Accumulate VOLTAMP; TARGET PRICE: RS.540 :Kotak Sec,

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VOLTAMP LTD
PRICE: RS.499 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.540 FY13E P/E: 9.8X
Voltamp numbers are in line with our expectations. The Transformer
manufacturing sector has been going through a continued phase of margin
pressure and subdued demand conditions. In general working capital cycle
has gone up thus constraining cash flow. The distress in the industry is
likely to persist in the near-to-medium term given moderating investments
in power and industrial sector. We maintain Accumulate on the stock.

Business environment remains weak. Management cautious in

taking orders.

n Net sales rose 9% YoY possibly aided by higher copper prices as this commodity

was up 27% yoy during the quarter.

n Volumes sold in MVA terms was 7938 MVA vs 7617 MVA. Realisation per MVA

stood at Rs 0.69 mn/MVA vs Rs 0.589 mn per MVA.

n The transformer sector has added capacity in anticipation of demand potential,

however actual T&D spending by utilities has been sluggish. Industry sources indicate

that the T&D equipment market has been flat for the current year. This is

resulting in price undercutting by corporates with a view to utilize their expanded

capacities.

n The domestic transformer industry continues to operate at lower utilization levels

of roughly 60% generating output of 170,000 MVAs.

n In a few cases, customers have delayed completion of orders. Management has

preferred to take fewer orders after due consideration to the credit worthiness of

the client.

n The management indicated that given the under-utilisation of existing capacity,

the price pressures in the market place are likely to sustain in the next 12-15

months. Thus, we have built in 270 bps decline in EBITDA margins in FY12.

n The company continues to remain debt-free and cash and investment stands at

Rs 1.2 bn.

n Working capital has increased to 154 days in H1FY12 vs 100 days in H1FY11

mainly due to higher inventory and debtors cycle.

n Voltamp has indicated that it has been in talks with foreign T&D equipment

manufacturers for tie-up (either technical/JV) for moving into the higher KV range

of transformers. However, these discussions have not been fruitful so far as foreign

players are interested in majority control rather than a JV. Transformer and

Rectifiers India Ltd (TRIL) have formed a MOU with a European company to

manufacture 765 KV transformers in India.

n Order backlog stands at Rs 4.44 bn vs Rs 4.38 bn. Order backlog is flat but is in

line with past trends.

Valuation

n The Voltamp stock is currently trading at 11.6x and 9.8x FY12 and FY13 earnings

respectively.

n We maintain ACCUMULATE with a revised DCF based target price of Rs 540 (Rs

519 earlier).