Voltamp Transformers

[shardhr]

@bozo_investor : - Connecting with you after quite some time. Another gem of an analysis from you. Our paths cross again here as I too looked into this as a value pick. Below are my answers\partial explanations to some of ur questions( based on my prelim analysis of the co. and some of its private competitors, which it seems are more than mkt cap of the company )

1. What is the brand value of Voltamp to its customers? (scuttlebutt in progress)

• The brand value of anyone in the industry doesn’t seem to be an imp factor at all. How I concluded this - none of the players, including Voltamp, market or try to build themselves as a brand. They only mention there manufacturing tech as unique - Cast resin in this case, but that too everyone mentions and probably uses to manufacture eventually. It seems nothing patented in that too, and when thr’s nothing unique, no company tries to invest there

2. What is the reason for the bill discounting income to appear in its books?

The co. uses bill discounting owing to its esteemed client base. To fasten the receivables cycle, banks discount payments for its established customers and releases payments early to them. This has improved Cash conversion cycle for the co. which they used to invest extensively. not in business, but in liquid assets

3. How is the company able to have such high fixed asset turnover?

This seems to be an industry attribute and the cause of intense competition. The process is less capital intensive and more of a labor assembly thing. So, once the raw materials are in place, its more of controlling employee costs play.

In fact, if u normalize the revenues, the NFAT has been consistently over 10 barring the period where thr capacity investment happened earlier than the business volume growth.

4. What kind of advantage does it get on paying its creditors promptly?

The co.'s raw materials are primarily imported or intl’l price linked and they don’t hedge the same. So, delayed payments always run a currency risk in case of Rupee devaluation. This situation happened arnd 2010-11 earlier and is a very potent risk in future as well. Yes, settling payments promptly mitigates it to some extent, but doesn’t eliminate it.

I’ll quote directly from an ET article on Sumeet Nagar’s investing journey : -

Failures in the early years of an investor are generally due to either one’s inability to evaluate all the factors affecting a business or in some rare times, due to one’s eagerness to make an investment. For him, one such example was Voltamp Transformers, a company which he admires.

“We invested in it in late 2011, during the euro crisis and thought we had managed to buy it cheap. Our stance was vindicated when the price rebounded in early 2012. However, as the year progressed and the rupee continued to depreciate, we found out that many of company’s raw materials, even when sourced locally in rupee terms, were linked to international prices. This meant their cost was going up as demand position was continuing to weaken, which meant limited ability for it to pass on those higher costs. Once we realised the mistake, we decided to exit at a loss,” he recalls.

I can share the complete article link, if required.

Awaiting urs\other investors views.

Disclosure : - Not invested. But on my watchlist.

[bozo_investor]

hi @shardhr

thank you so much for your response! this is really helpful.

following were some of the points that can also be considered -

1. on the bill discounting income - if the company is factoring its receivables, shouldnt biil discounting be a cost to the company and an income for the bank?
   This certainly has benefitted the company, but i do not see the corresponding costs.

2. Although they should ideally not be running such a large treasury, if one looks back at how the cash was accumulated, the current cash has been accumulated ever since the up cycle years, and this gradual cash build up can be seen in its books, while in the competitors books, this translated into additional capacity.

agree on your points with respect to lack of branding, early payments to creditors and NFAT. i wonder if the business is less capital intensive, why is overcapacity such a major challenge?

the Sumeet Nagar interview link is currently under a paywall, but you have adequately pasted the voltamp related extract above.

Also, there was one question that i was trying to figure - would you know the initial cost : maintenance ratio for industrial transformers? If the service contract is large and can only be served by Voltamp, the tail end income could be very profitable (had observed this in compressor companies)

Services income has only been 2% of sales for the company, so i doubt if this can work, but i thought it would be an interesting way to think through things.

[shardhr]

@bozo_investor : -

The costs regarding BD is a very valid and important point and can be checked with the company directly. They might have adjusted that in reported revenues but better to get the confirmation from the company.

I’ll digress a bit here now. An interesting thng happened while doing Voltamp competitor analysis, I discovered a related company that seems a better investment candidate qualitatively. The co. is - ABB Power Products and Systems India Limited - recently demerged from ABB and taken over by Hitachi ( the latter event happened first).

While I plan to start ABB Power Products thread soon, once I complete my analysis, I would like to mention few points as to why it is better than Voltamp : -

1. While Voltamp is a transformer manufacturer, ABB Power provides comprehensive grid solutions across industrial sectors. Basically wherever a power management solution is required, they’ll provide it and transformers is a part of their product portfolio. Also, the services profile is more sticky as customers who vl get systems installed thru them will engage them for ongoing maintainence too.

2. The co. benefits from parent co’s technology platforms which are need of the hour for digitization in industrial power mgmt. This trend is going to accelerate as it helps in reducing costs in managing integrated power supply systems

3. The parentage - The co.'s parent has been transferred from ABB to Hitachi. Both are MNCs with relatively better standards of governance. While these businesses becomes cash generating as we’ve analysed above, it can be counted that the company will be paying out dividends to its parent ( and shareholders too)

4. Relative valuation : - Optically, Voltamp transformers looks cheap. But once I analyzed ABB’s current customer base and future scope for thr businesses and services, I find it to be a quality worth paying up for case. And with scope and long runway of growth ahead of them the current mkt cap of 5500 crs. doesn’t seem expensive.

5. Its a spin-off and spin-offs generally have a better record of outperforming. This is purely frm probabilistic point of view but still tilts the odds in ABB’s favor.

Moderators can flag\remove the post on grounds of irrelevance but my only point here is to highlight the discovery of a better investment idea while working on an another one and an investor’s open mind to accept the same in light of facts.

Disclosure :- No investment in Voltamp. Tracking position in ABB Power Products India

[bozo_investor]

hi @shardhr - i have written to the company.

and wow, i am quite delighted in reading your points on ABB Power Products. I too would like to read up on it.

looking forward to the upcoming thread.

[rishit.05]

Hi all

I was on a call with the management of Voltamp Tranformers Ltd, represented by Mr. Kanubhai Patel (Chairperson)
Have created some rough notes

Summary:

1. Some prominent names on the call = Valuequest, Alchemy
2. Industries they cater to = Chemical, pharma, mobile (apple, tata comm), cement, steel, IT infra like data centres, Oil & gas, solar, wind, thermal, infra, pollution control equipment, sugar, F&B, fertilizers, dairy, defense and water. Basically, everyone needs a transformer whether old infra or new infra
3. Tailwinds = Infra push by the government, china + 1 & PLI, GDP growth proxy
4. Capacity utilization = Q2 current year was at 35%, Q3 at 70% & Q4 will be at 95%. Q4 last year got impacted due to Covid in the middle of good business traction and till July end there was barely any work
5. Pricing power = Even if the capacity utilization goes to 99%, they will not have pricing power like in 2008. This is because the industry is at a utilization of 60-65% only. But when their own utilization is high, they can easily let go of non-remunerative prices. They even let go of business regularly, if prices do not suit them. Pricing power was about to come back but due to Covid, we have gone back in time. We should be at the same place in a year now. When utilization is at 99%, we will start asking for our prices and then see how our customers respond or if we lose business
6. Edge = Quality, service and on time delivery. Because of this for many companies like L&T, Siemens etc, they will always be their 1st supplier of choice
7. Competitive scenario = No new player has come in for 10 years now. Few have gone bankrupt and some others are not showing it but are already in no position to take more work. Some were going out but got a lease of life due to the moratorium. Also, you can’t compare financials of transformer companies because it depends on what segments you serve and what voltage class you operate in
8. Temporary impact = Due to unprecedented rise in RM prices, margins may drop temporarily by 150-200 basis points. What happened is that they took new orders right before the pandemic and will now have to fulfill orders based on RM prices at that time. The impact will be close to 70-75cr of sales (which will be of lower margin) for the next two quarters. The remaining 90%+ orders are at new prices
9. Guidance = When asked about sales growth guidance, it was more like ‘If I can know the GDP growth, I will tell you the sales growth’. Most like by July 2021, things should be like 2019 and things may continue growing from there
10. Order backlog = 529cr. But getting orders is not a problem and they don’t even want to create huge order books and get locked in on pricing.
11. Story = Upto 2009 it was great for them and then capacity increased across the board and then it has been flat for the entire industry, till now. Last year onwards we were defying the industry and were the only ones growing. We are the only stable company currently. Customers believe we are the only dependable player cause life of a transformer is for 30yrs
12. Opinion on the wind sector = Wind is a tough business - too many external things to depend on. We don’t want to do more than 10% from renewables cause lots of people will go bankrupt and we may get a problem of receivables. Renew power, tata solar and other 2-3 names are only good
13. Cash = 475cr on the balance sheet. 3000mpa brownfield capex can be done in a matter for 9months only at a cost of 35cr. Cash will be used to create capacity when demand comes back. Acquisitions are useless since we can create the same thing quickly
14. Technology change = No technological change in industry currently. Normally in this area we are always ahead of the curve. Specifically, in terms of material and design. We also have a tie-up with a couple of companies where they transfer technology and we pay them one-time.
15. Sales break-up = 40% to direct corporates. 40% to EPC players, 20% exports, replacement market and others. 90% of sales are to non-government players so receivables have not been a problem. . Since we are the largest supplier of energy efficient transformers, this is giving us some sales in replacement market. Others don’t have any replacement market

Its ROE was very high in the last cycle. Not sure it will get there again anytime soon but in high GDP growth times, this one could easily re-rate significantly given the balance sheet, management quality, control on receivables and diversified customer base

Invested

[shardhr]

“Its ROE was very high in the last cycle. Not sure it will get there again anytime soon but in high GDP growth times” - ROE is still very high if u net out cash and investments from the equity. The problem emerges whn u check point (7) and (13) together. - Whnevr demand comes back - jst as easily they can put up new capacities, so can other\new players. The industry has low entry as well as low exit barriers it seems.

Disclosure : - Not invested.

[sangeet_lakkar]

thanks for these notes. do they conduct quarterly calls as i couldnt find any transcripts/ invite ?

[hiteshchauhanca]

i dont find any concall details on company website

[vignesh_iyer]

The numbers look strong in Voltamp and market giving thumbs up to the same despite strike at savli factory. Q4FY23 would be even stronger.

[vignesh_iyer]

Very strong numbers by voltamp transformers . Stock up 17% today. Dividend total Rs 60
Voltamp.pdf (3.4 MB)

[RohitVerma]

what is record date for dividend

[vignesh_iyer]

Massive trigger post Bharat Bijlee Numbers in Voltamp. Interesting

[vignesh_iyer]

If anyone has AGM summary notes or anything , please do share here

[Avin]

Hi Mukesh,

was reading your old contribution on the thread. can you guide now that it seems huge transformer shortages are about to happen or happening already in the world.

I have some queries :

1. How much power transformer capacity is required to cater Indian renewable energy plan of 500 GW? do we have enough? which are the companies that have the most capacity and can built-up if required? TRIL seems to have good capacity of 4000 MVA but is it enough to cater the demand?

2. Companies like Shilchar have a lot of land bank to do brownfield expansion, how much time would it take to set new capacity and when typically the manufacturer decide to enhance the same?

3. I read the commentaries available from promoters through annual reports, concalls etc (esp. TRIL and Shilchar), it seems to me that the demand it growing very high but the promoter does not want to commit very high targets or numbers and decision to expand is also taken very prudently rather than aggressively.

4. what about tech improvements in the industry? can AI or any digital tech disrupt the whole industry? what is the possibility?

5. What are smart transformers? A threat to traditional players like TRIL, Voltamp, Shilchar?

6. Where does BHEL stands in transformer business?

Please help clarify the above.

[Hemant_Kumar2]

As long as there is electricity, we’ll need transformers, in my opinion. The likelihood of AI or any other tech replacing transformers is as high as the same replacing motors or turbines or boilers, or battery or any machinery that transforms energy from one form to another.

Smart transformers will be nothing but the same with sensors or other bells and whistles on them but role of transformers in electricity supply chain will remain the same unless scientists discover a new form of electricity which automatically controls itself.

Current capacity is clearly not enough given the order book of existing players and their current capacity utilization (in 90s). And per capita electricity consumption in India is still the lowest globally so directionally demand is going to explode as urbanization trend continues and Indians move up the consumption ladder.

Basic mechanism of transformers is simple and space has been quite small with a few players in it with limited scale of operations. So if this space starts expanding and become attractive to other players, given growth in power demand over several years, would current players like Voltamp, Techno Electric or Shilchar or TRIL be able to maintain their hefty valuations (all trading at 3-7x their historical P/E) amid increasing competitiveness?

That to me is the ultimate question one needs to ask.

[Raj_A_A]

Q1FY25 results are very good Y-O-Y and lower than that of Q4FY24.

The point to note here is that management has stated that commodity prices are going up and scarcity of CRGO material with increasing price trend would increase input costs .

… The Company at present is witnessing healthy enquiry pipeline. However, with the
steep run up in material prices, orders closing take longer time at purchasers’ end.
New projects announcement by private corporates is yet to get momentum post
election results. Looking ahead, the business outlook likely to remains stable,
boosted by steady domestic demand and continued government support for
green energy and infrastructure projects.

… The challenge going forward is with increased demand for transformers in local and international markets managing supply chain i.e sourcing required raw material and components at budgeted cost with timely supply. The lower commodity prices have supported corporate profitability in FY:24 but recent trends of uptick in input prices, led by industrial metal prices and scarcity of CRGO material is likely to result in higher input cost going forward.

In view of the above, it appears margins might have peaked in Q3/Q4FY24. And Q2 FY 25 results may not match sequential result trend.

Discl: Invested and pruned partial qty post results. I am not qualified to advice and take my opinion with pinch of salt.

[AmarP]

Thanks for the insights Raj. Excellent observation.
My take is commodity prices will be increasing for everyone across Transformer manufacturers so as Voltamp. In the end, this increase will be passed on to the end customer and might take One-two quarter to reflect in books. I am not form this industry hence can’t comment for pricing mechanism.
Still optimistic about the growth of Voltmap as Mgmt know how to use cash without taking debt.
Disc: My own opinion, Invested.

[Hemant_Kumar2]

I compared performance of ABB Power Products (now Hitachi Energy) and Voltamp and the latter has clearly been a better bet.

Since Dec 2020, ABB power products revenue has increased by 70% and earnings only 70%. Despite that stock price has gone up 8x which is not so much due to earning growth but crazy rerating of multiples.

Voltamp has doubled its revenue and earnings 4 times. Stock price has gone up 11x.

On the valuations front, ABB Power is at 250 P/E and 35 times book capping upside. Voltamp on the other hand is trading at 40 P/E and 10 times book and below average industry valuations still gives it some upside despite significant run up.

[Jitendra_Vyas]

Is transformer sector losing its charm?

All players in transformer and power distribution sector are looking technically weak since last 2 months including Voltamp.

[Hemant_Kumar2]

That’s the beauty of Bull run. Stocks don’t run for 2-3 weeks and we start doubting the story

I don’t think there is any weakness in the stocks or anything wrong with the transformer sector per se. These stocks have given massive returns in last 1 year and some profit booking and consolidation is understandable.

Let the earning season commence and based on the results, we’ll see interest in these stocks coming back.

Disc- Invested in Voltamp