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Power Play - Voltamp

A healthy order book and improved volumes will work in favour of Voltamp Transformers in coming times

Profile
Established in 1965, Voltamp Transformers Ltd is one of India’s leading manufacturers of power and distribution transformers. Based in Vadodara, it is renowned for its designing and manufacturing capabilities. Voltamp primarily targets various industries for the sale of its transformers, but in recent times it has started to approach state electricity boards for orders. Voltamp’s major business comes from projects of leading international consultants and turnkey contractors like ABB, Siemens and L&T.

Promoters
Voltamp Transformers is promoted by Lalitkumar Patel, an engineer, who has previously worked with companies like Siemens AG, Germany from 1951 to 1959 and Bharat Bijlee Limited (then a licensee of Siemens AG) from 1961 to 1963. He started this company under the name of Voltamp Corporation in 1965. Approximately, 50 per cent of the company's shares are owned by the promoters, with mutual funds (14.19%) and FII (11.69%) combined making up for second-biggest chunk.

Investment Rationale
Improved Volumes
Voltamp’s sales picked up in the first three months of 2009, displaying a 23 per cent increase from the year-ago figures. Net profits too grew at a healthy pace of 40 per cent compared to the March 2008 quarter. This resulted in an increase in volumes. Sales in MVA terms jumped by 27.5 per cent to about 2,450 MVA, suggesting that order execution gained pace. However, realisations dipped marginally to Rs 6.7 lakh/MVA.

Strong, Despite Shrinking PAT
With a projected 350 bps drop in operating margins in FY10E, the company’s PAT is set to grow to 41 per cent in FY09E, but shrink to 11 per cent in FY10E, which translates into an EPS of Rs 111.6 and Rs 99.8 respectively. However, Voltamp is still expected to generate free cash flow of 64 per cent CAGR over FY09-11E on revenue of only five per cent CAGR, which makes Voltamp a strong player to see through the tough times.

Capacity Expansion
After having put it on hold for some time, Voltamp has gone ahead with its capacity expansion plans of upgrading its facilities to 13,000 MVA from 4,000 MVA. This suggests that the company has received positive feedback from its customers and expects some industries to increase their capex plans. Furthermore, Voltamp’s ability to manage its expansions with internal accruals is commendable because it adds strength to the balance sheet and also ensures that it does not have to expand on borrowed money.

Risk & Concerns
Order Deferrals
Voltamp has seen a seven per cent de-growth in its order backlog during the current quarter. The shrinking order book can be attributed to the deferral of orders from industrial clients, who accounted for 90 per cent of the order book. Due to this, volume growth of only a flat one per cent in FY09E and a three per cent de-growth in FY10E is expected. This transforms into revenue growth of 10.4 per cent in FY09E and 4.7 per cent in FY10E. However, on Voltamp’s ability to maintain average gross margins of 24.4 per cent since FY02, a eight per cent realization growth in FY10E can be expected.

Lower Operating Margins
Most of Voltamp’s orders for FY08 have factored in high raw material prices. With most of its purchases executed in spot markets and in combination with falling copper and CRGO prices, Voltamp’s margins have expanded sizeably by 400 bps in 9MFY09. The company’s inventory has risen three fold in Q3 to Rs 87 million while RM sales have dropped by 800 bps for the quarter and 400 bps for 9MFY09. A majority of Voltamp’s orders have an execution period of three to six months and the company has by now exhausted most of its legacy orders received in FY08.

Hence, the company’s operating margins are expected to be lower at 25 per cent of FY09 and 21.6 per cent for FY10E.

Valuation
With lesser number of orders coming in from industrial clients, the company in the past few quarters started to court SEBs. To an extent it has been successful in that effort, but a pitfall in this approach is that margins are very low. Still, at a CMP of Rs 730, the stock quotes at 7.2x and 5.9x of FY10E and FY11E earnings of Rs 97 and Rs 117 respectively.

Further, given that the company enjoys superior profit margins to players such as Bharat Bijlee or Emco, profitability will remain superior to industry average. We are also bullish about the company’s future due to the growth in the power sector.