Indo Tech Transformers (ITT) manufactures distribution transformers and power transformers. The company currently has three plants. Two are located in Chennai, Tamil Nadu, and one in Palakkad, Kerala. These three plants manufacture 500 –600 transformers of assorted sizes every month. They have an overall annual capacity of 2,450 MVA.
The key customers of ITT include state electricity boards (SEBs), engineering, procurement and construction (EPC) contractors, and the corporate sector. The company has also exported transformers to Nigeria, Srilanka, UK, US, Ghana, and Canada.
The net proceeds from the issue, after meeting issue expenses, will be utilised to:
*Relocate and modernise the Saidapet plant into a new distribution transformer plant of 750 MVA / annum at Thirumazhisai.
*Set up a new power transformer plant with a capacity of 2,400 MVA per annum including 220 KV class of transformers.
*Put up a 120-unit per annum dry-type transformer plant at Thirumazhisai.
*Meet the working capital requirements of the company.
The expected date of commencement of production of the distribution transformer plant, power transformer plant and dry-type transformer plant are 15 August 2006, 1 April 2007 and 20 June 2006, respectively.
Strengths
- The Union government’s emphasis on providing power for all by 2012 and reform initiatives including the accelerated power development and reforms programme (APDRP) is likely to benefit all organised electrical equipment manufacturers as there will be a thrust on quality products. About 1,00,000 MW of power generation capacity is likely to be added by 2012. For every 1MW of new capacity that comes up, 7-MVA transformers are used across generation, transmission and distribution segments. This implies a demand of 700,000 MVA of transformers unfolding over the next five years. This will result in an annual demand of about 1,40,000 MVA.
- Transformers usually have a life of 20-30 years. Hence, transformers installed in the 1970s and 1980s are likely to be replaced in the next few years. On an average, about 67,517-MVA transformer capacity has been added annually in the sixth five-year plan(1980-85). Since the life of these transformers exceeds 20 years, they are likely to be replaced.
- The commissioning of the proposed 2,400-MVA transformer plant will enable ITT to manufacture power transformers of higher range: 132 KV and 220 KV class of transformers. The margin in the higher end of transformers is better and competition is less as more technical knowledge is required.
Weaknesses
- ITT will lose the benefits it enjoys as a small-scale unit when the proposed projects are implemented. Once it loses this status, the company will not be entitled to the price preference that is available to small-scale manufacturing units for supply of equipment to the Tamil Nadu Electricity Board (TNEB). This is likely to shave off 100 basis points from its margin.
- TNEB accounts for almost half of its revenues, making it over-dependant on it.
Valuation
EPS for the FY 2005 is Rs 7.3 on post-issue equity. At an offer price of Rs 130, PE works out to 17.8. Annualised half-year EPS is Rs 9.2 and PE 14.1. TTM PE for the power sector is around 20.