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Indo Tech Transformers Limited ACMIIL �

Indo Tech Transformers Ltd.

AnalystPurvi [email protected]: (022) 2858 3403

Key Data (INR)

CMP 495

Target Price 663

Recommendation History (INR)

Reco Price Date: Feb 21,2007

291

Previous Target Price 392

Key Data

Bloomberg Code INDT IN

Reuters Code INTT .BO

BSE Code 532717

NSE Code INDOTECH

Face Value (INR) 10.0

Market Cap. (INR mn.) 5257

52 Week High (INR) 807

52 Week Low (INR) 313

Avg. Daily Volume (6m) 28698

1Year Beta (Sensex) 0.7

Shareholding %

Promoters 54.3

Indian Institutions 3.1

FII 11.9

Private Corporate bodies 12.7

Indian Public & Others 18.0

Total 100.0

(As on 31st Dec, 2007)

Rs. Mn FY08E FY09E FY10E

Net Sales 2051.9 2859.0 3323.6

Operating Profit 584.7 742.4 844.9

PAT 396.4 471.7 542.0

EPS (Rs.) 37.3 44.4 51.0

29 April, 2008

B U Y

BackgroundIndo Tech Transformers Ltd. (Indo Tech), based in Chennai, Tamil Nadu, was incorporated in the year 1992. Mr.P.E. Subramaniam, Chairman is the head of the organization. Mr. P.S Jagdish, Director is former President of Indian Transformers Manufacturers Association (ITMA). Indo Tech is a manufacturer of Power, Distribution and special transformers. The company is a prominent player in the Southern state electricity boards like Tamil Nadu, Andhra Pradesh, Karnataka and Kerala.

Key Highlights:

Indo Tech has maintained above average margins consistently. This shows company’s bent towards picking orders with healthy realisations and profitability. We believe, company’s smaller capacities compared with its peers leaves room for picking such orders.

Indo Tech’s 4,000 MVA - green field capacity expansion has come on stream from end of FY08. The added capacity will aid the volume growth over next 2 years.

At the 4,000 MVA capacity plant, Indo Tech will be able to manufacture transformers upto 400 MVA - 400KV class, up from its current range, which is upto 315 MVA-220 KV class of transformers.

With higher capacities available, Indo Tech plans to diversify its client base by increasing focus on Western and Northern SEBs and export market.

Valuations

We expect Indo Tech’s sales to grow at a CAGR of 29% and Net Profit to grow at a CAGR of 27% over FY07-FY10E. At current market price of Rs. 495 the stock is trading at a P/E multiple of 9.7 times of its FY10 E EPS of Rs. 51. We recommend investment in the stock with a price target of Rs. 663 which is equivalent to a P/E multiple of 13 times to its FY10E EPS.


Pace of Generation Capacity addition expected to improveFor achieving economic growth above 8%p.a. and providing power to all by the year 2012, the government has targeted achieving a cumulative generation capacity of 207,000 MW by 2012. Due to slippages of projects from the 10th Plan (2002-07), generation capacity addition target for the 11th plan (2007-12) has been increased to 78,577 MW against earlier target of 68,869 MW.Capacity addition of 41,110 MW was targeted during the 10th Five Year Plan. It is pertinent to note that 20,000 MW of capacity was under construction at the beginning of the 10th plan, which ended with actual capacity addition of 21,180 MW.Against 20,000 MW of capacity under construction at the beginning of the 10th plan, around 50,000 MW of capacity was under construction at the beginning of the 11th plan. Currently 60,214 MW of generation capacity is under construction for commissioning by the end of the plan while orders for 10,950 MW are yet to be placed.

According to Working Group on Power’s report, apart from the 78,577 MW capacity, 14,000 MW is to be added from renewable energy sources, while 12,000 MW of capacity is expected to be added by captive power plants during the 11th plan period. The power ministry has targeted doubling of the capacity every 10 years after 2012 and it projects the total installed capacity of 800,000 MW by the year 2030.Investments in Transmission & DistributionIn India, the ratio of investments in generation to T&D stands lower at 1:0.5 as compared with the global norm of 1:1. Inadequate investments in T&D have resulted in India’s transmission lines generally loaded to 90 per cent of the capacity and operating on alert conditions. States like Maharashtra, which are facing power shortage, are not able to import power from outside the state due to transmission constraints. Investment in transmission system during the respective five year plan is based on transmission infrastructure required for evacuation of power from, the generation projects expected to commission during the plan, as well as, for strengthening the system required for delivery of power to the load centres. With increased capacities being planned in generation and the requirement arising out of diversities in regional demand, government is planning to take the inter regional power transmission capacity under National Grid to 37,150 MW by the end of 11th plan.For the 10th plan, based on the 41,110 MW generation capacity addition programme a total of Rs 744 Bn was estimated to be spent on transmission schemes. Out of this, around Rs 403 Bn was to be spent for development of National and Regional grids

Around 50,000 MW of capacity was under construction at the

beginning of the 11th plan

Source: Ministry of Power


by Powergrid Corporation of India Ltd. (PGCIL) and its joint venture schemes. Corresponding to the actual pace of generation capacity addition, only about Rs.208Bn is estimated to be spent by PGCIL and its joint venture during the 10th plan. Under the state sector, the plan was to spend Rs 341 Bn for 66kV and above schemes. Based on power ministry’s estimate about Rs 289 Bn has been estimated to be spent by the state utilities during the 10th plan. Thus, around Rs 497 Bn was spent on transmission during the 10th plan. For the 11th Plan Rs 1400 Bn is planned to be spent on Transmission schemes, against Rs 744 Bn in the earlier plan. Typically, out of the T&D investments 65 % go towards transmission and 35 % towards - distribution.

Transformers demandAs a thumb rule, 7 MVA of Transformers capacities across the system is installed for each additional Mega Watt (MW) of generation capacity. Around 15% of the investment in Transmission system goes towards transformers.

In terms of buyer groups, the demand for transformers can be divided from utilities, industry and EPC contactors undertaking projects for utilities and industry. It is seen from the past trend in India that Power transformers account for around 70% of the transformers market where as the distribution transformers constitute around 30%.With increased focus on power related infrastructure, the transformers industry has seen high growth rate in volume as well as value terms. The Compounded Annual Growth rate that the industry witnessed from FY02 to FY07 was 18% in terms of volumes. The data compiled by IEEMA shows that average annual production increased from around 47,000 MVA p.a during the 9th plan period (1998-2002) to 83,000 MVA pa. during the 10th plan (2002-2007).

Around 15% of the investments in a transmission system go

towards transformers

Source: Cris Infac, Industry

Source: IEEMA


Transformers have a life of around 20-30 years. Assuming an average life of 25 years, transformers installed during 1980 to 1985 will generate replacement demand over the next few years. During the sixth five-year plan (1980-85), 88,541 MVA of transformer capacity was added. Of this, power transformers accounted for 76% and 24% was on account of distribution transformers. On an average, about 18,000 MVA of transformer capacity was added annually during these 5 years, which can be expected to come for replacement over the next few years.As quality and technology of Indian transformers is comparable to the world standards, Indian players have considerable presence in exports market. Exports constitute around 10% of the sales. Players are looking at augmenting exports. The export demand is expected to be supported by the infrastructure investments in the Middle East, Africa, Europe, USA etc.Thus, apart from the demand from transmission and distribution associated to generation capacities, the demand for transformers is expected to be supported by, investments in inter regional power transmission capacity under National Grid, replacement demand, Government’s focus on programmes like RGGVY and APDRP, investments in industry and increasing focus on exports.

Major PlayersIndian Transformers industry is fragmented with few organized players. The total number of players is about 180 of which only around 15 players are from the organised segment. According to industry estimates, the organised segment accounts for 70% of the market share. With increasing demand for higher voltage class and better product quality, the share of organised players is expected to increase.Realisations at industry level have improved with increasing demand. This has seen margins of most players increasing over the past 3 years. Capacity addition by major players

Company name Capacity before

expansion

Current Capacity Capacity Addition

in future

Crompton Greaves 23404 25970 NA

BHEL 16000 20500 18000

ABB 12000 12000 5000

EMCO 10000 20000 -

Areva T&D 9000 15000 15000

Bharat Bijlee 8000 11000 4000

Transformer and Rectifier 5400 7200 16000

Voltamp 5400 9000 NA

Siemense 0 15000 -

Indo Tech 3350 7450 -

IMP Power 3600 3600 2400

Total 96154 146720 60400

Capacity in MVA, Source: Company, Industry ReportsCompanies like Crompton Greaves, BHEL, ABB are entering 765 KV class transformers in the wake of demand from National Grid and Ultra Mega Power projects.Transformers industry is low capital intensive and setting up a green field capacity can take around 1 and ½ years. In view of this, it is easier for already established players to increase capacities to cater to the increasing demand, and players are increasing capacities to cater to the growing demand. We expect the supply side increase to be supported by domestic demand and increasing focus of players on exports.

Quality and technology of Indian transformers is comparable to the world

standards


Indo Tech Transformers Ltd.Indo Tech Transformers Ltd. (Indo Tech), based in Chennai, Tamil Nadu, was incorporated in the year 1992. Mr.P.E. Subramaniam, Chairman is the head of the organization. Mr. P.S Jagdish, Director is former President of Indian Transformers Manufacturers Association (ITMA). Indo Tech is a manufacturer of Power, Distribution and special transformers. The company is a prominent player in the Southern state electricity boards like Tamil Nadu, Andhra Pradesh, Karnataka and Kerala.

Capacity expansion on streamWith the increasing demand for transformers Indo Tech has undertaken expansion of capacities along with moving up in the value chain by offering higher range of transformers. The company has recently added 4,000 MVA of Power transformers capacity, taking its capacity to 7,450 MVA from 3,450 MVA earlier. With a capex of about Rs. 600 Mn over FY07 and FY08, the company has undertaken projects like, modernizing Distribution Transformers facility, adding a Dry Type Transformers facility apart from setting up the above mentioned green field 4,000 MVA Power transformers facility capable of manufacturing transformers upto 400 KV class. The capex was funded by a mix of IPO proceeds that the company raised in FY06 (Rs.370 Mn), Debt (Rs. 100 Mn) and Internal Accruals.

Capacity Breakup MVA

Power Transformer up to 220 KV 2400

Power Transformer up to 400 KV 4000

Distribution Transformers 950

Dry Type Transformers 100Source: Company

The new facility is equipped with manufacturing capabilities for transformers up to 400 KV, up from earlier 220 KV. Initially, the company plans to utilise this facility for manufacturing transformers upto 220KV class, as getting approval from the clients for the higher rating transformers may take 6-12 months time. The company has started receiving orders for this facility including export orders.According to the company, the green field capacity is utilising around 15% of the land available. The company may use this land for expanding capacities in future.

Indo Tech’s 4,000 MVA plant has come on stream from

February,2008


Diversifying client baseTraditionally, Indo Tech has been a prominent player in southern state electricity boards like Tamil Nadu, Kerala and Andhra Pradesh. With the new Power Transformers facility going on stream from February,08 the company is increasing its focus on catering to more SEBs and export market. It plans to increase its presence in western and northern states like Gujarat, Maharashtra, Rajasthan, Punjab, Bihar and Haryana. The company’s order backlog of Rs. 1800 Mn at the end of December, 2007 includes orders from Mahrashtra SEB, Gujarat SEB apart from Tamil Nadu, Andhra Pradesh, Kerala and Karnataka. The order backlog also includes ~Rs 200 Mn worth of export orders which were almost nil so far due to constraint on capacities. The company is now pursuing business from USA, Canada, Europe and Middle East, where it is expecting higher margin orders. In the EPC contactors segment, its clients include players like Larsen & Toubro, ABB and Reliance Energy. Indo Tech has more than 3000 customers under its corporate client base. Indo Tech has signed a brand licensing agreement with Dupont in December, 07 for Dry Type Transformers. It will be marketing Dry Type Transformers to Hotels, Hospitals, Software Technology Parks, Commercial Properties where the demand for the same is increasing due to its benefits like less risk of fire, less space requirements and environment friendliness. Dry Type Transformers overcome the issue of higher space requirements, as they can be placed indoor.

Bent towards orders with healthy realisations and profitabilityIndo Tech’s performance over last 3 years shows that the company has been able to maintain above average margins, which are attributable to its strategy of pursuing higher margin orders and favorable movement of raw material prices. Indo Tech’s manufacturing capacity puts it into the bracket of the smaller players from the organized segment of the industry. Also the company claims to enjoy locational advantage in South where competition is less in terms of number of players. We believe that company’s strategy of pursuing higher margin business is supported by its lower capacity, which leaves head room for picking orders with healthy realisations. As many players in the industry are present in products other than transformers, one-on –one comparison is not possible with them. Pure transformer players include Voltamp, Transformers and Rectifiers India (TRI), IMP Power and Indo Tech.

During the 9 months of the current fiscal, Indo Tech’s sales in terms of MVA increased to 2030 MVA from 1562 MVA in the corresponding period of the last fiscal, an increase of around 30%. While the net sales increased to Rs. 1428 Mn, translating in to a growth of ~44%. The net realisations for the period increased to 0.7 Mn from 0.63 Mn per MVA, registering a growth of 11%. The Operating margins during the

Indo Tech has consistently managed healthy realisations

and profitability

Source: ACMIIL Research, Company


period improved to 29.6% from 22.6% resulting in 89% growth in operating profit and 94% growth in Net Profit. The operating margins at ~30% is among the best in the industry. Analysis of the performance shows that Indo Tech’s higher margins are mainly attributable to healthy realisations and raw material cost management. Although we believe that a part of company’s improved operating margins on account of fluctuations in commodity prices over past few quarters, may not be sustained in future. Financial AnalysisCapacity Utilisation

Company’s sales in MVA terms is expected to increase by 30% during the current fiscal, as compared to 24% growth during the last year. The company has been able to improve average realisations per MVA during the current fiscal, which grew to Rs 8.5 Lakhs during 9M FY08 as compared to 7.7 Lakhs in 9M FY07. Working Capital Management

As seen in the chart above, the company’s performance in terms of working capital management has been one of the best in the industry.

Order BacklogCompany’s order book of Rs 1800 Mn is equivalents to trailing 9 months’ sales and around its next 6 months’ sales.



One of the best in terms of working capital mangement


Future ExpectationsWe expect the company’s future growth to be aided by the addition of capacity, which has come on stream from February,2008. However, we expect Indo Tech’s realisations to moderate over the period of F07- FY10E as it sells higher MVA transformers from the expanded capacities, and as capacity addition by competitors comes on stream. We also believe that the margins of the company may moderate going forward as it may not sustain the gains from favorable raw material price movements in future. We expect the company’s operating margins to gardually fall to 25% in FY10E, from 29.5% in FY08E. We expect Indo Tech’s sales to grow at a CAGR of 29% and Net Profit to grow at a CAGR of 27% over FY07-FY10E. Concerns:Raw material prices: As a market practice, contracts with SEBs involve Price variation clause as against corporates, which generally do not allow for the same. The SEBs determine extent of price variation to be allowed by arriving at average prices of raw material for the relevant month. This price may differ from actual cost to Indo Tech depending on its time of entering into the contracts for the raw materials. High fluctuations in raw material prices going forward can put pressure on the operational margins.Slow pace of generation capacity addition: The demand side is expected to be driven mainly by capacity additions in power generation, domestically. Slow pace of generation capacity addition and major difference between the targeted and actual capacity additions can affect the demand side significantly.High dependence on Tamil Nadu Electricity Board: Out of the total sales to SEBs, sales to Tamil Nadu electricity board have been constituting around 50%. Any significant slow down by this electricity board can have adverse impact on Indo Tech’s financials.Entry into new markets and new product range: While we have anticipated margin pressure, Indo Tech’s move towards entering different states and higher product range – may lead to higher than expected pressure on its operations - like margins and working capital requirements.Lower operating margins may impact the sentiment:The operating margins of the company have seen improving trend over the past, and reached 34% in December quarter mainly on account of favorable raw material price movement. The company may not be able sustain gains from fluctuations in commodity prices in future and this may impact the sentiment negatively. Valuations:

We expect Indo Tech’s sales to grow at a CAGR of 29% and Net Profit to grow at a CAGR of 27% over FY07-FY10E. At current market price of Rs. 495 the stock is trading at a P/E multiple of 9.7 times of its FY10 E EPS of Rs. 51. We recommend investment in the stock with a price target of Rs. 663 which is equivalent to a P/E multiple of 13 times to its FY10E EPS.


Profit & Loss Account (Rs. In Mn) FY07 FY08E FY09E FY10E

Gross Sales 1879.3 2482.0 3458.3 4020.3

Net Sales 1553.7 2051.9 2859.0 3323.6

Operational Expenditure 1163.5 1467.2 2116.6 2478.7

Operating Profit 390.2 584.7 742.4 844.9

Other Income 32.2 35.5 45.0 55.0

EBITDA 422.5 620.2 787.4 899.9

Depreciation 11.4 15.2 63.9 66.9

EBIT 411.1 605.0 723.5 833.0

Finance Charges 14.7 5.4 10.0 13.0

Profit Before Taxation 396.4 599.6 713.5 820.0

Tax 134.3 203.3 241.9 278.0

Profit after Tax 262.1 396.4 471.7 542.0


Balance Sheet (Rs. In Mn) FY07 FY08E FY09E FY10E

Share Capital 106.2 106.2 106.2 106.2

Reserves & Surplus 806.5 1146.9 1562.7 2048.8

Net Worth 912.7 1253.1 1668.9 2155.0

Loan funds 64.7 64.7 64.7 64.7

Deferred Tax Liability 19.7 19.7 19.7 19.7

Sources of Funds 997.1 1337.5 1753.3 2239.4

Gross Block 457.4 804.1 884.1 934.1

Less: Depreciation 74.8 90.0 153.9 220.7

Net Block 382.6 714.1 730.2 713.4

Investments 220.2 220.2 220.2 220.2

Inventories 120.4 256.5 381.2 474.8

Debtors 426.1 540.0 733.1 830.9

Cash on Hand 340.2 193.2 412.0 819.2

Loans & Advances 249.5 329.4 459.0 533.6

Total Current Assets 1136.3 1319.1 1985.3 2658.5

Current Liabilities 451.8 596.7 831.3 966.4

Provisions 290.2 319.2 351.1 386.2

Net Current Assets 394.3 403.2 802.8 1305.9

Application of Funds 997.1 1337.5 1753.3 2239.4


Indo Tech Transformers Limited ACMIIL �0

Cash Flow Statement (Rs. In Mn) FY07 FY08E FY09E FY10E

Profit before Tax 396.4 599.6 713.5 820.0

Operating Profit before working capital changes 392.1 584.7 742.4 844.9

Net Cash from Operating Activities 191.1 225.5 319.7 471.1

Net Cash from Investing activities -336.5 -311.2 -35.0 5.0

Net Cash from Financing Activities 6.1 -61.3 -65.9 -68.9

Net Increase/(Decrese) in Cash & Cash Equivalents -139.3 -147.1 218.8 407.2

Opening balance of Cash and Cash Equivalents 479.5 340.2 193.2 412.0

Closing balance of Cash and Cash Equivalents 340.2 193.2 412.0 819.2


RatiosFY07 FY08E FY09E FY10E

Profitability Ratios

Operating Margin % 25.1 28.5 26.0 25.4

EBIT Margin % 26.5 29.5 25.3 25.1

PAT Margin % 16.9 19.3 16.5 16.3

RONW/ROE% 28.7 31.6 28.3 25.2

ROCE% 42.1 45.9 41.7 37.5

Leverage Ratios

Debt/Equity 0.1 0.1 0.0 0.0

Debt Service Coverage Ratio 28.0 112.0 72.4 64.1

Turnover Ratios

Inventory Turnover 12.9 8.0 7.5 7.0

Debtors Turnover 3.6 3.8 3.9 4.0

Creditors Turnover 3.4 3.4 3.4 3.4

Fixed Asset Turnover 4.1 2.9 3.9 4.7

Valuation Ratios

EPS (Rs.) 24.7 37.3 44.4 51.0

CEPS (Rs.) 25.8 38.8 50.4 57.3

Book Value (Rs.) 85.9 118.0 157.1 202.9

P/E @ 495 20.1 13.3 11.1 9.7

P/CEPS @ 495 19.2 12.8 9.8 8.6

P/BV @ 495 5.8 4.2 3.1 2.4


Indo Tech Transformers Limited ACMIIL ��

Transformers are used for changing the voltage of the electric current. The voltage levels have to be changed at various stages of electricity flow – from generation point to the consumption point. A generation unit produces electric current at a lower voltage, which has to be increased for efficient transmission and for reducing T&D losses during the transmission of electricity. The voltage again has to be lowered for the purpose of Subtransmission and Distribution of electricity for end use consumption.

Types of Transformers:

Transformers can be divided into three categories depending on the functions they perform:

Power Transformers: Power Transformers are used for changing the voltage of electric supply from generators while connecting them to power evacuation system and further in transmission. They can be Step up (for increasing voltage levels) or Step down transformers (for reducing voltage levels) e.g. the power at generation level is of low voltage and has to be changed to higher voltage level for the purpose of transmission. Industry categorises higher voltage transformers – i.e. transformers with voltage level of 132KV and above under power transformers.

Distribution Transformers: Distribution Transformers are used for changing the voltage at various stages of sub-transmission and distribution - the power at transmission level is of higher voltage and has to be changed to lower voltage level for the purpose of sub transmission and distribution.

Special Transformers: Welding, Traction, Furnace etc.

Typical breakup of Transformer cost:

CRGO Steel: 30-35% (Imported)

Copper: 30-35%

MS Steel: 8-10%

Transformer Oil: 5-10%

Components & Others: 15-20%

CRGO (Cold Rolled Grain Oriented) Steel Laminations, which perform the function of generating magnetic flux in the transformers, is the key raw material, besides copper. As CRGO steel is not manufactured domestically thus it is imported directly from global majors like Thyssen –Germany, Kawasaki and Nippon Steel – Japan, AK Steel – USA or indirectly through Minerals and Metals Trading Corporation and local traders.

Annexure

Indo Tech Transformers Limited ACMIIL ��

Disclaimer:

This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or

any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information

contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.

To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views

expressed in the report

Disclosure of Interest Indo Tech Transformers Ltd

1. Analyst ownership of the stock NO

2. Broking Relationship with the company covered NO

3. Investment Banking relationship with the company covered NO

4. Discretionary Portfolio Management Services NO

This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for

circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.

The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We

may from time to time have positions in and buy and sell securities referred to herein.

Notes:

HNI Sales:Raju Mewawalla, Tel: +91 22 2858 3220

Institutional Sales:Bharat Patel, Tel: +91 22 2858 3732

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