Shilchar Technologies - Power & Distribution Transformers - Sunrise Sector?

Stock Opportunities Untested - but worth a good look
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The concall had every second analyst asking the same question Expansion, Expansion, Expansion.

The management has been very clear wrt to their stance they’ve nothing concrete & it’s in planning stage.

Now if one observes business this has been a year of Domestic business blazing for them. It has grown by more than 80% compared to exports that have grown by 30%

This also can be a reference that even as tariffs uncertainty prevails, the company isn’t likely to face much jitters because domestic demand is intact, USA is a part of exports, and as per management they’ve already laid down plans to tackle the issue.

As for expansion it might be the case that they are waiting for accruals & some certainty to expand at one shot.

But this gets negated by their response about growing receivables. So in all likelihood it’s about taking conservative steps so as to not get their operations ruffled.

The management was pretty clear that their 750-800 crores guideline is conservative by their own admission. It wouldn’t be a surprise that they actually do close to 850 crores & surprise many like they usually do.

What the missing link is that exports as a %age of business has dropped significantly & yet margins have been stellar. Tells a lot about their operational excellence.

We can all deliberate on the transformer cycle & how Shilchar’s management could be slow in ramping up but if tailwinds have a few years left then perhaps they are sticking to their template of sustainable growth, keeping their books pristine.

Last thing, they are going to list on NSE soon & bonus is being done to help with that.

All in all nothing new or surprising.

I have no comments on valuation For me the management quality also gets a company a little premium :sweat_smile:

Disc: Invested from very low levels, biased & no recommendation

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In recent months,the stock of Shilchar Technologies has been to hell and back. It stood very strong in the initial market sell-off but when it gave way it continued to crumble,almost halving in the interim. Then just a week pre results stock started springing up. It opened and closed at UC on results day with 18k pending bids at UC and then the day post nos.,stock was locked at UC with 118k bids! I don’t recall seeing such a large pending bid queue on Shilchar ever. All this is a testament to how much they blew away expectations. To start with,the mgt itself had been guiding for 550 cr revs in FY25 which implied a Q4 similar to Q3 in terms of revenue. However,the company instead reported a ~60% qoq jump maxing out it’s capacity in Q4 itself. One must also note that mgt repeatedly understates peak capacity nos. A part of this would also have to do with the geographical & application distribution of their revenues. I remember back in FY23 they would keep insisting that 350 cr is their peak rev number,and yet they did 118 cr qtrly revenue with the same capacity. So it didn’t surprise me that their MVA realization at 7500 MVA and an annualized turnover of 930 cr comes to north of 12 lk/MVA rather than the assumed and stated 10 lk/MVA. It’s also instructive to note how mgt has repeatedly kept expectations low on the margins side. The EBITDA margins have been a slight concern for some smart investors since it’s always felt very toppish,being head and shoulders above peers. Company has stepped up it’s margins every few qtrs and sustained the new range. One must also note that Shilchar is the only listed Transformer co. that has been doing GMs of ~40% since 4-5 qtrs now. Mkts continue to love TRIL and give it a much better multiple inspite of repeated dilutions and much inferior return ratios. While to their credit,TARIL’s product mix has continued to improve I still feel the gulf b/w Shilchar & TRIL is too wide & quiet unfair.

I won’t be surprised if Shilchar does 850-900 cr revs in FY26 and ~30% EBITDA which implies a 250-70 cr EBITDA or an EPS of ~250+. So the stock after the recent thrashing and recovery is still available at 26-27x. TARIL with an expected PAT of 350-400 cr trades at 17k cr mktcap or at ~45x fwd.

Disc.: Invested. Views are biased,reduced my position in recent months.

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I feel Shilchar was started getting the same valuations once Shilchar lists on NSE too and FII and DII buying picks up

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As per the management in concall, trade receivables are due to “LCs” (probably line of credit). Customers can either pay upfront (within 30 days) or after 180 days with interest. Since the company doesn’t need cash urgently, they prefer the 180-day option and earn interest.
Disc: invested.

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Not Line of Credit but Letter of Credit. It is a very common instrument used in Trade Finance.

Letter of Credit Explained

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Would you have deeper insights into why GMs for Shilchar are much higher than, say TARIL? During the concall, management said in terms of pricing, they might just 1-2% more premium over their competitors for what they say is better service and better product (?) that they offer. Their ROCE is also way more than TARIL’s and that has got to be driven by OPMs since there isn’t too much of a difference in the asset turn ratio.

So then what is it that drives their better GMs and OPMs? Operational efficiency? What is it that they do to give them consistently better margins?

Or is it simply their product mix that gives them better margins - I know TARIL is more into power transformers and higher kv transformers, furnace transformers, etc while Shilchar is more into distribution and renewables transformers.

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It is because of the variance (variability of supply of electricity from solar and windmills that we need to put in these transforms in distribution too. coal plant 10 gw can operate at that capacity if you have coal all year long (24 hrs a day). 10 GW of solar’s output is not in your hand, anyways it won’t operate at night

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Had a couple of queries that I’ve clarified with the person handling Shilchar Investors Relations over call

In Q4 the domestic business had shot up but they don’t see any concern with exports as of now with any preponing of orders from clients in US as well. My query was regarding the drastic mix change as well as growth delta. Plus US business is a part of business. They would’ve have already charted a mitigation plan plus demand worldwide is huge.

Also had a query to them regarding exports to other countries & Europe etc to which I got the response that some new accounts have been added as well in Africa etc. One key thing is that domestic demand is huge, validated by Taril also.

On the capex side my query was what would be the timeline to scale up to which the person responded it would take 4-6 quarters but when I countered that last time it took less, he still maintained it’ll take a year. Not convinced but looks more like it’ll be the reality. He told that drawings etc are in progress along with equipment’s requirement to put up facility

My final question was on max capacity utilisation & whether there was any difference in output in case domestic business gets heavy as in they did 230 cr in Q4 to which he replied there’s absolutely no difference whether it’s exports or domestic but capacity utilisation can go up from assumed 100% which is actually fair as happens in capital equipment industry.

All in all management is conservative but I really do feel that 800 cr will be easily achievable with 850 a possible reality & they might come up with more capacity by FY27 Q1 or Q2 beginning, which really puts 4-6 quarters required to expand into perspective, because even if they announce in a couple of months now there are monsoons ahead which delayed the execution last year.

Disc: Invested & biased

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