Brokerage firm ICICI Securities has initiated coverage on the stock of Voltamp Transformers with a 'buy' recommendation and a target price of ₹3,610, implying a 35 percent upside.
The brokerage firm is positive about the company which is a key player in the transformer manufacturing space. It highlighted that Voltamp has a domestic market share of 15 percent (as per management), catering to diversified sectors (85 percent of revenue comes from private customers).
"Over the years, Voltamp has developed a strong relationship with clients, which has helped it have a large installed base of more than 60,000 transformers (as of March 2022) across sectors in India and overseas markets," ICICI Securities said.
The stock hit its 52-week high of ₹3,686 on August 4, 2022, on BSE. As of March 13 closing, the stock is down nearly 28 percent from that level.
ICICI Securities believes Voltamp stands to be a key beneficiary of the energy transition, private capital expenditure (capex) revival and PLI (production-linked incentive) initiatives of the government in the manufacturing space.
The brokerage firm underscored that the company’s current order book at nearly ₹900 crore, strong balance sheet and improved outlook on profitability would likely keep earnings growth strong in the next three years.
"We have modelled a revenue and earnings CAGR of 11 percent and 16 percent, respectively, over FY22-FY25E. Further, a pick-up in power distribution capex and investments in the manufacturing sector could lead to growth in Voltamp’s order book," ICICI Securities said.
Investment rationale by ICICI Securities
Diversified business model: As per the brokerage firm, Voltamp has a diversified clientele, including private players and select PSUs, with the former accounting for a majority of its revenue. The top-10 client contribution to FY22 revenue was nearly 22 percent.
The company supplies transformers to various industries including data centres, water, refineries, mining, infrastructure, solar/wind, FGD (flue gas desulfurization), private utilities, cement, sugar cogen, pharma, auto and auto-ancillaries.
Orderbook at an all-time high: As per ICICI Securities, Voltamp's order inflow during the nine months of the financial year 2022-23 (9MFY23) grew 18 percent year-on-year (YoY) to ₹1,170 crore.
This helped Voltamp report its highest-ever order backlog of ₹900 crore for transformers totalling about 8,160MVA, more than 85 percent 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," ICICI Securities said.
Prudent execution track record: ICICI Securities highlighted that 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.
The company has been able to manage its cashflows better than peers and command healthy return ratios. It has net cash of ₹640 crore (23 percent of current market cap) as of December 2022-end, the brokerage firm observed.
Valuation: As per the brokerage firm, Voltamp stock trades at 11.8 times FY24E and 10 times FY25E EV/EBITDA.
[EV/EBITDA is a ratio to comparea company's enterprise value (EV) to its earnings before interest, taxes, depreciation and amortization (EBITDA)].
ICICI Securities further said that the stock's RoIC (return on invested capital) stands at 34 percent and 36 percent for FY24E and FY25E, respectively.
The brokerage firm believes the company's order book would improve with capex revival and greater distribution capex. It pointed out that 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," said ICICI Securities.
However, intense competition, higher raw material prices and a slowdown in industrial capex are the key risks for the company.
According to a MintGenie poll, three analysts on an average have a ‘buy’ call on the stock.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.