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VOLTAMP LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.873
FY11E P/E: 10.1X
Voltamp's third quarter numbers are in line with expectations. The results
highlight continued slackness in demand for electrical equipment as well as
prevalent margin pressure in marketplace.
The transformer market has been reeling under oversupply as demand is yet
to recover to the pre credit-crisis levels while several players have added
capacity. The problem is compounded by instances of clients delaying taking
delivery of the product.
We rate Voltamp as our preferred stock within the midcap transformer
space in view of debt-free, cash surplus of Rs 147 per share and superior
management quality. Thus, despite the pricing pressures, we recommend
BUY with a revised target price of Rs.873 (Rs.954 earlier)
Numbers marred by severe margin pressure
n Net sales grew 9% YoY as the company has preferred to go slow on taking orders
in view of the adverse market conditions for transformer makers.
n While there has been revival in industrial production, it is yet to translate into
improved offtake for Transformer companies. The sector has added capacity in
anticipation of demand potential, however actual T&D spending by utilities has
been sluggish. This is resulting in price undercutting by corporates with a view to
utilize their expanded capacities.
n The company managed to keep its overheads under control but could not contain
the sharp decline in margins. The management has indicated that in a bid to
garner market share, players are resorting to severe price cuts.
n It is likely that the company may have accepted orders at low margins. For the
T&D equipment industry it has been a difficult quarter with (TRIL reported 340
bps reduction in EBITDA margins) several leading producers reporting sharp margin
contraction.
n Cash and investment stands at Rs 1.6 bn.
Transformer Industry Scenario
n Industry observed significant capacity addition in last two years with Areva doubling
its capacity to and Siemens carrying out of Greenfield expansion in 765 KV
segment. However, demand is increasing at a slower pace for transformers.
PGCIL spending has remained sluggish in much of CY10.
n Currently industry is operating at 70-75% capacity utilization. Competition is intensifying
between various players leading to margins compression. Chinese and
Korean manufacturers are also tightening their grip especially in 765 KV segment.
Stock Outlook
The stock has underperformed the peers in view of the poor sector fundamentals.
We believe that the pains that the industry is going through may be temporary and
fundamentals should improve once momentum in T&D spends by utilities gain
steam. T&D spending is currently lagging the generation capacity growth and the
situation should correct in the future. Within the midcap transformer industry,
Voltamp is a quality stock with strong balance sheet. Hence we do not see significant
downside from these levels.
Valuation
n The Voltamp stock has underperformed the market given industry woes.
Voltamp is currently trading at 10.1x FY12 earnings.
n We moderate our margin estimates going forward to factor in increasing competition
and currently prevailing over capacity in the industry.
n We maintain BUY on the stock with a DCF based target price of Rs 873 (Rs 954
earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
VOLTAMP LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.873
FY11E P/E: 10.1X
Voltamp's third quarter numbers are in line with expectations. The results
highlight continued slackness in demand for electrical equipment as well as
prevalent margin pressure in marketplace.
The transformer market has been reeling under oversupply as demand is yet
to recover to the pre credit-crisis levels while several players have added
capacity. The problem is compounded by instances of clients delaying taking
delivery of the product.
We rate Voltamp as our preferred stock within the midcap transformer
space in view of debt-free, cash surplus of Rs 147 per share and superior
management quality. Thus, despite the pricing pressures, we recommend
BUY with a revised target price of Rs.873 (Rs.954 earlier)
Numbers marred by severe margin pressure
n Net sales grew 9% YoY as the company has preferred to go slow on taking orders
in view of the adverse market conditions for transformer makers.
n While there has been revival in industrial production, it is yet to translate into
improved offtake for Transformer companies. The sector has added capacity in
anticipation of demand potential, however actual T&D spending by utilities has
been sluggish. This is resulting in price undercutting by corporates with a view to
utilize their expanded capacities.
n The company managed to keep its overheads under control but could not contain
the sharp decline in margins. The management has indicated that in a bid to
garner market share, players are resorting to severe price cuts.
n It is likely that the company may have accepted orders at low margins. For the
T&D equipment industry it has been a difficult quarter with (TRIL reported 340
bps reduction in EBITDA margins) several leading producers reporting sharp margin
contraction.
n Cash and investment stands at Rs 1.6 bn.
Transformer Industry Scenario
n Industry observed significant capacity addition in last two years with Areva doubling
its capacity to and Siemens carrying out of Greenfield expansion in 765 KV
segment. However, demand is increasing at a slower pace for transformers.
PGCIL spending has remained sluggish in much of CY10.
n Currently industry is operating at 70-75% capacity utilization. Competition is intensifying
between various players leading to margins compression. Chinese and
Korean manufacturers are also tightening their grip especially in 765 KV segment.
Stock Outlook
The stock has underperformed the peers in view of the poor sector fundamentals.
We believe that the pains that the industry is going through may be temporary and
fundamentals should improve once momentum in T&D spends by utilities gain
steam. T&D spending is currently lagging the generation capacity growth and the
situation should correct in the future. Within the midcap transformer industry,
Voltamp is a quality stock with strong balance sheet. Hence we do not see significant
downside from these levels.
Valuation
n The Voltamp stock has underperformed the market given industry woes.
Voltamp is currently trading at 10.1x FY12 earnings.
n We moderate our margin estimates going forward to factor in increasing competition
and currently prevailing over capacity in the industry.
n We maintain BUY on the stock with a DCF based target price of Rs 873 (Rs 954
earlier).
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