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Key beneficiary of industrial capex revival

We initiate coverage on Voltamp Transformers (Voltamp) with a BUY rating and an SOTP-based target price of Rs3,610 (35% upside). Company is a key player in the transformer manufacturing space with a domestic market share of 15% (as per management), catering to diversified sectors (85% of revenue comes from private customers). Over the years, Voltamp has developed strong relationship with clients, which has helped it have a large installed base of >60,000 transformers (as of Mar’22) across sectors in India and overseas markets. We believe Voltamp stands to be a key beneficiary of energy transition, private capex revival and PLI initiatives of the government in the manufacturing space. Company’s current orderbook at ~Rs9bn, strong balance sheet and improved outlook on profitability would likely keep earnings growth strong in the next three years. We have modelled a revenue/earnings CAGR of 11%/16% over FY22-FY25E. Further, pick-up in power distribution capex and investments in the manufacturing sector could lead to growth in Voltamp’s orderbook.

* Diversified business model: Voltamp supplies transformers to various industries including data centres, water, oil & gas / refinery, steel / mining / minerals, infrastructure, solar / wind, FGD, private utilities, cement, sugar cogen, pharma / F&B, and auto / auto-ancillaries. Company has a diversified clientele, including private players and select PSUs, with the former accounting for a majority of its revenue. Top-10 client contribution to FY22 revenue was ~22%.

* Orderbook at an all-time high: Order inflow during 9MFY23 grew 18% YoY to Rs11.7bn. This helped Voltamp report its highest-ever order backlog of Rs9bn for transformers totalling ~8,160MVA, more than 85% of which is from private operators and the rest from SEBs and utilities. We expect the momentum to continue with strong opportunities coming up in manufacturing, industrial capex on capacity expansion and energy transition.

* Prudent execution track record: Voltamp has been a preferred vendor amongst its clients due to its prudent execution track record and working capital management despite the cyclical nature of the business. Company has been able to manage its cashflows better than peers and command healthy return ratios. It has net cash of Rs6.4bn (23% of current market cap) as at Dec’22-end.

* Initiate with BUY: The stock trades at 11.8x FY24E and 10x FY25E EV/EBITDA. RoIC stands at 34%/36% for FY24E/FY25E. We believe the orderbook would improve with capex revival and greater distribution capex. More sales would ensure better profitability on the back of improving utilisation of the industry’s installed capacity. We believe any new capacity addition plans by the company could be a positive trigger going ahead. Risks: Intense competition, higher raw material prices and slow-down in industrial capex are the key risks.

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