Unlike most other transformer makers, Voltamp Transformers (VTL) is mainly focused on the industrial transformers including power and distribution and dry-type transformers.
The main customers profile is the corporate sector which was adversely affected by the credit crunch. As a result, several projects were either deferred or delayed. This reflected in terms of lower volumes (MVAs) delivered in Q1 FY10.
As against transformer sale of 2510 MVAs in the first quarter of FY09, the company sold 1590 MVAs in Q1 FY10. The company’s current order backlog indicates close to 10000 MVAs of transformer capacity to be delivered in FY10 which is roughly the same as in FY09.
In value terms, the revenue growth may lag given pressure on realizations and lower material prices which the company would have to pass to the customer.
EBITDA margins dipped in Q1 FY10 due to lower volumes coupled with pricing pressure. The company indicated that project execution activity has slowed down which is resulting in clients taking longer to take delivery.
The management has indicated that new transformer capacities that have come onstream especially in the state of Gujarat. It is expected that the second quarter would also be low on fresh dispatches and bulk of the large orders are for deliveries from Q3 FY10 onwards. Thus there is a significant possibility of margin pressure continuing into Q2 FY10.
Voltamp is currently trading at valuations of 9.9x FY10 earnings. In the current year, we expect earnings growth to succumb to margin pressure.
In our view, this would restrict further rerating of the stock. We maintain REDUCE with a price target of Rs850 (Rs800 earlier).