For 9MFY09, Voltamp Transformers (VTL) PAT improved 45% to Rs846 million, while revenues climbed 13.4% to Rs4.76 billion.
While we estimate earnings to improve 41% for FY09E, we expect a decline of 11% for FY10E mainly on 3% volume decline and 360bps drop in operating margins.
This drop in margins is mainly on account of lower order intake and an almost depleted stock of legacy orders, taking out operational leverage.
VTL is a debt-free company and is expected to record free cash flow of 64% CAGR over FY09-11E in spite of only 5% revenue CAGR on the back of declining volumes.
At current EV/EBITDA of just 2x FY10E, we rate the stock BUY with a price target of Rs431, assigning an exit P/E of 4x FY10E (discount of 60% to its average two- year forward multiple of 10.8x), offering an upside of 28.4%.