Transformers & Rectifiers- Impacted by one offs, dispatch slippage : Emkay

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Transformers & Rectifiers

Impacted by one offs, dispatch slippage & competition

ACCUMULATE

CMP: Rs 280                                       Target Price: Rs 315

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n     TRIL rep. PAT of Rs68mn vs est. of Rs146mn due to (1) one time incentives (~Rs10mn), (2) dev. exp. of 1150kv transfrmr (~Rs15mn), (3) dispatch slippages & (4) competition

n     Around 1,300MVA of dispatches slipped to Q4 resulting in volume (2,711MVA) decline of 5% yoy; this led to revenue declining by 1% yoy to Rs1.3bn (realizations were up 4% yoy)

n     Due to same reasons, EBITDA margins declined by -205bps yoy; No signals of competition pressures easing except for fact that order inflows have been strong for third qtr in a row

n     Cut FY11E/12E earnings by 30%/32%; Order inflows, realizations and 765kv manufacturing key variables to track;  maintain accumulate on 20% valuations discount to peers 

Performance impacted by one offs, dispatch slippages & competition

TRIL reported revenues of Rs1.3bn lower than our expectations of Rs1.6bn mainly due

to dispatch slippages of 1,300MVA to Q4 and volumes declining by 5% yoy to

2,711MVA. Though, realizations improved by 4% yoy to Rs0.47mn/MVA due to (1)

product mix in favor of higher range and (2) higher raw material prices pass through

under PVC. Competition was visible in EBITDA margins, which declined by 205bps yoy

to 9.3% and significantly lower than our estimate at 14.8%. The EBITDA margins were

also impacted due to (1) one time incentives (~Rs10mn), (2) dev. exp. of 1150kv

transfrmr (~Rs15mn) & (3) dispatch slippages. As a result of flattish revenues and

decline in EBITDA margins, EBITDA and PAT declined by 19% and 39% (lower other

income) yoy, below estimate.

But on the positive side order inflows very strong for third qtr in a row

The strong positive to note in this quarter was yet again strong order inflows of Rs1.7bn,

increase of 218% yoy (on low base). This is after reporting ~100% yoy growth in order

inflows in H1FY11. Though the pricing pressure still visible in orders is hurting the

performance but three quarters of strong order inflows after 4 quarters of muted inflows,

is definitely a strong positive and key variable to track going forward along with order

inflow realizations.

Cut earnings on lower margins and volumes

TRIL has reported EPS of Rs19.7/Share (decline of 10% yoy) in 9mFY11. We cut our

FY11E/FY12E earnings by 30%/32% on the back of (1) lower volume growth in FY11E

(10% growth vs 20% earlier) and (2) lower margins (12.0% vs 14.5% earlier).

Maintain Accumulate on 20% valuation discount to peers

At CMP of Rs280, TRIL is trading at 8.1/6.9x FY11/12E earnings, 1.1/1.0x FY11/12E Book

Value and 4.9/4.1x FY11/12E EBITDA. This is a discount of 20% to the peers. Also on

EV/MVA basis, TRIL is trading at 0.14mn/MVA which is ~ 45% discount to industry average

of Rs0.27mn/MVA. We believe competition is still intense in the sector with no signals of

easing - remaining an overhang on the sector. But we relatively prefer TRIL due to (1)

strong order inflows since past three qtrs and (2) valuations discount to peers. We maintain

‘Accumulate’ ratings with a revised price target of Rs315/Share (earlier Rs448/Share).

Key variables to track - order Inflows, realizations in new orders & 765kv

entry

Apart from absolute order inflows and realizations in new orders (which remains key to the

margins), the important thing to look at is TRIL’s entry into 765kv. TRIL has been L1 in one

of the PGCIL’s 765kv orders bid recently. As per management, TRIL is the only company in

India (apart from Crompton) which has manufacturing and testing facilities already in place

for 765kv. TRIL had bid for PGCIL order in JV with the MNC & is likely to manufacture

765kv transformers starting FY12E. We believe with power generation sector likely to see

significant jump in the capacity additions coupled with transmission infrastructure moving

into higher ranges, 765kv manufacturing capabilities would be a big long term positive for

the company