The Hindu Business Line : Voltamp Transformers: Invest at cut-off

The order book of Rs 250 crore is likely to be converted to revenues in the next 3-4 months and is a reflection of the growing demand for power equipment.

MR LALITKUMAR H. PATEL (left), Chairman and Managing Director, Voltamp, with Mr Kunjalbhai L. Patel, Vice-Chairman and Joint Managing Director. — Paul Noronha

Steady growth in topline, robust demand for transformers driven by power reforms in the country, and a stronghold in the dry transformer segment lend visibility to the earnings growth of Voltamp Transformers (Voltamp). Investors with a penchant for risk can consider investing in the company's initial public offer (IPO) with one/two-year perspective.

Voltamp is a maker of oil-filled power and distribution transformers and also dry-type ones .

The IPO is an offer for sale of 48.84-lakh shares; there is no fresh issue of shares, at present. Post-issue, the promoters (who are actively managing the company) will hold 51.7 per cent in the company.

In the price band of Rs 295-345 the share will trade at 9-11 times its expected FY-07 earnings. This is at a discount to its closest peer, Indo Tech Transformers. The valuation is attractive considering the company's superior return on equity compared with a bigger player such as Emco.

In the above price band, the stock's market capitalisation would be Rs 300-350 crore. The stock's small market cap can expose it to liquidity risks in a volatile market.

Voltamp's bottomline witnessed a compounded growth of 60 per cent during the last three years with an equally robust sales growth. While the present offer will not result in expansion of capacity, Voltamp increased its installed capacity from 4,500 MVA to 5,400 MVA in FY-06, the full effect of which is likely to be seen in FY-07 production.

The company's capacity can be stretched to 6,500 MVA on a three-shift basis. Its order book worth Rs 250 crore (70 per cent of FY-06 revenues) is likely to be converted to revenues in the next three-four months and is a reflection of the growing demand for power equipment.

We expect the demand for transformers in the industrial and power utilities segments to drive business in the range at which the company currently operates.

Revenue and business model

Unlike a majority of transformer-makers, Voltamp derives a significant portion of revenue from industrial segments and large turnkey contractors. In FY-06, it derived less than five per cent of its revenue from the State electricity boards (SEBs). The company's top customers include ABB, Larsen & Toubro, and Hindalco.This revenue model addresses two issues. One, the company's receivables face a lower risk of delayed payments or bad debts, especially vis-à-vis the State Electricity Boards.

wo, while the actual volume produced may be low, the transformers are customised to suit the various industrial segments and hence tend to be high-value orders.

Thus, the revenue model appears to have an edge.

While oil-filled transformers are the major contributors to Voltamp's revenue, its dry transformer segment has grown rapidly and now contributes close to 25 per cent of the revenue.

Backed by foreign technology that has been fully absorbed and government regulations on safer equipment, we expect this division to accelerate topline growth.

The company at present commands 45-50 per cent of the market share in the dry transformer business.

Limitations

Increasingly, players such as Emco are widening their presence in project execution. Voltamp has so far not ventured into such business.

This may see the latter's margins appear less attractive compared with vertically integrated players.

The company had negative operating cash flows in FY-06. This was the result of huge inventory, post bulk purchases, as the comoany did not have commodity hedging.

Since Voltamp has fixed pricing with customers, it now resorts to hedging the cost of raw materials such as copper through its supplier to protect margins.

Lack of hedging at any time may result in relatively steep increase in raw material costs compared to peers as a number of them who cater to SEBs have price escalation clauses.

Offer details

The offer for sale is open from August 24 to 29.

Enam Financial Consultants is the book running lead manager.

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