Voltamp Transformers

A healthy order book, improved volumes in the March quarter, low debt and revival in activity in the transmission and distribution space buttress the earnings visibility for Voltamp Transformers. Investors with a two-three-year perspective can consider investing in the stock of Voltamp. At the current market price of Rs 691, the stock trades at seven times its expected per share earnings for FY-10.

Given the recent surge in the stock market and the consequent run up in the stock of Voltamp, investors can consider buying the stock in small quantities on declines linked to broad markets. Note that the stock’s small market cap can expose it to higher volatility in price.

After a dip in revenues in the December quarter, Voltamp’s sales once again picked up in the three months ended March ‘09 with a 23 per cent increase over a year-ago numbers. Net profits too grew at a healthy pace of 40 per cent compared to March 2008 quarter.

The key positive aspect of the result is the improvement in volumes. Sales in MVA terms rose by 27.5 per cent to about 2450 MVA, suggesting that the order execution has gained pace. Realisations, however, dipped marginally to Rs 6.7 lakh/MVA. This decline, perhaps a result of an aggressive pricing policy despite the slowdown, may continue for the next couple of quarters until industrial demand revives.
Realisation from orders

Unlike a good number of transformer companies, Voltamp has traditionally received over 90 per cent of its revenues from industries such as pharmaceuticals, power, automobiles and metals. Larsen & Toubro, Reliance Industries and Jindal Steel are some of its customers. However, as capex plans across sectors have been curtailed over the last few quarters, Voltamp has begun to selectively explore opportunities to sell to state utilities.

The current order book of Rs 450 crore (8,340 MVA) includes orders from SEBs as well. The realisations from these orders could be less attractive than historical realisations. However, the shift in focus from industrial orders to SEBs was inevitable in the current slowdown.

While realisations and profitability could suffer in the next six-eight months (0.7 times FY-09 net sales) when these orders translate into revenues, we believe that for a small company like Voltamp, holding on to volumes may be a higher priority than profit margins to manage competition.

Further, given that the company enjoys superior profit margins to players such as Bharat Bijlee or Emco, the profitability may yet remain superior to the industry average.
Expanding capacity

A move to higher margin industrial orders appears possible in the second half of FY-10 given the indications provided by some industries regarding their capex plans. That the company has gone ahead with its plan to expand capacity by 4,000 MVA to 13,000 MVA (after putting it on hold for sometime) also suggests that it may have received positive feedback from customers. At least a part of this planned addition is expected to be operational by the second half of FY-10.

Voltamp’s ability to manage its expansions so far with internal accruals, appears commendable given the stiff working-capital conditions prevailing for the transformer industry. This feature not only adds strength to the balance-sheet but also ensures that borrowing costs do not strain profits in future.

A key macro pointer to a revival in the transmission and distribution industry is the increase in orders awarded to T&D companies from Power Grid Corporation since January. Stability at the Centre, post-elections, is also likely to ensure that the order flows are not disturbed.

After cooling off in December, raw material prices, especially that of copper, have been increasing steadily since January. A continuation of this trend could lead to a marginal dent in profit margins.

via BL