VOLTAMP TRANSFORMERS Margins under pressure:: Edelweiss

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􀂄 Subdued revenue growth; margins slip further
Voltamp Transformers’ (VAMP) Q2FY11 earnings were significantly below our and
consensus estimates. At INR 93.2 mn, PAT declined 45.7% Y-o-Y on the back of
poor operating performance. During the quarter, EBITDA declined 37.1% Y-o-Y
to INR 125 mn. Rising commodity prices has hit the company’s input costs,
resulting in a sharp fall in EBITDA margins to 10.1% (down 782bps Y-o-Y), its
lowest level in the past 17 quarters. The raw material cost increased 27.4% Y-o-
Y (up 1,026bps Y-o-Y to 84.1% of sales) even as lower other expenses (down
272bps Y-o-Y to 2.6% of sales) helped curb further fall. In terms of revenue, the
company reported a growth of 11.8% Y-o-Y to INR 1,243 mn, in line with
estimates as volumes improved 12.6% Y-o-Y and 23.8% Q-o-Q. Realisation,
however, was flat Y-o-Y while it dipped 15.6% sequentially. The company’s
current order backlog stands at INR 4.38 bn which is 0.8x FY10 revenues.
􀂄 Volume improves; realisation flat
Realisation during the quarter, at INR 526K/MVA, was flat Y-o-Y. However, Q-o-
Q, it declined 15.9%. Volume for the quarter, at 2,363 MVA, improved both Y-o-
Y as well as sequentially by 12.6% and 23.8%, respectively.
􀂄 Revising down estimates
With rising commodities prices, VAMP’s margins have been hit adversely. Also,
the small transformer industry continues to reel under over-capacity scenario,
which we expect to stay for the next few quarters. We expect the company’s
capacity utilization to reach peak levels during H2FY12 as the T&D spending
scenario is expected to improve. Given the pressure on margins and lower
utilization levels, we have cut our EBITDA margin estimate by 391bps and
305bps for FY11 and FY12, respectively. Accordingly, the earnings are revised
down 22.9% and 19.8% for FY11E and FY12E, respectively.
􀂄 Outlook and valuations: Cautious; maintain ‘HOLD’
Rising commodity prices have started to impact VAMP’s margins. Also, we expect
the company’s capacity utilisation to remain under pressure on the back of
increased capacity. On our revised estimates of INR 65.6 and INR 74.6, the
stock is trading at P/E of 13.4x and 11.7x FY11E and FY12E, respectively. We
maintain ‘HOLD’ on the stock. We downgrade our rating on the stock to ‘Sector
Underperformer’ from ‘Sector Performer’ on relative returns basis.