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* Shilchar is a Vadodara based transformer company formed in 1986. It is expanding its capacity by 90% from 4000 MVA to 7500 MVA by end of July 2024 on the back of strong industry demand (mainly renewables).

* Shilchar derives 60% of revenue from domestic and 40% from Exports to North America & Middle East

* Within domestic, 80-85% of revenue accrues from generation transformers for renewables which are complex to manufacture & involve higher level of customisation and thus generate superior margins (15-20%) compared to other players who are mainly present in distribution transformers (10-12%).

* Within exports, bulk of the revenue accrues from distribution transformers. However, international OEMs have high quality standards and vendors have to undergo a long process of approvals & trial runs and after few years, meaningful orders are given. This acts as an entry barrier. (Failure rate of transformers in India is at 15% v/s 2% in developed countries). Exports margins are > 30%.

* Key clients include Tata Power, Larsen & Toubro, Mahindra Susten, Adani Green and Torrent Power.

* Debt free company with high ROCE; will generate Free Cash Flow in excess of Rs. 100 Cr every year.

* Over FY24-26E, we envisage healthy revenue/earnings growth of 37%/36% CAGR along with consistently high ROCE. We value Shilchar at P/E multiple of 36x FY26E (10% premium to our target P/E for midcap capital goods basket, owing to superior growth & ROCE) and arrive at a TP of Rs. 8,000.

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