Mr. Visweswara Reddy, Chairman & Managing Director, Shirdi Sai Electricals Limited at Kadapa, Andhra Pradesh.
Image: Vikas Chandra Pureti for Forbes India
August 2018. It was a rude and unexpected jolt, but what hurt N Visweswara Reddy the most was his assessment of the setback. “It was an unfair jolt,” recalls the mechanical engineer, alluding to a rating downgrade of Shirdi Sai Electricals (SSEL) by Crisil in August 2018. The downgrade, the rating agency underlined in its report, reflected the pressure on SSEL’s financial risk profile, particularly liquidity due to an unprecedented stretch in receivables, ongoing capital expenditure, inadequate bank guarantee limits, and geographical concentration of revenue—around 70 percent came from discoms (distribution companies) of Andhra Pradesh. Though there were enough red flags for a downgrade, it disconcerted the first-generation entrepreneur. “We closed FY18 with over Rs1,000 crore in operating revenue and a decent PAT [profit after tax],” recounts Reddy. “Still a downgrade…I was shocked beyond words.” For a moment, he felt that somebody had taken the sheen of his gruelling journey.
Back in 1994, Reddy started his entrepreneurial career by default. Born in a nondescript village, some 60 kilometres from Kadapa in Andhra Pradesh, Reddy was the first in his farming family to complete engineering in 1991. After three years of stints at a slew of engineering companies, the young graduate was steamrolled by his communist father to start repairing transformers in his village and nearby areas. Crippled by regular power shortages, his father was overwhelmed with a compassionate urge to help farmers who were at the receiving end of an erratic electricity supply and frequent outages.
His mechanical engineer son was best suited to solve the problem. Reddy reluctantly yielded to his father’s wishes and started repairing transformers. One village at a time, Reddy moved into adjoining districts and expanded his network. After five years, he entered the business of engineering, procurement, and construction (EPC) contracts in 1999, and became a sub-contractor for laying down distribution lines. He dabbled into a turnkey contractor, and gained experience in design, supply, and erection of substations, high-voltage distribution networks, and rural electrification. In 2004, Reddy started manufacturing transformers, and by early 2018, SSEL had built a sizeable power, distribution, and transformer manufacturing empire, which boasted Rs1,001 crore in revenue and Rs72 crore in PAT (profit after tax).
By 2018, after over two decades in operations, SSEL’s high-torque performance started getting acknowledged. The company has been undertaking EPC contracts since 1999 and has an established market position in this business, Crisil noted in one of its rating reviews in 2018. “SSEL is backed by strong execution capability, healthy relationship with customers, and a robust order book of Rs2,518 crore as of June 30, 2018,” it underlined, adding that the company from Kadapa benefited from the technological tie-up with America’s Metglas, a subsidiary of Hitachi Metals of Japan, for manufacturing of amorphous core-based transformers. Shirdi Sai Electricals had emerged as a force to reckon with in the transformer industry, and Reddy was enjoying his high-voltage journey.
The rating downgrade in 2018 punctuated Reddy’s dream run. “I am an engineer and was never good with finance,” he confesses, adding that he had historically struggled to raise capital with the banks. Then there was the issue of large working capital requirements. The tender-based operations resulted in significant funding needs for security deposits and margin money for bank guarantees. “The company has not yet been able to secure commensurate enhancements in its bank guarantee limits,” the rating report highlighted.
There was another irritant that Reddy had ignored for a considerable time: Geographical concentration of revenue. The discoms in Andhra Pradesh contributed over 70 percent of the company’s revenue and outstanding order book. Though SSEL’s projects are funded by central and multilateral agencies, the concentration of revenue in one state has been a cause of concern for a slew of reasons. First, too much dependence on one state does not augur well for financial sustainability. Second, delays in the execution of projects or any dispute in these regions could adversely affect the cash flow. Third, the power transmission, distribution, and transformer businesses have low margins. SSEL’s PAT of Rs72 crore in FY18 was not enough to inspire confidence in the growth of the business. The downgrade shock forced Reddy to re-examine the torque, horsepower, and dynamics of his business.
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Fast forward to October 2024. Shirdi Sai Electricals has emerged as the second-biggest transformer maker in India in revenue and volume. The operating revenue has jumped from Rs924.93 crore in FY21 to Rs3,666.94 crore in FY24. During the same period, the PAT has increased from Rs88.50 crore to Rs608.46 crore. “Now only 50 percent of revenue comes from Andhra,” claims Reddy, adding that the company has widened its reach to Bihar, Gujarat, Madhya Pradesh, and Odisha. The company has also expanded its play by acquiring a 75 percent stake in Indo Tech Transformers, a power and distribution transformer manufacturing company with manufacturing plants in Chennai and Kanchipuram in Tamil Nadu. The subsidiary too has grown at a brisk pace: Operating revenue has jumped from Rs91.61 crore in FY10 to Rs498.31 crore in FY24.
What’s remarkable about Shirdi Sai Electricals’ trajectory is the way it has cranked up the PAT. “We focused a lot on backward integration of operations,” he claims, adding that SSEL’s backward integration into core, conductor, winding, and tank fabrication operations boosted profitability. While most of the transformer makers outsource the production of these parts, SSEL manufactures about 60-70 percent of the transformer parts in-house. “This gives us significant cost control and ensures quality check,” he says, adding that the company earned Rs250 crore by exporting transformers in the last fiscal, and the target for FY25 is fixed at Rs450 crore. “We have exported close to four lakh transformers to over nine countries,” claims Reddy, adding that the company has an installed capacity to manufacture around 96,000 transformers every year.
Over the last seven years, Reddy also diversified manufacturing operations. In FY23, he started manufacturing high-capacity power transformers at Prayagraj, Uttar Pradesh, which beefed up SSEL’s product range and expanded its footprint across North India. The company has production plants at Kadapa, Kanchipuram, and Naini in Uttar Pradesh. “The capital structure and debt protection metrics remained strong with strong profitability and absence of debt-led capex,” Infomerics Ratings noted in its credit rating report in September 2024. A strong order book of Rs10,916 crore as of June 1, 2024, is diversified among major discoms across the country, the report added.
Emboldened by the success of the transformers business, Reddy is now taking an audacious bet in solar power. Indosol Solar, a special purpose vehicle set up by SSEL, has bagged approval from the Centre for its 10,000 MW, Rs25,000-crore solar module manufacturing project under two tranches of the production-linked incentive (PLI) scheme. In April this year, the company started production from its solar PV module manufacturing plant at Ramayapatnam in Nellore, Andhra Pradesh. “For us, extension into solar is a logical move to become a full-stack sustainable energy player,” says Reddy, adding that the company has lined up Rs1,000 crore to expand transformers manufacturing capacity across its plants.
The brisk pace of growth and success has also brought in its wake a fair share of allegations and glare around its activities. Take, for instance, early this year, the Telugu Desam Party (TDP) reportedly received Rs40 crore in electoral bonds from SSEL, which was the second highest contributor after Megha Engineering and Infrastructure Limited’s Rs28 crore and its group company Western UP Power Transmission Company Limited’s Rs20 crore. Reddy defends his move by saying that the idea of having electoral bonds was to ensure transparency in electoral funding and democracy. “Everything we did is within the parameters of the law,” he says, adding that the company’s interest is to support political ideas that work to promote industry and quality of life. The initial journey of SSEL happened in the past term of TDP under N Chandrababu Naidu.
Heady success notwithstanding, the transformer man from Kadapa has to contend with a slew of potential challenges. The biggest threat lies in the hyper-competitive nature of the transformer industry. The distribution transformer industry is fragmented and cluttered due to the presence of too many players, which in turn puts excessive pricing pressure on the players. “The tender-based procurement by the majority of the customers results in pressure on pricing and margins for the industry players,” notes Infomerics in its latest report. There are other challenges such as the weak financial health of the distribution companies, which hampers the order inflow and adversely impacts liquidity. “Cheap overseas imports, especially from China, also present competition to the domestic transformer industry,” the note added.
Reddy, for his part, says that he is focused on opportunities rather than challenges. While conceding that the transformer and distribution business is not an easy vertical to be in, Shirdi Sai Electricals has done the hard yards over the last three decades. “We knew success would take time. This business tests your patience and resilience,” he says. The mechanical engineer is backing his game plan to add the right amount of torque to his energy business. “There would be fluctuation in fortunes but we are confident of success,” he signs off.