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CM Strategy

Experimental Exit: POWERINDIA with 46% Returns in 7 months

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We started an experimental trade on POWERINDIA (ABB Power Products) in August 2020. This was after a very interesting short term trade on POWERINDIA (Read our previous post) which gave us 2.5% in two months. That trade was an arbitrage between the open offer price and the market price, and the open offer was supposed to be for all the shares of the company.

Then we started thinking. What is this company? Why is the open offer for ALL outstanding shares of the company? Is this valuable?

The ABB Power Products Story

ABB worldwide sold its powergrid business to Hitachi for an EV of $11 billion. Now, ABB is also listed in India, so they first demerged the powergrid division and called it POWERINDIA.

Because there was a takeover, Hitachi had to offer to buy out at least 26% of POWERINDIA from the rest of the investors. Given that ABB owned 75% of the company, and ABB couldn’t participate, it effectively meant all remaining shareholders could sell their stake to Hitachi. The price, changed frequently, was about 870 or so towards the end.

However, the company seemed to be dramatically undervalued at this price.

What do they do?

For the most part, they are into power grids. This involves products like Transformers, reactors, grid automation, power quality systems and so on. Also, they have solutions like electrical-bus charging systems, high voltage DC grid connectors, digital substations etc.

They also power Indian metros (Delhi, Bangalore, Kochi and more) and have commissioned many high voltage DC lines, including one from the North-east to Agra.

They’re also doing e-charging station grids, with a test project in IIT Madras. This is quite the future, honestly.

Why’s it undervalued?

At Rs. 900 the company was valued at a little under 4,000 cr. For 2019, it made a profit of Rs. 160 cr. but some of that contained one timers. Assuming they might be able to generate a Rs. 200 cr. net profit for 2021 (2020 was a washout year), that’s only a 20 times earnings for an MNC player, in a growing industry, with 75% ownership held by promoters (so low float) and very little debt. (300 cr. or so).

The point was that ABB itself was at 50-60 times earnings, pre-demerger. And the Powergrids business was a significant part of the ABB India company

Massive scale for the future:

  • Energy distribution in cities, where they provide products and services, will be huge going forward in India with urbanization
  • Massive rail network changes – from the Dedicated Freight Corridor to improving existing lines – will see POWERINDIA participate
  • More metros in more cities coming up, and POWERINDIA is a key player
  • E-bus charging grids will be needed for many cities as electric vehicles start getting acceptance especially from urban-intra-city public transportation systems
  • They service all the big industry players – BHEL, Power Grid corporation, Indian Railyways, L&T etc. Resurgence of Indian capex in infrastructure will hugely benefit POWERINDIA

Given this, we believed that the company would likely go to at least 1,400 per share, a market cap of around 6,000 cr. for a P/E of 30 at least.

The idea was to ride it from Rs. 900 to Rs. 1400 – a fixed target for a market cap of 6,000 cr. We said buy it any price below 990.

We’ve got there in seven months

The stock hit 1,500 today and we put in an actionable to exit the position.

Powerindia actionable

We entered in August, so it’s actually seven months.

Assuming an entry even at Rs. 1000, this is a 46% returns. (At Rs. 900 it’s 63%) POWERINDIAThe stock did hit 1,400 earlier.

How well are the experimentals doing?

Typically short term, or extremely risky trades, these kind of situations are what we look at with Capitalmind Premium. (Please Subscribe!)

We had, just in the last few months:

You’ll see these in your app dashboard at https://app.capitalmind.in/experimentals/ if you are a subscriber to Capitalmind Premium, and in #experimentals on Slack.

What’s next for the stock?

This was an experimental with a clear target. So we exit to close the experimental. 46% return isn’t that bad.

But the fundamentals of everything have changed. There could be significantly more juice in this:

  • the budget brings about much more focus on railways and the grid
  • More metros are coming to many cities
  • There’s massive expansion of e-mobility
  • With lower interest rates, private sector capex is starting to grow

With all this, and the scale of POWERINDIA, we might see a much larger potential for the company.

We’re looking carefully at it for the long-term portfolio. But let’s wait for results in a week or so, to hear what management has to say. We might end up buying it again. Yes, this sounds like oh, we could have just held, but we must note that every position is taken with a certain idea in mind, and the POWERINDIA experimental we had was to target a certain return. So we book this experimental’s profit for now. We might take a fresh entry, even at a higher price if required, after more analysis.

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