"Solar pumps and energy efficient agripumps play key role in realising thegovernment's vision on modernising Indian agriculture and make it robust driver fordoubling the farm income and National Food Security"
The big message I wish to convey that your Company stands at the most optimisticjuncture in its existence.
The Company reported strong financial performance in 2016-17: revenues increased 51%while profit after tax strengthened almost 10-fold to RS.21.32 cr compared to the previousyear's RS.1.97 cr. The Company strengthened the quality of its business as well: EBITDAmargin increased to 15% from 11% in year 2015-16.
While the financial performance was robust I would urge readers to look beyond thenumbers of FY2016-17 and appraise our significant prospects. The few areas that I haveselected to focus on which would significantly improve our performance in the near futureinclude:
One: Action on ground
Low solar energy cost will widen applications
The optimistic future of our Company is not based on certain expected future events butactions already happening on the ground.
There is a ground-shift in India's solar industry. For one the government hasannounced a target of 100 GW of solar capacity by 2022 from a level of around 12.30 GWpresently. The country added 5.5 GW of capacity in FY2016-17; the Country plans to add 5GW of rooftop and 10 GW of large scale solar power capacity in the current fiscal year.The focus on renewable energy capacity addition demonstrates the Government's focus onIndia's submission to the United Nations Frame Work Convention on Climate Change onIntended Nationally Determined Contribution (INDC): that India will achieve 40% cumulativeelectric power capacity from non-fossil fuel based energy resources by 2030.
Following the capacity addition in the current fiscal year India is set to emerge asthe third biggest solar market in 2017 overtaking Japan but trailing US and China.
The remarkable driver of this transformation has been a sharp decline in the cost ofcapacity creation; the result is that for the first ever time the cost of solar energygeneration declined below the cost of grid energy sustained by fossil fuels. We believethat this reality will inspire the government to seek wider applications of solar energyin every-day products moderating the cost of use for consumers and country.
Two: Turnaround in long-term opportunities
The improved prospects of solar energy translated into attractive opportunity for acompany like Shakti Pumps. To get a better appreciation of what this growth means itwould be relevant to recognise where we have come from: the solar pump was a product thatthe Company launched in 2013. The product was largely directed at government agencies thatwould in turn provide the product to farmers. However for years even as prospects ofthe product remained unquestioned the optimism did not translate into action and impactedour performance in the last two financial years.
However opportunity rebounded during the year under review and resulted in revenues ofRS.411 cr accompanied by better margins and higher profits.
Besides the Company is engaged in the export of pumps for the last two decades.Following declining geopolitical and operating conditions in the Gulf the Company shiftedits strategic focus to other geographies to mitigate the risk arising out of the excessivedependence on any region. Further the Company decided to focus on cash flows and avoidedsales with stretched receivables. The result is that in the last couple of years theCompany strengthened its export roots with a better dealer/ distributor network.
The Company also enhanced its range of industrial pumps and associated itself withreputed dealers and consultants to expand its reach in the Industrial residential andagricultural segments.
Three: The improvement appears sustainable
The government's policies related to solar pumps across the country indicate that theupturn is not fleeting but sustainable. The Central and various State Governments havemade significant changes to programmes and policies to make it more sustainable with awin-win proposition for the Government farmers and companies supplying these pumps.
The turnaround was partly the result of the Government's initiative to double farmerincomes; the Power for All objective improve rural living conditions. However providingpower is critical to the success of these initiatives although providing powertransmission/distribution lines in villages and remote areas are expensive andsignificantly time-consuming due to operational and other issues. Further providing powerto farms is unremunerative for distribution companies. Solar Pumps is the right solutionfor providing power to farms. On the face this appears expensive but the cost ofproviding power transmission lines timeline and alternative use of the same grid poweroutweighs the initial cost of solar pumps.
As an extension we are seeing an increasing number of States turn to solar energy. Ouroptimism is derived from the fact that Energy Efficiency Services Limited a governmentorganisation advocating the use of energy- efficiency products is evangelising the use ofsolar pumps across the country. States like Rajasthan Chattisgarh Uttar Pradesh andMadhya Pradesh have already embraced this concept; the day is not far when this conceptgains widening acceptance across more States creating a considerably larger market.
Four: Shakti Pumps' dominant market share
Shakti Pumps is one of the largest players in India's solar pumps market. This marketdomination has been derived from a deep technology advantage. The Company provides aglobally comparable product; based on IE standard's energy efficiency rating where IE-1.0is the lowest IE-2.0 & 3.0 is considered normal IE-4.0 difficult and IE-5.0considered best our pumps have reported a rating up to IE-5.0 which makes them among thebest in the world. The result
is that the Company's solar pumps are being purchased by some of the most prominentIndian companies for their onward deployment. Besides our pumps are being increasinglyspecified in government tenders making them the standard by which smaller competition iscompared or appraised.
We believe that as the market for solar pumps widens in India and if we can protect ourdominant market-leading position the result could be disproportionate gains in terms ofrevenues margins and cash flow.
Five: Shakti Pumps possesses adequate capacity
At Shakti Pumps we are optimistic of our prospects on account of our future-readinessin terms of installed capacity. The Company is equipped to manufacture 500000 pumps perannum; the Company's capacity utilisation during the year under review was only 46%indicating that the Company is attractively placed to address increasing demand withoutcorresponding capital investments resulting in better return on equity and thus enhancingshareholders' value.
Six: The market is virtually limitless
India is one of the largest agricultural economies with almost 60% of the country'spopulation dependent (directly or indirectly) on agriculture. The country's farm sector isestimated to deploy 30 mn conventional pumps; the proportion of solar pumps alreadydeployed by the country is only a fraction of 1%. This negligible market share indicatesvirtually unlimited potential that could keep serious long-term players engaged for years.
India had installed 91400 solar pumps up to 31 October 2016. We believe that offtakeduring the financial year under review represents the start of a multi-year growth journeyrelated to solar pumps.
Seven: Shakti Pumps is backward-integrated
At Shakti Pumps we do not just possess the capacity to assemble and manufacture pumps;we also possess the capability to manufacture nearly all key components required in pumpsmanufacture enhancing our quality control on the one hand and widening our value-chainthe other. Besides the Company has demonstrated the ability to integrate the core pumputility with solar energy panel features resulting in an integrated solution.
Eight: Expanding our export footprint
From being largely Gulf-dependent for exports Shakti Pumps has started widening it's apresence in the global market and created a presence in six new countries in the last twoyears and added 12 dealers. The Company has floated a subsidiary in the US to drive thebusiness in the US market.
In view of the convergence of these realities we believe that the Company is poised tosignificantly benefit from the increased installations of solar pumps in the Country apartfrom expanding its reach in the area of industrial pumps exports and the energy-efficient conventional agricultural pump segments. This has already begun to manifest incapital assets that enhance sectoral viability convenience and national savings.
With the Indian government focused on modernising agriculturewhile investing in SmartCities road infrastructure drinking water and urbanisation we can be safely assured ofthe prospects of energy-efficient pumps resulting in attractive corporate prospects theCompany appear attractive across the foreseeable future.
Chairman & Managing Director.