The power opportunity

IPO REVIEW

Voltamp IPO looks reasonably priced considering that it has potential to post steady growth over the next few years.

Power equipment makers are having their moment under the sun with continuously rising demand for their products, and reforms in the sector. Smaller players like Voltamp Transformers too are queuing up to get a piece of the action. It will soon enter the capital markets with an IPO to enhance its brand and visibility.

Voltamp Transformers plans to raise funds in the range of Rs 144 crore to Rs 168 crore through the issue of 48.8 lakh shares of Rs 10 of which 95 per cent will be offered to investors.

With one of the promoter families selling their stake (48 per cent) in the company, the shares would be offered to the public within a price band of Rs 295-345 through a 100 per cent book building process. process.

However the offer seems to be good as well as bad. Good for the obvious reason of getting a stake in the business without any equity dilution. Bad since the money raised won't fund the company's operations. 
 

FINANCIALS
FY06 (Rs crore)	Voltamp	Indo Tech	Bharat Bijlee	Emco
Sales	248.80	92.70	300.80	405.40
Operating profit	33.10	16.60	49.60	45.80
OPM	13.30	17.80	16.50	11.30
Net profit	23.40	11.10	33.70	19.10
NPM	9.40	11.90	11.20	4.70
Price	295-345	173.00	975.30	536.50
EPS	23.20	10.40	59.60	24.10
P/E	12.7-14.9	16.60	16.40	22.30

Voltamp's valuation stands at 12.7 times its floor price and 14.9 times the cap price for its FY06 earnings. For the same period, the valuations of peers were higher - Bharat Bijlee (16.4x), Indo Tech Transformers (16.6x) and Emco ( 22.25x).

According to analysts, at the current valuations Voltamp looks attractive. With revenues increasing at a CAGR of 42 per cent and profits at 53 per cent between FY02 and FY06, analysts feel that the company has the potential to perform well in the future too.

40-year old Voltamp Transformers manufactures power and distribution transformers used across a spectrum of industries like petrochemicals, oil refining, cement, steel, paper, mining, auto, power plants, metro rail and buildings. It produces both oil filled and dry type transformers.

The company's plant at Makarpura, Vadodara has a capacity of 5,400 MVA (mega volt amperes) and manufactures up to 132 KV power transformers. Voltamp is a diversified player targeting engineering, EPC and industrial segment players as most of them require customised products and offer better margins.

Its top clientele includes leading names such as Reliance, Jindal Steel, L&T, Siemens, ABB, Torrent Pharma and Suzlon, which contributed about 31 per cent to FY06 revenues.

Transmission and distribution equipment makers are in huge demand and are pocketing major orders on the back of power reforms and rural electrification projects.

"Transformer producers are sure to see good growth in the coming years as the annual domestic demand will jump to 1,40,000 MVA from the current 1,10,000 MVA in a couple of years. Moreover, with a good technology base, Indian manufacturers are also eyeing overseas markets," says Avinash Barve, senior director operations, Indian Electrical and Electronics Manufacturers' Association.

Voltamp derives a major portion of its revenues from distribution transformers. The power segment chips in with the rest. In fiscal FY06, distribution and power transformers contributed Rs 148 crore and Rs 100 crore respectively.

The company is a leading player in dry type distribution transformers, which contributed about 22 per cent to revenues. There is a large demand for rural electrification transformers from state electricity boards (SEBs), but the company has reduced exposure to this market segment due to delayed payments. The SEB business contributes 5 per cent to total revenues.

In future, the revenue mix may see a tilt in favour of dry type transformers as the company plans to increase the market share in the segment. These explosion proof units are around 70 per cent costlier than normal transformers and are meant for hotels, skyscrapers, hospitals, entertainment malls and factories.

The company has tied up with two German manufacturers to produce specialised dry type transformers. They have a longer life, require lower maintenance and offer higher margins as compared to regular oil-based ones.

The company now plans to foray into international markets such as West Asia, Africa and south East Asia, which offer business opportunities. Voltamp holds orders worth Rs 250 crore executable in the current fiscal, which does not appear very impressive.

But analysts are not perturbed given that its peers also have order book equal to last year's sales. In FY06, the company earned revenues of about Rs 249 crore, a 42 per cent increase compared to FY05. Operating and net profits increased by 50 and 60 per cent to Rs 33.11 crore and Rs 23.43 crore respectively.

The operating and net margins stand at 13.3 and 9.4 per cent respectively, which are lower compared to peers like Bharat Bijlee and Indo Tech Transformers.

"No doubt, Voltamp's business is in line with its peers but with 20 per cent of revenues coming from the high margin dry type transformer segment, the margins appear much lower than what they ought to be," says Sameer Ranade of Pioneer Investment Intermediaries. The stock is however reasonably priced and the IPO may be worth subscribing to.

Issue opens: August 24
Issue closes: August 29