Larsen and Tuobro (L&T) is the single largest shareholder of the company with a 26% stake and two directors on SEL's board. SEL has a marketing tie-up with L&T and derives around 40% of its total revenues through the L&T channel. The other big clients of the company include General Electric and Schneider Electric. In the switchgear segments, exports constitute around 41% of the company's revenues.
With a gradual revival in the domestic capital expenditure (capex) cycle in the key industries and an improvement in the project spending, the management expects a strong growth in the company's earnings in the next two to three years. The company has bagged a prestigious order worth Rs106 crore from the state government of Tamil Nadu under the Integrated Urban Development Scheme for executing energy efficient projects under the public-private partnership model and expects more deals in the coming year. Overall, the management is quite optimistic of delivering over 20% CAGR in the top line in the next two years.
After a stagnant net income growth over FY2012-14, SEL is well poised to deliver a CAGR of around 50% in the earnings over FY2014-16. At the current market price of Rs137, the stock trades at 10.6x and 7x FY2015 and FY2016 estimates respectively based on our quick earnings estimates. On a cash earnings basis, the stock trades at 6.6x and 5x FY2015 and FY2016 estimated earnings. SEL is a consistent dividend paying company with a pay-out of around 20% (the company maintained the pay-out ratio even when its earnings growth was muted). Given the significant improvement in the earnings and the fact that L&T is its largest shareholder and marketing partner, we believe SEL deserves a better valuation multiple. We expect a 25-30% potential upside to the stock price in the next six months.