This small-cap company is critical to the success of India’s power revolution. Should you invest?

There’s been a surge of interest in new sectors this year, and one that's sparked attention recently is transformers. These seemingly unassuming components play an indispensable role in our lives. From powering homes to fuelling factories, transformers silently modify voltage levels, ensuring efficient electricity delivery. They aren’t flashy, but their importance is undeniable.

The global transformer market, however, faces several challenges. Heightened demand for raw materials, supply-chain disruptions, labour constraints, shipping bottlenecks and geopolitical tensions have all contributed to shortages and price hikes.

These shortages are particularly severe in certain regions, with lead times for transformers of various sizes exceeding a year. Several companies are making strategic moves in the transformer sector, and Amba Enterprises is one of them.

Today, we will examine how this small-cap stock is positioned to become a critical player in the upcoming transformation of India's power sector.

What does Amba Enterprises do?

Amba Enterprises Limited is a power engineering solutions company that manufactures and sells silicon steel slit coils, transformer lamination sheets, cut-to-size transformer laminations, toroidal cores, motor stamping, and die-casting rotors.

The company operates two manufacturing facilities at Nanded in Pune, Maharashtra, where it makes laminated steel cores.

Amba Enterprises stock

What does it offer?

Amba Enterprises isn't just another transformer manufacturer. It’s a one-stop shop for a range of electrical components that keep industries humming. Here's a breakdown of its offerings:

• CRNO/CRNGO lamination strips: The company manufactures high-quality CRNO/CRNGO lamination strips in various sizes. It offers these strips in a range of specifications and offers customisation to meet clients’ precise requirements.
• Transformer lamination: The company has a long tradition of making an extensive range of transformer laminations and strips.
• Broader spectrum: Amba offers several other products, including generator and alternator stampings, motor and pumps stampings, solid and full coil, inserted shaft with rotor, and die cast rotor.

Their products are among the most crucial components of their clients’ value chains. They are mainly used in industries such as UPS manufacturing, transformers, energy distribution, automobiles, electrical equipment and appliances.

Why is it vital to India's power-sector transformation?

Amba Enterprises has carved a niche in the Indian power sector through its deep expertise in transformer lamination manufacturing, and is the largest manufacturer of transformer core lamination.

These laminations – thin sheets of electrical steel – form the core of transformers and thus play a critical role in efficient power transmission and distribution. The company prioritises high-grade electrical steel chosen specifically for its magnetic properties, ensuring efficient energy transfer within the transformer core.It has honed its manufacturing to minimise imperfections and irregularities in the laminations, which could lead to energy wastage during transmission.

Amba Enterprises has remained at the forefront by focusing on low-loss core technology.This involves using advanced materials and production techniques to reduce energy wastage within transformers. The increased emphasis on energy efficiency in today’s world thus gives it a competitive edge.

Transformer requirements also vary depending on the application. The company thus offers a wide range of lamination sizes, thicknesses and grades to cater to diverse customers.This ability to customise products helps the company serve a broader segment within the power sector.

Amba’s expertise positions the company as a key player in enabling a robust and efficient power grid, which is crucial for India's continued growth and development.

What are its financials like?

From FY21 to FY23, the company's revenue increased at a 13.4% compound annual growth rate (CAGR). However, there was a slight dip of 0.6% in 2023. This was followed by a strong rebound in 2024, when revenue jumped 29.3%. However, its net profit dropped at a compound annual rate of 1.8% over this period, while its net profit margin fell from 2.9% to 2.2%.

Financial snapshot

The company has maintained its operating profit margin between 2% and 4%. It has also had a healthy 24.6% return on capital employed (ROCE) over the past three years.

What’s next for the company?

Recognising the growing demand, Amba plans to increase its plant capacity significantly. The company is actively exploring new opportunities and conducting feasibility studies for new products and components for the growing electric vehicle (EV) sector. It aims to bring in ₹5.5 billion in revenue by 2025.

Conclusion

The Indian government has implemented various initiatives to foster the development of the domestic electronics manufacturing industry and create an ecosystem for companies such as Amba Enterprises. The global power transformer market is projected to hit $38.91 billion by 2030 at a healthy CAGR of 7.1%, indicating a booming industry that’s primed for growth.

Government initiatives for grid upgrades and the incorporation of cutting-edge technology are key factors propelling the power transformer industry. The surge in demand is expected to continue, fuelled by new inter-state transmission system (ISTS) connected power projects and HDVC projects.

Increased international orders, rising infrastructure spending globally, the"China plus one" strategy, the embrace of renewable energy, and supplier consolidation also indicate a promising future for the industry.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com