Voltamp Transformers Ltd - Rs 350.00

Established in 1963, Voltamp Transformers Limited (VTL) is a leading manufacturer of customized transformers for industrial, building and power applications. It has special expertise in production of dry type vacuum resin impregnated (upto 3 MVA/11 kV class) and cast resin transformers (upto 7.5 MVA/33 kV class) apart from manufacturing regular oil filled power & distribution transformers, induction furnace transformers & unitized substations. Infact, company is the market leader in dry type transformers with around 40% market share. Unlike other transformer makers, VTL's focus is on the non-SEB industrial and engineering segment, which has enabled the company to preserve profitability on a consistent basis. Company caters to a wide spectrum of transformer users in various industries like petrochemical, oil refining, cement, paper and pulp, pharmaceuticals, automobiles, steel, power plant, building, metro rail applications, mining and minerals and many others. Its client base includes the leading business houses, well known PSUs and large cooperatives such as Reliance Industries, Jindal Steel, Bharatforge, Hindalco, Guj Alkalies, Kirsloskar group, JK Cement, Siemens, ABB, L&T, Torrent Power, Suzlon etc to name a few. Notably, company derives nearly 40% of total revenue from distribution transformer, 35% from power transformer & balance 25% from dry type transformer.

As of today, VTL has three manufacturing units, each for power, distribution & dry type transformer at Makarpura, Vadodara with a combined production capacity of 9000 MVA per annum on a three shift basis. Surprisingly, VTL has consciously taken low exposure to state electricity board which constitutes nearly 5% of total sales. As per the management, SEB market for transformers has large volumes but is characterized by stiff price competition and also the credit period is high resulting in huge receivables position thus bloating the working capital. However in case of downturn, company always has the option to increase its supply to SEB. But currently with nominal revenue contribution from the SEBs, VTL’s exposure to receivable risk, due to financial ill health of SEBs, is low. On the other hand, company has focused on the dry type transformer segment aggressively as it is a highly lucrative business offering higher margins than oil filled transformers and only few players manufacture them. Also the technology used is not easily available. Accordingly, VTL has license agreements with two German companies for manufacture of vacuum resin impregnated dry type transformers and cast resin dry type transformers.

To meet the rising demand of transformers, VTL is in the midst of Greenfield expansion and is putting up manufacturing facility at Vadadla, Vadodara with an investment of about Rs.35 cr. The plant, expected to become operational by April 2009 will enhance the capacity by more than 50%, thereby taking the total transformer manufacturing capacity to 13000 MVA from 9000 MVA. Post expansion the capacity across business segments will stand as distribution transformers – 5000MVA, power transformers – 6000MVA and dry type transformers – 2000MVA. With govt aggressively pressing for accelerated development of power generation, transmission and distribution capacities, transformer industry is expected to continue a CAGR above 15%, for the next five years period. In view of this, VTL, being one of the oldest and established players in the transformer sector, is expected to benefit. Secondly with the increasing demand of dry type transformers, their contribution in the overall sales is bound to increase which in turn will give a boost to the operating margins of the company. Thirdly the recent fall in copper price will also positively impact the bottomline going forward. Meanwhile, VTL’s has satisfactory order book position of around Rs 400 cr.

Recently, VTL came out with encouraging set of nos for the Sept qtr. Sales grew by 15% to Rs 170 cr but PAT jumped up 50% to Rs 27 cr on back of better operating margin which stood at 22% against 19% last year. Accordingly for six months ending Sept’08, it recorded 25% & 40% growth in sales and NP to Rs 340 cr and 50.50 cr respectively. Hence it has already posted an EPS of Rs 50 for H1FY09. So for the entire FY09 it may clock a turnover of Rs 650 cr and profit of Rs 85 cr i.e. EPS of Rs 84 on equity of Rs 10.10 cr. It may even declare a dividend of Rs 15 for FY09 which gives a yield of more than 4% at CMP. Fundamentally also company is quite strong being debt free and having huge reserves of more than 150 cr, liquid cash worth Rs 60 cr, ROCE of 95% and ROE of 60%. Considering the 52w high of Rs 1940, scrip has been battered down mercilessly to 20%, thereby giving a good opportunity for long term investor to accumulate for a price target of Rs 675 in 12~15 months.

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STOCK WATCH

Transformer & Rectifiers (135.00) whose IPO issue @ Rs 465 per share got over subscribed by 91x times in Dec 2007 is finding no buyer at Rs 150 now. Company is one of the leading manufacturers of power & distribution transformers, furnace transformers, rectifier transformers and specialized transformers. It currently manufactures transformers up to 220 kV class and has an installed capacity of 7,200 MVA transformers per annum. To cash on the boom in power sector, company is setting up a Greenfield plant in Moraiya, near Ahmedabad with an installed capacity of 16,000MVA. The new plant, expected to be operational by March’09 would be capable of manufacturing transformers upto 756kV class, though the company initially intends to manufacture transformers of 220kV and 400kV classes. As of now, company has order book position of Rs 383 cr, out of which 70% comprises of power transformers. For the latest Sept’08 qtr, its sales as well as net profit increased by 60% to Rs 114 cr and Rs 12.70 cr respectively. Accordingly it may end FY09 with sales of Rs 400 cr and NP of Rs 36 cr i.e. EPS of Rs 28 on current equity of Rs 12.90 cr. However, it will report substantial growth in FY10, as new plant will begin operation.

Last week Vakrangee Software (48.00) announced encouraging set of nos for the Sept’08 quarter. Revenue shot up 60% to Rs 91 cr whereas profit increased by 50% to Rs 19 cr posting an EPS of Rs 9 for the single quarter. Accordingly for H1FY09, it has registered 70% growth in topline to Rs 153 cr and 65% rise in profit to Rs 30 cr. Despite such impressive performance its share price has tumbled down to sub Rs 50 levels from high of Rs 300 in May’08 due to distress selling by FII’s. Company has emerged as the only provider of document management and printing management solutions in the organized sector. With more than 15 years of experience in servicing various government organizations, company forayed into the private sector for the first time during last fiscal, which includes large companies from the BFSI, retail and telecom sector in both its DMS and PMS vertical. It digitized various inbound documents (including application and KYC forms) and developed customized software for each project. To meet the growing customers need in the print management segment, it tied up with Eastman Kodak and installed Asia’s biggest large scale variable color data printers. It is setting up a new hub office at Gurgaon equipped with second printer of same type. Last year it opened 32 new offices and has plans to open 100 more in couple of years. Meanwhile, India is reporting the fastest global growth in e-governance, catalyzed by the implementation of the RTI Act, which makes it mandatory for all government departments to digitize their physical documents. It may end FY09 with sales of Rs 300 cr and profit of Rs 58 cr leading to an EPS of Rs 27 on current equity of Rs 21.40 cr. As FII’s hold huge chunk scrip may continue to underperform in short term.

Once again Mazda Ltd (35.00) has come out with flying colours for the Sept’08 qtr. Its net sales as well as net profit grew by 40% to Rs 22 cr and 2.30 cr respectively. It has already posted an EPS of more than Rs 10 for H1FY09. So for entire FY09, it is slated to register sales of Rs 80 cr and profit of Rs 8 cr i.e. EPS of Rs 19 on small equity of Rs 4.25 cr. Company is among the few engineering companies in the world, manufacturing very specialized, high technology and critical equipments for various industries like power, refineries, fertilizers, chemicals, nuclear, sugar, paper, food, pharma etc. Broadly its product profile is segmented into vacuum system, valve division, air pollution control equipment, crystallizers and evaporators. Notably, it has a technical collaboration with world renowned Croll-Reynolds Inc. USA, who holds 12% stake in the company. Fundamentally, company is on a strong footing with very low debt equity ratio and good reserves leading to a book value of Rs 61. Moreover HSBC is holding nearly 8% stake even as on 30th Sept and hasn’t sold any share in this carnage. At an Enterprise value of merely Rs 20 cr scrip and at a P/E multiple of harly 2x times, scrip is trading damn cheap. A screaming buy.

In the recent meltdown, share price of TIL Ltd (165.00) has been reduced to just 20% from its high of Rs 825 in Jan 2008. Company is engaged in three business segment namely construction and mining solutions (55%), material handling solutions (25%) & power systems solutions (20%). It has long term technical and strategic alliances with leading equipment manufacturers in the world- Caterpillar Inc, Manitowoc crane Group, USA Famak S.A, Poland and Paceco Corp, USA. Pioneering the manufacture of mobile cranes in India, company produces rough terrain, truck mounted, yard and industrial cranes, reachstackers, electric level luffing cranes, articulated lorry loaders, generator sets, equipment for specialized Defense applications at its Kolkatta plant apart from marketing imported equipment and spares of reputed global manufacturers. For the Sept’08 qtr, it reported 50% growth in sales and PAT to Rs 264 cr and 9 cr respectively. To cater the global clients effectively it has set up subsidiaries in Singapore, Nepal, Myanmar etc which are doing well. Further company is putting up a Greenfield plant in West Bengal under a capex of Rs 175 cr for which it has made a pref allotment of 30 lac warrants to promoters and others to be converted into equity @ Rs 326 per share. On a consolidated basis company is estimated to clock a turnover of Rs 1400 cr and PAT of Rs 50 cr. This translates to an EPS of Rs 50 on current equity of Rs 10 cr whereas the diluted EPS works out to Rs 39 cr on enhanced equity of Rs 12.75 cr. A solid bet.

Small & Beautiful

Last week Vakrangee Software (48.00) announced encouraging set of nos for the Sept’08 quarter. Revenue shot up 60% to Rs 91 cr whereas profit increased by 50% to Rs 19 cr posting an EPS of Rs 9 for the single quarter. Accordingly for H1FY09, it has registered 70% growth in topline to Rs 153 cr and 65% rise in profit to Rs 30 cr. Despite such impressive performance its share price has tumbled down to sub Rs 50 levels from high of Rs 300 in May’08 due to distress selling by FII’s. Company has emerged as the only provider of document management and printing management solutions in the organized sector. With more than 15 years of experience in servicing various government organizations, company forayed into the private sector for the first time during last fiscal, which includes large companies from the BFSI, retail and telecom sector in both its DMS and PMS vertical. It digitized various inbound documents (including application and KYC forms) and developed customized software for each project. To meet the growing customers need in the print management segment, it tied up with Eastman Kodak and installed Asia’s biggest large scale variable color data printers. It is setting up a new hub office at Gurgaon equipped with second printer of same type. Last year it opened 32 new offices and has plans to open 100 more in couple of years. Meanwhile, India is reporting the fastest global growth in e-governance, catalyzed by the implementation of the RTI Act, which makes it mandatory for all government departments to digitize their physical documents. It may end FY09 with sales of Rs 300 cr and profit of Rs 58 cr leading to an EPS of Rs 27 on current equity of Rs 21.40 cr. As FII’s hold huge chunk scrip may continue to underperform in short term.

For the latest Sept’08 quarter, sales of Ind Swift Lab (25.00) increased by 35% to Rs 146 cr and PAT improved by 45% to Rs 10.50 cr. Hence it has already posted a NP of Rs 20.50 for six months ending Sept’08 against a PAT for Rs 31 cr for entire FY08. Notably, company has started exporting to USA in a big way after getting USFDA approval in Sept 2007 for its API manufacturing facility at Derabassi Punjab for Clarithromycin. It is now expecting to get a second USFDA approval in 2009 which will further boost the export revenue. Presently, exports constitute around 40% of sales with company having presence in 45-50 countries across globe. For future growth the company has a robust product pipeline of 25 products which includes few blockbuster drugs as well. It has successfully filed over 72 DMFs with the US, Canadian, UK and European Drug Authorities. Hence company has been aggressively expanding its capacity and has increased the gross block by almost five times to Rs 470 cr from 100 cr in 2005. For FY09 it may report sales of Rs 550 cr and NP of Rs 30 cr i.e. EPS of Rs 11 on diluted equity of Rs 27.50 cr. To fund its growth plan, company made a pref allotment of 28 lac warrants @ Rs 70 in March 2007 and recently allotted another 25 lac warrants @ 70 to promoter group. With a book value of whopping Rs 97 and expected CEPS of 18~20 Rs, scrip is trading relatively cheap at a P/E ratio of less than 2~3x times. Although company has an high debt on its books, still it a good bet at current levels

In the recent meltdown, share price of TIL Ltd (165.00) has been reduced to just 20% from its high of Rs 825 in Jan 2008. Company is engaged in three business segment namely construction and mining solutions (55%), material handling solutions (25%) & power systems solutions (20%). It has long term technical and strategic alliances with leading equipment manufacturers in the world- Caterpillar Inc, Manitowoc crane Group, USA Famak S.A, Poland and Paceco Corp, USA. Pioneering the manufacture of mobile cranes in India, company produces rough terrain, truck mounted, yard and industrial cranes, reachstackers, electric level luffing cranes, articulated lorry loaders, equipment for specialized Defense applications at its Kolkatta plant apart from marketing imported equipment and spares of reputed global manufacturers. Under the power system, it sells generator sets in the 180 KVA-2250 KVA range, using Caterpillar diesel engines and Hindustan Power Plus engines as a base. For the Sept’08 qtr, it reported 50% growth in sales and PAT to Rs 264 cr and 9 cr respectively. To cater the global clients effectively it has set up subsidiaries in Singapore, Nepal, Myanmar etc which are doing well. Further company is setting up a Greenfield plant in West Bengal under a capex of Rs 175 cr for which it has made a pref allotment of 30 lac warrants to promoters and others to be converted into equity @ Rs 326 per share. On a consolidated basis company is estimated to clock a turnover of Rs 1400 cr and PAT of Rs 50 cr. This translates to an EPS of Rs 50 on current equity of Rs 10 cr whereas the diluted EPS works out to Rs 39 cr on enhanced equity of Rs 12.75 cr. A solid bet.

Once again Mazda Ltd (35.00) has come out with flying colours for the Sept’08 qtr. Its net sales as well as net profit grew by 40% to Rs 22 cr and 2.30 cr respectively. It has already posted an EPS of more than Rs 10 for H1FY09. So for entire FY09, it is slated to register sales of Rs 80 cr and profit of Rs 8 cr i.e. EPS of Rs 19 on small equity of Rs 4.25 cr. Company is among the few engineering companies in the world, manufacturing very specialized, high technology and critical equipments for various industries like power, refineries, fertilizers, chemicals, nuclear, sugar, paper, food, pharma etc. Broadly its product profile is segmented into vacuum system, valve division, air pollution control equipment, crystallizers and evaporators. Notably, it has a technical collaboration with world renowned Croll-Reynolds Inc. USA, who holds 12% stake in the company. Fundamentally, company is on a strong footing with very low debt equity ratio and good reserves leading to a book value of Rs 61. Moreover HSBC is holding nearly 8% stake even as on 30th Sept and hasn’t sold any share in this carnage. At an Enterprise value of merely Rs 20 cr scrip and at a P/E multiple of harly 2x times, scrip is trading damn cheap. A screaming buy.

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Indotech Transformers Ltd - Rs 165.00

Established in 1976, Indotech Transformers Ltd (ITL) is primarily engaged in manufacturing of power & distribution transformers, furnace transformers & special transformers upto 100 MVA / 220 kV class. It is amongst the few companies who have the technology to manufacture mobile sub-station transformers upto 60 MVA/220 kV class adhering to American Standards. Lately, company has also ventured into manufacturing of open ventilated dry type transformers which have higher realization and lucrative margins. Till date, ITL boast of supplying over 56,000 transformers of various capacities to over 3900 customers in India. Besides, it also exports various transformers to USA, UK, Canada, Nigeria, Germany, Egypt, Singapore, Qatar, Abu Dhabi, Saudi Arabia, Sri Lanka, Japan, Switzerland etc. Primarily, company derives the revenue from sale of transformers to state electricity boards, EPC contractors, industrial & corporates customers etc with more than 70% of total revenue coming from various SEB’s and has a market share of around 15% in the southern states.

Till last year, ITL was operating thru two manufacturing facilities spread across Palakkad in Kerala & Thirumazhisai in Chennai with combined production capacity of 3450 MVA. But recently it has set up a state-of-the-art Greenfield plant in Kancheepuram with a name plate capacity of 4000 MVA. Though originally conceived with an installed capacity of 2400 MVA, company decided to revise it to 4000 MVA to cater to anticipated demand. So as of now the total transformer production capacity of the company stands at 7450 MVA. Secondly, this Extra High Voltage transformer plant which commenced commercial operation from Feb 2008, is equipped to manufacture large power transformers upto 315 MVA, 400KV class. Earlier in July 2007, ITL has commissioned a dry type 100 MVA transformer plant for which it has signed a MOU with DuPont (USA). Hence it now also manufactures dry transformers between 100KVA/11kV & 2500KVA/33kV class. These transformers are environmental friendly, maintenance free, very safe, with low operating cost & with overloading capability. The dry type transformers are specifically used in urban areas such as residential complex, malls, software technology parks, office complexes, in addition to other special application areas such as petroleum refineries, in ships and in areas where there is a risk of fire.

As of today, ITL has an order book of nearly Rs 120 cr and is expecting to get further Rs 50 cr in near future. In coming years, company finds huge opportunity as far as business from SEB, power projects, public utilities, industrial customers and exports are concerned. Besides govt’s rural electrification programme to electrify all villages in the country is expected to substantially boost the demand for transformers. Moreover a good demand for transformers is anticipated from the power-intensive sectors like cement, metals, chemicals, oil and gas where massive investments are planned in the coming years. With power being a major input, all the companies are looking at captive power plants to achieve cost efficiencies and assured availability. The dry type transformers will also be in great demand as their application increases in shopping malls, hotels and other commercial set-ups. Apart from domestic demand, the power sector in the developing regions of the world like the Middle East, Africa and Asia is on the growth path and this would be a huge opportunity for the players in the industry to export profitably.

Fundamentally as well financially, ITL is on a strong footing. Recently, it came out with excellent set of nos. Sales improved by 30% to Rs 65 cr and net profit jumped up 40% to Rs 14 cr posting an EPS of Rs 13 for the single quarter. For H1FY09 it has already registered an EPS of Rs 23 against Rs 16 for the same period last year. However, the raw material cost forms around 75% of the pricing of a transformer. So any sharp movement in the prices of the raw material, on either side, may put pressure on the margins of the company. Secondly, if the major raw materials like copper and CRGO continue to correct sharply, this would lead to lower realization for the company. Despite all such concerns, ITL may clock a turnover of Rs 240 cr and profit of Rs 40 cr for FY09. This translates into an EPS of Rs 38 on current equity of Rs 10.60 cr. To conclude, considering company’s very low debt equity ratio and impressive profit margin, investors can buy at current levels for a price target of Rs 280 (i.e. 70% return) in 9~12 months.

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