The Hindu Business Line : Indo Tech Transformers: Invest

STEADY growth in revenues, imminent benefits from key reforms in the power sector and sound customer base lend optimism to the growth prospects of Indo Tech Transformers.

On line are expansion plans that should ramp up the revenues from 2007. An investment in the company's initial public offer may be considered with a two/three-year perspective. At the offer price of Rs 130, the stock would trade at a multiple of 14 times its expected FY-06 per share earnings.

The company makes power and distribution transformers. With a presence mainly in South India, it supplies to a number of State electricity boards (SEBs) and turnkey contractors such as Larsen and Toubro and ABB. sThe proceeds of the fresh issue are to be deployed in relocating, expanding and modernising the existing plants and setting up a dry type transformer plant. Post-issue, the company's equity base would rise to Rs 10 crore.

Moving up the value chain

Moving up the value chain.

The company has climbed up the value chain from producing small distribution transformers to those with high ratings, which have better margins. The proposed manufacture of higher range power transformers is expected to boost the current margins and expand the company's client base. Expansion of capacities in the distribution transformer segment may see demand with the increased focus on distribution facilities by SEBs.

The company has already forayed abroad, supplying to North American power utilities. Due to capacity constraints, the revenue from exports has remained quite small. Increased capacity may see the company ramping up export revenues.

Comfort in margins

Indo Tech Transformers has improved its operating profit margins from 8.5 per cent in 2003 to 15 per cent for the half-year ended September 2005.

The improvement can be attributed primarily to a chunk of revenues coming from the power transformer business, where the margins are better than in distribution transformers. Volumes have also driven the OPM. The annualised growth in sales over the past three years stood at 24 per cent.

Inclusion of price variation formula (PVF), which allows price variations in raw materials to be passed on to the customer, is likely to protect the company from steep increase in key inputs such as CRGO steel and copper. The PVF clause has been built into 85 per cent of the current order-book of Rs 136 crore. Going forward, margins are likely to sustain or slightly improve as a result of expansion of current capacities and manufacture of higher range products. Both the operating and net profit margins are now superior to peers such as Emco.

Macro demand drivers

The Electricity Act, 2003, the Accelerated Power Reforms Development Programme (APDRP) and the formation of the National Power Grid are key developments that can push the demand for power equipment. Indo Tech has obtained approval as a supplier of 132 kV power transformer for Power Grid Corporation.

Hence, the company is likely to get its share of business from the investments made for inter-regional transfer of power, as envisaged by the National Power Grid.

Multi-licensing in distribution (wherein more than one competing company can distribute power in an area through independent systems) is likely to give impetus to the transformer demand.

Indo Tech Transformers derives about 20 per cent of its revenues from engineering procurement and construction (EPC) contractors and has in the past received orders from companies such as ABB and Suzlon Energy. The robust order flow of turnkey power projects seen in these companies is likely to pave way for transformers demand.

Risks

While Indo Tech's plan to move to a higher range of power transformers would place it in the league of players such as Bharat Bijlee, the company may see increased competition from a few contemporaries. However, if the current pace of demand sustains, all organised players should be accommodated.

The company derives much of its revenues from SEBs, some of which are financially weak. Though the company has been able to recover dues on time so far, the risks of non-recovery remains high. This may affect the company's profitability.

Offer details: The offer is open from February 10 and closes on February 16. Enam Financial Consultants is the lead manager to the public offer.

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