Transforming capacity

IPO REVIEW

Transformers & Rectifiers is banking on its greenfield unit to take on the transformer majors.

Ahmedabad-based Transformers & Rectifiers (India), which makes transformers for power and industrial applications, is expanding its transformer capacity and range. The company is setting up a greenfield facility at Moraiya, near Ahmedabad to manufacture 400 kV class transformers.

Transformers & Rectifiers (TRIL) has facilities in Changodar and Odhav in Gujarat to manufacture transformers up to 220 kV with a combined capacity of 7,200 MVA.

The new transformer facility will increase capacity to 23,200 MVA by FY09, and from being a marginal player, it will be placed among the top five transformer players in the country.

More importantly, it will open up the high margin 400 kV plus category for its products. TRIL wants to raise equity of Rs 127 crore to Rs 140 crore to fund the Rs 60 crore facility. The balance IPO money will be used to fund working capital requirements.

Capacity expansion
Though a large number of players in the sector are implementing expansion programmes, TRIL believes that there is enough demand to justify its expansion. With 1 lakh MVA of annual transformer demand for the next five years emanating from the power generation, industrial applications and the replacement segment, the transformer sector is expected to grow by 35 per cent a year for the next five years.

With the new plant expected to be commissioned in the second half of FY09, the company believes it will be difficult to get 400 kV orders initially. To tackle the pre-qualification condition of having supplied such transformers to customers before, the company intends to offer the first batch of transformers to one of its existing clients at a discount.

It has chosen this path instead of tying up with a foreign collaborator as it believes that there is no value addition by the foreign player on the design or production improvements and it comes at a high cost.

Till the first order is received (end FY09), the company plans to use this facility to manufacture power and industrial transformers of up to 220 kV class.

Says Jitendra Mamtora, the company's chairman and managing director, "We would like to achieve a high load factor with good margins at the new plant." Power transformers are a high volume low margin game, while industrial transformers are the opposite and offer operating margins of up to 30 per cent.

Industrial focus
The company makes furnace and rectifier transformers for industrial applications. In the furnace transformer space, the company says that it is the leader with a 50 per cent market share. States Mamtora, "The market for furnace transformers is Rs 80 crore and TRIL's share is Rs 40 crore."

These transformers find application in the steel and ferro-alloy sectors and contribute 15 per cent (Rs 32 crore) to TRIL's sales. The company wants to improve its share of this market which is growing at an annual rate of 20 per cent. "The operating margins for furnace transformers are around 30 per cent and are the highest for all categories of transformers," says Mamtora.

A strong order book
As of November, the company is sitting on a Rs 360-crore order book (1.4 times FY07 sales) for transformers of varying capacities to be executed over eight months.

Nearly two-third of this order book is for utility clients while the rest is for industrial applications. A large chunk of the orders are for 132 kV and 220 kV class transformers.

"While average realisations for the company stands at Rs 5.5 lakh per MVA, smaller class (below 220 kV) fetch Rs 8-9 lakh per MVA while the higher class transformers get half of that," says Mamotra.

The company will bank on its existing two plants at Changodar and Odhav with capacities of 6,000 MVA and 1,200 MVA to sustain its growth momentum as the new plant is unlikely to come on stream before the second half of FY09.

While the order book is likely to significantly improve once the new plant is operational, the company will face stiff competition in the higher class transformers where it has neither the technology nor experience in selling the product. It is depending on in-house technology and sales record to overcome the challenges in selling this new category of transformers.

The company also has to contend with high raw material costs (copper, galvanised steel and transformer oil) which account for 70 per cent of raw material costs. "We are including a price escalation clause in most contracts, while for others we hedge for copper to take care of the volatility," says Mamtora. 
 

TOUGH TIMES AHEAD
H1FY08  (Rs crore)	Bharat Bijlee	EMCO	Indotech	Voltamp	Transformer
Net Sales	251.47	338.49	90.75	277.35	126
% change	38.82	40.43	68.4	56.55	76.22
Operating Profit	47.25	45.24	26.38	57.76	25
% change	109.16	39.24	114.4 7	125.89	122.82
OPM (%)	18.79	13.37	29.07	20.83	19.84
Net profit	28.96	19.36	17.14	35.55	13
% change	128.75	19.73	119.18	137.32	133.81
NPM (%)	11.52	5.72	18.89	12.82	10.32
EPS TTM (Rs)	127.2	41.67	32.68	59.02	26
ROE( FY07) (%)	57.04	18.87	32.23	46.81	60
ROCE (FY07) (%)	69.88	25.72	48.04	67.96	62.24
Price (Rs)	3396.85	1342.2	615	1621.5	425/465
P/E TTM (x)	26.76	33.61	21.06	30.12	24/26
P/E FY08 (x)	22.65	19	17	21	22/24
P/E FY09 (x)	16.18	15	12	15	12/13

Valuations
The company's top line has grown at an annual rate of 67 per cent for the last five years while net profits have grown at 96 per cent in the same period.

For the six months ended September 2007, the company has recorded net sales of Rs 126 crore, EBIDTA of Rs 25 crore and net profit of Rs 13 crore. For FY08 and FY09, the company could hit revenues of Rs 360 crore and Rs 500 crore and net profit of Rs 72 crore and Rs 50 crore.

With estimated earnings per share of Rs 19 and 34 for FY08 and FY09, the company is available at 22 and 12 times at lower end of the price band of Rs 425 and 24 and 13 times at the higher end of Rs 465. These numbers are in line with other transformer players and the issue is not aggressively priced.

Issue opened: December 7
Issue closes: December 12