Voltamp Transformers

Stock Opportunities Not-so-Hidden Gems
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Using low quality raw material has always been concern for the industry, below is the news :-

Is DRI sparing big fish using non-prime steel for transformers?

http://www.knnindia.co.in/sectors/is-dri-sparing-big-fish-using-non-prime-steel-for-transformers/31-12844.go

New Delhi, Dec 8 (KNN) After initial crackdown against transformer manufacturers using non-prime steel, mostly those headquartered in Rajasthan, the Directorate of Revenue Intelligence (DRI) seems to be going soft on this illegal trade, leaving the industry to wonder why big fish are being spared.

Industry sources said that a big name in large electrical equipment and transformer association headquartered in Mumbai, who has been patronized by big sharks, has never complied with the quality control order issued by the Steel Ministry to bar import of second-hand CRGO. Not only that, it has been conspiring to take the matter for cancellation of the order in parliament using its proximity to some Members of Parliament and high-level bureaucrats at the Centre.

Industry players told KNN on the condition of anonymity that the recent raids by the DRI on a handful of non-prime CRGO traders in Rajasthan are unlikely to make any impact given that this malpractice is rampant and in Rajasthan alone, there are more than 100 units involved in processing of the low-quality steel brought from overseas.

“It is tip on ice berg; action should be extended to other states of the country. Unless DRI catches big fish who are manufacturing power transformers, this menace will not stop,” said one manufacturer.

Given the financial loss being suffered by utilities due to use of dubious quality steel in transformers, the source said, “Any amount of re-structuring and investment shall not bear any fruits and the target of providing 24x7 power to all in the current 12th plan period could prove a pipedream.”

The source added, the use of spurious material in the manufacture of equipment is also responsible for the financial mess in the power sector.

“So far no action has been initiated against traders getting the spurious CRGO from abroad in SEZ zones and freely selling the material to manufacturer of power distribution transformers,” the source said.

Dwelling on the modus operandi of this illicit trade, the source said, importers/ processors get the non-prime, mills left over, scrap, spurious CRGO material from all over the world in SEZ zones. Since these zones are not subjected to any rules and regulations for customs clearance at ports, material is stored in the godowns there and sold to the manufacturers of power and distribution transformers at dirt cheap rate of 30 per cent of prime material price.

The source further said that in a recent case transformers exported to one country were rejected and shipped back to the Indian exporter, giving a bad name to the Indian industry.

“Concerned authorities have been informed of this malpractice but there is no action,” the source said.

“Unless the Government of India takes severe action against such manufacturers and trade, this menace will continue as it has been going on for last two decades and the quality control order will remain just on paper,” the source added. (KNN Bureau)

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I had attended a call in May 2016 on Indian transformer industry where Mr. Kaul of Indian Transformers Manufacturers Association gave the participants a brief about the industry.
Key points are below:

  • The industry size is around 13,000cr to 15,000 cr and comprises around 700 players. Each MW of power capacity addition requires 7MVA of transformers, and the current focus on power generation would support the transformer industry
  • Current industry capacity is 1500 GVA and the utilization is 40 to 50%. Organized sector forms 75% to 80% of the total
    industry.
  • Huge orders are being placed by public participants like PGCIL and SEBs currently, but this would still take the industry
    capacity utilization to only ~70% by 2017.
  • Industrial transformers, which form around 15 to 20% of the total production, and as per Mr Kaul there is no demand uptick happening in this space currently
  • Pricing of transformers seems to be under pressure as the SEBs and PGCIL have revamped their bidding process and this has reduced cartel formation as per Mr. Kaul.
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I was just going over the financials of the company and peeking into their 220 crores investments which is 20% of its market cap. Their OTHER income for 2016 was 28 crores (which was mostly from the interest, dividends and gain on investments). If the trend continues their other income will be higher than their operating profit soon.

Out of the 220 crores , 117 crores is in mutual funds and 42 crores in PMS including 17 cr with Ask Wealth Advisor Pvt. Ltd. PMS (Anyone knows how they are doing ? Do they have any multibaggers? lol) and about 1 crore with Motilal Oswal PMS. Rest is in bonds, FD’s etc.

From the 2016 AR

The Company has continued investment of surplus funds available, in various debt and equity schemes of mutual funds, fixed deposit with banks, debentures and bonds, PMS, tax-free bonds,etc. and earned a reasonable return on the same and the Company has also expanded its investment portfolio, from time to time. 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. In this uncertain market condition, the Company has limited options to deal with this situation.

I was also reading in the Transformers and Rectifiers thread about the competition in this segment which is huge and I see no near plans of voltamp to do capex, also the current capacity util is around 70%. On one hand you have company like TRIL which has increased its capacity by over 4 times since 2008 onwards and planning on raising huge QIP. Voltamp has zero debt and there has been no equity dilution. In good times that is year 2005 - 2009, their sales grew at cagr of 38% and PAT at 66%. So it looks like they do have execution capabilities when the demand comes back ?

How do you really play voltamp ? What is your take on their investment route ? Is this a super safe bet with limited downside because of their debt ,investments and reasonable valuations, which should do reasonably well during the power cycle proven by their past record ? Would love to hear views of the senior investors.

disc: invested

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Voltamp has managed to show YoY BL growth even though YoY TL has fallen. This is mainly because of “Other Income”. How can I find out what that Other Income is? PL statement does not provide the details.

Do update if you have any information regarding the same. Thank you.

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@investr look at their previous year annual report. I assume other income are from their investments.

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Tax is also lower at 20.3% vs. 27.1% as compared to previous year. OI and lower tax has contributed to higher BL inspite of TL falling by 25%.

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AR - http://www.voltamptransformers.com/userfiles/addedPDF/annualreportPDF/50th_Annual_Report_2016-17.pdf

As on date orders available for execution in the current year amount to 310 crores (5200 MVA) providing revenue` visibility for about 7 months period.

Overall commentary of the management is not very positive on the demand growth -
"In spite of the Government’s continued efforts to provide a fillip to the power sector by way of schemes like the UDAY, 24x7 Power for all, 100 per cent electrification of villages and the introduction of transparent mechanisms such as competitive bidding for the allocation of resources like coal, utility performances did not show any significant signs of improvement in current financial year. The Industry continue to live with surplus capacity resulting in continued pricing pressure. The outlook for the sector is improving with slow pace. "

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Good set of numbers YoY

12 % growth in Revenues from Ops.
30% growth in PAT and EPS.

update: YoY and not QoQ. Thanks Chirag for correcting.

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Did you mean “YoY”? Because QoQ the numbers are down. While YoY they are up.

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The ‘Saubhagya’ scheme will mean a good opportunity for transformer suppliers particularly in the smaller capacity like sub 220 KV transformers, which will find their applications in connecting the remote villages with relatively less density of consumers. Companies like Voltamp Transformers are the leading players with lot of spare capacity in the sub-220 KV segment. Voltamp, which is sitting on cash (25 percent of market capitalisation), operated at capacity utilisation of 78 percent in FY17 and sitting on good order book providing improved earnings visibility.

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Voltamp Result:-

image
image979×1200 308 KB

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The Q1FY19 results are out. Revenue has grown by a healthy 28% YoY. However, upon first glance, the profit growth (PAT up by a mere 4% YoY) appears fairly mediocre.

However, a slightly closer look presents a very different picture of profit growth. As this Company has significant cash holdings, the Other Income component (primarily interest and other income from cash and financial investments) is quite high and needs to be removed in order to analyze operational profitability. Similarly, the Income Tax rates have been somewhat fluctuating over the past few years, distorting YoY profit comparison.

Hence, my favorite metric for analyzing YoY growth in operational profitability for this Company is PBOT (Profit Before Other Income and Taxes). The PBOT has grown by 82% YoY, indicating very healthy performance at operational profit level. In fact, the PBOTM bottomed out in FY14 at 1.6% and has been steadily rising since, reaching 9.7% for T4Q Q1FY19.

The reasons of mediocre PAT growth despite such healthy Operational Profit growth are: a) fall in Other Income and b) rise in Income Tax rate over Q1FY18.

With a strong track record, zero debt, and cash holding of Rs 360 cr, Voltamp is well placed to benefit from the expected capex upswing in the economy over the next few years. The valuation (P/E of 13.0 and P/B of 1.5) don’t seem to capture the growth prospects.

Disclosure: Invested.

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The Q2FY19 results are out. However, as in the last quarter, the Other Income has decreased and Income Tax rate has increased, hence the anaemic bottomline growth is betraying the excellent business performance.

Revenues have grown by 47% YoY and the Profit before Other Income and Tax has grown by 147% YoY.

However, a significant decrease in Other Income (from 14 cr to 6 cr) and increase in the Income Tax rate (from 26% to 34%) have eaten away all of the PBOT growth and the Net Profit growth is flat YoY.

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In this quarter (Q2’19), gross margins appear to be low but because of increase in realizations (from 5.4lacs/MVA to 7.5lacs/MVA) gross profits per MVA increased by 33% to 1.56 lacs/MVA. Similarly EBITDA/MVA doubled 76000/MVA from 38000/MVA.

These numbers look good for H1’19 as well, EBITDA/MVA increased by 70% vs H1 2018 and 20% vs full year FY18.

Improving profitability is a positive sign worth noting. Commentary on cement, auto, paper, textile, tyres, chemicals, and oil & gas has been positive and bodes well for V.

However, these positive data/commentary/indicators are there for only few quarters, unless the trend continues for another couple of more quarters one can not be sure of a structural revival in industrial capex.

best
rajat

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image

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Hi Rajat,

Where have you got the MVA numbers from? They don’t seem to break out the MVA sold every quarter.

Thanks

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Hi Samarth, Kotak securities releases quarterly update. Got this data from there.

best - rajat

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Great sales from Voltamp with special dividend Rs 22.5
https://www.bseindia.com/corporates/anndet_new.aspx?newsid=d763181d-d4a8-4f6b-98e1-1e85b3abcc48

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I had started studying the transformer industry and written about it here.

i found Voltamp to be fundamentally the best in all the transformer companies. Below is my thesis on the company -

Based in Baroda, the co. is focused on small transformers (upto 22kv) and mainly caters to the industrial segment (90%+ sales). Below are its fundamentals –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 535 570 516 445 517 563 611 639 829 859
increase by 6% -10% -14% 16% 9% 8% 5% 30% 4%
EBITDA 12% 7% 7% 3% 4% 7% 10% 11% 11% 13%
EBIT 11% 6% 5% 2% 2% 6% 9% 10% 11% 12%
PBT 14% 9% 9% 8% 7% 11% 15% 16% 15% 13%
Tax rate 33% 31% 29% 23% 15% 26% 22% 27% 31% 21%
PAT 10% 6% 6% 6% 5% 8% 12% 12% 10% 10%
EPS 51 33 33 26 28 43 71 73 84 88
increase by -36% -1% -20% 8% 55% 64% 2% 15% 5%
Asset Turns 1.3 1.3 1.1 0.9 1.0 1.1 1.0 1.0 1.1 1.1
Totall Assets / NW 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
RoNW 14% 8% 8% 6% 6% 9% 13% 12% 12% 12%
Core RoNW 16% 8% 8% 4% 6% 10% 19% 19% 20% 28%
RoCE 16% 8% 8% 3% 5% 9% 18% 19% 21% 28%

It can be observed that:

  1. Voltamp has not made operating losses in any year, even when all other players were near the brink in 2014.
  2. It has not undertaken any capacity expansion since 2010, and all its up cycle profits have been conserved as cash.
  3. It has the best working capital cycle in the industry, despite its promptness in paying creditors on account of liquidity. This is on account of focus on collection (along with factoring) and low business contribution from Government bodies like SEBs and transmission companies. It further has been debt free for the last 10 years.
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debtor Days 99 111 103 117 102 97 92 83 78 64
Inventory Days 69 71 54 49 60 66 55 62 54 56
Payable days 2 5 0 25 21 13 16 14 14 18
Cash Conversion Cycle 165 177 157 140 141 150 130 131 118 103

In some years, PBT margin has been higher than EBIT margin on account of high cash balances and the resulting treasury income.

Realizations have improved significantly over last 2 years on account of the company product mix gearing towards lower voltage generators which gives a higher MVA realization. Thus, when realizations per MVA are compared with TRIL (Transformers and Rectifiers India), there is a significant variation since TRIL sells higher voltage transformers.

Volumes - MVA(million Volts Ampere) 2017 2018 2019 2020
Voltamp 10,189 9,180 11,053 10,297
TRIL 24,428 22,740 20,451 18,737
Realizations / MVA (INR)
Voltamp 578,791 672,113 727,404 809,945
TRIL 345,915 292,876 394,602 351,177

With 70-80% of sales being the raw material consumed and the industry comprising of 100s of players, it has all the trappings of a commodity business, and yet Voltamp has been able to carve a niche for itself in the following ways -

  1. Leadership in Dry transformers

Dry transformers are a type of industrial transformers which use air as a cooling mechanism in place of transformer oil and are coated in epoxy resin. This makes them easy to install, gives them higher efficiency (especially in moisture prone areas), reduces fire hazard and has lower maintenance costs. However, dry type transformers can bear only limited loads and thus have voltage limits upto 35kv. On account of its technology transfer agreement with MORA and HTT GmbH, both from Germany, Voltamp is the market leader in the dry transformer market in India with a market share >40%. However, this is a small market with dry transformers contributing to only 20% of company’s revenues.

  1. Diversified Customer Base
    Due to competitive bidding and long payment cycles, Voltamp has shied away from catering to public utilities orders and instead mostly caters to various industries with more than 1,000 customers. Its top 10 customers in FY 19 were Larsen & Toubro, ABB India, HPCL Mittal Energy, Gujarat Energy Transmission Corpn., JSW Steel, Siemens, Megha Engineering, JAEI Engineering LLP and ISGEC Heavy Engineering. These 10 customers contributed to 26% of total FY 19 revenues.

  2. Efficient WC cycle –
    Voltamp has the best WC cycle, despite its extremely low payables above –

CCC 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Voltamp 165 177 157 140 141 150 130 131 118 103
TRIL 160 139 173 142 148 131 142 239 156 212
BBL 90 113 134 141 124 147 150 157 132 152
IMP 156 213 167 124 109 99 109 142
Indo tech 95 81 83 177 137 114 172 113 90 114

Risks

  1. Volatile RM prices – As RM costs are 75-80%, of which copper (26%) and CRGO (19%) are key, any changes in the above might derail company’s profitability. Copper prices have been soft over last 10 years globally and any increase in the same might inflate company’s cost structure.
  2. These RM costs affect Voltamp even more since most of the industrial contracts it enters into are fixed price contracts (with 7-30 days variation allowed in some contracts), while Gov contracts are variable cost contracts.
  3. The company has bank guarantees of INR 183 crores as performance guarantees and INR 166 crores as taxation claims. Any of the above liabilities coming into fruition will affect the NW of the company significantly.
  4. Despite being in the business of selling transformers, the company has booked significant bill discounting income, reasons of which have not been disclosed -
Particulars 2017 2018 2019 2020
Bill Discounting Income 3.2 4.3 5.2 6
PBT 93 100 123 113
as a % of PBT 3% 4% 4% 5%

Capital Allocation

While its competitors were expanding their capacities, Voltamp has not undertaken any capacity expansion and has conserved the cash in its balance sheet. This cash pile has been deployed in equity mutual funds, debt mutual funds, FDs and even PMS (ASK Wealth Advisors, MOSL etc.). This has led to a rather volatile treasury income and makes one wonder that it might have been better had they given this cash back to the shareholders and not played a star fund manager -

Particulars 2015 2016 2017 2018 2019 2020
treasury Income 19 25 33 31 30 6
Investments
Debt Funds 101 82 256 282 244 310
Equity Funds 55 66
PMS 37 41 39 53 56 41
Cash/FDs/Bonds 76 99 22 25 38 43
Total 214 221 317 360 393 460
Pre tax yield 9% 11% 10% 9% 8% 1%

Further, despite the growing sales, the company has barely invested in any new fixed assets, and thus its NFAT (Net Fixed Asset Turnover) has been increasing the years, and has now approached levels which are unusual for a manufacturing company –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Sales to FA 9.4 10.4 9.9 9.4 12.2 14.3 15.5 13.9 17.1 14.6

Valuation

Transformer companies have cyclical profitability and the upcycle for Voltamp would invariably follow industrial capex. The fascinating 2016 edelweiss report above got almost all their research right, but anyone investing in transformer companies relying on it would have lost their money simply because forecasted uptick in capex never materialized. This is one of the few companies where I am thinking hard on the role of a trigger. (generally I just sit tight)

Voltamp has a market cap of 1,120 crores (at LTP of INR 1,110), with cash in books of 562 crores, giving it an EV (enterprise value) of 560 crores. With Fy20 core profits of 78 crores, voltamp is currently trading at 7x PE, which is quite cheap. However, there is a big question on the sustainability of this 78 crores (H1FY21 profits are 21 crores). Hence, I have currently initiated a tracking position, and will certainly add more based on FY21 performance.

Open questions

  1. What is the brand value of Voltamp to its customers? (scuttlebutt in progress)
  2. How do industrial customers go about the process of choosing a transformer? What parameters do they look for?
  3. What is the reason for the bill discounting income to appear in its books?
  4. How is the company able to have such high fixed asset turnover?
  5. What kind of advantage does it get on paying its creditors promptly?
    Feel free to get back in case of any comments or in case you need any data in excel.
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