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Transformer Industry
03 Feb, 2010 We believe investments in T&D infrastructure will drive growth for Transformer
industry. We initiate coverage on Transformers & Rectifiers India Ltd (TRIL),
TRIL and Voltamp Transformers Ltd (VTL). We recommend a Buy at Decline on TRIL
CMP 415 with a price target of INR468 and BUY for VTL with a price target of INR1051.
Target Price 468
Investment Thesis
VTL India has set for itself ambitious targets of investments in the power sector, in view
CMP 905 of the significant power deficit and sustaining the economic growth momentum.
Target Price 1051 The momentum of capacity addition is expected to improve in the later half of the
Eleventh Plan and continue at a higher rate during the Twelfth Plan, with large capacity
additions lined up by the private sector.
Investments of INR3.5 trillion and INR4.7 trillion are expected in the power sector
during the eleventh and twelfth five-year plan periods, respectively. Capacity addition
of 54,000MW is expected during the eleventh plan and ~1,00,000MW is planned for
the twelfth plan periods. With huge power plants coming up, the need for transmission
will drive demand for transformers. Significant opportunities are present in 400 Kv,
220 Kv and 132 Kv classes; ~33,878 ckm of 400KV, 26,510 ckm of 220 Kv, 19,708
ckm of 132 Kv and 8,671 ckm of 66 Kv transmission lines are expected to be added by
the end of the eleventh plan period, which would need step-up/down transformers.
Power Grid Corporation of India (PGCIL) plans to increase interregional transmission
capacity (national grid) from 16,450 MW in 2007 to 37,150 MW by 2012, a CAGR
of 18% over 2007-12. Moreover, power sector reforms such as APDRP and RGGVY
have thrown up opportunities for the industry and TRIL.
Approximately 97,456 MVA of transformer capacity was added during 1983-87 and
238,150 MVA during 1987-91. As average life of a transformer is 25 years they are
expected to be replaced during the eleventh and twelfth plan periods.
Thus, significant capacity addition during the eleventh and twelfth plan periods,
focus on transmission and distribution along with replacement demand will present
significant opportunities for Transformer manufacturers.
We initiate coverage on Transformers & Rectifiers India Ltd (TRIL), and Voltamp
Transformers Ltd (VTL).
TRIL: At CMP of INR415, TRIL is trading at a P/E of 10x its FY11E and 8.9x
its FY12E earnings. Looking at opportunities that lie in the power sector, TRIL’s
capabilities in 400Kv class category, its annual capacity of 23,200 MVA and strong
order book we assign a P/E multiple of 10x to its FY12E earnings and recommend
a “Buy at Decline” on the stock with a price target of INR 468.
VTL: As significant portion of balance sheet constitutes of investments, we have
valued core (transformer) business separately and then added investments per share.
We have assigned a P/E of 10x to Voltamp’s core (transformers) business earnings
of INR 70 (FY12E) to arrive at value per share of INR 700. Considering investments
per share of INR351 (FY12E) and core business value of INR700/share, we initiate
coverage on Voltamp Transformer Limited with a “BUY” recommendation and a
price target of INR1051.
Analyst
Chinmay Gandre
research@acm.co.in
Tel: (022) 2858 3407
Power industry
● Demand/supply scenario
Power demand increased at a 5% CAGR to 700 billion Kwh in 2007-08 from 410
billion Kwh in 1996-97. However, supply remains a concern. Supply rose to 650
billion Kwh in 2007-08, from 360 billion Kwh in 1996-97.
(billion Kwh)
700
650
600
550
500
450
400
350
300
250
200
2000-01
1994-95
2004-05
1992-93
1997-98
2002-03
2007-08
1995-96
1998-99
2005-06
1991-92
1993-94
1999-00
2001-02
2003-04
1996-97
2006-07
Supply Demand
Source: CRISIL
40000
30000
20000
10000
0
1980-85 1985-90 1992-97 1997-02 2002-07 2007-12E 2012-2017E
Target Actual
Source: CRISIL, ACMIIL Research
200 -10%
0.0 -12%
2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Requirement Availability Surplus (deficit) percent
Source: CRISIL Research
Transmission
Transformer Industry
Overview
The power sector value chain comprises generation, transmission and distribution
(T&D). Electricity generated at a power plant is transmitted to the nearest grid via
step-up transformers and then to the state grid (via step-up or step-down transformers).
Then it is transmitted to a power substation via step-down transformers. Finally,
distribution transformers are used to transmit power from the sub-transmission point
to end consumers.
End Users
[Residential/
commercial
users]
Source: CRISIL
Power transformers account for 70-75% of the total installed capacity while
distribution transformer accounts for the remaining 20-25%. In the power transformer
segment, step-down transformers account for 75-80% of the total installed capacity
while step-up transformers account for the rest.
Demand – Supply
● Demand
Installed transformer capacity on the grid has increased at a 6% CAGR to
1,019,283 MVA in 2007 from 467,517 MVA in 1994. Power generation capacity
grew to 132,329 MW in 2007, from 76,754 MW in 1994. Thus, for addition of
each MW in generation, ~7 MVA of transformer capacity was added on the grid.
MVA per MW increased from 6 MVA per MW in 1994 to 7.7 MVA per MW in
2007 and is expected to increase further given the Government of India’s (GoI)
increased focus on transmission and distribution to reduce transmission losses.
Year Transformer Capacity Total Power capacity (MW) MVA per MW
installed on the Grid (MVA)
1994 467,517 76,754 6.09
1995 493,793 81,172 6.08
1996 511,432 83,295 6.14
1997 497,412 85,796 5.80
1998 580,319 89,103 6.51
1999 584,095 93,416 6.25
2000 655,962 97,948 6.70
2001 649,455 101,997 6.37
2002 687,646 105,112 6.54
2003 725,837 108,085 6.72
2004 759,240 112,171 6.77
2005 906,107 114,164 7.94
2006 965,198 124,287 7.77
2007 1,019,283 132,329 7.70
Source: ACMIIL Research, CRISIL
Demand for transformers includes fresh demand (i.e. ~7MVA per MW) and
replacement demand, as average life of a transformer is 25 years.
Development of new
Capacity Addition Policies Development of Industrial areas Export Demand
National Grid RGGVY APDRP -Sez's
-Industrial Belt, etc
Source: ACMIIIL Research
Note: RGGVY: Rajiv Gandhi Grameen Vidyutikaran Yojana, APDRP: Accelerated Power Development & Reforms
Programme
● Supply
Over the past four years, organized players have accounted for 80-85% of
production of transformers in India. These players increased their capacity from
97,787 MVA in FY06 to 152,065 MVA in FY09 to tap demand and grab the
opportunity arising from the demand-supply mismatch. Installed capacity of these
players currently stands at 172,065 MVA.
Currently, BHEL and Areva T&D are undertaking capacity expansion of 25,000
MVA and 15,000 MVA, respectively, which would be commissioned by the end of
the eleventh five year plan. Going forward, it appears unlikely that companies would
undertake new projects given that significant capacity has built up in the industry.
● Order Book – Revenue visibility of 6 to 9 months
Most transformer manufacturers have a strong order book, with revenue visibility
of 6 to 9 months. Companies such as TRIL and EMCO, which have doubled
capacity to 20,000 MVA and above, have been successful attracting in incremental
orders.
Particulars Voltamp TRIL Bharat Bijlee EMCO Indo tech
Order book Q2 FY10 (INR Mn) 4,510 4,491 3,919 5,440 700
Order book Q2 FY10 (MVA) 8,110 10,200 NA 11,700 NA
Order book to TTM Sales 0.87 1.10 0.72 0.56 0.56
Source: ACMIIL Research
● Over the past three years, the industry has recorded strong sales growth CAGR
of more than 30% back by demand and rise in commodity prices.
● Over the years operating margins have also improved owing to strong demand
and limited supply (as capacity expansion plans were under construction during
the period).
● The industry is characterized by healthy return ratios. Players such as Voltamp
have outperformed the industry with ROCE and RONW in excess of 40% owing
to focus on the industrial segment. Voltamp sold customized products to industrial
clients, which fetched better margins. It also enjoyed lower working capital
requirement on account of faster recovery of dues from industrial clients.
● Most players have negligible debt as well as investments in liquid funds.
Shareholding %
Promoters 76.8
Power Distribution Furnace Rectifier
FII 2.0 Transformers Transformers Transformers Transformers
DII 4.6
Others 16.7
Total 100 5 MVA to 160 160 KVA & above, Upto 160KA DC
MVA/400KV upto 33KV class 105 KA
Facilities
TRIL has three manufacturing units in Moraiya, Odhav and Changodar near
Ahmedabad, Gujarat. It started a new facility with an annual capacity of 16000 MV
p.a. in Moraiya in May 2009. As a result, the total annual capacity has increased
to 23,200 MVA from 7,200 MVA in FY09. For FY10, TRIL expects production of
3,000-4,000 MVA from this plant. The plants in Moraiya and Changodar primarily
manufacture power transformers, while Odhav produces distribution transformers.
Particulars Annual Capacity Built-up area Capability
Moraiya 16,000 MVA 14,000 Sq. M Production and testing of 765 kV Transformers
Changodar 6,000 MVA 7,200 Sq. M Production and testing of 245 kV Transformers, up to
160 MVA.
Odhav 1,200 MVA 600 Sq. M Production and testing of transformers up to 66 kV, up
to 15 MVA
Source: Company
Order book
● Order book growth
The order book grew from INR3,398 million in FY08 to INR3,732 million in
3Q FY10. The MVA order book increased from 6350 MVA in FY08 to 9095
MVA in 3Q FY10. Order intake increased sharply during 1Q FY10 as the same
period also saw Moraiya facility coming on stream. The current order book of
INR3732 million is ~0.85x TTM sales and provides revenue visibility for six to
nine months.
Order book
12,000
10,728
10,200
10,000 9,229 9,095
Current order book of INR3732
8,000
million is ~0.85x TTM sales and 6,350
7,240 7,093 7,134
2,000
0
FY08 Q1 FY09 Q2 FY09 Q3FY09 Q4 FY09 Q1 FY10 Q2 FY10 Q3 FY10
INR Mn MVA
Source: Company
>245 KV
1%
>145 KV & <245 KV
50%
Source: Company
Capex
TRIL undertook capex of INR700 million for the 16,000 MVA green field facility
in Moraiya. The project was primarily funded through proceeds from an IPO during
FY08. TRIL started the facility in May 2009; with this, the company has more than
tripled its production capacity to 23,200 MVA p.a. TRIL has no further capex plans
in the near term.
SWOT Analysis
Strengths
● Capability to manufacture 400 & above Kv class transformers: TRIL is one
of the few players that can manufacture transformers of 400 Kv & above. The
Moraiya facility is well equipped and has a capacity to produce and test up to765
Kv transformers. So far, in 400KV, the company has supplied two transformers
to LANCO.
Particulars Power Transformers
Up to 220 Kv 220 Kv to 400 Kv 400 Kv & above
Emco Ltd ü - -
Bharat Bijlee Ltd ü - -
Indo Tech Transformers Ltd ü ü -
Voltamp Transformers Ltd ü - -
Vijai Electricals ü ü ü
TRIL ü ü ü
Source: Crisil Research
The company has also developed in-house design and engineering capabilities. It
has approval from utilities for manufacturing power transformers of up to 400 kv
without any external technological support. Recently, it implemented a LANCO
order with in-house technology.
● SEBs account for 70% of revenue
TRIL primarily supplies transformers to SEBs which contribute to ~70% of its
total revenue; industrial users account for the rest (Annexure III- TRIL Client List).
With SEBs as its customers, TRIL is insulated from fluctuation in raw material
prices to an extent, as owing to the built-in price variation clause (Annexure IV
– Price Variation Formulae), it is passed on to the SEBs. Moreover, the company
is also protected from any slowdown in investments in the private sector.
● Negligible debt and investments in liquid funds
The gestation period to manufacture a transformer is 3 to 6 months; this, coupled
with debtor days of more than 120 (as majority clients are SEBs) result in a higher
working capital requirement. In a working capital-intensive business, funding and
working capital management are important success factors. TRIL has INR761.7
(FY09) million in current investments and a low D/E ratio of 0.2, which enable
the company to fund its working capital requirements.
● Second-largest facility: TRIL has a production capacity of 23,200 MVA, second-
largest after Crompton Greaves. Thus, the company should be able to explore
significant growth opportunities.
● Strong order book: TRIL has a strong orderbook of INR3,732million (~0.85x
TTM sales), which provides revenue visibility for six to nine months.
Weaknesses
● Significant capacity build-up to impact realization: Over the past five years,
owing to the demand-supply mismatch, transformer manufacturers have recorded
higher realization and profitability. However, significant capacity has been built
up in the industry. Transformer capacity has increased to ~2,00,000 MVA from
~1,25,000 MVA in FY06. In addition, ~40,000 MVA is expected to be operational
by the end of the eleventh plan period. Thus, considering this and the competition,
realizations are expected to drop and in turn impact the growth of the company.
● Dependence on imports for CRGO (Cold Rolled Grain Oriented Steel): CRGO
constitutes ~35% of the raw material cost. The component is not manufactured in
India due to high manufacturing cost. Indian manufacturers including TRIL are
thus exposed to possible constraints on timely availability of CRGO.
Opportunities
● Significant capacity addition during the eleventh and twelfth plan periods:
Capacity addition of 54,000MW is expected during the eleventh plan and
~1,00,000MW is planned for the twelfth plan periods. With huge power plants
coming up, the need for bulk transmission will drive demand for higher class
transformers.
● Focus on transmission and distribution:
Power Grid Corporation of India (PGCIL) plans to increase interregional
transmission capacity (national grid) from 16,450 MW in 2007 to 37,150 MW
by 2012, a CAGR of 18% over 2007-12. Moreover, power sector reforms such as
APDRP and RGGVY have thrown up opportunities for the industry and TRIL.
● Replacement demand:
Approximately 97,456 MVA of transformer capacity was added during 1983-87
and 238,150 MVA during 1987-91. As average life of a transformer is 25 years,
transformers are expected to be replaced during the eleventh and twelfth plan
periods.
Threats
● Severe competition: MNCs such as ABB and Areva T&D have strong presence
in the Indian market. In addition, ten to twelve domestic manufacturers as well as
un-organized players are competing for orders from SEBs, utilities and industrial
clients. This makes the market very competitive, especially since the orders
normally are awarded to bidders with a high technical score and the lowest bid.
Financials
Net sales
TRIL’s net sales grew at a 49% CAGR to INR4,305 million in FY09, from INR1,308.3
million in FY06, driven by capacity addition and healthy realization on the back of
rise in commodity prices.
Net Sales Capacity and Production Details
7000 25,000 120
6,2579 23,200 23,200 23,200
105
6000 5,662
20,000 100
5000 4,686
4,305 77 80
4000 15,000
60 13,000
%
MVA
12,000
Rs. mn
3,057 60
3000 49
10,000 56
2,212 52
7,200 7,200 7,526 7,200 40
43
2000 5,400 5,543
1,308 5,000 4,328 10,000
2,630 20
1000
0 0 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Production Capacity Utilization Level
Source: ACMIIL Research, Company
Margins
We expect operating profit margin to decrease in FY11E and FY12E to 15% and
14.5%, respectively, due to capacity build-up in the industry.
Margins
20
18 19.0
16
15.6 15.8 15.5
14 15.0 14.5
Percentage
12
10 11.3 10.5
8 9.4 9.5 9.7
8.0
6
4
2
0
FY07 FY08 FY09 FY10E FY11E FY12E
OPM NPM
Source: ACMIIL Research, Company
We estimate PAT margin to fall to 9.5% and 9.7% in FY11E and FY12E from 10.5%
in FY09 owing to fall in operating margins.
Valuation and Recommendation
At CMP of INR415, TRIL is trading at a P/E of 10x its FY11E and 8.9x its FY12E
earnings. Looking at opportunities that lie in the power sector, TRIL’s capabilities
in 400Kv class category, its annual capacity of 23,200 MVA and strong order book
we assign a P/E multiple of 10x to its FY12E earnings and recommend a “Buy at
Decline” on the stock with a price target of INR 468.
One year forward P/E Chart
700
600
500
400
300
200
100
0
28-Jan-08
28-Feb-08
28-Mar-08
28-Apr-08
28-May-08
28-Jun-08
28-Jul-08
28-Aug-08
28-Sep-08
28-Oct-08
28-Nov-08
28-Dec-08
28-Jan-09
28-Feb-09
28-Mar-09
28-Apr-09
28-May-09
28-Jun-09
28-Jul-09
28-Aug-09
28-Sep-09
28-Oct-09
28-Nov-09
28-Dec-09
28-Jan-10
28-Dec-07
Close Price 11 PE 12 PE 10 PE 8 PE
Source: ACMIIL Research
Ratios
Particulars FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Profitability Ratios
OPM (%) 10.9 15.6 19.0 15.7 15.5 15.0 14.5
PAT Margin (%) 5.9 8.0 11.3 10.5 9.4 9.5 9.7
RONW (%) 35.5 42.4 16.5 18.2 15.3 16.1 15.6
ROCE (%) 34.8 43.7 24.8 24.2 21.9 23.1 23.4
Per Share Ratios
EPS (Rs.) 11.2 24.9 26.8 35.0 33.9 41.6 46.8
CEPS (Rs.) 12.5 27.8 28.9 37.6 38.1 46.4 51.8
BV Per Share (Rs.) 31.6 58.7 161.9 192.2 221.5 258.5 300.6
Valuation Ratios
P/E (x) - - - - 12.2 10.0 8.9
P/CEPS (x) - - - - 10.9 8.9 8.0
P/BV (x) - - - - 1.9 1.6 1.4
Capital Structure Ratios
Debt/Equity 0.8 0.8 0.2 0.2 0.1 0.1 0.0
Current Ratio 1.4 1.6 2.5 2.6 2.5 2.6 2.4
Turnover Ratios
Debtors turnover ratio 2.5 3.6 3.1 3.0 2.9 3.0 3.0
Inventory turnover ratio 4.2 6.1 5.8 7.0 7.0 7.0 7.1
Fixed Asset Turnover 11.8 11.6 12.8 9.6 5.1 6.3 7.1
Source: ACMIIL Research
B U Y
Voltamp Transformers Ltd
Key Data (INR) Voltamp Transformers Ltd (VTL), established in 1963, manufactures power,
CMP 905 distribution transformers and dry-type transformers. The company has manufacturing
Target Price 1051 facilities in Vadodara and Vadadla with installed capacity of 9,000MVA and 4,000MVA
respectively. The industrial segment accounts for ~80-90% of VTL’s client base. The
Key Data company’s current order book stands at INR4,176.3 million, 0.8x TTM sales.
Bloomberg Code VAMP IN
Product Range
Reuters Code VOTL.BO
BSE Code 532757
The company manufactures power, distribution and dry type transformers. In the
NSE Code VOLTAMP
power transformer segment, VTL manufactures up to 100 MVA and 220 Kv class
Face Value (INR) 10
transformers. In dry type transformers, the company is a leader with a market share
Market Cap. (INR Mn.) 9318.5
of 40%. It manufactures two types of dry transformers, vacuum resin impregnated up
to 5 MVA, 11Kv and Cast resin up to 7.5MVA, 33 Kv, in technical collaboration with
52 Week High (INR) 1050
MORA (Germany) and HTT (Germany) respectively. Power transformers (49%)
52 Week Low (INR) 265
contribute to the majority of VTL’s revenue followed by distribution and dry-type
Avg. Daily Volume (6m) 85663
transformers. Revenue Break Up FY09
Product Portfolio
Shareholding %
Power Transformer Distribution Transformer
Power transformer 5MVA, 33KV to 100MVA, 220KV 32%
Promoters 46.1 49%
Distribution 315KVA, 11KV to 5MVA, 33KV Dry Transformer
FII 23.8 19%
Dry 63KVA, 11KV to 7.500 MVA, 33KV
DII 10.0
Source: Company
Others 20.1
Total 100 Facilities
Particulars Annual Capacity (MVA) Capability
Vadodara 9,000 Produce and test up to 220 Kv and 100 MVA – primarily power
transformers
Vadadla 4,000 Manufacture Distribution and dry type transformers
Source: Company
Voltamp has two manufacturing units in Vadodara and Vadadla, Gujarat. Its Greenfield
unit in Vadadla has an installed capacity of 4,000MVA and commenced operations in
November 2009. As a result, its total annual capacity has increased to 13,000MVA,
comprising 6,000MVA, 5,000MVA, and 2,000MVA of power, distribution and
dry type transformer capacities respectively. The plant in Vadodara primarily
manufactures power and distribution transformers, while the new facility at Vadadla
will manufacture dry and distribution transformers.
Capacity Break Up
100%
90%
80%
2300 2700 3500 4800 4800 6000
70%
60%
50%
MVA
40%
30% 1700 2000 2700 3200 3200 5000
20%
10%
500 700 1000 1000 1000 2000
0%
FY05 FY06 FY07 FY08 FY09 FY10
Dry Transformer Distribution Transformer Power Transformer
Source: Company
Order Book
VTL’s order book grew from INR1,489 million in FY06 to INR4,176.3 million in
January 2010. Current order book is ~0.8x TTM sales, providing revenue visibility
for 6-9 months. Majority of the order backlog comprises power transformers (~51%)
followed by distribution (26%) and dry transformers (23%).
Order Book
5000 4750
4510
4500 4176.3
4072
4000
3505
3500
Majority of orders comprises of 3000 2926
orders from industrial users
INR MN
2500
2000
1489
1500
1000
500
0
FY06 FY07 FY08 FY09 Jun 09 Oct 09 Jan 10
Source: Company
Nature of contracts
VTL primarily supplies to industrial clients, which contribute to ~80 to 90% of its
total revenue. Industrial orders are at fixed prices and thus expose the company to
movement in raw material prices. However, to protect itself from fluctuating raw
material prices, VTL hedges with the help of forward contracts.
Capex
The company undertook capex of INR261.7 million for the 4,000MVA Greenfield
facility in Vadadla. The project was primarily funded through internal accruals. It
incurred expenditure of INR143.8 million in FY09 and the rest has been spent in
FY10. The facility started operations in November 2009; with this, the company
has a production capacity of 13,000MVA p.a. VTL has no further capex plans in the
near term.
SWOT Analysis
Strength
● Efficient working capital management and funding:
Funding and working capital management are important factors for a transformer
company. VTL primarily supplies to industrial clients, and as a result, working
capital being blocked in the form of debtors is considerably low compared with
peers. Debtor days for VTL are ~53 versus 75-120 days for peers.
FY09 Voltamp TRIL Bharat Bijlee EMCO Indo tech
Debtor days 52.4 119.8 108.7 162.6 76.6
Source: ACMIIL Research
The company also has INR1,352 million (FY09) as current investments and zero
debt, which helps fund working capital requirement.
● Diverse client base
VTL has a diverse industrial client base and it is not dependent on any particular
industry. It supplies to various industries such as petrochemicals, metals, cement,
real estate and others. No sector contributes more than 15% to its revenue. In
FY09, its top 10 clients accounted for 39% of its revenue.
Private Sector-Investments
25
20
15
INR trillion
10
De 001
Au 001
De 000
Au 000
De 003
Au 003
Au 1999
De 002
Au 002
De 008
Au 008
09
De 006
Au 006
De 004
Au 004
De 005
Au 005
De 007
Au 007
20
2
c-2
2
c-2
2
c-2
2
c-2
2
c-2
2
c-2
2
c-2
2
c-2
2
c-2
g-
g-
g-
c-
g-
g-
g-
g-
g-
g-
g-
De
Announcement Under Implementation
Source: CMIE
Threats
● Severe competition: MNCs such as ABB and Areva T&D have strong presence
in the Indian market. In addition, 10-12 domestic manufacturers as well as un-
organized players compete for orders from SEBs, utilities and industrial clients.
This makes the market very competitive.
Financials
Net Sales
Net Sales
8000
7,091
7000 6,431 6,536
6000 5,553
5,250
5000
4,058
Rs. mn
4000
3000 2,488
2000
1000
0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
VTL’s net sales grew at a 46% CAGR to INR6,430.6 million in FY09, from
INR2,487.9 million in FY06, driven by capacity addition and healthy realization on
the back of rise in commodity prices.
Capacity & Production Details
14,000 120
106
12,000 100
86 88 88
10,000 83 82
74 80
8,000
60
13,000
13,000
13,000
MVA
%
11500
6,000
10600
9541
9624
9,000
9,000
40
7898
4,000
7,200
6188
5,400
4503
2,000 20
0 0
FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Capacity Production Utilization level
Source: Company, ACMIIL Research
In FY10E, we expect VTL’s net sales to dip INR5,250 million owing to fall in
realizations. For FY11E and FY12E, we expect sales to increase to 6,536.3 million
and INR 7,091.3 million respectively, backed by volume growth.
Margins
In FY08 and FY09, VTL recorded exceptional margins in excess of 20% as the
period was characterized by strong demand due to huge investments and liquidity in
the economy. However, operating margins have dropped to the 19% in 9M FY10, as
investments have slowed down. For FY11E and FY12E, we expect operating profit
margins to remain low at 16.3% and 16% respectively.
Margins
25 23.3
21.2
20 19.1
18.0
16.5 16.0
15.1 17.9
13.6
Percentage
15 15.6
14.4 14.5
13.0 12.8
10
9.3 9.7
0
FY06 FY07 FY08 FY09 9M FY10 FY10E FY11E FY12E
OPM NPM
Source: Company, ACMIIL Research
We estimate PAT margin to fall to 13% and 12.8% in FY11E and FY12E respectively,
owing to fall in operating margins and increase in depreciation cost.
Valuation and Recommendation
As significant portion of balance sheet constitutes of investments, we have used valued
core (transformer) business separately and then added investments per share.
Looking at opportunities that lie in the power sector, investment announcements in
private sectors, and a strong order book, we assign a P/E of 10x to Voltamp’s core
(transformers) business earnings of INR 70 (FY12E) to arrive at value per share of
INR 700.
Considering investments per share of INR351 (FY12E) and core business value of
INR700/share, we initiate coverage on Voltamp Transformer Limited with a “BUY”
recommendation and a price target of INR1051.
Particulars Adjusted PAT Adjusted EPS P/E multiple Segment value
(FY12E) (FY12E) per share (INR)
Core business 707.9 70.0 10 700
Investments per share 351
Target Price 1051
Source: ACMIIL Research
Financials
Profit & Loss Account INR Mn
Particulars FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Net Sales 2,487.9 4,058.0 5,553.5 6,430.6 5,249.6 6,536.3 7,091.3
Total Expenditure 2,148.6 3,444.5 4,374.9 4,932.1 4,304.7 5,457.8 5,956.7
Operating Profit 339.4 613.5 1,178.6 1,498.6 944.9 1,078.5 1,134.6
Other Income 42.8 48.7 107.6 239.7 240.0 265.0 300.0
EBIDTA 382.2 662.2 1,286.2 1,738.3 1,184.9 1,343.5 1,434.6
Depreciation 19.2 21.7 31.3 44.7 62.0 70.7 71.8
EBIT 363.0 640.5 1,254.8 1,693.6 1,123.0 1,272.8 1,362.8
Interest 10.1 12.6 5.0 4.7 6.2 6.2 6.2
PBT 352.9 627.9 1,249.8 1,689.0 1,116.8 1,266.6 1,356.6
Taxes 122.7 232.3 450.8 540.9 357.4 418.0 447.7
PAT 230.2 395.6 799.0 1,148.0 759.4 848.6 908.9
Adj PAT (Core Business) 202.3 364.9 730.3 985.1 596.2 671.1 707.9
Growth in Sales (%) 63.1 36.9 15.8 -18.4 24.5 8.5
Growth in Operating Profits (%) 80.8 92.1 27.1 -36.9 14.1 5.2
Growth in PAT (%) 71.8 102.0 43.7 -33.9 11.8 7.1
Growth in Adj PAT 80.4 100.1 34.9 -39.5 12.6 5.5
OPM (%) 13.6 15.1 21.2 23.3 18.0 16.5 16.0
PAT (%) 9.3 9.7 14.4 17.9 14.5 13.0 12.8
Source: Company, ACMIIL Research
Ratios
Particulars FY06 FY07 FY08 FY09 FY10E FY11E FY12E
Profitability Ratios
OPM (%) 13.6 15.1 21.2 23.3 18.0 16.5 16.0
PAT Margin (%) 9.3 9.7 14.4 17.9 14.5 13.0 12.8
RONW (%) 33.1 39.7 48.5 43.4 23.1 21.1 18.9
ROCE (%) 41.1 63.8 75.7 64.0 34.0 31.6 28.3
Adj RONW (%) 29.1 47.8 68.5 76.1 54.8 49.0 56.1
Adj ROCE (%) 35.1 75.0 106.2 112.0 79.8 72.6 83.1
Per Share Ratios
EPS (Rs.) 22.8 39.1 79.0 113.5 75.1 83.9 89.8
Adj EPS 20.0 36.1 72.2 97.4 58.9 66.3 70.0
CEPS (Rs.) 24.7 41.3 82.1 117.9 81.2 90.9 96.9
BV Per Share (Rs.) 68.7 98.4 162.8 261.6 325.1 397.4 475.6
Valuation Ratios
P/E (x) - - - - 12.1 10.8 10.1
P/CEPS (x) - - - - 11.1 10.0 9.3
P/BV (x) - - - - 2.8 2.3 1.9
Capital Structure Ratios
Debt/Equity 0.3 0.0 0.0 0.0 0.0 0.0 0.0
Current Ratio 3.4 1.9 2.0 2.4 2.2 2.1 2.2
Turnover Ratios
Debtors turnover ratio 6.5 10.7 9.2 7.0 6.9 8.5 7.9
Inventory turnover ratio 3.9 5.9 7.1 9.7 9.1 9.3 8.6
Fixed Asset Turnover 30.8 41.0 31.3 35.6 13.8 20.5 27.5
Source: ACMIIL Research
Annexure I - Transformers
For transmission and distribution networks to transfer large amounts of alternating current electricity over long distances with
minimum losses and least cost, different voltage levels are required in various parts of networks. A generation unit produces
electric current at a lower voltage, which has to be increased for efficient transmission and for reducing T&D losses during the
transmission of electricity. The voltage again has to be lowered for the purpose of Sub transmission and Distribution of electricity
for end use consumption. Transformers enable requisite changes in voltage.
A transformer has two types of circuits: primary circuit and secondary circuit. The primary and secondary coils are wrapped
around a core. A changing current in the first circuit (the primary) creates a changing magnetic field, which in turn induces a
changing voltage in the second circuit (the secondary). This process is known as mutual induction. By adding a load to the secondary
circuit, one can make current flow into the transformer, thus transferring energy from one circuit to the other
The iron core forms a complete magnetic circuit and is made up of laminated strips of special steel having low hysteresis loss
and high electrical resistivity. The lamination of the core reduces the eddy-current loss. For an average transformer used in a
MAGNETIC FLUX
SECONDARY WINDING
PRIMARY WINDING
AC OUTPUT POWER=
APPLIED INPUT
INPUT POWER
VOLTAGE POWER
MINUS LOSSES
OUTPUT
AC
VOLTAGE
IRON CORE
ESSENTIALS OF A TRANSFORMER
power station, the conductor used for the windings consists of paper insulated copper bar or wire. In assembling the transformer,
great care is taken to ensure windings are well insulated, both from the iron core and from each other. The basic construction of
a core type transformer consist of an iron core, a cylinder of insulation followed by the low voltage winding, a further insulating
cylinder and a high voltage winding. Clamps are used to hold the assembly in place.
Raw material break up
Copper: 30-35%
MS Steel: 8-10%
Transformer Oil: 5-10%
Components & Others: 15-20%
CRGO Steel: 30-35%
(CRGO performs the function of generating magnetic flux in the transformers and is a key raw material besides copper. As CRGO
steel is not manufactured domestically, it is imported directly from global majors like Thyssen of Germany, Kawasaki and Nippon
Steel of Japan, AK Steel of USA or indirectly through Minerals and Metals Trading Corporation and local traders.)
Type of transformer
● Power transformers:
Power Transformers are used for changing the voltage of electric supply from generators while connecting them to power
evacuation system and further in transmission. They can be Step up (for increasing voltage levels) or Step down transformers
(for reducing voltage levels) e.g. the power at generation level is of low voltage and has to be changed to higher voltage
level for the purpose of transmission. They range from 11 kV to 765 kV and account for 70-75% of the total value of the
transformer industry.
● Distribution transformers:
Distribution Transformers are used for changing the voltage at various stages of sub-transmission and distribution - the power
at transmission level is of higher voltage and has to be changed to lower voltage level for the purpose of sub transmission and
distribution. Distribution transformers are used to transfer power from transmission to distribution points. They account for
25- 30% of the total value of the transformer industry.
Notes:
Institutional Sales:
Ravindra Nath, Tel: +91 22 2858 3400
Kirti Bagri, Tel: +91 22 2858 3731
Himanshu Varia, Tel: +91 22 2858 3732
Email: instsales@acm.co.in
Institutional Dealing:
Email: instdealing@acm.co.in
Disclaimer:
This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or
any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information
contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.
To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views
expressed in the report
Disclosure of Interest Transformers & Rectifiers India Ltd Voltamp Transformers Ltd
1. Analyst ownership of the stock NO NO
2. Broking Relationship with the company covered NO NO
3. Investment Banking relationship with the company covered NO NO
4. Discretionary Portfolio Management Services NO NO
This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for
circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.
The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We
may from time to time have positions in and buy and sell securities referred to herein.