Voltamp Transformers

Stock Opportunities Not-so-Hidden Gems
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Voltamp Transformers is a focussed Transformer manufacturer. The Company has installed facility to manufacture Oil filled Power and Distribution Transformers up to 160MVA, 220kV Class, Resin Impregnated Dry type Transformers up to 5 MVA, 11KV Class (in Technical collaboration with MORA, GERMANY) and Cast Resin Dry type Transformers up to 12.5 MVA, 33 KV Class (in Technical collaboration with HTT, GERMANY). It has two plants, both located in Vadodara, Gujarat.

Unlike a good number of transformer companies, Voltamp has traditionally received a big chunk of it’s revenues from industries such as pharmaceuticals, power, automobiles and metals. Industrial sales entail higher margins than those to state utilities, apart from providing a more diversified industrial base.

The Company (along with the rest of the industry) has been operating at sub-optimum levels over the past few years due to overall capex and power sector slowdown. However, the Company seems to have managed slowdown better that most other companies in this industry. It did not have even a single year of negative profit and generated hefty cash flows throughout the slowdown period. In fact, it has maintained it’s dividend at Rs 10 for the past several years, even if it had to pay 40% - 50% of net profits as dividend to maintain the dividend.

Over the past 10 years, the Company has generated a hefty Rs 430 cr in operating cash flows and has given out about Rs 120 cr as dividends. It is debt-free and has cash & liquid investments of about Rs 245 cr that can be utilized to quickly expand business once the capex revival gains momentum.

The annual growth of both the topline and the bottomline has turned positive in FY15 after being in the negative for several years (Revenues grew 16%, Operating Profit grew 60% and sales volume grew 27% indicating that the country’s capex cycle probably bottomed out in FY14 and revival started in FY15).

The Company’s RoE and margins are expected to expand significantly once the capex cycle takes hold. The RoE, currently at 6%, ranged from 35% to 60% during the previous capex up cycle period of 2004-09.

As the market currently is not excited about this Company, it is available at P/B of only 1.7 (as opposed to the range of 5-15 it traded in the pre-2009 boom years). The P/E, at 26, is also fairly low when you consider the fact that we might be very near to the bottom of the capex cycle. As the capex cycle revives and the Company’s RoE moves from 6% to say, 25-30% over the next few years, the EPS will eplode. Another important point to note is that as a significant chunk of the Company’s sales come from private and public sector customers across a varied industrial base, it is not dependent merely on revival of power sector capex. An overall industrial capex revival will also benefit the Company.

Disclosure: Invested.

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There are a few things which I think one should look at. Their cash conversion cycle is abysmal at 149 days. Further if you look at the PBT it mainly constitutes of other income (between 60% to 70%) derived from interest and dividend from the investments. From a pure operational perspective the profits are much lesser. The company has no short term debtto meet the working capital requirements which are huge when you look at their cash conversion cycle and all this working capital is being met by internal accurals. As an investor I would be questioning the mgmt or trying to understand these further. If you involve WACC and ROCE into calculations the company has been a destroyer of wealth in last few years.

The future prospects could be bright and it does look interesting but the above are a few criteria I will be constantly monitoring.

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The right way of analyzing Companies in cyclical industries is very different from analyzing their non-cyclical counterparts. The parameters mentioned in Anant’s post above are more suitable for a growth company such as Page Industries.

Analysis of Companies in cyclical industries has to be divided into two distinct phases. First is how fast they managed to grow in an up-cycle phase and the quality of that growth. Second is how well they managed the down-cycle phase. Voltamp has passed the test in both these phases.

In the last up-cycle phase of FY03-09, it increased its EPS 21 times (from 5.3 to 114), a 6-yr CAGR of 66%. Similarly, it grew it’s book value by 11 times during this period, a CAGR of 49%. Another important aspect to note is that it managed this growth entirely through internal accruals while generating free cash flows for most of this period. So it passes the up-cycle test with flying colours.

In the subsequent down-cycle period of FY09-14, although the EPS fell sharply, it remained in green throughout this period whereas most of it’s competitors went into red. It managed to grow it’s book value by a CAGR of 10% even during this difficult down-cycle period. Not to mention the fact that it continued to generate decent cash flows throughout this period. It also maintained a slightly reduced, but still healthy dividend (from 12.50 to 10). So it passes the down-cycle test as well.

Now, my responses to the specific points raised in the above post.

Their cash conversion cycle is abysmal at 149 days.

The primary reason is increase in the receivable days. Owing to the unfavourable business environment of the past few years, some of their customers are finding it difficult to pay on time. Hence, the receivable months has increased from 1-2 months earlier to 3-4 months now, resulting in increase in the cash conversion cycle. This should reduce going forward when the overall business environment improves.

Further if you look at the PBT it mainly constitutes of other income
(between 60% to 70%) derived from interest and dividend from the
investments. From a pure operational perspective the profits are much
lesser.

This is typical of any well managed, cash rich company in a cyclical industry. As business conditions deteriorate in a down-cycle phase, their operating profit reduces but their interest and dividend income from investments continues to increase / remains stable. Hence, such income becomes a bigger portion of PBT. However, this situation reverses itself as the up-cycle progresses. In the case of Voltamp, other income constituted only 8%-14% of PBT during FY03-09. However, as the down-cycle progressed, it started constituting bigger and bigger share of PBT and seems to have peaked at about 80% of PBT in FY14.

If you involve WACC and ROCE into calculations the company has been a destroyer of wealth in last few years.

Every well managed company in a cyclical industry generates RoCE and RoE less than the cost of capital during cyclical downturn, but at least manages to generate positive returns (like Voltamp has done). Their mediocre counterparts don’t even manage to generate positive returns (like most of Voltamp competitors). You need to consider an entire cycle (involving both up and down phases) to find out the return generated by a Company. Voltamp has generated an annualized RoE of 28% during the 12-yr period from FY03 to FY15, which is fairly good. In any case, the economic down-cycle is (hopefully) behind us now. So the next 5-7 years should resemble the FY03-09 period for Voltamp rather than the FY09-14 period :smile:

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I agree that Voltamp is a well managed co. But I think we need to look more deeply into industry dynamics. Is there any import threat from cheaper chinese/korean equipment co’s ? In some segments I track prices are unlikely to reach past levels due to dumping from these countries. Also there was a lot of capacity built up in the last period you cite so an analysis of present demand vs supply is required.

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In any cyclical industry, capacity usually exceeds demand during cyclical downturns. Even Voltamp’s capacity ulilization bottomed out (it seems) at 51% in FY14. It has improved to 65% in FY15 (It was 106% in FY09 and nearly 100% in FY07 and FY08).

Even their FY15 AR mentions the following very clearly:

Profit margins remained very low, due to intense price war amongst organized sector manufacturers because of over capacity in the Industry…The Company expects further improvement in volume at available market prices.

Coming to the industry dynamics and Chinese / Korean imports, even I do not expect the net profit margins and RoE to reach the previous cycle peaks of 18% and 60% respectively. Even half of these is enough to give very good returns to the investor.

Somehow, I feel there are not enough quality discussions in valuepickr around companies in cyclical industries. Most discussions I have seen here revolve around growth companies. Hence, even cyclical industry companies end up getting analyzed here on parameters relevant to non-cyclical growth companies :smile:

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Hi Alok,

Thanks for your inputs on cyclical industries, As you said, these are not frequently discussed here - I think there is just a single catch-all thread for cyclicals -

They seem to make huge gains in a short span of time - though when that time comes is the question :smile:

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Thanks Alok. Appreciate for starting the thread. I went through the AR for the FY 2014-15 and below are the notes from the Outlook section
"As on date, orders available for execution in the current year amount to ` 265.32 crores, totaling 4696 MVA, providing revenue visibility for about 5-6 months period. The Company is favourably placed in recently floated utility tender of large value."
Does it mean that getting business is still a concern for Voltamp? If we consider this, how do you find Transformer and Rectifiers India Ltd. which has a visibilty of more than 500 crores?
Also from finance section it says "The receivable position and inventory holding level is not improving and higher investment in receivables and inventory has become reality for the Company to live with. "
Does it show that the management is still not confident of the business scenario turning around?

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I agree with you Alok my experience with Cyclicals is very limited and my opinions are certainly derived from the growth companies. Will take another look and may be understand further from folks like you on to how to analyze cyclical companies.

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Hellow all,

I am a Power Transformers Design Engineer by profession. I am working in this industry from last 5 and half years after completing my graduation on 2009. During whole my career this industry is in very bad down turn. During this time 2 new manufacturers (Prime Meiden ltd. Nellore , AP and TBEA Energy India. Vadodara, Gujart) started their production which increases the total capacity. I really wonder how Voltamp Transformers earning profits during this period. Only MNC companies like ABB,Alstom and Siemens are in profits. Most of the other companies like T&R, Barat Bijilee, Emco , Prolec GE ( Indo tech Transformers ) are in losses. This may be because of their debt. All the above mentioned companies are bigger than Voltamp but if you see Market Cap Voltamp is twice or trice of thees companies ( this is ofter 3 fold run up of stock price of theese companies during last 2 years). One must appreciate Voltamp management for this.

Coming to manucaturing process. Power transformers manufacturing takes atleast 2 months and commissioning and transport to site will take 1 to 2 months. This is because Power Transformers are not standardised products they are made to the specification. This specification varies with each utility and state boards. Drawings approval with utilities itself takes 15 days, after this only manucaturing starts. All this leads to higher working capitals and receivable days of atleast 3 months.

Voltamp generally considered as small company in this industry as they manufacturs mostly upto 132 kV transformers. Other companies manufactures upto 220 and 400 kV transformers. Vijai Elecricals llimited( is now Toshiba T&D ) is the major compititor to Voltamp. I can say cheep Chinese or Korean manufacturers are not compititor in this industry, because of strictly followed vendors list by state boards. Even new manufacturers will take atleast 5 to 8 years to get approval from all state boards.

I believes this down turn is over and slow down is bottomed out. But because of higher capacity comparing to last cycle it will take more time to reach peak capacity utilisation.

Readers may study other companies also as they are below the Mcap of Voltamp.

Hoping for better days ahead to this industry

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Hi @mmvravindra What is your views on IMP Powers Ltd as a company. (http://www.imp-powers.com/ It looks cheap as compared to TRIL & Voltamp, as it trades at market cap of 65 cr, which is 1/12th of Voltamp and 1/6th of TRIL) .

Disc : Invested, hence views may be biased.

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thanks alok for good analysis. Even I was having same views as of Anant Jain though I had known this company since listing and as such have confidence that they will make good of any opportunity that they get.
But the question is as inferred from AR 15 and written by other folks in this thread that demand scenario is expected to be weak. How come you deduce that demand scenario will get better. Also operational metrics seems to have changed a lot in comparison to 03-09 period.
If it has any advantage over others then it can be good investment as MOS is there at these levels. Your take please

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In this industry we can divide companies into 3 categories based on their profiles

  1. MNCs like ABB, Crompton Greaves, Alstom, TBEA, Thosibha (Vijai Elecricals) and Siemens

These companies manufactures transformers ranges from 132 kV to 765kV, They have somany other business in power industry so slow down in transformers market didn’t effect much. But in good market condition they can earn good retuns.

  1. High profile Indian manufacturers

T&R, Barat Bijilee, Emco, Prime meiden ltd. Prolec GE (Indo tech )

These companies manufactures transformers ranges from 132 to 400 kV. T&R manufacturs 765 kV translators also. These companies Core business is Transformers only

  1. Low profile Indian manufacturers

Voltamp, Schnieder , IMP power , Kirlosker, Kanohar and many small companies

These companies manufactures transformer upto 132kV. Few claims they manufacturs 220 kV also but they are not femiliar. Schnieder is an MNC bought its plant from Alstom and upto 132 kV only. Being in union territory IMP has some tax advantages.

Few more points to note in this industry are
i. State boards gives order to L1 (low cost) companies while opening tenders. They don’t give any premium to quality provided by MNC companies. This is advantage to low profile companies like Voltamp.

ii. Variation in raw materials costs are immediately passed to customers so we can’t consider present scenario of low commodity prices as an advantage. Some times boards ask for variable prices based on IEEMA formula.

iii. Payment by costumers is not in single term. They release in parts like 10% after drawings , 40% after testing 20% after comissioning etc etc. 10% of payment will be paid after successful performance in guarantee period i.e after 3 years of commission.

iv. Any failure of Transformer at site leads to exceptional loss of money for transport it back to plant , repair, again testing, tranport back to site and commissioning.

Hope this information is usefull for your research

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@bibhuashish
Voltamp’s performance has been far better than TRIL or any other competitor, during both the up-cycle and down-cycle phases, on all parameters (Cash Flows, EPS Growth, RoE, etc). If fact, unlike Voltas, most of the other companies in this industry are in the red.

I never give much importance to the order books. One, it shifts your focus from 5-10 years to 2-4 quarters. Second, Company A having hefty order cancellation penalties will always have a lower order book than Company B which might be more liberal in this regard. Third, an order book at the most provides you the near term revenue visibility - it tells you nothing about how profitable those revenues will be.

@jainaj
You can never be sure about the tops and bottoms of business cycles. However, the FY15 turnaround in the performance certain capital goods companies that I am tracking and certain other factors lead me to believe that the capex cycle has turned around. However, this is ultimately a subjective judgement - no precise mathematical formula here :smile:

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Slide 30 of this presentation gives an overview of the opprotunity for the power T&D sector. In a recent presentation to an investor gathering, Aditya Dhoot (MD of IMP Powers Limited) was ver positive about the sector. He is also the head of ELECRAMA, an industry association for the Power T&D sector. Though, I am not an expert on this sector, I thought of sharing few bits that I have gathered on it.

Presentation to an Investor Gathering by Aditya Dhoot

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Interesting excerpts from management discussion of Voltamps FY15 annual report:

The macro-economic situation is still sluggish and policy measures taken by the new Government are yet to positively influence the economy and the business of power industry. The slowdown in power industry began few years back, continued to this financial year also and continued impacting capacity utilization and price realization because of keen competition amongst organized sector manufacturers owing to overcapacity in industry.

Overall CAPEX by corporates both private and public sectors, are much lower and with that limited demand is being chased by huge capacity. This has caused industry’s capacity utilization at sub-optimum level and price realization and liquidity problem is still faced by most of players in the transformer Industry. In addition to this, the entry of Chinese Manufacturers since few years and continuation of addition of capacity by Multinational Companies in over-crowded industry, has also lead to margin under pressure.

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Bharat Bijlee, a co, in same sector announced its quarterly numbers as below :-

http://corporates.bseindia.com/xml-data/corpfiling/AttachLive/BAF572AC_5038_408C_A314_7172699B1F5B_131627.pdf

Looks like sector is turning around.

Amit

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I was going through their share holdings in the notes to AR and they have some amounts( 5 to 10) of shares of TRIL, IMP Power and others. Is it some kind of strategy to keep a tab on what their competitors are into? Pretty impressive then.

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TRIL came out with q1 result and was really disappointing. Will this be the trend across the transformer manufacturers? Would have to wait to see the results of others.

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Hi All,

I just came across this thread.

I am actively involved in manufacturing of small industrial transformers since last 18 years & also am a retail value investor.

Recently, I had set up a manufacturing unit of Oil cooled Distribution transformers, normally used in Residential, Industrial & for power utilities.

The rules of the game here are totally different. The sector is marred by cut-throat competition, unethical de-rating of transformers, red-tapism by state owned public utilities, & very low customer bargaining power with the manufacturer. ( there is no moat, unless one gets into very huge transformers, where the competition is less severe ).

The margins have been on a considerable downfall since 2008-09 & dont have a chance to pick-up either in the near future.
.
I was invested in Voltamp a few years ago. Although the company has an excellent management, respectful brand in the market, debt-free financial books, yet the sectorial problems will not allow them to show sustainable positive growth.

All in all., I would suggest everyone to completely stay out from this sector & look for better profitable avenues.

Regards,

Mukesh Tolani

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@mukesh_gt
Dear Mukesh, nice to meet you.
Myself a Transformer Design Engineer.
You are correct that Transformer Industry is at cut-throat competition.
Especially distribution transformers are became like a commodity product. There is no rocket science involved in making distribution transformer. Hence there is no moat, There are hundreds of distribution transformer companies in India. Recently ABB shutdown its plant because of high supply and less demand.

Only power transformers business above 220kV can offer entry barriers in terms of Product approval from state board and Product technology. Power transformer business also suffering with surplus capacity and lower utilization levels. But there is hope in the industry that demand will pickup in near future. Recently announced reform UDAY is a boon to the industry if it could implemented by states.

Look at less stressed power transformer companies like TRIL. They will be the major beneficiaries of this reform. Read this article http://wap.business-standard.com/article/companies/power-equipment-manufacturers-expect-uday-to-boost-order-flow-115120300835_1.html

Disclosure :
Not invested in Voltamp
Little position in TRIL

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