It has been the survival of the fittest for Indian transformer makers in recent years. A slowdown in demand, increasing competition and surplus capacity in domestic markets have even forced some companies to shut stop.
Voltamp Transformers is an exception. It survived the lean years by prudently managing capital, conserving cash, postponing capital spending and keeping a rein on borrowings. As a result, it is among the better-placed companies to take advantange as the investment cycle turns.
To put it in perspective, the company’s operating profits had fallen from Rs 151 crore in FY09 to a low of Rs 15 crore by FY14. But because of zero interest costs, the company remained heathy. Moreover, during this period, the company accumulated cash. Today, it is sitting on cash and cash equivalents of close to Rs 400 crore, or about 40 percent of its market capitalisation. This enabled it to deal with the slow capital expenditure in the private space as well as the initial hiccups caused by implementation of the Goods and Services Tax.
Today, the story is no longer about survival, but revival. During the first nine months of financial year FY19, the company reported revenue growth of 32 percent year-on-year. Operating profits jumped 62 percent to Rs 60 crore.
Improving visibility
The company is the leader in the sub 220 KV transformer segment. Orders from renewable companies, the railways, state utilities, and under the Green Energy Corridor Program and the “Power for all” scheme have started. These orders are reflected in the order books of large firms such as Thermax, ABB, Siemens, L&T and GE T&D.
For instance, in Q3FY19, GE T&D reported an 84 percent year-on-year growth in orders. While Thermax’s orders grew only 5 percent, in the renewable energy space, Inox Wind and Suzlon reported 73 percent and 71 percent growth in orders respectively.
While ordering lacks a broad- based recovery, it is expected that transformers, which are a critical component of the electricity value chain, would see growth in the coming quarters. In the September quarter, Voltamp’s order book grew 16 percent followed by 13.5 percent growth in the December quarter. Voltamp’s order book stood at Rs 455 crore, or 6268 MVA, which is the highest in recent quarters.
Better profitability
Voltamp has an annual manufacturing capacity of about 13000 MVA. In the current fiscal, it is expected to book sales of about 10,500-11,000 MVA, which implies a capacity utilisation of 80 percent. Capacity utilisation should be even better in the next fiscal and lead to an improvement in margins.
Moreover, it is bidding for only select orders that offer higher margins. The payoff from the strategy and the company’s ability to pass on increasing manufacturing costs are improving realisations. In the last two years the realisations have improved by more than 2.5 lakh to Rs 8.14 lakh per MVA in Q3FY19.
Cash in the books
The company is sitting on cash of around Rs 400 crore. It is gradually getting deploying this cash in the business by buying land and preparing to boost capacity as it reaches near full utilisation levels. As a result, both revenue visibility and profitability would improve in the coming years.
"We expect cost optimisation, better realisations and operating leverage to push up margins in the next two years. We expect earnings to clock a 22 percent CAGR (compounded annual growth rate) over FY18-21," said Balachandra Shinde, an analyst tracking the company at Anand Rathi
Valuation
Cash in the books accounts for almost 40 percent of its current market capitalisation. This is also a reason that the stock has got very strong downside support. At the current market price of Rs 1117 a share, the stock is trading at around 9-10 times its FY20 estimated earnings, which is quite reasonable in the light of this cash and 18-20 percent growth in earnings on a conservative basis.
Note: This article was originally published on 5th March 2019 for our premium subscribers. After this, the stock has moved up marginally and thus the valuation data shown in the graphics is only for the information purpose and needs to be adjusted in the current context
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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here
