Voltamp Transformers : Margins go down further: Emkay

Visit http://indiaer.blogspot.com/ for complete details �� ��

Voltamp Transformers

Margins go down further

HOLD

CMP: Rs 862                                       Target Price: Rs 840

---

n     Competition led significant hit (780 bps yoy) in the EBITDA margins to 10.1%, resulted in PAT decline of 46% yoy 

n     Pricing visibility not there, margins to remain under pressure; annual report MDA hints towards much lower margins

n     Downgrade earnings by 21/19% for FY11E/12E driven by lower margin (-250bps) assumption (12/13% in FY11E/12E)

n     Valuations (EV) not cheap at 6.7x FY12E EBITDA (30% premium to peers); Maintain Hold, Reduce target to Rs839  

EBITDA margins decline by 780bps yoy - competition visible in numbers

Voltamp reported numbers which were significantly below expectations mainly due to

much lower EBITDA margins. It reported 12% yoy growth in revenues to Rs1.24bn

which was lower than our expectations of Rs1.37bn. The revenue growth was driven by

13% yoy volume growth to 2,363MVA. However, realizations continued there downward

pressure (-1% yoy) to Rs0.53mn/MVA. This is in spite of raw material cost rising by 13%

yoy to Rs0.44mn/MVA. The realization pressure is attributed to competition and

consequently, the EBITDA margins declined by 780bps yoy to 10.1% versus our

expectations of 15.3%. As a result of 780bps drop in EBITDA margins, EBITDA and

PAT declined by 37% and 46% to Rs125mn and Rs93mn (our expectations Rs211mn

and Rs175mn respectively).

Downgrade earnings by 21%/19% for FY11E/12E

Though we expect improvement in numbers going forward, but the pace and timing of

improvement is still not clear as the pricing still lacks visibility. Even the management

discussion in the annual report hints towards much lower margins in FY11E versus

FY10. Also the realizations (23% lower yoy) in the order inflows (Rs1.4bn or 3000MVA)

during the quarter hints towards lower margins going forward. Thus, though we continue

to build in 15% volume growth but lower our EBITDA margin assumptions. We have

now built in 12%/13% EBITDA margins versus earlier assumption of 14.5%/15.0% in

FY11E/12E. As a result, we downgrade our earnings by 21%/19% to Rs57.1/72.1 for

FY11E/12E.

Valuations not cheap; Reduce target price and maintain Hold

At CMP of Rs862, the stock is trading at 12.1xFY12E earnings, 2.0xFY12E Book value

(ROE of 18%) and 6.7xFY12E EBITDA. On EV/EBITDA basis, the stock is trading at

30% premium to peers. Considering lack of pricing visibility in the industry, the

valuations are not cheap even on absolute basis. Unless there is visible improvement in

the pricing scenario, we expect the stock to underperform due to higher base of

numbers going into Q3FY11E and current valuations premium.

We have valued Voltamp at 25% premium (considering strong balance sheet and track

record) to peers, on EV/EBITDA basis. We maintain Hold rating on the stock and cut our

price target to Rs840/Share versus earlier target of 955/Share.