Voltamp Transformers Ltd: Investment Thesis – Introspeck

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Continuing from the previous post, I found Voltamp Transformers Ltd. to be an outlier and decided to study it further. Based in Baroda, the co. is focused on small transformers (upto 22kv) and mainly caters to the industrial segment (90%+ sales). Below are its fundamentals –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Revenue 535 570 516 445 517 563 611 639 829 859
increase by 6% -10% -14% 16% 9% 8% 5% 30% 4%
 
EBITDA 12% 7% 7% 3% 4% 7% 10% 11% 11% 13%
EBIT 11% 6% 5% 2% 2% 6% 9% 10% 11% 12%
PBT 14% 9% 9% 8% 7% 11% 15% 16% 15% 13%
Tax rate 33% 31% 29% 23% 15% 26% 22% 27% 31% 21%
PAT 10% 6% 6% 6% 5% 8% 12% 12% 10% 10%
 
EPS 51 33 33 26 28 43 71 73 84 88
increase by -36% -1% -20% 8% 55% 64% 2% 15% 5%
 
Asset Turns 1.3 1.3 1.1 0.9 1.0 1.1 1.0 1.0 1.1 1.1
Totall Assets / NW 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1
 
RoNW 14% 8% 8% 6% 6% 9% 13% 12% 12% 12%
Core RoNW 16% 8% 8% 4% 6% 10% 19% 19% 20% 28%
RoCE 16% 8% 8% 3% 5% 9% 18% 19% 21% 28%

It can be observed that:

  1. Voltamp has not made operating losses in any year, even when all other players were near the brink in 2014.
  2. It has not undertaken any capacity expansion since 2010, and all its up cycle profits have been conserved as cash.
  3. It has the best working capital cycle in the industry, despite its promptness in paying creditors on account of liquidity. This is on account of focus on collection (along with factoring) and low business contribution from Government bodies like SEBs and transmission companies. It further has been debt free for the last 10 years.
Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Debtor Days 99 111 103 117 102 97 92 83 78 64
Inventory Days 69 71 54 49 60 66 55 62 54 56
Payable days 2 5 25 21 13 16 14 14 18
Cash Conversion Cycle 165 177 157 140 141 150 130 131 118 103

4. In some years, PBT margin has been higher than EBIT margin on account of high cash balances and the resulting treasury income.

5. Realizations have improved significantly over last 2 years on account of the company product mix gearing towards lower voltage generators which gives a higher MVA realization. Thus, when realizations per MVA are compared with TRIL (Transformers and Rectifiers India), there is a significant variation since TRIL sells higher voltage transformers.

Volumes – MVA(million Volts Ampere) 2017 2018 2019 2020
Voltamp 10,189 9,180 11,053 10,297
TRIL 24,428 22,740 20,451 18,737
Realizations / MVA (INR)
Voltamp 578,791 672,113 727,404 809,945
TRIL 345,915 292,876 394,602 351,177

Business Assessment

With 70-80% of sales being the raw material consumed and the industry comprising of 100s of players, it has all the trappings of a commodity business, and yet Voltamp has been able to carve a niche for itself in the following ways –

Leadership in Dry transformers

Dry transformers are a type of industrial transformers which use air as a cooling mechanism in place of transformer oil and are coated in epoxy resin. This makes them easy to install, gives them higher efficiency (especially in moisture prone areas), reduces fire hazard and has lower maintenance costs. However, dry type transformers can bear only limited loads and thus have voltage limits upto 35kv. On account of its technology transfer agreement with MORA and HTT GmbH, both from Germany, Voltamp is the market leader in the dry transformer market in India with a market share >40%. However, this is a small market with dry transformers contributing to only 20% of company’s revenues.

Diversified Customer Base

Due to competitive bidding and long payment cycles, Voltamp has shied away from catering to public utilities orders and instead mostly caters to various industries with more than 1,000 customers. Its top 10 customers in FY 19 were Larsen & Toubro, ABB India, HPCL Mittal Energy, Gujarat Energy Transmission Corpn., JSW Steel, Siemens, Megha Engineering, JAEI Engineering LLP and ISGEC Heavy Engineering. These 10 customers contributed to 26% of total FY 19 revenues.

Efficient WC cycle – Voltamp has the best WC cycle, despite its extremely low payables above  –

CCC 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Voltamp 165 177 157 140 141 150    130 131 118   103
TRIL 160 139 173 142 148 131    142 239 156   212
BBL   90 113 134 141 124 147    150 157 132   152
IMP   156 213 167 124 109      99 109 142  
Indo tech   95   81   83 177 137 114    172 113   90   114

Risks

  1. Volatile RM prices – As RM costs are 75-80%, of which copper (26%) and CRGO (19%) are key, any changes in the above might derail company’s profitability. Copper prices have been soft over last 10 years globally and any increase in the same might inflate company’s cost structure.
  2. These RM costs affect Voltamp even more since most of the industrial contracts it enters into are fixed price contracts (with 7-30 days variation allowed in some contracts), while Gov contracts are variable cost contracts.
  3. The company has bank guarantees of INR 183 crores as performance guarantees and INR 166 crores as taxation claims. Any of the above liabilities coming into fruition will affect the NW of the company significantly.
  4. Despite being in the business of selling transformers, the company has booked significant bill discounting income, reasons of which have not been disclosed –
Particulars 2017 2018 2019 2020
Bill Discounting Income 3.2 4.3 5.2 6
PBT              93            100            123            113
as a % of PBT 3% 4% 4% 5%
Source: Annual reports

Capital Allocation

While its competitors were expanding their capacities, Voltamp has not undertaken any capacity expansion and has conserved the cash in its balance sheet. This cash pile has been deployed in equity mutual funds, debt mutual funds, FDs and even PMS (ASK Wealth Advisors, MOSL etc.). This has led to a rather volatile treasury income and makes one wonder that it might have been better had they given this cash back to the shareholders and not played a star fund manager –

Merged cells indicate total amounts in MFs.

Further, despite the growing sales, the company has barely invested in any new fixed assets, and thus its NFAT (Net Fixed Asset Turnover) has been increasing the years, and has now approached levels which are unusual for a manufacturing company –

Particulars 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
NFAT 9.4 10.4 9.9 9.4 12.2 14.3 15.5 13.9 17.1 14.6
Above sales to fixed asset ratio is very unusual for a manufacturing company.

Valuation

Transformer companies have cyclical profitability and the upcycle for Voltamp would invariably follow industrial capex. The fascinating 2016 edelweiss report in the previous post got almost all their research right, but anyone investing in transformer companies relying on it would have not made money since despite the increased capex, the overcapacity did not vanish. This is one of the few companies where I am thinking hard on the role of a trigger. (generally I just sit tight)

Voltamp has a market cap of 1,200 crores (at LTP of INR 1,180), with cash in books of 562 crores, giving it an EV (enterprise value) of 640 crores. With Fy20 core profits of 78 crores, voltamp is currently trading at 8x PE, which is quite cheap. However, there is a big question on the sustainability of this 78 crores (H1FY21 profits are 21 crores). Hence, I have currently initiated a tracking position, and will certainly add more based on FY21 performance.

Open Questions

  1. What is the brand value of Voltamp to its customers? (scuttlebutt in progress, if you know anyone in this business, pls do let me know)
  2. How do industrial customers go about the process of choosing a transformer? What parameters do they look for?
  3. What is the reason for the bill discounting income to appear in its books?
  4. How is the company able to have such high fixed asset turnover?
  5. What kind of advantage does it get on paying its creditors promptly?

Feel free to get back in case of any comments or in case you need any data in excel. Also consider sharing this to like minded people if you have found it rewarding, Happy investing!



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Umang Shah

Umang Shah

Through his writing, Umang shares his perspectives on how he thinks of investing, decision making, books and life in general.
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