Kotak puts ACCUMULATE on Voltamp Transformers

Voltamp caters to a broad spectrum of industries across the core sector. Within the industries, metals, construction, sugar and cement account for roughly 45-50% of the turnover.

Given the sharp correction in metal prices and moderation in demand, several players have cut down on fresh capex commitments, which is resulting in severe slowdown in new orders.

While the utilities (SEBs) remain the largest customer segment for the transformer makers, Voltamp has traditionally focused on the non-utility segment or the industrial segment.

Marquee client base includes Reliance Industries, Jindal Steel, Hindalco, DLF, Infosys Technologies ABB, Siemens, Larsen & Toubro, Torrent Power and Suzlon.

However, with the industrial segment showing signs of cyclical downturn, the company has started taking orders from the SEBs as well.

The company is spending around Rs350 million for creating greenfield manufacturing facility. On completion in Q4 FY09, the total installed capacity to manufacture transformers will increase to 13000 MVA from the present 9000 MVA.

The company is comfortably placed to post a net revenue of around Rs7-7.5 billion in FY09. It has achieved net revenue of Rs3.4 billion in H1FY09. With an order backlog of Rs3.5-4 billion, Voltamp has adequate comfort in achieving the target revenues.

Outlook and valuation

The stock is currently trading at inexpensive valuations of 3.8x and 4.9x FY09 and FY10 earnings respectively. At the current price, dividend yield works out to 3.9%, which is attractive.

Dividend payout has been low at 16% in FY08, and we see scope of increase in dividend payout as the company has adequate cash surplus.

We are however, reducing our target price for the company by building in stresscase scenario. In our DCF model, we have forecast a 6% CAGR in revenue growth beyond FY10 till perpetuity.

Similarly, in the model, we have forecast operating margins to decline from 21% in FY08 to 14% in FY11 and thereafter. We have taken a WACC of 13.6% and reduced terminal growth rate to 3%. Thus we arrive at a price target of Rs472.