2 Smallcap Proxies for Smart Meter Theme 

Dear Viewers

Almost a decade ago, I happened to watch a very interesting documentary - 'Katiyabaaz' in Mumbai Film fest.

I had no clue of what the movie or title was all about.

As I found later, the literal translation of the word is 'electricity thief'.

The movie has a very interesting and realistic premise set in the city of Kanpur, Uttar Pradesh - the long power cuts and loadshedding that could range up to over 12 hours.

The need for power leads to the rise of likes of Loha Singh- a local fixer who provides illegal electricity connections to people by plugging into official supply through live wires.

Living in humble area marked by a criss- crossing wires, a common feature marking most densely populated streets in Kanpur, the guy enjoys his popularity as some kind of Robinhood who takes risks to bring relief from sweltering heat and power cuts, helping the less privileged. Of course, the residents are happy to pay him for this service.

It's a documentary made over two years, following real characters like local fixers and the authorities in Kanpur Electric Supply company (KESCO) which is in financial losses due to such illegal connections.

A dry subject, which is a nationwide issue was infused with life with humour. and lot of candid conversations about daily power cuts and local fixes, that any resident in tier two town could relate to. Afterall, this is nationwide problem.

By the release of this documentary, the authorities had no success against rampant electricity theft.

It's been more than a decade since.

When it comes to poor power infrastructure, inefficiencies and theft, not much has changed.

India's power industry has been grappling with the twin menaces of power theft and infrastructural inefficiencies, leading to losses for the power and distribution companies and dissatisfied public. The average annual losses are pegged at an average of 34%.

Could smart meters be a solution to this issue?

Introduced in July 2021, the National smart metering scheme aims to install 25 crore smart meters by 2025, hoping to deal with these threats and modernize electricity infrastructure. In value terms, the capex is estimated at Rs 1.5 lac crores (trillion).

With real-time monitoring, detection of power theft and automated billing, the government aims to narrow losses through smart meters, if not eliminate them.

Against the tall target, the implementation has been at a crawling pace.

So far, only1.1 crore meters have been installed.

As per the management of Genus Power, a company that manufactures and provides smart metering solutions on EPC basis, over 6 to 7 crore smart meters should be installed this year.

Realistically, this target of 25 crore will take 4 to 5 years.

In India, the penetration of smart meters is well below 2%, as compared to 50 % and above for the developed nations. In short, the runway is huge. The average annual growth potential is over 68% CAGR for volumes if you take a generous six-year timeline.

Coming to potential profit-making opportunities from this theme....

The front runners on National smart metering theme include companies like Genus Power, Salzer Electronics and HPL Electric and Power.

These are direct players, already well known.

Today, I'm going to dig a bit deeper beyond these names to know two smallcap cap proxy players in smart meter theme.

You see, the Government has mandated a minimum local content for procuring smart meter to boost domestic manufacturing. This leads to a huge opportunity for these lesser-known pick and shovel suppliers, or proxy plays on smart meter theme.

The first is Permanent Magnets. The company supplies electrical components and assemblies for current and speed sensing, magnetic shielding, and magnetic assemblies. It is a supplier to the top three electricity meter companies globally.

Currently, depending on the product, the company's components could range Rs 20 to Rs 350 per smartmeter. And depending on the metal content, the margins could be in 10% - 20% range. But that could improve. You see, the company is adding more products to serve a larger portion of this smartmeter opportunity.

Besides smart meters, Permanent Magnet supplies electrical solutions to 50% of tier 1 auto companies globally, in both EVs and combustion engine-based vehicles.

Its new application areas include Electrical, Medical, Aerospace, Engineering and Computers.

With return ratios above 20% and an almost debt free balance sheet, it's a candidate to keep in your watchlist.

The second is Shivalik Bimetal Controls Ltd.

Its products include shunt resistors and electrical contacts, which are critical to smart meters.

As per the management, Shivalik enjoys a dominant market share in the component for domestic smart metering and could account of Rs 40 to Rs 50 per smartmeter.

The company makes other niche components as well that are used in in appliances, EVs, switchgears, energy devices and battery management systems. So, this story goes well beyond smart meters too. It's basically a proxy on electrification.

The revenue potential is three times with minimal capex needed, and the balance sheet is almost net debt free. The return ratios are healthy at well above 20%.

Now do note that these are not stock recommendations, but some important names in smallcap space that deserve to be on your watchlist for India's energy transition and smart meter theme.

Let me know through your likes and comments if you found this video useful.

Thank you for watching. Goodbye.