Decades of under-investment, followed by a march towards building sufficient power for the nation, have created significant opportunities, although structural constraints and rising competition suggest the need to be selective
The share prices of Voltamp and Bharat Bijlee (transformer manufacturing companies) rallied around 20% on the back of their 4QFY13 results before giving away some gains on Tuesday. Nomura Equity Research in its report on smaller transformer companies believes the positive stock reaction was on the back of sequential improvement seen in their operating as well as net profit metrics. It seems that this has fuelled some investors’ hope about revival in performance of other large transformer manufacturers, too, specifically Crompton Greaves. The brokerage analysed the reasons for the margin improvement in these companies and found that the reasons for margin improvement are company specific for Voltamp and Bharat Bijlee.
For example, Voltamp has benefitted from a fall in its other expenses, in both y-o-y and q-o-q absolute amount terms, while Bharat Bijlee witnessed an absolute reduction in its staff costs both y-o-y and q-o-q. Both of these trends are company specific and possibly due to cost-control initiatives that these companies might have adopted to protect margins, states the Nomura report.
Despite hopes of a benefit from easing commodity prices, smaller transformer companies are yet to record any benefit in raw materials/sales as reported in their 4QFY13 results. The brokerage thinks the read-across for larger T&D companies, if any, should largely be related to RM/sales, where we do not see any improvement.
Moreover, revenue growth, too, on an aggregate basis for the five companies that the brokerage has analysed continues to be negative. TRIL (Transformers and Rectifiers India) is the only exception, possibly on the back of its aggressive participation in PGCIL (Power Grid India) orders last year.
Key takeaways from the 4QFY13 trend of Top 5 small transformer manufacturers
• On an aggregate basis, in FY13 revenue declined by -14.5% y-o-y, higher than 7.3% decline noted in FY12 compared to the +5.2%y-y growth in FY11.
• Overall EBITDA margin at 4.1% in FY13 was a new low (against 5.6% in FY12 and 5.9% in FY11). The 150bps (basis points) y-o-y decline in margins in FY13 was led by higher staff cost/sales (+50bps) and other expenses/sales (+130bps) which was partially offset by slightly lower raw material cost (-40bps).
• Put together, all five companies made a net loss of Rs13 million in FY13 against a profit of Rs642 million in FY12 and profit of Rs985 million in FY11.
• In 4QFY13 revenue declined at a slower rate -1.8% y-y compared to around -19% in 3QFY13 and around -25%y-y in 2QFY13.
• This improvement has largely come from a jump in revenue for Transformers and Rectifiers, as recently it has been able to win a higher share of PGCIL’s orders. Excluding Transformers and Rectifiers, revenues for the other four companies were down around 18%y-y.
• Margin in 4QFY13 at 4.4% was down 370bps y-o-y and 40bps q-o-q.
• The current earnings trend of transformer companies highlights that a weak macro environment continues to weigh on revenue as well as margin profile.
Nomura has advised ‘Reduce’ for the Crompton Greaves stock with traded price of Rs105. It added that it was estimating a recovery in growth to around 12-15% growth in FY14F and FY15F compared to around 2.5% growth in FY13F for domestic power business.
In 4QFY13, Nomura is looking at a 5.5% revenue growth in the domestic power segment. This compares with a 1.8% decline in revenues y-o-y reported by the five transformer companies analysed below.
The brokerage estimates EBIT margins of 10% up 210bps q-o-q but down 170bps y-o-y for Crompton Greaves’ domestic power segment in 4QFY13. In comparison, the five transformer companies have reported a margin decline of 35bps q-q and 365bps y-o-y, on an aggregate basis.
Further, Crompton Greaves’ domestic power segment contributes only 27% of overall consolidated sales and 40% of segment EBIT for the company. Thus a large part of the recovery for CRG has to be driven from its international business, which contributes 34% of overall revenues but a negative contribution at the EBIT level, states Nomura.
