Monday 11 February 2008

Multibaggers - Accurate Transformers

Accurate Transformers

Accurate Transformer has been operating at low capacities, primarily on account of working capital constraints; there is however a scope for substantial ramp up in the event of the company managing its working capital better and getting additional resources. The company is therefore in a position to take advantage of a boom in demand without incurring any further capital expenditure. Higher capacity utilization will eventually lead to higher revenues and increased profitability.

Accurate Transformers Ltd

Transformer is an integral part of the power sector irrespective of the fact whether it is Hydro Power, Thermal, Wind, Solar or Nuclear Power. Accurate Transformers, operating in a growth industry, currently trading at a PE of 6 and a market cap of Rs.43 crores with expected sales of Rs.200 crores for FY 08 is available at reasonable valuations compared to the peer group.

Accurate Transformers Ltd. is a Delhi based company and manufactures Power and Distribution Transformers. The company was previously delisted due to non compliance of the provisions of listing agreement. The stock got listed again in June 2007 after all compliances were met and is presently traded in ‘Z’ Group.

Business

Accurate Transformers has plants at 6 locations – Ghaziabad, Greater Noida, Sikandarabad, Dehradun and 2 in Haridwar. The plants at Haridwar and Dehradun have been recently set up and enjoy various benefits on account of Income Tax, Sales Tax and Excise.

Accurate Transformers manufactures Power Transformers and Distribution Transformers. A transformer is said to be one of the simplest and widely used electrical equipment. A transformer largely consists of three critical components – a) the copper winding wire. b) the transformer core, generally made of silicon steel or CRGO Silicon Plates and c) Insulators that prevent jumping of high voltages across connectors. The transformer core is made of CRGO steel plates that have a high proportion of silicon at around 3-4%. This high content of silicon helps in reducing ‘core losses’, or losses through resistance in the steel.

Transformers are used to step up and step down the voltage. Power Transformers are used to transform power voltage from Generation to the Distribution point. Power transformers are generally Step Up Transformers. These help in Stepping up voltage at the Power Generation points to ease transmission of power to the Distribution point Distribution Transformers are used to transform power voltage from Transmission point to distribution of power to the end user.

Generally, generation of power occurs at around 11KV. For ease of transmitting power to the load centres, the voltage is ramped up to 400 KV and then subsequently stepped down in stages to 220 KV, 132 KV, 66KV and 33 KV at the sub-transmission level. For consumption by the households and commercial establishments, the voltage is stepped down to 1.1 KV and subsequently to 440 V/220 V. Therefore, each stage requiring a change in voltage requires either a power or a distribution transformer.

The company manufactures Power Transformers upto 40 MVA capacity. The company is getting into higher capacity Power Transformers of 160 MVA capacity and has already developed prototypes for 160 MVA capacity transformers.

Concerns

Accurate Transformers has a high debtor receivable cycle. This is due to the fact that the biggest customers of the company are various State Electricity Boards and the collection period ranges between 120-180 days.

Accurate Transformers suffers from low Operating Margins when compared with the peer group. We believe that this may be on account of a number of factors like lower capacity utilization and High Debtor receivable cycle. The longer debtor cycle leads to working capital constraints which in turn results in lower capacity utilization and high interest costs, resulting in lower profitability. Infact, the company is consciously trying to better manage its financial resources because of which there has been a marked improvement in its operating margins which have gone up to 9.25% for the 9-months period ended December 07.

The other major concern is fluctuation in raw material prices since raw material constitutes around 85% of the total cost, however in most cases the contracts with the customers contain price fluctuation clauses, covering the company.

Conclusion

Until a few years back, the Indian Transformer Industry was in a mess. This was on account of outdated laws, lack of funds, poor distribution sector and the State Electricity Boards (SEBs) reeling under huge losses. The SEBs were facing a state of near bankruptcy on account of inefficiencies, huge AT&C losses due to poor grid management, inefficiencies in metering and billing mechanisms etc. The transformer industry, in turn, suffered as a result of lack luster demand and poor debt recovery.

India has one of the lowest electricity consumption levels in Asia, which is primarily on account of chronic and widespread electricity shortages in the country. Apart from inadequate investment in power generation, high T&D losses due to undermetering, under-collection and under-investment have also resulted in demand outpacing supply. While the SEBs were constrained in investing in the sector due to their poor financials, the private sector players stayed on the sidelines due to inadequate protections and escalating risks.

The enactment of the Electricity Act 2003 came as a big relief to the Indian Power Sector. The government thrust on power led to an upsurge in demand, the creation of the National Grid and programmes such as APDRP, restructuring of SEBs, as well as the entry of the private sector into the transmission and distribution (T&D) segment. All this has put Power Transmission and Distribution Equipment sector in a sweet spot. This also led to the growth of Transformer industry which logged healthy growth 2003 onwards. The scenario for the transformer industry is very promising; given the ongoing Government Power Program till 2012. Infact, Transformer is an integral part of the power sector irrespective of the fact whether it is Hydro Power, Thermal, Wind, Solar or Nuclear Power. Accurate Transformers being one of players in the transformer business with scope for substantial ramp up will definitely benefit from the huge growth potential in the segment.

Accurate Transformers has ventured into fast growing Rural Electrification Projects which involves providing electricity in remote areas and include the laying of lines, poles and setting up substations. It is currently implementing two such projects - one at Etah district of Uttar Pradesh and another at Nainital District of Uttaranchal.

Accurate Transformer has been operating at low capacities, primarily on account of working capital constraints; there is however a scope for substantial ramp up in the event of the company managing its working capital better and getting additional resources. The company is therefore in a position to take advantage of a boom in demand without incurring any further capital expenditure. Higher capacity utilization will eventually lead to higher revenues and increased profitability.

For Accurate Transformers, the major customers being State Electricity Boards, around 50% of the Sales Revenues come in the Jan-Mar quarter. For FY 07-08, we expect the company to report Sales Revenues of over Rs.200 crores and a PAT of around Rs.8 crores, which will result in an EPS of Rs.26. Accurate Transformers inspite of the concerns is available at reasonable valuations compared to the peer group and is operating in an industry which is expected to log healthy growth in the years to come.

Long Term Investors can accumulate the stock at its current price and add on declines.

Ashish Chugh is an equity analyst and investment consultant based at New Delhi, INDIA. At the time of writing this article, he, his firm and dependent family members have a position in the stocks mentioned above. The author, his firm or any of his dependent family members may make purchases or sale of the securities mentioned in the report while the report is in circulation. The author invites readers to send him email and welcomes comments, feedback & queries at nexgenfin@yahoo.com.

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