Eye Accurate Transformers, Indo Asian Fusegear: Chugh

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Ashish Chugh , Invesment Analyst & Author of Hidden Gems feels that Accurate Transformers's stock seems undervalued."This company is available at a price-to-earning ratio of 5.5 and this looks undervalued one from the peer group and second is the expected growth which can come in the future, this stock could go a long way," he told CNBC-TV18.

 

Chugh is also very positive on  Indo Asian Fusegear  because he feels that the fortunes of this company are linked to the fortunes of the power sector and as well as the construction sector. In the near-term, we are not seeing any slowdown in both these sectors, he said.

 

Excerpts from CNBC-TV18's exclusive interview with Ashish Chugh: 

 

Q: What is the story in Accurate Transformers?

A: Off late we a have seen a lot of debate and deliberation happening about the power sector, especially after the listing of Reliance Power IPO. There seem to be some concerns regarding companies where production or generation is few years away; however, there is no debate about the potential of the power sector in India.

 

India is a power-deficit country and the per capita power consumption is lowest in Asia and government has got good power generation programme till 2010. In that scenario, it would be worthwhile looking at companies that are equipment suppliers to the power sector as they could be the beneficiaries of the huge capacity expansion that is happening. Secondly, these companies should be ruling at reasonable valuations so that in case the market takes a downturn, one's losses are restricted

 

Accurate Transformers is a Delhi-based company manufacturing power and distribution transformers. It has got six manufacturing plants located in UP and Uttaranchal. They have three plants located in the tax-free areas of Haridwar and Dehradun. For financial year '06-07 this company achieved sales revenue of RS 172 crore and made PAT of above Rs 6 crore, which resulted in an EPS of Rs 20. For the first nine years of the current financial year, the sales are up by 11% to Rs 102 crore and PAT is up by 50% to Rs 4.5 crore

 

This company supplies to various State Electricity Boards and around 50% of its revenues come during January-March quarter. So for the full year, we can assume a revenues around Rs 200 crore, PAT will be around Rs 8-8.5 crore - which results in an EPS of more than Rs 25 on a small equity of Rs 3 crore.

 

There are also few concerns about this company. Firstly, this company has high receivable cycle, which is mainly on account of the fact that it supplies to State Electricity Boards and the payments take about 4-6 months. Secondly, the company has lower operating margins compared to the industry average. As against industry margins of 15-16%, this company did around 7.1% margins in FY06-07.  This problem is mainly because of working capital constraints and high debtor receivable cycles. The management is conscious of this fact and they are trying their best to improve margins which is evident from the fact that in first nine months of current financial year, OPM has gone up from 7.1% to 9.25% and the management is confident of bringing the margins up to 14% over the next two years.

 

If one compares this company with peer group, there is huge valuation gap especially in price to earning ratio, which ranges between 15 to 25 for various companies manufacturing transformers, as against which, the P/E of this company is just 5.5. The market cap of this company is just Rs 40 crore on expected sales revenues of Rs 200 crore this year. And going purely by valuation with the peer group, this stock looks undervalued.

 

This company is also going in for rural electricification projects, it has done two projects in UP and second in Nainital district for electrification of about 800 villages and it is also trying for few more projects in the rural electrification space.

 

A company belonging to a high growth sector and transformers companies are on a roll these days and there is a shortage of capacity for the manufactures of transformers in India. This company is available at a price-to-earning ratio of 5.5 and this looks undervalued one from the peer group and second is the expected growth which can come in the future, this stock could go a long way.

 

Q: Any positions in Accurate Transformers?

A: Me and my family has got investments in this company.

 

Q: The other stock is better known Indo Asian Fusegear , why do you think it can be a multibagger from here?

 

A: I would not call it a multibagger. But at these levels, it looks very attractive. This again is a company, which is catering to both the power sector, which is registering a good growth and also to the construction sector - we are seeing so many malls and residential complexes coming up. Now this company has got a product portfolio that caters both to the power and construction sector, which are high growth sectors. This company manufactures switchgears, various electricity products starting from switchgears distribution boards, changeover switches, modular switches. They have got a variety of lighting products also, they manufacture CFL, fluorescent tube lamps, HID lamps and also manufacture wires and cables.

 

This company again has got eight plants, which are located mainly in the states of Punjab, Haryana, UP, Himachal and Uttarakhand. They have started a new plant recently at Haridwar for manufacturing of switchgears and CFL lamps. They have a distribution network comprising of 30 offices of their own. They have 800 distributors and their products are sold through over 35,000 retail outlets. Besides this company has got overseas offices in Dubai and Germany also.

 

The company is ramping up the capacities of its various products at their existing locations and also setting up new plants. This company is setting up plant for the manufacturing of home and building automation products in joint venture with a Spanish company. This plant is coming up near Haridwar. Again they are setting up a plant in Saudi Arabia along with Saudi National Glass Company for manufacturing of CFLs and HID lamps.

 

If you see the financials of the company last year the revenues were about 214 crore, PAT was about 17.5 crore. In the first nine months of the current financial year we have seen revenues go up by about 30% to 195 crore and however the PAT has come down by about 17% to 10.5 crore. So this stock currently trades at a price to earnings ratio of 11.

 

Now the fortunes of this company are linked to the fortunes of the power sector and as well as the construction sector. So in the near-term, we are not seeing any slowdown in both these sectors. In fact we are seeing hectic activity in both the sectors and both these sectors are touted as growth sectors. So the company - firstly, it is available at a price to earning ratio of about 10-11, which is quite reasonable for a growth sector. Secondly, it is ramping up production of various products at its existing locations and also setting up new plants, which is a positive as far as the scalability of the business is concerned. Thirdly, it is catering to high growth sectors and available at reasonable valuations. I think at Rs 120 the downside from these levels looks restricted and one can expect a reasonable return from the stock in the next few years.

 

Disclosures:

 

I and my family may have some small quantities of investment in this stock.