Transformer Industry

Transcription

1 VTL CMP 95 Target Price 151 Transformer Industry 3 Feb, 21 We believe investments in T&D infrastructure will drive growth for Transformer industry. We initiate coverage on Transformers & Rectifiers India Ltd (TRIL), TRIL CMP 415 and Voltamp Transformers Ltd (VTL). We recommend a Buy at Decline on TRIL with a price target of INR468 and BUY for VTL with a price target of INR151. Target Price 468 Investment Thesis India has set for itself ambitious targets of investments in the power sector, in view of the significant power deficit and sustaining the economic growth momentum. 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,MW is expected during the eleventh plan and ~1,,MW 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 4 Kv, 22 Kv and 132 Kv classes; ~33,878 ckm of 4KV, 26,51 ckm of 22 Kv, 19,78 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 16,45 MW in 27 to 37,15 MW by 212, a CAGR of 18% over 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 and 238,15 MVA during 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 1x its FY11E and 8.9x its FY12E earnings. Looking at opportunities that lie in the power sector, TRIL s capabilities in 4Kv class category, its annual capacity of 23,2 MVA and strong order book we assign a P/E multiple of 1x 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 1x to Voltamp s core (transformers) business earnings of INR 7 (FY12E) to arrive at value per share of INR 7. Considering investments per share of INR351 (FY12E) and core business value of INR7/share, we initiate coverage on Voltamp Transformer Limited with a BUY recommendation and a price target of INR151. Analyst Chinmay Gandre research@acm.co.in Tel: (22) Transformer Industry ACMIIL

2 Power industry Demand/supply scenario Power demand increased at a 5% CAGR to 7 billion Kwh in 27-8 from 41 billion Kwh in However, supply remains a concern. Supply rose to 65 billion Kwh in 27-8, from 36 billion Kwh in (billion Kwh) Supply Demand Source: CRISIL Expected capacity addition of ~54, MW in the eleventh plan and Target capacity addition of 1,, MW for the twelfth plan Power deficit expected to continue in eleventh plan Demand is estimated to grow at 7% and 8% CAGR in the eleventh and twelfth five-year plan periods, respectively, which would be catered to by new capacity additions. In line with the power requirements of the country, GoI is targeting capacity additions of 7,MW and 1,MW in the eleventh and twelfth five-year plan periods, respectively. However, looking at the trend of actual capacity additions, ~54,MW is expected to be added during the eleventh five-year plan period. MW Deficit is expected to continue Planned Vs Actual Capacity Addition E E Target Actual Source: CRISIL, ACMIIL Research Power deficit was ~1% in Despite the estimated addition of ~54,MW in the eleventh five-year plan period, the deficit would continue. However, a balanced scenario is expected by the end of twelfth five-year plan period. Transformer Industry ACMIIL

3 Bn Kwh % Requirement Source: CRISIL Research Investments in the power sector Investments in the power sector are expected to grow at a 7% CAGR to INR3.5 trillion in the eleventh five-year plan period, a huge rise from the last few five year plans. A large share of investment, ~INR2.2 trillion, could be in generation, followed by INR.9 trillion and INR.4 trillion in distribution and transmission, respectively. Investment in transmission Availability Surplus (deficit) percent Per cent -1% Transmission is split into transmission lines and substation, with each accounting for 5% of the cost. Transformers form a major component of substation and account for around 3% of the cost, while switchgears account for nearly 4%. 2% -2% -4% -6% -8% Transmission Transformers accounts for ~3% of the substation component cost Transmission Line (5%) Transmission Line Towers (TLT) (35%) Conducters (45%) Others (2%) Substation component (5%) Transformers (3%) Switchgears, circuit breakers, SCADA, etc (4%) Others (3%) Source: CRISIL Transformer Industry ACMIIL

4 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. Transmission line towers (TLT) Power generating station [1.1 kv-33 kv] Step up transformer [22kv-765kv] Receiving substation [22kv-765kv] Transmission line towers (TLT) Distribution Transformer [33kv-22kv] Step down power Transformer [33kv-22kv] Step down power Transformer [33kv-22kv] End Users [Residential/ commercial users] Source: CRISIL Power transformers account for 7-75% of the total installed capacity while distribution transformer accounts for the remaining 2-25%. In the power transformer segment, step-down transformers account for 75-8% of the total installed capacity while step-up transformers account for the rest. Demand Supply Demand Year Installed transformer capacity on the grid has increased at a 6% CAGR to 1,19,283 MVA in 27 from 467,517 MVA in Power generation capacity grew to 132,329 MW in 27, from 76,754 MW in 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 27 and is expected to increase further given the Government of India s (GoI) increased focus on transmission and distribution to reduce transmission losses. Transformer Capacity installed on the Grid (MVA) Total Power capacity (MW) MVA per MW ,517 76, ,793 81, ,432 83, ,412 85, ,319 89, ,95 93, ,962 97, ,455 11, ,646 15, ,837 18, ,24 112, ,17 114, , , ,19, , Source: ACMIIL Research, CRISIL Transformer Industry ACMIIL

5 Demand for transformers includes fresh demand (i.e. ~7MVA per MW) and replacement demand, as average life of a transformer is 25 years. Demand for Transformers Fresh Demand Replacement Demand Capacity Addition Policies Development of National Grid RGGVY APDRP Development of new Industrial areas -Sez's -Industrial Belt, etc Export Demand Source: ACMIIIL Research Note: RGGVY: Rajiv Gandhi Grameen Vidyutikaran Yojana, APDRP: Accelerated Power Development & Reforms Programme Demand for transformers - 11th five year plan Eleventh five-year plan Capacity of ~54,MW is expected to be added in the eleventh five-year plan period. This translates into incremental demand of ~415,353 MVA for transformers. The average life of a transformer is 25 years, which means that transformers installed during to would be due for replacement in the eleventh five-year plan period. Around 97,456 MVA of transformer capacity was added during to Thus, demand of ~ 512,89 MVA of transformer capacity is expected during the eleventh five-year plan period. In addition, ~12, to 15, MVA of transformers are exported every year. Year Total Generation Capacity (MW) Generation addition (MW) Transformer Capacity required (MVA) Fresh demand for Transformer (MVA) Replacement demand (MVA) Transformer Demand (MVA) ,61 1,732 1,11,57 82,287 19,491 11, ,965 4,94 1,139,334 37,764 19,491 57,255 21E 158,3 1,65 1,216,834 77,51 19,491 96, E 171,933 13,93 1,323,887 17,53 19, , E 186,316 14,383 1,434,636 11,749 19,491 13,24 Source: CRISIL, ACMIIL Research Total 415,353 97, ,89 Twelfth five-year plan Assuming that ~65, MW of capacity would be added during the twelfth fiveyear plan period, incremental demand of 5,5 MVA and replacement demand of 238,15 MVA is expected. Particulars Capacity Addition (MW) 12th plan 65, MW Expected Demand of Transformers - MVA New Replacement Total Power Transformer 37,371 29, ,73 Distribution Transformer 13,129 28, ,92 Total Demand 5,5 238,15 738,65 Source: ACMIIL Research, CRISIL Supply Over the past four years, organized players have accounted for 8-85% of production of transformers in India. These players increased their capacity from 97,787 MVA in FY6 to 152,65 MVA in FY9 to tap demand and grab the opportunity arising from the demand-supply mismatch. Installed capacity of these players currently stands at 172,65 MVA. Transformer Industry ACMIIL

6 Top 1 players (Organized sector) Particulars (MVA) FY6 FY7 FY8 FY9 Current capacity Capacity 97, ,36 144,19 152,65 172,65 Production 68,8 9,81 17, ,487 NA Utilization level NA Source: ACMIIL Research Considering the expansion projects under implementation, an additional capacity of ~4, MVA is expected by the end of the eleventh plan period, which would take the total capacity to ~2,1, MVA p.a. Thus installed capacity should be sufficient to cater to the demand for transformers. Peer group profile Fragmented industry with ~1 to 12 organized players The Indian transformer industry (including un organized players) was estimated to be around INR8 billion as of FY8. The industry is fragmented with only a few organized players such as BHEL, ABB, Crompton Greaves, Areva T&D, EMCO, Bharat Bijlee, Indo Tech Transformers Ltd, Voltamp, Vijai Electricals, TRIL, and IMP Powers. Market share of organised players is to be approximately 8-85% per cent. Product Profile Primary presence in up to 22 Kv class In the power transformer category, companies in the high-end segment (4 KV and above) mainly include international players such as ABB, Areva T&D India, and Siemens and Indian manufacturers such as BHEL, Crompton Greaves, TRIL and Vijai Electricals. Most other players are present in up to 22 Kv and in distribution transformers. Particulars Power Transformers Distribution Transformers Up to 22 Kv 22 Kv to 4 Kv 4 Kv & above Emco Ltd - Bharat Bijlee Ltd - - Indo Tech Transformers Ltd - Voltamp Transformers Ltd - - Vijai Electricals TRIL Source: CRISIL Significant capacity expansion Large players such as BHEL, ABB, Areva T&D, Crompton Greaves, and Siemens have capacity of more than 15, MVA p.a. However, they are diversified power equipment players and the transformer segment is not a major revenue contributor. Among players who primarily manufacture transformers, TRIL is the largest by capacity followed by EMCO, Vijai Electrics, Voltamp, and Bharat Bijlee. Most players have significantly expanded capacity to tap demand. Over the past four years, capacity utilization has improved to 8%, on the back of strong demand and as expansion projects were under construction for majority of the companies. Transformer Industry ACMIIL

7 Particulars MVA FY6 FY7 FY8 FY9 Capacity 5,4 7,2 9, 9, (13,-Current Capacity) Voltamp TRIL Bharat Bijlee EMCO Indo tech ABB Crompton Greaves BHEL Areva T&D Vijai Electrics Top 1 players Source: ACMIIL Research Production 4,53 6,188 7,898 9,541 Utilization Capacity 5,4 7,2 7,2 7,2 (23,2 Current capacity) Production 3,78 5,4 5,763 7,248 Utilization Capacity 8, 8, 8, 11, Production 4,19 6,359 8,111 7,589 Utilization Capacity 1, 1, 2, 2, Production 7,443 8,46 1,743 1,946 Utilization Capacity 2,45 3,35 7,45 7,45 Production 1,843 2,298 2,783 3,11 Utilization Capacity 1, 12, 12, 16,875 Production 5,555 8,127 8,944 15,151 Utilization Capacity 23,44 25,97 24,67 24,67 Production 14,381 18,895 22,765 23,45 Utilization Capacity 16, 17,5 2,5 2,5 Production 14,847 18,783 17,96 21,74 Utilization Capacity 8,5 9, 15, 15, Production 5,588 8,45 12,75 14,635 Utilization Capacity 8,633 13,14 2,37 2,37 Production 6,49 8,264 1,681 9,167 Utilization Capacity 97, ,36 144,19 152,65 Production 68,8 9,81 17, ,487 Utilization Currently, BHEL and Areva T&D are undertaking capacity expansion of 25, MVA and 15, 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 2, MVA and above, have been successful attracting in incremental orders. Particulars Voltamp TRIL Bharat Bijlee EMCO Indo tech Order book Q2 FY1 (INR Mn) 4,51 4,491 3,919 5,44 7 Order book Q2 FY1 (MVA) 8,11 1,2 NA 11,7 NA Order book to TTM Sales Source: ACMIIL Research Transformer Industry ACMIIL

8 The industry is typically characterized by high revenue growth, healthy return ratios, and negligible debt Particulars Voltamp TRIL Bharat Bijlee EMCO Indo tech Net Sales 6,43.6 4,35. 5,447. 9, ,67.4 Sales CAGR FY OPM NPM EPS CAGR FY D/E RONW ROCE Source: ACMIIL Research Over the past three years, the industry has recorded strong sales growth CAGR of more than 3% 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 4% 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. Transformer Industry ACMIIL

9 B U Y a t D e c l i n e Key Data (INR) CMP 415 Target Price 468 Key Data Bloomberg Code TRIL IN Reuters Code TRNF.BO BSE Code NSE Code TRIL Face Value (INR) 1 Market Cap. (INR Mn.) Week High (INR) Week Low (INR) 12.6 Avg. Daily Volume (6m) Transformers & Rectifiers India Ltd Transformers & Rectifiers India Ltd (TRIL), incorporated in 1994, manufactures power, distribution, furnace and specialty transformers. The company has three manufacturing facilities in Changodhar, Odhav and Moraiya. Currently, it has the second-largest installed capacity (23,2 MVA) in India. SEBs and utility companies comprise ~7% of its clients. TRIL s current order book (Q3FY1) stands at INR3,732 million, ~.85x TTM sales. Product Range TRIL primarily manufactures power transformers. In this segment company has capability to manufacture 22 kv as well as 4 Kv class transformers. Recently, it successfully executed an order for supply of 4 Kv transformers to LANCO. The company also produces distribution and industrial transformers. Types of Transformers Shareholding % Promoters 76.8 FII 2. DII 4.6 Power Transformers Distribution Transformers Furnace Transformers Rectifier Transformers Others 16.7 Total 1 5 MVA to 16 MVA/4KV 16 KVA & above, upto 33KV class 15 KA Upto 16KA DC Source: Company, CRISIL Facilities TRIL has three manufacturing units in Moraiya, Odhav and Changodar near Ahmedabad, Gujarat. It started a new facility with an annual capacity of 16 MV p.a. in Moraiya in May 29. As a result, the total annual capacity has increased to 23,2 MVA from 7,2 MVA in FY9. For FY1, TRIL expects production of 3,-4, 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, MVA 14, Sq. M Production and testing of 765 kv Transformers Changodar 6, MVA 7,2 Sq. M Production and testing of 245 kv Transformers, up to 16 MVA. Odhav 1,2 MVA 6 Sq. M Production and testing of transformers up to 66 kv, up Source: Company Order book Order book growth to 15 MVA The order book grew from INR3,398 million in FY8 to INR3,732 million in 3Q FY1. The MVA order book increased from 635 MVA in FY8 to 995 MVA in 3Q FY1. Order intake increased sharply during 1Q FY1 as the same period also saw Moraiya facility coming on stream. The current order book of INR3732 million is ~.85x TTM sales and provides revenue visibility for six to nine months. Transformer Industry ACMIIL

10 Current order book of INR3732 million is ~.85x TTM sales and provides revenue visibility for six to nine months 12, 1, 8, 6, 4, Order book 9,229 7,24 7,93 7,134 6,35 4,574 3,398 3,837 3,83 3,888 1,728 4,892 1,2 4,491 3,732 9,95 2, FY8 Q1 FY9 Q2 FY9 Q3FY9 Q4 FY9 Q1 FY1 Q2 FY1 Q3 FY1 INR Mn MVA Source: Company Majority of orders are of 12 Kv and 22 Kv Order book break up Over the past three quarters, power transformer orders have been in excess of 7% of the total order book. By transformer class, majority of orders are for 12 Kv and 22 Kv. Order Book Break up (Q3 FY 1) Order Book-Transformer Class Export 4% >36 KV & <72.5 KV 2% >72.5 KV & <145 KV 32% Furnace & Rectifier 6% Distribution 5% Power 85% <36 KV 15% >245 KV 1% >145 KV & <245 KV 5% Source: Company Capex TRIL undertook capex of INR7 million for the 16, MVA green field facility in Moraiya. The project was primarily funded through proceeds from an IPO during FY8. TRIL started the facility in May 29; with this, the company has more than tripled its production capacity to 23,2 MVA p.a. TRIL has no further capex plans in the near term. Transformer Industry ACMIIL 1

11 SWOT Analysis Strengths Capability to manufacture 4 & above Kv class transformers: TRIL is one of the few players that can manufacture transformers of 4 Kv & above. The Moraiya facility is well equipped and has a capacity to produce and test up to765 Kv transformers. So far, in 4KV, the company has supplied two transformers to LANCO. Particulars Power Transformers Up to 22 Kv 22 Kv to 4 Kv 4 Kv & above Emco Ltd - - Bharat Bijlee Ltd - - Indo Tech Transformers Ltd - Voltamp Transformers Ltd - - Vijai Electricals TRIL 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 4 kv without any external technological support. Recently, it implemented a LANCO order with in-house technology. SEBs account for 7% of revenue TRIL primarily supplies transformers to SEBs which contribute to ~7% 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 12 (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 (FY9) million in current investments and a low D/E ratio of.2, which enable the company to fund its working capital requirements. Second-largest facility: TRIL has a production capacity of 23,2 MVA, secondlargest 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 (~.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,, MVA from ~1,25, MVA in FY6. In addition, ~4, 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. Transformer Industry ACMIIL 11

12 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,MW is expected during the eleventh plan and ~1,,MW 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 16,45 MW in 27 to 37,15 MW by 212, a CAGR of 18% over 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 and 238,15 MVA during 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 INR4,35 million in FY9, from INR1,38.3 million in FY6, driven by capacity addition and healthy realization on the back of rise in commodity prices. Rs. mn ,38 2,212 3,57 Net Sales 4,35 4,686 5,662 6,2579 MVA 25, 2, 15, 1, 5, 49 2,63 5,4 6 Capacity and Production Details 77 7,2 7,2 4,328 5, ,526 7,2 43 1, 12 23,2 23,2 23,2 12, 52 13, % FY6 FY7 FY8 FY9 FY1E FY11E FY12E FY6 FY7 FY8 FY9 FY1E FY11E FY12E Production Capacity Utilization Level Source: ACMIIL Research, Company We expect TRIL s realization to decrease (FY9-12) due to significant capacity build-up in the industry. However, we expect net sales to grow at a CAGR of 12% to INR6,257 million in FY12, from INR4,35 million in FY9, primarily driven by volume growth. Transformer Industry ACMIIL 12

13 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. Percentage Source: ACMIIL Research, Company Margins FY7 FY8 FY9 FY1E FY11E FY12E OPM NPM We estimate PAT margin to fall to 9.5% and 9.7% in FY11E and FY12E from 1.5% in FY9 owing to fall in operating margins. Valuation and Recommendation At CMP of INR415, TRIL is trading at a P/E of 1x its FY11E and 8.9x its FY12E earnings. Looking at opportunities that lie in the power sector, TRIL s capabilities in 4Kv class category, its annual capacity of 23,2 MVA and strong order book we assign a P/E multiple of 1x to its FY12E earnings and recommend a Buy at Decline on the stock with a price target of INR One year forward P/E Chart Dec-7 28-Jan-8 28-Feb-8 28-Mar-8 28-Apr-8 28-May-8 28-Jun-8 28-Jul-8 28-Aug-8 28-Sep-8 28-Oct-8 28-Nov-8 28-Dec-8 28-Jan-9 28-Feb-9 28-Mar-9 28-Apr-9 28-May-9 28-Jun-9 28-Jul-9 28-Aug-9 28-Sep-9 28-Oct-9 28-Nov-9 28-Dec-9 28-Jan-1 Source: ACMIIL Research Close Price 11 PE 12 PE 1 PE 8 PE Transformer Industry ACMIIL 13

14 Profit & Loss Account INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Net Sales 1,38.3 2,212. 3,57.1 4,35. 4, , ,257. Total Expenditure 1, , , ,627. 3,96. 4, ,349.8 Operating Profit Other Income EBIDTA ,7.3 Depreciation EBIT Interest PBT Taxes PAT Growth in sales (%) Growth in Operating profits (%) Growth in PAT (%) OPM (%) Net Profit Margin (%) Source: Company, ACMIIL Research Balance Sheet INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Sources of Funds Share Capital Reserves and Surplus , , , ,211. 3,755.4 Total Shareholders Funds ,92.5 2, , ,34.2 3,884.6 Total Loan Funds Net Deferred Tax Liability Minority interest Total Capital Employed ,53.5 3,13.7 3,3.4 3, ,22.3 Application of Funds Gross Block ,74. 1,124. 1,174. Less: Accumulated Depreciation Net Block Capital Work in Progress Investments ,216.5 Net Current Assets , , ,63.3 2,42.6 1,91.6 Total Assets ,53.5 3,13.7 3,3.4 3, ,22.3 Source: Company, ACMIIL Research Transformer Industry ACMIIL 14

15 Cashflow Statement INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Pre tax profit Add Depreciation Interest Exp Profit before working capital changes ,7.3 Working capital changes Less Taxes Net Cash flow from operating activities Net Cash flow in investment activities Net Cash flow from financing activities , Net increase /(decrease) in cash Op. balance of cash and cash equivalents Cl. balance of cash and cash equivalents Source: Company, ACMIIL Research Ratios Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Profitability Ratios OPM (%) PAT Margin (%) RONW (%) ROCE (%) Per Share Ratios EPS (Rs.) CEPS (Rs.) BV Per Share (Rs.) Valuation Ratios P/E (x) P/CEPS (x) P/BV (x) Capital Structure Ratios Debt/Equity Current Ratio Turnover Ratios Debtors turnover ratio Inventory turnover ratio Fixed Asset Turnover Source: ACMIIL Research Transformer Industry ACMIIL 15

16 Voltamp Transformers Ltd B U Y Key Data (INR) CMP 95 Target Price 151 Key Data Bloomberg Code VAMP IN Reuters Code VOTL.BO BSE Code NSE Code VOLTAMP Face Value (INR) 1 Market Cap. (INR Mn.) Week High (INR) Week Low (INR) 265 Avg. Daily Volume (6m) Voltamp Transformers Ltd (VTL), established in 1963, manufactures power, distribution transformers and dry-type transformers. The company has manufacturing facilities in Vadodara and Vadadla with installed capacity of 9,MVA and 4,MVA respectively. The industrial segment accounts for ~8-9% of VTL s client base. The company s current order book stands at INR4,176.3 million,.8x TTM sales. Product Range The company manufactures power, distribution and dry type transformers. In the power transformer segment, VTL manufactures up to 1 MVA and 22 Kv class transformers. In dry type transformers, the company is a leader with a market share of 4%. 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 MORA (Germany) and HTT (Germany) respectively. Power transformers (49%) contribute to the majority of VTL s revenue followed by distribution and dry-type transformers. Revenue Break Up FY9 Shareholding % Promoters 46.1 FII 23.8 DII 1. Others 2.1 Product Portfolio Power transformer Distribution Dry Source: Company 5MVA, 33KV to 1MVA, 22KV 315KVA, 11KV to 5MVA, 33KV 63KVA, 11KV to 7.5 MVA, 33KV Power Transformer 49% Distribution Transformer 32% Dry Transformer 19% Total 1 Facilities Particulars Annual Capacity (MVA) Capability Vadodara 9, Produce and test up to 22 Kv and 1 MVA primarily power transformers Vadadla 4, 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,MVA and commenced operations in November 29. As a result, its total annual capacity has increased to 13,MVA, comprising 6,MVA, 5,MVA, and 2,MVA 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 MVA 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FY5 FY6 FY7 FY8 FY9 FY1 Dry Transformer Distribution Transformer Power Transformer Source: Company Transformer Industry ACMIIL 16

17 Order Book VTL s order book grew from INR1,489 million in FY6 to INR4,176.3 million in January 21. Current order book is ~.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 Majority of orders comprises of orders from industrial users INR MN FY6 FY7 FY8 FY9 Jun 9 Oct 9 Jan 1 Source: Company Nature of contracts VTL primarily supplies to industrial clients, which contribute to ~8 to 9% 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,MVA Greenfield facility in Vadadla. The project was primarily funded through internal accruals. It incurred expenditure of INR143.8 million in FY9 and the rest has been spent in FY1. The facility started operations in November 29; with this, the company has a production capacity of 13,MVA 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 days for peers. FY9 Voltamp TRIL Bharat Bijlee EMCO Indo tech Debtor days Source: ACMIIL Research The company also has INR1,352 million (FY9) 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 FY9, its top 1 clients accounted for 39% of its revenue. Transformer Industry ACMIIL 17

18 Industry Wise Revenue Break Up Sugar 2% Textile 2% Auto & auto ancl 4% Engg& Electricals 5% Private utilities 5% Infra project 7% Source: Company Chemicals 2% SEBS 8% Others 11% Petro chemicals 15% Real estate 9% Cement 9% Metals 11% Power Projects 1% Presence in dry type transformers: VTL is a leading manufacturer of dry transformers with a market share of ~4%. It manufactures vacuum resin impregnated dry and cast resin transformers. The segment contributes ~ 2% to revenue and grew at a CAGR of 29% (FY6-9). Dry transformers find application in high-rise buildings, hotels, stadiums, airports, and ports as they are non-inflammable, environment-friendly and maintenance-free. Strong order book: VTL has an order book of INR4,51 million (~.9x TTM sales), which provides revenue visibility for 6-9 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,,MVA from ~1,25,MVA in FY6. In addition, ~4,MVA is expected to be operational by the end of the eleventh plan period. Thus, given this and the competition, realizations are expected to drop and in turn impact the growth of the company. Dependence on industrial clients: As VTL primarily supplies to industrial clients such as Reliance industries, Jindal steel, Infosys, Siemens, ABB, L&T, and Reliance Energy, it is exposed to the slowdown in investments in the private sector. 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 VTL are thus exposed to possible constraints on timely availability of CRGO. Opportunities Thrust of GOI on the power sector Capacity addition of 54,MW is expected during the eleventh plan and ~1,,MW is planned for the twelfth plan periods. Moreover, initiatives such as development of a national grid along with power sector reforms such as APDRP and RGGVY have brought about significant opportunities for the industry and VTL. Private sector investments: Investments in the private sector have recorded strong growth from 26 onward. Projects under implementation have grown from INR4.1 trillion in Q2FY6 to 19.8 trillion in Q2 FY1. New project announcements have also registered healthy growth of 44% during the same period. Although the global financial crisis has slowed down project announcements, current announcements of INR17.2 trillion are significantly higher compared with the average of INR2. trillion during Transformer Industry ACMIIL 18

19 25 Private Sector-Investments 2 INR trillion Source: CMIE Threats Severe competition: MNCs such as ABB and Areva T&D have strong presence in the Indian market. In addition, 1-12 domestic manufacturers as well as unorganized players compete for orders from SEBs, utilities and industrial clients. This makes the market very competitive. Financials Net Sales Rs. mn ,488 Dec-1999 Aug-2 Dec-2 Aug-21 Dec-21 Aug-22 Dec-22 4,58 Announcement 5,553 Aug-23 Dec-23 Aug-24 Dec-24 Aug-25 Dec-25 Aug-26 Net Sales Under Implementation 6,431 5,25 6,536 Dec-26 Aug-27 Dec-27 Aug-28 Dec-28 Aug-29 7,91 FY6 FY7 FY8 FY9 FY1E FY11E FY12E Source: Company, ACMIIL Research VTL s net sales grew at a 46% CAGR to INR6,43.6 million in FY9, from INR2,487.9 million in FY6, driven by capacity addition and healthy realization on the back of rise in commodity prices. MVA 14, 12, 1, 8, 6, 4, 2, , , Capacity & Production Details 9, , , , , % FY6 FY7 FY8 FY9 FY1E FY11E FY12E Capacity Production Utilization level Source: Company, ACMIIL Research Transformer Industry ACMIIL 19

20 In FY1E, we expect VTL s net sales to dip INR5,25 million owing to fall in realizations. For FY11E and FY12E, we expect sales to increase to 6,536.3 million and INR 7,91.3 million respectively, backed by volume growth. Margins In FY8 and FY9, VTL recorded exceptional margins in excess of 2% 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 FY1, as investments have slowed down. For FY11E and FY12E, we expect operating profit margins to remain low at 16.3% and 16% respectively. Margins Percentage 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 1x to Voltamp s core (transformers) business earnings of INR 7 (FY12E) to arrive at value per share of INR 7. Considering investments per share of INR351 (FY12E) and core business value of INR7/share, we initiate coverage on Voltamp Transformer Limited with a BUY recommendation and a price target of INR151. Particulars Adjusted PAT (FY12E) Adjusted EPS (FY12E) P/E multiple Segment value per share (INR) Core business Investments per share 351 Target Price 151 Source: ACMIIL Research FY6 FY7 FY8 FY9 9M FY1 FY1E FY11E FY12E OPM NPM Transformer Industry ACMIIL 2

21 Financials Profit & Loss Account INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Net Sales 2, ,58. 5, ,43.6 5, , ,91.3 Total Expenditure 2, , , , ,34.7 5, ,956.7 Operating Profit , , ,78.5 1,134.6 Other Income EBIDTA , , , , ,434.6 Depreciation EBIT , , ,123. 1, ,362.8 Interest PBT , ,689. 1, , ,356.6 Taxes PAT , Adj PAT (Core Business) Growth in Sales (%) Growth in Operating Profits (%) Growth in PAT (%) Growth in Adj PAT OPM (%) PAT (%) Source: Company, ACMIIL Research Balance Sheet INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Sources of Funds Share Capital Reserves and Surplus , , , , ,71.5 Total Shareholders Funds , , , ,2.1 4,811.6 Total Loan Funds Total Capital Employed ,4.5 1, , , ,3.1 4,821.6 Application of Funds Gross Block Less: Accumulated Depreciation Net Block Capital Work in Progress Investments , ,2. 2,65. 3,55. Net Current Assets , Differed Tax Assets Total Assets ,4.5 1, , , ,3.1 4,821.6 Source: Company, ACMIIL Research Transformer Industry ACMIIL 21

22 Cashflow Statement INR Mn Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Pre tax profit , ,689. 1, , ,356.6 Add Depreciation Interest Exp Profit before working capital changes , , , , ,434.6 Working capital changes Less Taxes Net Cash flow from operating activities ,58.7 1, ,52.7 Net Cash flow in investment activities Net Cash flow from financing activities Net increase /(decrease) in cash Op. balance of cash and cash equivalents Cl. balance of cash and cash equivalents Source: Company, ACMIIL Research Ratios Particulars FY6 FY7 FY8 FY9 FY1E FY11E FY12E Profitability Ratios OPM (%) PAT Margin (%) RONW (%) ROCE (%) Adj RONW (%) Adj ROCE (%) Per Share Ratios EPS (Rs.) Adj EPS CEPS (Rs.) BV Per Share (Rs.) Valuation Ratios P/E (x) P/CEPS (x) P/BV (x) Capital Structure Ratios Debt/Equity Current Ratio Turnover Ratios Debtors turnover ratio Inventory turnover ratio Fixed Asset Turnover Source: ACMIIL Research Transformer Industry ACMIIL 22

23 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 PRIMARY WINDING SECONDARY WINDING AC APPLIED VOLTAGE INPUT POWER OUTPUT AC VOLTAGE OUTPUT POWER= INPUT POWER MINUS LOSSES 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: 3-35% MS Steel: 8-1% Transformer Oil: 5-1% Components & Others: 15-2% CRGO Steel: 3-35% (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 7-75% of the total value of the transformer industry. Distribution transformers: IRON CORE ESSENTIALS OF A TRANSFORMER 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 25-3% of the total value of the transformer industry. Transformer Industry ACMIIL 23

24 Dry type transformers: Dry type transformers can either be a power transformer, distribution transformer or an industrial transformer. They are used in places where there are high chances of a fire breaking out. As there is no oil used in the transformer, the fire risk is considerably reduced in this type of transformers. Dry type simply means it is cooled by normal air ventilation. The dry type transformer does not require a liquid such as oil or any other liquid to cool the electrical core and coils. Annexure II - Transmission system in India The transmission system in India operates at several voltage levels: Extra high voltage: High voltage direct current (HVDC), 765 kv, 4 kv, 22 kv and 132 kv High tension: 66kV, 33 kv, 11kV Low tension : 6.6 kv, 3.3 kv, 1.1 kv, 22 V Annexure III TRIL Client List Utilities Transmission Corp of Andhra Pradesh Ltd Maharashtra State Electricity Transmission Co Gujarat Energy Transmission Corporation Ltd Uttar Pradesh Corporation Tamil Nadu Electricity Board Kerala State Electricity Board NTPC Industrial clients: LNT Seimens Rohit Ferro-Tech Ltd Suzlon Energy Monnet Ispat & Industries Ltd Annexure IV Price Variation Formulae Assuming delivery is in the month of December Assuming order was tender in the month of May Original price (Po) 1. Raw material Prices as of Price Weight Copper August - 4 M prior to delivery C March - 2 M prior to Tender Co 1 CRGO Sept - 3 M prior to delivery ES April - 1 M prior to Tender ESo 1 WPI - Iron & steel Saturday Sept - 3 M prior to Delivery IS Saturday Feb - 3 M prior to Tender ISo 1 Insulation Material Sept - 3 M prior to delivery IM April - 1 M prior to Tender IMo 1 Transformer Oil Oct- 2M prior to delivery TO March - 2M prior to Tender TOo 1 CPI Industrial worker Index Sept- 3M prior to delivery W Feb - 3M prior to Tender Wo Revised price Transformer Industry ACMIIL 24

25 Notes: Institutional Sales: Ravindra Nath, Tel: Kirti Bagri, Tel: Himanshu Varia, Tel: Institutional Dealing: 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. Transformer Industry ACMIIL 25