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Our view

Voltamp Transformers’ (VAMP) Q3F2Y4 print was way ahead of expectations on EBITDA and PAT front (revenue came in line with exp.) driven by skyrocketing gross margin of 33.4% on a revenue growth of ~14% YoY (+4% volume growth). Order Inflows for 9MFY24 stood at Rs13.85bn, 11,734MVA (+34%, +31% YoY). Since Raw material (r.m.) cost form 89% of the total operating cost, EBITDA margin is primarily driven by r.m. costs with a limited operating leverage benefit. Hence, gross margin expansion trickled down almost entirely to EBITDA margin which also expanded ~1000bps YoY to 25.7%. A higher other income led to PAT growth of 86% YoY which came in at Rs946mn.

Looking forward

What we are witnessing in the transformer industry is something unprecedented, particularly on the margin front where strong players are entering unchartered territories of gross and EBITDA margin (last two quarter gross margin of VAMP has been at a decadal high). Realization growth has outpaced volume growth in the last 5 years with 10% realization CAGR over FY18-23 against a volume CAGR of 5%. Incrementally, while we expect volume growth may sustain at ~10% in the next two years driven by capacity creation across its major end-user sectors (petrochemical, steel, construction & buildings, cement, data center etc.), the pace of realization growth could see normalization with the increased capacities coming in FY25-26 and increasing competitive intensity from regional players. Therefore, gross margin could see moderation starting FY26. We are rolling over to FY26 and building in a 24% EPS CAGR over FY23-26E. We are increasing our FY24E/FY25E EPS estimates by 38%/25% respectively mainly surprised by the margin performance of the company which remains unprecedented and increase our target price to Rs8,300 based on 22x FY26 EPS. Downgrade to Neutral as current price factors in both strong volume growth (~2x of last decadal average) and never-seen-before EBITDA margin of ~19- 20%.

Double digit realization growth amid a stable R.M Cost environment leading to scintillating gross and EBITDA margin performance

While both volume growth and realization growth have remained strong in 9MFY24 (~9% each), realization growth has surpassed volume growth by a factor of 2x over FY18-23 (realization growth of 10% vs volume growth of 5%). While this was also a function of pass through of increased input costs in FY22-23, incrementally, the company has been able to increase the gross margin by being selective in choosing high bid margin orders amid a situation of under capacity in the industry. Voltamp is a preferred supplier to large industrial companies in sectors such as steel, refinery & petrochemical, pharmaceutical, cement and counts large players like Siemens, L&T, ABB, Hitachi, Adani, Reliance as its key customers. Therefore, the possibility of elevated gross margin performance could unfold for the next few quarters.

Increased competitive intensity a real possibility with announcements of capacity increase, sharp jump in industry RoCEs, revival of sick units

A significant number of transformer manufacturers have announced capacity increases which is expected to get commissioned by FY26, the pricing environment could see deterioration. This could mean moderation in gross margin from FY24 levels of an expected 30%. Also, the company has highlighted the possibility of increased competitive intensity from regional players as well as revived sick companies. RoCE for Voltamp has improved substantially from ~20% in FY19 to 46% in FY23 making the industry an attractive investment destination. We are building in realization growth to moderate to 5% in FY26 from 10% in FY24 while volume growth is expected to remain ~10% over the next two years provided the company puts up capacity. It is evaluating land for the new facility and the expansion plan will be finalized after the conclusion of the general assembly elections.

Voltamp’s low-cost structure with significantly lower other expenses as % of sales

Voltamp has been able to reduce its other expense to ~6% of sales in FY23 from ~8-10% over FY12-21. This is much lower compared to ~8-10% for some of its competitors. This has translated into superior EBITDA margin performance and low operational cost structure. Employee costs for a range of transformer companies remain in the range of 3-5%. Voltamp’s EBITDA Margin jumped ~1000bps YoY to 25.7% in Q3FY24 which has few one-offs in other expense related to provision write-backs. However, even adjusted to that, the company commands industry leading EBITDA margins.

Result Highlights

Sales grew by 14.3% YoY to ~Rs4.1bn (YSLe: Rs4.2bn). Volume grew 4% YoY to 3,278MVA with majority of the growth coming in through price increases. The order inflow for 9MFY24 stood at Rs13.85bn (+34% YoY in value, +31% YoY in volume) indicating near term growth to be driven more by volume.

Gross margin came in at 33.4% (+950bps YoY, +410bps QoQ). The current quarter saw a strong derived price growth of ~10% YoY leading to a sharper expansion in gross margin

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