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Transformers & Rectifiers: Moving higher end - Views on News from Equitymaster
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Transformers & Rectifiers: Moving higher end
Nov 19, 2009

We recently met up with the management of Transformers and Rectifiers (TRIL) to understand the companyís business as well as its outlook for the sector. The following are the excerpts of that research meeting. Background: The promoters started the company in the year 1981. They, at the time, made transformers on a small scale. Over the next few decades, the company increased its capabilities and capacities. It now has a total capacity of 23,200 MVA and make transformers for various applications. The company is now majorly into rectifier, furnace and power transformers.

Rectifier and furnace transformers contribute about 30% of the companyís sales. Power transformers contributed the bulk with over 70% of TRILís revenues. Over the last five fiscal years to FY09, the company has grown its sales at about 50% annually. Its order backlog currently stands at Rs 4.5 bn. The average execution period for the same is 10 months.

Current status quo: TRIL recently signed an agreement with Power Grid for the development of 1,200 KV (higher rating) transformers. It has seen a fall in sales and profits in 1HFY10. This was due to a combination of two reasons. A fall in prices of raw materials has brought down the overall value of orders, as also a fall in overall pricing due to a lesser number of orders.

The company sees its operating margins at a sustainable 16.5% to 17% going forward. It does not have any major capital expenditure plans for over the short to medium term as of now. However, it is scouting for international acquisitions. This will give TRIL a leeway in charging higher prices to customers in Europe and the US. It is targeting Rs 1 bn of export sales for FY10. It has also set a target of an overall utilisation of about 50% of its installed capacity for this year.

Outlook for industry: The management is of the opinion that the fall in profits that the industry has seen off late is a short term phenomenon. What is impacting profitability is the slowing of orders and customers facing cash flow problems due to the overall slowdown.

The entire industry has a capacity of 225,000 MVA. Another 24,000 MVA is in the pipeline. In contrast, the current production level stands at 160,000 MVA. The management expects an annual demand of over 300,000 MVA over the next 5 years.

What to expect?
At the price of Rs 340, the stock is trading at 10.8 times its trailing twelve months earnings. TRILís current bulk of sales comes from lower rating (220KV) transformers. However it is moving in the direction of higher rating 400KV and 1,200 KV transformers. This is the direction that Indiaís entire T&D system is moving towards. Thus these attempts will benefit the company going forward. The current lot of orders being executed by the company have been low on profitability. We believe this is because they were booked during the third and fourth quarters of FY09 wherein the credit crisis was at its peak. This had led to a lot of fear in the industry. Margins and pricing were the first to take a beating on these orders. As they make their way out of the system, things should start looking upwards for the company once again.

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