer Concentration
Shivalik faces the challenge of high customer concentration, with its top 5 customers accounting for 40% of its shunt business revenue and 30% of its bimetals business revenue. While this concentration has significantly reduced from ~90% three to four years ago, it remains a potential risk.
The loss of any major customer could significantly impact Shivalik’s revenues. To address this, the company has implemented a policy to limit individual customers to no more than 10% of total revenues. However, when a substantial opportunity arises, the company is prepared to reassess this policy and weigh the potential trade-offs.
Substitution
Hall effect sensors present a possible substitution risk for Shivalik’s shunts due to their similar current measurement capabilities. However, the management of Shivalik has noted that the adoption of Hall effect sensors is infrequent and typically occurs in situations where there is a lack of dependable shunt suppliers. To mitigate these challenges, Shivalik emphasizes on continuous innovation and tailor its product offerings to meet specific customer needs.
Backward Integration
Shivalik primarily serves as a Tier-2 supplier to Tier-1 suppliers like Vishay or directly to OEMs. A potential risk arises if one of these Tier-1 suppliers, who are currently Shivalik’s customers, decides to backward integrate and start manufacturing shunts themselves, which could significantly impact Shivalik’s business.
Why hasn’t this happened yet?
The answer lies in the cost structure. Shivalik’s components typically constitute only about 1% or even as low as 0.1% of the overall product cost. This low cost makes it more economical for customers to outsource these components from specialists like Shivalik rather than investing in their manufacturing lines.
However, this doesn’t eliminate the threat. Just because it hasn’t happened yet doesn’t mean it won’t happen in the future.
Raw Material Prices
Shivalik operates in a business where fluctuations in raw material prices pose a significant risk. Key components for bimetals include nickel, manganese, and chromium steel, while copper and manganese are primarily used for manufacturing shunts. The prices of these commodities can vary due to factors such as shifts in supply and demand or geopolitical situations.
To mitigate this risk, Shivalik leverages its long-standing and personalized relationships with its customers. These relationships allow the company to secure long-term contracts that either have fixed prices or include price-adjustment clauses enabling Shivalik to pass on the volatility in raw material costs to its customers, helping to protect its margins and financial stability.
To Summarise
- Shivalik Bimetals sits at a favorable spot with expectations of robust growth in automobiles, smart meters, and the switchgear industries.
- Electric Vehicles require 8- 16x more shunts than ICE vehicles.
- Significant revenue growth at healthy margins, driving profitability at ~33% CAGR from FY19-23.
- Capital expenditure is in place to match the anticipated demand surge, aiming for potential revenues of ~1600 Cr at full capacity.
- The last two quarters saw muted results, largely because of inventory destocking and a sluggish North American automotive sector. Expected to normalize by H2 FY25.
- Valuation-wise, considering a ~20% growth expectation and a 2-3% boost in EBITDA margin, its priced at ~23 times its FY26 earnings, suggesting a promising outlook despite recent hiccups.
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Disclosure: Shivalik Bimetals is not a part of our Capitalmind Focused Portfolio. This article is intended solely for informational purposes and should not be considered as an investment recommendation.
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