The Hindu Business Line : Numeric Power Systems: Buy

The steady financials, the improving margins, and the growth potential in the Indian and foreign markets add visibility to the earnings growth of Numeric Power. Further, it is also a unique listed play in the electronic power equipment segemnt.

At the current market price, the stock trades at seven times its likely earnings for FY-07 on a consolidated basis. Being in the small-cap segment, with a market capitalisation of about Rs 165 crore and relatively low trading volumes, the stock may be subject to volatility. This makes it suitable for investors with a high-risk appetite and a long-term perspective.

Numeric makes power protection products such as UPS used for computer or network protection and process automation.

The company has a wide range of products catering to IT and IT-enabled services, medical applications, financial and insurance sectors, small and medium enterprises, and homes.

Steady business

With more and more businesses (including telecom and critical care medical instruments) running on technology solutions, the need for power protection systems for reliability and quality has become vital. Given India's significant power deficits and the ubiquitous outages and voltage fluctuations, Numeric Power's products have significant market potential in the country. The IT and business process outsourcing boom in the country has further propelled the demand for such products.

The company has a dominant position in this segment and has clients such as Intel, Infosys and Veritas. Its ability to offer remote monitoring through customer IT networks and Web-enabled solutions has not only helped capture overseas market but has also facilitated cost-control through efficient servicing.

Further, Numeric Power Systems has about 156 sales and service offices across India to cater to various regions. Income from service, which stood at about 11 per cent of total revenue in FY-2006, can be expected to increase given the geographic reach that the company has. This is also likely to lead to repeat orders.

While Numeric's brand image may help draw clients in the corporate sector, it may not be easy for the company to fully tap the small enterprises and home needs. This space is dominated by the unorganised sector where pricing plays a dominant role.

This revenue segment, although not significant, has been expanding with the company's new range of digital plug-and-play UPS systems with communication possibilities. Further, its aggressive tie-ups with close to 1,000 channel partners may see an expanded market share from this segment.

The company's fully-owned subsidiary in Sri Lanka and an export-processing unit in Chennai cater to the overseas markets. Other subsidiaries in Singapore and Mauritius, which trade in the company's products, have enabled effective tapping of markets in Africa and the US directly and through partners. The Singapore subsidiary also acts as a sourcing point for batteries, which are fully imported for the end product.

Last year, the company implemented an auxiliary power systems project for Power Grid Corporation in the entire north-eastern States, in a turnkey effort involving design, supply and installation of total power conditioning systems.

With this, the company has elevated itself to an integrated player in power protection systems. This may well act as a reference point for more such projects in future.

Strong financials

Over the past five years Numeric Power's topline has grown 22 per cent annually on a compounded basis. Effective cost-rationalisation measures have, however, led to healthy top and bottomline growth for the nine-months ended December 2006.

This has also led to improvement in operating profit margin to 11.5 per cent for the latest quarter as against 9.5 per cent in the corresponding previous period.

The company's healthy reserves and low borrowed capital gives it the option of using internal accruals or further debt for any expansion purposes.

Risks

Numeric Power completely imports batteries used in its products and to that extent subjects itself to foreign currency risks. Steep increase in the prices of key raw materials such as lead, copper and steel could dent OPMs and also affect bottomline as it may be difficult to pass on the increases to the end-customer. Technological obsolescence is a key risk in such businesses.

However, the company's in-house R&D appears well-equipped to face the same and has made strides in products with improved efficiency and high-frequency design.

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