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VOLTAMP LTD
PRICE: RS.701
RECOMMENDATION: BUY
TARGET PRICE: RS.954
FY11E P/E: 12X
q Pricing continues to remain under pressure in the transformer market.
May take a few quarters for recovery.
q Capital engagement has increased and the company is cautious on order
intake.
q However, contrary to ongoing pain in the industry, taking note of the
price correction, we upgrade stock to BUY. Our DCF model supports a unchanged
price target of Rs 954, thus valuing the stock at 13.8x FY12 earnings.
Company remains debt-free and estimated cash surplus of Rs 140
per share.
Pricing continues to remain under pressure in the transformer market
n Bunching of fresh capacity coupled with slippage in anticipated spending in the
T&D sector has resulted in intense competition among players. The situation has
been further aggravated by competition from Chinese and Korean transformer
makers. Over the past two years, domestic transformer capacity has increased
significantly. Data compiled by us on the eight transformer major indicates a
close to 50% increase in capacity. As against this, the domestic market has
grown at 10% pa. Exports have also not completely recovered from the setback
following the credit crisis. This combined with slippages in power generation capacity
is translating into slowdown in transformer demand.
n The impact of the sharp erosion in prices is reflected in the margins of Voltamp,
which has shrunk from 16.7% in H1 FY10 to 10.5% in H1 FY11. The Voltamp
management indicated that the situation is unlikely to change in the near future.
The management opined that recovery in EBITDA margins may take at least a
year. The Voltamp management also highlighted that in recent months, there
have been delays from the client side in picking up delivery.
Due to the severe competition in the transformer market, apart from the margins
there has also been deterioration in payment cycle. In Q2 FY11, there has been a
44% increase in debtors against a 12% rise in revenues.
Order backlog stands at Rs 4.1 bn, which is healthy as the company tends to maintain
six months of revenue visibility. The management has indicated that demand
scenario is improving consistently and this is reflecting in higher number of enquiries.
However, the management is cautious in taking orders. Hence, the order backlog is
sluggish at Rs 4.0-4.5 bn.
The Indian Transformer industry
n The power transformer industry is dominated by the organized sector while the
unorganized sector still holds a significant share of the distribution transformer industry.
In 2010, the Indian industry added 215400 MVA of transformer capacity
as compared to 140000 MVA in 2007.
n The transformer market stood at Rs 127 bn in FY10, with CGL, BHEL, ABB,
Areva, Vijai Electricals, Emco and Voltamp accounting for close to 50% of the
share.
n A major challenge faced by the Indian transformer industry is the lack of adequate
transformer testing facilities in the country. Manufacturers are facing constraints
in the existing test stations operated by the CPRI, which in turn is resulting
in delivery schedules.
n Given the space constraints associated with installing a switchyard in urban locations,
the preference for Gas insulated substations in the 400 KV and above is expected
to increase.
n An important requirement is the provision of services during the commissioning
of the transformer and thereafter. In this regard, domestic transformer manufacturers
who provide ease of servicing and repair score over their international
counterparts.
Introduced FY12 earnings
Our FY12 earnings build healthy growth in revenues of 18% and stable EBITDA
margins. We project earnings to grow 16% in FY12. There could be upsides to our
margin assumption in FY12.
Contrary to ongoing pain in the industry, taking note of the price
correction, we upgrade stock to BUY
n Voltamp is expected to report a decline in profits for the second consecutive year
as the rich margins enjoyed by transformer companies have corrected and are
currently under pressure.
n However, we expect that the growth outlook remains largely intact as the power
transmission and distribution sector remains under-invested in relation to the generation
sector. PGCIL expects its spending in 12th plan to be at least 2x of 11th
plan.
n Feedback from transformer makers indicates that, margins should recover in the
next 2-3 quarters. Thus we believe that EBITDA margins are close to bottoming
out.
n As compared to EPC companies, Voltamp is debt-free and has cash surplus of Rs
140 per share.
n Despite building in no margin recovery in the future, our DCF model supports a
target price of Rs 954, thus valuing the stock at 13.8x FY12 earnings.
n The management stands out in terms of access to investors and signaling of
emerging industry trends.
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