Indo Tech Transformers Ltd --buy

Indo Tech Transformers Ltd.
Key Data


CMP
Rs 515
Date
October 15 th 2007
Sector
Capital Goods
Face Value
Rs.10
BSE Code
532717
52 Week H/L
Rs 586/ 163
Market Cap
Rs 547Cr


Investment Rationale
Indo Tech Transformers Ltd (ITTL) was established in 1976, is a leading manufacturer and supplier of transformers to Southern State Electricity Boards (SEB's) with installed capacity of 3450 MVA and market share of 15 percent. The company till date has supplied over 56000 transformers of various capacities (UP 100 MVA) to over 3900 clients in India.
The company is expanding its current capacity of 3450 MVA to 7450 MVA through a greenfield facility at Kanchipuram, Tamilnadu with an investment of Rs48.6 crore. The plant is likely to be commissioned by October 2007. ITTL has already expanded its Thirumazhisai facility (near Chennai, India ) from 1800MVA to 2400MVA at an investment of Rs4.60 crore (US$1.05 Mn) during Sept / Oct 2006.
The company has order book of Rs128.33 crore comprising of 26% distribution transformer and 74% power transformer to be completed in next 6-9 months. Nearly 86% order book is from SEB's (State Electricity Boards) and 14% is from industrial clients. The company has entered into JV with E.I. Dupont for manufacturing of dry type transformers with installed capacity of 100 MVA. The dry type transformers has better future prospects due to booming realty sector coupled with higher realization, as the average realizations in dry type distribution transformers is better at Rs6.75 lakh per MVA (after paying 3 percent royalty to E I Dupont) as compare to Rs.6.5 lakh per MVA in other transformers.
The company has reported 48 percent 115 percent jump in revenue and profit in Q1FY08 to Rs39.38 and 6.90 crore respectively along with margin expansion of 767 bps and 2.51 bps at operating and net profit level to 25.01 percent and 17.52 percent respectively.
The current installed capacity of Indian transformer industry is around 1200000 MVA which is expected to be 1800000 MVA by 2010 owing to massive capacity expansion of over 82000 MW of power by Government of India to 210000 MW by 2010 to achieve its objective of power for all by covering 125000 remaining villages in its flagship program Bharat Nirman Yojna in next 5 years.
The above scenario translate into approx 130000 MVA of transformer demand per annum in addition to the replacement demand of 15000 MVA, both put together would be 145000 MVA per annum is creating huge gap between actual demand and supply.
Going forward, the company would be concentrating more on corporate clients having large residential & commercial projects like integrated townships, SEZ's, IT parks etc. The company has already identified more than 43 cities and town where heavy real estate activities are on full swing to market its distribution transformers. The sustain order inflow coupled with rising sales of high capacity transformers would continue to drive future revenue and earnings.
Key Developments:
Strong order book of Rs128 crore
The company has robust order book of Rs128 crore to be completed in next 6 to 9 months. It has the virtual monopoly to supply transformers to SEB's in southern parts of India . Given the massive capacity addition through captive power plants, merchant power plants, Ultra Mega power plants etc., the demand for power transformer is likely to be surged going forward.

Segment Wise Breakup
Rs Crore
%
Distribution Transformer
33.31
25.96
Power Transformer
95.02
74.04
Total
128.33
100.00
Client Wise Breakup
Rs Crore
%
State Electricity Boards
110.9
86.42
Industrial Clients
17.43
13.58
Total
128.33
100.00

Forayed into dry type distribution transformer in JV with E.I. Dupont
The company has entered into JV with E.I. Dupont for manufacturing of dry type transformers with installed capacity of 100 MVA. The dry type transformer is safer than oil transformer in case of bust causing minimal damage. The booming realty sector like integrated townships, IT Parks, SEZ's, Hotels etc. are the prospect demand drivers going forward. The company has already identified more than 43 cities and town where heavy real estate activities are on full swing to market its distribution transformers.
Financial Performance:
115 percent jump in Net Profit along with margin expansion.
The company has reported 115 percent growth in net profit to Rs6.90 crore in Q1FY08 along with 251 bps expansion in net margin to 17.52 percent. The operating profit surged by 165 percent to Rs9.85 crore along with 767 bps expansion in operating margin to 25.01 percent. The margins expansion is attributed to 19.30 percent point reduction in raw material as % of sales to 70.98 percent in Q1FY08.
Valuations:
At current market price of Rs515 the stock is quoting at a PER 18.81x. On EV/Sales and EV/EBITDA it is available at 2.99x and 11.83x of TTM June 07 earning respectively.




Industry Scenario
India at 60 since her independence remains as power deficient nation. The peak demand deficit is still around 14 percent. Nearly 20 percent of Indian villages ( 56.5 percent of rural households, 7.78 crore population) don't have power supply. The government of India has started Bharat Nirman Yojna in 2003 to provide power to remaining 125000 villages by 2010.

Power Situation
Demand
Met
Surplus/ Deficit
Energy
572,812 MU
519,656 MU
-9.30%
Peak Demand
100,403 MW
86,425 MW
-13.90%

Source: Ministry of Power
The achieve the above target it has plan to add another 100000 MW by 11th plan to expand its exiting capacity of 127000 MW. The expected investment is around Rs4.5 trillion.
Plan Investment in power sector

Segments ($ Billion)
X Plan (2002-2007)
XI Plan (2007-2012)
Renovation
2.3
3.5
Rural Electrification
9.2
13.8
Distribution
10.4
11.5
Transmission
13.2
16
Generation
57.1
70.4

Source: Central Electricity Authority
India, in order to achieve the above target would require a massive expansion in transmission and distribution network.
Transmission and Distribution (T&D) network would further propel the over all demand for transformers. The Indian transformer industry has grown 16 percent in last couple of years which is expected to grow 22 percent in next five years.
The investment in T&D has been remains ignorant for many years resulting into mismatch between actual generation and consumption. The government of India plans to invest over Rs2.5 trillion on T&D due to massive capacity expansion of over 100000 MW.
The current expanded capacity of Indian transformer companies is 127250 MW which not sufficient enough to meet the growing demand.

Key players
Installed capacity
(MVA)
Recent / Proposed
expansion (MVA)
Total
(MVA)
Crompton Greaves
23,400
7,000
30,400
BHEL
12,000
4,000
16,000
Areva T&D
8,500
-
8,500
EMCO
15, 000
5,000
20,000
ABB
10,000
-
10,000
Voltamp
5,400
-
5,400
Bharat Bijlee
8,000
3,000
11,000
Indo Tech
3,450
4,000
7,450
IMP Power
3600
2400
6000
Vijay Electrical
12500
0
12500
Total
101,850
25,400
127,250

Source: Company
The massive capacity addition in power generation of over 100000 MW in next 5 years is expected to fuel the demand for transformers going forward. The demand for transformers is expected to grow at 1300000 MVA per annum in addition to the replacement demand of 15000 MVA per annum.
Outlook
India being a power deficient nation requires huge investment in T&D networks to reduce the gap between actual generation and consumption of power. Given the expected demand for the transformer, we believe the company is well equipped with its expanded capacity to serve the surging demand. Going forward, the company would be concentrating more on corporate clients having large residential & commercial projects like integrated townships, SEZ's, IT parks etc. The company has already identified more than 43 cities and town where heavy real estate activities are on full swing to market its distribution transformers. The sustain order inflow coupled with rising sales of high capacity transformers would continue to drive future revenue and earnings.
Developments and Impact
Strong order book of Rs128 crore
The company has robust order book of Rs128 crore to be completed in next 6 to 9 months. It has the virtual monopoly to supply transformers to SEB's in southern parts of India . Given the massive capacity addition through captive power plants, merchant power plants, Ultra Mega power plants etc., the demand for power transformer is likely to be surged going forward.

Segment Wise Breakup
Rs Crore
%
Distribution Transformer
33.31
25.96
Power Transformer
95.02
74.04
Total
128.33