• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Mr P. S. Shekar (left), Director (Operations), and Mr P. S. Jagdish, Executive Director.

Vidya Bala

Indo Tech Transformers has so far overcome the hurdles of slowing order flows and higher borrowing costs better than similar small sized peers.

The company has also improved its profit margins by effectively juggling its product mix. For the quarter-ended September 2008, the company’s sales grew by a healthy 27 per cent compared to the figures a year ago, while net profits rose 39 per cent.

At the current price of Rs 171, the stock trades at 3.3 times its expected per share earnings for FY-10. On a trailing basis, the price-earnings multiple is at an all-time low of 4.5.

Indo Tech Transformers may be a good option for investors looking for mid- and small-cap companies with strong growth potential. However, given the steep slide in the stock market, investors can consider buying the stock in small lots for every significant broad market decline of, say, 5 per cent or more.

While the stock would call for an investment perspective of at least three years, investors should consider a strategy of actively booking profits on it, based on target returns.

With a small base, Indo Tech’s profits grew at an annualised rate of about 70 per cent over the last three years. While such growth rates may no longer be a reality, doubling of capacities and the strong demand scenario for transformers are likely to convert into at least half the above growth rate over the next couple of years. Power reform in the country has seen Indo Tech rapidly building its order book over the last couple of years.

On the back of improved order flows, the company decided to scale up its operations by hiking capacities from 3350 MVA to 7450 MVA now.

While 2008 is proving to be a challenging year for a number of capital goods companies and this has triggered fears of excess capacity, Indo Tech has been successfully diverting its increased production into export markets. Exports contributed close to 20 per cent of sales for the quarter ended September 2008, from nil a year ago.

This has not only allowed absorption of new capacities but has provided support to profit margins, as export orders in this line of business tend to have better margins abroad.

An 18 per cent increase in realisation from Rs 6.79 lakh per MVA a year ago to Rs 8.02 lakh per MVA now, suggests the support lent by the export market, apart from a changing composition of revenue mix and firm commodity prices in the beginning of 2008.

However, such high realisations may not be sustainable as the company may have to shift to a strategy of targeting higher volumes rather than selecting higher margin orders to market its additional capacities.

This may also result in a more tempered operating profit margin scenario for the company. OPM at 34 per cent now is way above the industry range of 20-24 per cent. A volume-focussed approach could trim the OPMs to 26-28 per cent, nevertheless superior to industry averages.

Indo Tech’s practice of stocking up raw materials at the bidding stage proved to be beneficial in a rising commodity price environment. However, softening commodity prices could play a role in muting realisations if a similar strategy is continued. Copper, for instance, has tumbled to the lowest in three years recently.

Indo Tech’s changing order mix may, however, provide some respite on this front. Industrial/export orders now account for 58 per cent of the order book.

These orders, typically being fixed price contracts (which would not require the company to reduce prices on account of commodity price declines), may provide some support on realisations in the medium term.

Indo Tech has traditionally been dependent on SEBs for business, with this customer segment accounting for 80 per cent of the order book even in 2007. SEBs now account for only 42 per cent of the order book.

0The shift in order mix in favour of industrial orders comes as a positive to the company at a time when mid-sized companies are being challenged for funds to support working-capital requirements. Indo Tech usually receives advances against the orders of industrial customers and also realises the dues on delivery.

This is in contrast to the credit period of about 60 days provided to SEBs, post-delivery. Increase in orders from the industrial segment is likely to ensure that Indo Tech is not imperilled by stretched working capital cycles.

From a long-term point of view too, the shift in mix provides comfort, as the poor financial health of SEBs could put Indo Tech’s earnings in jeopardy if it were excessively dependent on the State customers.

In the context of financing, Indo Tech has managed well, with negligible debt at borrowing costs averaging less than 11 per cent; positive operating cash flows in FY 08 have also ensured funds for working capital.

Indo Tech has not had any phenomenal increase in order book during the quarter. In terms of volume, unexecuted orders remained steady at 1,696 MVA (Rs 117 crore) at the end of September quarter as against 1591 MVA in the first quarter. That there has been no dip in the order book position can be viewed as a positive.

The company has also actively explored the export markets and won orders as recently as this month.

More Stories on : Electrical Goods | Stocks | Recommendation

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line