Expected improvement in demand scenario for transformer and industrial motors augur well for the bounce back
India is expected to add a generation capacity of 62,000 MW in the 11th Five-Year Planas against the original 11th Plan target of 78,700 MW. Against the expected capacityaddition, of the country had added just 25,721.77 MW till November 2010, thus leavingabout 36,278.23 MW to be added in the balance period of about 16 months. Though thegeneration capacity addition target for the 12th Plan is not yet fixed, it may in upwardsof one lakh MW.
Given the thumb rule of 10 MVA of transformer demand for every MW of new generationcapacity, the demand in the next six years and three months is expected to be about 13-14lakh MVA. Even if about 80% of the current expectation of one lakh MW of generationcapacity addition happens in the 12th Plan, fresh demand for transformer will be about11-12 lakh MW in the next six years and three months. This translates into an annualtransformer demand of more than two lakh MVA.
If the expected replacement demand of about 20,000-25,000 MVA per annum and theprojected export demand of about 18,000 MVA per annum is taken into account, the currentunfavourable demand-supply scenario for transformers is expected to vanish given theaggregate transformer capacity of the country is expected to be around two lakh MVA perannum. This is all expected to result in improvement in realisation and profit for thecompanies operating in this industry in the short to medium term.
Bharat Bijlee (BBL) is one company well placed to gain from the demand scenario, whichwill turn from unfavourable to favourable. A leading manufacturer of power transformers inIndia, the company also manufactures a wide range of standard and customised low tensionelectric motors for industrial application, gearless machines for the elevator industryand other electrical products. Power transformers accounted for 72%, motors 23%, andothers the balance 5% of its revenue in the fiscal ended March 2010 (FY 2010).
A market leader in the 220-KV class of transformers, BBL caters largely to stateelectricity boards. Thus, the company enjoys the benefit of price variation clause for itsutility orders book. Due to the price variation clause, its sales value and margin go upwhen copper price moves up consistently, which has been the trend recently
Sales went up 11% to Rs 496.39 crore, and operating profit by 40% to Rs 61.22 in thenine months ended December 2010. Eventually, net profit was higher by 47% to Rs 35.12crore. Net profit grew a sharp 92% to Rs 14.18 crore even while sales rose an impressive28% to Rs 207.21 crore in the quarter ended December 2010.
The economy is expected to grow at around 8%, which would attract robust investmentsacross industries and, in particular, the power sector. This is likely to propel growth inthe markets in which BBL operates. Bearing this in mind, the company is continuing toinvest in the growth of the transformer and motor businesses, and in its projectsoperations.
BBL holds 28,25,160 shares of Siemens India. At the current price of around Rs 845, thecompany’s holding in Siemens India is worth around Rs 239 crore, which means aroundRs 423 per share of BBL. Notably, Siemens AG, Germany, which owns about 55% of the Indian company, plans to raise the stake to 75% and has offered to pay investors Rs 930 a sharein a voluntary open offer.
BBL has other investments in blue chip companies like Bank of India, HDFC, HDFC Bank,Hindustan Oil Exploration, and ICICI Bank. All these investments including those inSiemens are worth Rs 252 crore, which means around Rs 446 per share of BBL.( current market cap ..575 cr only)
Disinvestment of these holdings, as and when it happens, will unlock substantial value.Even if this investment is not sold, its value will only increase due to excellent growth prospects of these investments.
BBL’s book value was Rs 397 end March 2010. At the last AGM, the management hadindicated that it was willing to give bonus or consider stock-split at or before the nextAGM.
We expect BBL to register EPS of Rs 101.6. in FY 2011. The share price trades at Rs1020. P/E is 9.5.
Source: Capitaline Databases
INVESTMENT DETAILS
28,25,160 Equity shares of Rs. 2 each of Siemens India Ltd.
1,02,980 Equity shares of Rs. 10 each of HDFC Ltd.
15,821 Equity shares of Rs. 10 each of ICICI Bank Ltd
3,33,333 Equity shares of Rs. 10 each of Hindustan Oil Exploration Co. Ltd.
500 Equity shares of Rs. 10 each of the HDFC Bank Ltd.
5,400 Equity shares of Rs. 10 each of Bank of India
In Mutual Funds
11,768,150 Birla Sun Life Savings Fund - Instl - Growth 2057.15
16,904,703 HDFC Floating Rate Income Fund - Short Term Plan - Wholesale -
Growth
2651.49
296,752 ICICI Prudential Flexible Income Plan Premium - Growth
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