Buy Transformers; target of Rs 460: KRChoksey

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Buy Transformers; target of Rs 460: KRChoksey

KRChoksey is bullish Transformers and Rectifiers India and has recommended buy rating on the stock with a target of Rs 460 in its April 26, 2011 research report.

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KRChoksey is bullish Transformers and Rectifiers India and has recommended buy rating on the stock with a target of Rs 460 in its April 26, 2011 research report.

"Transformers & Rectifiers India Ltd (TRIL) sales for the quarter stood at Rs 223.7 crores v/s Rs 216.7 crores in Q4FY10, a growth of just 3% on back of lower realizations per MVA. TRIL sold 5788 MVA of transformers in this quarter v/s production of 6663 MVA of transformers. 875 MVA of transformers is lying as inventory which has been valued at cost and will be dispatched in the current quarter. The net profit for TRIL for this quarter stood at Rs 14.6 crore v/s Rs20 crore last year, a fall of 27%. TRIL sales on an annualized basis increased by 4% to Rs 547.3 crore and sales in terms of MVA was 12,557 MVA of transformers, a growth of 9%. Net profit for the year stood at Rs 42.1 crore a de-growth of 20%, mainly on back of lower per MVA realizations of Rs 4.36 lakh/MVA v/s Rs 4.48 lakh/MVA in FY10 and higher raw material prices which increased by ~ 370 bps on an annualized basis."

"Transformers industry is going through a tough time presently, with low ordering activity for transformers and players competing fiercely for the existing pie on one hand and increasing raw material prices on the other hand are leading to declining profit margins for the transformer manufacturers. In case of TRIL the raw material prices increased by 370 bps on an annualized basis compared to FY10. As an entry strategy for gaining its footprints in the higher KV transformers of 400 KV & 765 KV transformers TRIL is bidding aggressively at wafer thin margins, TRIL has been qualified as a L1 bidder for eight 765 KV transformers. Operating profit margins that we have assumed in our model is ~ 12%, rationale being the wafer thin margins in higher KV transformers is being compensated by higher margins in the Export business (~12% of sales FY12E) and the rectifier business (~10% of sales FY12E)."

"TRIL is one of the 5 vendors who participated in a development project for design, manufacturing and supply of 1200 KV transformers to Power Grid Corporation of India. On successful running of this transformer for 2 years, TRIL will be qualified for bidding for tenders from Power Grid for the 1200 KV transformers, hence no near term benefits to flow from this exercise. Order book for TRIL stood at Rs 328.6 crore and 7,749 in terms of MVA. Power transformers form the chunk of the order with 6,253 MVA of transformers. TRIL aims to produce ~18,000 MVA of transformers in FY12 and is trying to diversify its order book by concentrating on the higher margin rectifier transformer business. TRIL has been qualified as a L1 for fourteen 765 KV transformers along with its Ukrainian partner of which eight will be manufactured by TRIL and this is not part of the order book as LOI is yet to be awarded."

"At CMP of Rs 288 TRIL is trading at 7.16x and 6.27x its FY12E and FY13E EPS of Rs 40.24 and Rs 45.98 respectively. The rising copper prices and delay in implementation of power projects on account of environmental clearances, linkages with coal and other issues is taking its toll on the transformer industry. Also the operating margins are expected to come under pressure as TRIL is aggressively bidding as part of its entry strategy into the higher KV transformers. We revise our target price for TRIL to Rs 460. At our target price the stock would trade at 10x it FY13E EPS of Rs 46," says KRChoksey research report.

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