Shilchar Technologies - Power & Distribution Transformers - Sunrise Sector?

[T11]

My take away from Q4’24 and FY’24 results:

Top Line Performance:

• 10.5% Y-o-Y growth (from 95 Crs. to105.42 Crs.)
• 11% Q-o-Q de-growth (from 118 Crs. to105.42 Crs.)
  There can be different perspectives on recent quarter numbers, however, personally I am looking at the performance in context of few data points

1. Management shared during last concall that a) they are running at 100% CU; b) had order book of 355 Crs. as on Jan’24.
2. In current quarter results, a) margins are intact and rather improving; b) have inventory buildup of ~36 Crs.

So, to me, this Q-o-Q de-growth is worth checking with management in case there is a concall (not announced yet), however, in absence of a call, should not be a real alarming situation to act upon.

Margins:
Operating margins improved to 30% as against 27% last quarter and 22% same quarter last year. Just a conjecture, is it possible that they had a little higher share of export in the mix. As management informed last time, in export they have low complexity products with higher margin. That can be one of the reasons for comparatively lower top line however improved margins. May be, may be not.

Capex:: Phase 1 looks to be progressing little behind the plan. They had 1500 MVA addition at an expenditure of ~10 Crs. with a due date of commercial production starting April 1st. As per recent balance sheet ~1.7 Crs added to PPE and ~4 Crs CWIP. Is it not that current CWIP pertains to phase 1 only and has not really got added to PPE?

Balance sheet:
On a lighter note, they have also published Balance sheet and cashflow statement along with P&L. Why no one talking about that whereas that deserves at least some bit of discussion

Cash equivalent - Moved up by 25 Crs.
bank balance - moved up by 26 Crs.
Investments - addition of ~14 Crs.

Cashflow:
Cash from operations improved despite large inventory buildup (~35 Crs.) (partially offset by increased debtor days .) Net, ~2x cash from Operations.

To sum it up, the big picture view is that they are standing at ~1% of total domestic transformer capacity (domestic capacity is believed to be ~ 4,00,000 MVA). With capex, may go upto little less than 2%. Are predominantly into 66 KV class with some presence in 132 KV class. Segment that they are serving are mostly into renewables (primarily Solar) and are into distribution transformers only. Higher KV class and generation transformers are absolute white space for them as of now.

With such healthy margins, sturdy balance sheet and velocity of cash accumulation on books (even after factoring in the recent capex of 30 Crs.), I am slightly positive that management will enough elbow room in future, should the demand situations stays strong.

Disc: Invested, had transactions in last 60 days. Things may change as part of the risk mitigation strategy or for other reasons.

Thanks,
Tarun

[Hardeep_Renny]

Comments on X look extremely motivated, company posted expected results and no one is talking about exceptional ROCE and ROE of the company, just bashing it.

[aadhar.aggarwal]

@T11

Segment that they are serving are mostly into renewables (primarily Solar) and are into distribution transformers only.

Hi. Can you simplify this a bit more? My opinion is that they are focusing on clientele which wants captive renewable power for their manufacturing operations. That is why they are able to increase volumes even though they are primarily selling small capacity transformers. Would you agree to this or can you shed more light on this? I wrote about this in more detail in post 87 on this thread. An excerpt is below:

@aadhar.aggarwal

Next is what is driving this increased demand. My opinion is that the usage of captive renewable capacity by industries is growing massively now. I say this because Shilchar does not work with any government clients. They mostly work with private clients. But the private sector in India is a minority player when it comes to transmission of power or when it comes to the discom business. So what is the private sector going to use their transformers for?

[Kiran_Kumar_KG]

Is these margin are sustainable going forward ? , any one has view please respond not able to confirm this.

[aadhar.aggarwal]

@Kiran_Kumar_KG

Is these margin are sustainable going forward ?

The company has never had such margins in its history. In my opinion over the long term, they are not sustainable. Unless they have fundamentally changed something about the business. For example usually building a transformer is a labour intensive process. Especially when the transformer has to be customised.

So unless they have suddenly figured out how to automate more of the building process, I am not sure if margins can sustain.

[sumit_tumba]

I think Transformers, and renewable energy space is atleast 5 years story, if not more.
And Shilchar’s export orders, and relationship with overseares customers from developed countries -should ensure the margin to sustain for a very long time.

[hardik_shah1]

Listen to the oddlots podcast on Bloomberg or apple

Odd Lots: Lots More on America’s Electrical Components Crisis on Apple Podcasts

The last few years shortage of electrical components from switchgears to transformers to trans oil is now coming to parity and should be resolved in two years.

So components companies may do well till then. Then margins will come to parity at maybe higher rate but nowhere close to 20-30%. 10-14% will be new normal for most companies.

Thats the play. But market is giving PE as if current margins will sustain into eternity.

Discl: Do not own any transformer company except for CGPower which is more of a wider industrial play.

[anupamsinha]

As per the concall transcript, there are various types of transformers. Shilchar is into renewable transformers. Which is a niche market. There are virtually no big organized player (at least bigger than them). Then there’s a entry barrier as well. No idea if margins will continue to be the same or will increase or decrease.

Not a buy or sell recommendation. Invested. May be biased.

[tbhavesh]

Shilchar focusses a lot on exports. Shilchar does not rely on any government orders where there are pricing pressures to be at the bottom. Shilchar focusses more on RE sector largely for clients that are setting up their own captive plants - these clients value a lot on performance and are willing to pay the extra price. Shilchar has lot of experience and credentials in this space - as client priority is more of reliable performance, they generally give higher price. Shilchar will continue to maintain 25 - 30% range as long as this demand continues which should continue for few more years.

Disc : No recent transactions - invested since much lower levels and views can be biased

[sumit_tumba]

I heard this podcast before, but not sure where it says “coming to parity and should be resolved in two years”, not sure if I missed anything.
But I think, it should continue much longer than 2 years, considering the huge demand due to AI and data center (AI itself will double the global power consumption in 2 years time), Crypto mining, old grid revamps in US/Europe, transiting to EV/and charging stations all over the world, focus on renewal energy generation for energy security/geopolitical prospect and reducing carbon footprint.

[hardik_shah1]

@sumit_tumba

coming to parity and should be resolved in two years

This is my understanding and not a quote. He does mention demand remaining for the things you have mentioned. But also supply increasing.

All Elec component makers are increasing capacity not just in India but elsewhere. Again if you notice closely i said margins will move to new normal band and not old band of 7-8% but 10-14%.

Anyway this is my opinion and I can certainly be absolutely wrong and have been wrong earlier. Thanks for engaging. Thats what this forum is for.

Side Note: My problem is all these companies have PE of 50-80-100 which is unsustainable. There may not be downside, but we should at least consider what’s the upside.