Transformers are the New Gold. Here are Top 5 Stocks in this Booming Market

Editor's note: In a recent interview, Elon Musk said that artificial intelligence (AI) will run out of electricity and transformers by 2025.

2025 - you read that right!!

Here's a little backstory for some context...

You see, 2-3 years ago, when the electric vehicle (EV) revolution was just picking up, the entire world saw the chip shortage unfold as the top EV makers expanded at a rapid pace.

Over time, the chip shortage that was hurting major vehicle manufacturers was subsided as companies ramped up their facilities for manufacturing more semiconductor chips.

Now, with the AI revolution picking up pace, there are initial signs that the world could possibly face supply crunches in electricity and transformers as soon as next year.

We at Equitymaster believe that there's a MAJOR theme evolving in the transformers industry and the demand for transformers is here to stay for the coming decade.

In February 2024, we covered a detailed editorial highlighting the top 5 transformer stocks that could make the most out of this opportunity.

Continue reading...

Top 5 Transformer Stocks to Add to Your Watchlist

The power transformer market is set to soar, reaching a projected USD 38.91 billion by 2030, with an anticipated 7.1% CAGR from 2023 to 2030.

This growth is attributed to technical advancements and the escalating demand for electricity worldwide.

Government initiatives aimed at grid upgrades and the incorporation of cutting-edge technology are pivotal factors propelling the power transformer industry.

The surge in demand for 100 MVA to 500 MVA products in transmission networks, is driven by the transformative shift towards renewable energy and ambitious government targets for renewable capacity installation, especially in solar and wind applications.

Notably, Middle East & Africa governments are actively fostering renewable energy, intensifying the need for transformers.

Currently, the global transformer market faces shortages and price hikes due to heightened raw material demand, pandemic-induced supply chain disruptions, labour constraints, shipping challenges, and geopolitical tensions.

Shortages are particularly severe in certain regions, with a minimum lead time of over a year for transformers across sizes.

Despite these challenges, demand remains robust. The surge in demand is expected to continue, fuelled by new inter-state transmission system (ISTS)-connected power projects and HDVC projects.

To highlight the potential beneficiaries, here are five transformer companies strategically positioned to capitalize on this robust growth trajectory in the industry.

#1 Voltamp Transformers

First on our list is Voltamp Transformers.

Voltamp Transformer is a significant manufacturer of oil-filled power and distribution transformers, with a 15% domestic market share as stated by management.

The comprehensive product portfolio is a direct result of the company's technical collaborations with a myriad of pioneers in the world.

It boasts a well-diversified customer base of over 1,000 customers across various end-use industries such as power, oil refineries, textile, chemical, real estate, automobile, infrastructure, and steel.

Voltamp Transformers Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	27.56%	1.38%	-12.80%	53.01%	21.79%
Operating Profit Margin (%)	15.74%	14.33%	21.65%	16.14%	19.56%
Net Profit Margin (%)	10.24%	10.41%	16.21%	11.78%	14.44%
Return on Capital Employed (%)	18.86%	15.90%	17.83%	19.59%	25.50%
Return on Equity (%)	12.98%	12.46%	14.18%	14.96%	19.51%

Data Source: Ace Equity

Between 2019-2023, the net sales and profits have registered at a 5-year CAGR of 16% and 22%, respectively. The returns have been strong, with a 5-year average RoCE and RoE of 19.5% and 14.8%, respectively.

Given the energy transition, increased private investment, and government incentives in manufacturing, Voltamp Transformers is well-positioned for substantial growth.

With a strong order book, a robust balance sheet and a positive outlook for profitability, the company is expected to grow well.

To know more about the bank, check out its financial factsheet and latest financial results.

#2 Transformers and Rectifiers

Next on our list is Transformers and Rectifiers.

Transformers and Rectifiers (India) (TRIL) is a leading manufacturer of transformers up to 1,200 kV class.

TRIL has a wide range of transformers, like power & distribution transformers, furnace transformers, rectifier transformers & special transformers.

It has strong in-house design & technical expertise; combined with technical collaboration/JV relationship for 765 kV transformers & reactors.

The company enjoys a widespread presence in the domestic market catering to power distribution, petrochemical, pharmaceutical, power transmission, green energy, railways, paper and pulp, mining, etc.

It is gradually expanding its presence in the international landscape with over 25 countries. The domestic market accounts for 88% of revenues and exports account for the balance 12%.

Transformers and Rectifiers Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	20.21%	-17.35%	4.87%	55.86%	18.56%
Operating Profit Margin (%)	8.55%	9.59%	10.52%	7.22%	9.38%
Net Profit Margin (%)	0.60%	0.15%	1.03%	1.23%	3.07%
Return on Capital Employed (%)	8.22%	7.66%	9.40%	10.40%	14.98%
Return on Equity (%)	1.53%	0.31%	2.25%	4.08%	11.30%

Data Source: Ace Equity

Between 2019-2023, the sales and net profits have registered a 5-year CAGR of 13.9% and 45.9%, respectively.

The 5-year average returns have also improved, with the RoCE and RoE propelling to 14.9% and 11.3%, respectively.

The stock has moved up sharply. This comes on the back of healthy growth prospects. The company is well-poised to enjoy a robust outlook coupled with an all-time high order backlog.

As of December 2023, the company reported an order of Rs 25 bn, up more than 50% YoY.

TRIL is currently trading at a PE of 362x, a substantial premium to its 5-year median PE of 29x.

To know more about the bank, check out its financial factsheet and latest financial results.

#3 Apar Industries

The third stock on our list is Apar Industries.

The company is the world's largest conductor manufacturer, third largest transformer oil manufacturer, and India's largest renewable cables manufacturer.

Its expansive market presence extends to global leadership, solidifying its position as a market giant.

With a distinguished clientele, including major players in engineering, procurement, construction (EPC), as well as crucial sectors like railways, defence and marine, the company has capitalized on internal strengths and market opportunities, paving the way for consistent growth.

Apar Industries Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	36.87%	-6.64%	-13.85%	46.38%	53.45%
Operating Profit Margin (%)	6.35%	6.88%	7.18%	6.55%	9.08%
Net Profit Margin (%)	1.71%	1.82%	2.51%	2.76%	4.44%
Return on Capital Employed (%)	30.03%	28.82%	23.20%	27.94%	52.72%
Return on Equity (%)	11.78%	11.41%	12.51%	16.48%	32.28%

Data Source: Ace Equity

Between 2019-2023, Apar Industries' revenue and net profit have grown at a CAGR of 19.8% and 34.5%, respectively.

This surge in profitability has resulted in a healthy set of return ratios. The company's RoE stands at 16.8% while RoCE stands at 32.5%. It also a low debt to equity ratio of 0.14x.

Apar Industries' competitive advantage lies in its strong position in thriving markets, combined with cost efficiency and strategically located manufacturing facilities.

The company's optimistic long-term demand outlook, supported by a robust order flow and growth opportunities, sets the stage for sustained revenue growth over the foreseeable future.

In the nine months ended 2024, the company reported new order inflow of Rs 63.5 bn, up 16% YoY.

Moreover, The Ministry of New and Renewable Energy has a target of awarding 50 gigawatts per annum of renewable energy capacity, including 10 gigawatts per annum from wind energy between 2024 and 2028.

The company believes that if even a portion of these aggressive plans get executed, the demand for conductors, cables and transformer oil will all remain strong.

Apar Industries is currently trading at a PE of 30.6x, a significant premium to its 5-year median PE of 14x.

To know more about the bank, check out its financial factsheet and latest financial results.

#4 CG Power

Fourth on our list is CG Power.

CG Power, also known as Crompton Greaves Power, is an Indian multinational company that specializes in electrical equipment and engineering solutions.

The company provides a wide range of products and services including transformers, switchgear, motors, automation products and EPC solutions for power transmission and distribution.

CG Power has a strong presence in both domestic and international markets, with operations in over 50 countries.

The company has a diverse customer base, serving industries such as power generation, transmission and distribution, oil and gas, cement, steel, and railways.

CG Power Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	-1.41%	-35.91%	-40.38%	79.53%	27.52%
Operating Profit Margin (%)	4.57%	1.67%	7.59%	12.39%	15.23%
Net Profit Margin (%)	-6.15%	-25.76%	42.72%	11.40%	11.30%
Return on Capital Employed (%)	-0.47%	-33.45%	150.83%	60.94%	65.51%
Return on Equity (%)	-19.61%	-1666.79%	0.00%	146.30%	57.55%

Data Source: Ace Equity

In recent years, the company has undergone significant restructuring and has implemented several strategic initiatives to improve operational efficiency and profitability.

These efforts have resulted in improved financial performance, reduced debt and a positive outlook for the company.

Earlier in 2023, the company allocated Rs 2.8 bn for expanding motor capacity and Rs 1.25 bn for transformer expansion, making a total capital expenditure of over Rs 5 bn for the next two years.

Additionally, there's a budget of Rs 1 bn for regular capital expenditure across divisions.

Notably, the company is actively seeking a technology partner for the development of electric vehicle (EV) motors and controllers, signalling a strategic move into the burgeoning EV space.

At the current price of Rs 448, the stock is available at a P/BV of 30 times, a large premium to its historical median of 1.3 times.

To know more about the bank, check out its financial factsheet and latest financial results.

#5 Shilchar Technologies

Last on our list is Shilchar Technologies.

Shilchar Technologies manufactures Electronics & Telecom and Power & Distribution transformers.

The company caters to a wide cross-section of industrial segments from utility to the renewable energy sector and individual retail customers across the globe.

It has been concentrating on catering to the needs of the renewable energy sector, including solar and wind energy in the local market.

The company has a commendable position, being one of the top companies in India supplying transformers for renewable energy.

Shilchar Technologies Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	35.43%	-38.17%	61.88%	52.66%	57.09%
Operating Profit Margin (%)	13.44%	8.47%	10.11%	12.64%	21.83%
Net Profit Margin (%)	6.54%	2.10%	4.69%	7.79%	15.39%
Return on Capital Employed (%)	18.69%	4.52%	12.50%	23.58%	53.85%
Return on Equity (%)	13.48%	2.45%	8.66%	19.22%	42.86%

Data Source: Ace Equity

Between 2019-2023, the sales and net profits have registered a 5-year CAGR of 26.6% and 49%, respectively.

The returns have increased, with the RoCE and RoE averaging at 22.6% and17.3%, respectively over a 5 year period.

Looking ahead, the distribution transformer division has large orders on hand and it will continue to receive orders throughout the year due to high demand in foreign countries.

The company expresses confidence in robust demand for the upcoming years, attributing it to the surge in large-scale projects emerging across the globe in the renewable sector.

To know more about the bank, check out its financial factsheet and latest financial results.

In Conclusion

Looking ahead, the Indian transformer industry is poised for substantial growth, buoyed by favourable demand for transmission and distribution products.

Additionally, increased international orders, rising infrastructure spending globally, the "China plus one" strategy, the embrace of renewable energy, and supplier consolidation collectively contribute to a promising future for the industry.

We'll discuss more about the underlying opportunity in our next editorial.

Watch out for this space.

You can also check out the video version of this editorial on Equitymaster's YouTube channel.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...