Riding on the T&D Capex Wave
We initiate coverage of Skipper Limited (Skipper) with a BUY recommendation and a target price of Rs 600/share, implying an upside potential of 44% from the CMP. Skipper is India’s largest and the world’s only integrated Transmission & Distribution (T&D) company present across the entire transmission chain. The company has its own Structure Rolling, Manufacturing, Tower Load Testing Station, and Transmission Line EPC. Its capability to execute high-voltage power transmission projects gives it a distinct competitive edge over peers. It currently has ~10%-15% market share in high-voltage transmission lines. Skipper is also a leading brand in the polymer sector in India (pipes and fittings) with a capacity of 62,000 MTPA. It also manufactures Telecom towers and Railway structures. The company operates through three segments – Engineering (68% of FY24 Revenue), Infrastructure (18%) and Polymer (14%). National Electricity Plan (NEP) has projected a total Capex of Rs 4.75 Tr Cr during the period 2022-27 for laying out an additional transmission system (of 220 kV+) in the country to meet the rising power demand as well as to evacuate power from the growing RE capacity. Skipper is well-positioned to cater to this growing T&D investment. To cater to the soaring T&D infrastructure demand, Skipper targets to double its capacity from the current 3 Lc tonnes to 6 Lc tonnes over the next 4-5 years with a total Capex of ~Rs 800 Cr.
Investment Thesis
• Strong Orderbook: Skipper has a healthy orderbook of Rs 5,844 Cr as of Jun’24 with 59% domestic T&D orders, 27% Non-T&D orders (Telecom, Railways, Solar, Water EPC & other Steel Structural items) and 14% export orders. All export orders pertain to T&D. The company also has a strong bidding pipeline of Rs 18,000 Cr of which Rs 11,500 Cr pertains to international orders. It has an average order-win ratio of 25% of the bid pipeline.
• Capacity Expansion to Cater to Strong Demand: The company has the largest Engineering capacity in India at 3,00,000 tonnes and it is currently operating at 90% utilisation (from 70% in FY24). To fulfil robust demand, the company is expanding its capacity by 25% i.e., 75,000 tonnes by Q1FY26. It plans to further increase its capacity by another 75,000 tonnes in FY26.
• Multiyear Revenue Visibility: The additional capacity of 75,000 tonnes by Q1FY26 will contribute to additional revenue of Rs 800-1,000 Cr in FY26. The management has a strong guidance of 25% revenue CAGR over the next 3 years as the order book stands at 2.1x of the combined revenue of the Engineering and Infrastructure segments in FY24.
• Exports Market Offers a Large Landscape: The company has a strong international presence with exports to more than 60 countries and a strong foothold in Asia Pacific, Middle East, and Latin American regions. It is working on entering into developed markets such as the US, Canada and Europe which has the potential to generate lucrative contacts. Currently, it has little presence in the developed market.
• EBITDA Margins to Improve moving forward: The company has consistently operated at an EBITDA margin of 9.7-9.8% in the last 3 years. It saves on labour and freight costs being located in East India as it sources steel from nearby steel plants. On the back of operating leverage from the revenue growth and better product mix (from export orders), the company expects its margins to improve to 10.5-11% in the coming years. We model Revenue/EBITDA/PAT CAGR of 25%/30%/55% over FY24-27E and model EBITDA margins to improve YoY to 10%, 10.5% and 11% over FY25-27E (as compared to 9.7% in FY24).
• Robust Balance Sheet Strength: The company’s Debt/Equity stood at 0.64x as of FY24. It has announced Rs 600 Cr fund-raise in Aug’24 through equity-linked instruments for the Capex of Rs 800 Cr over the next 4 years. It had announced Rs 200 Cr through rights issues in Feb’24 of which Rs 50 Cr has been called and raised and the authorisation of the balance call of Rs 150 Cr has been received. Given higher working capital needs as operations expand, it will use a mix of external debt, internal accruals and equity for expansion project, rather than using only debt for funding the expansion. It aims to maintain the debt/equity at 0.75-0.8x and not exceed 1.0x to keep the leverage under control.
Valuation & Recommendation
With the sectorial tailwinds (refer to our industry section), capacity expansion, robust order book and revenue growth along with expected improvement in margins, we assign a target P/E multiple of 22x on our FY27 EPS estimate and arrive at our Mar’26 TP of Rs 600/share and initiate coverage with a BUY rating. Our TP implies a potential upside of 44% from the CMP.
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