IMP Powers Limited : Transformer Sector Turnaround Is Here ?

 

Current price : 108
52 Week High / Low : 117 / 74
Market Cap : 93 Crores
9M FY 2017 EPS : 2 Rs

Disclaimer: This is not a recommendation to buy / hold / sell any securities mentioned in the blog post. The published post is for information purposes only.


Company Description

History – Started in 1961 as a manufacturer of measuring and testing equipment including energy meters. In 1980s it ventured into distribution and power transformers. In 2005, IMP Powers Limited went into CDR and emerged much stronger post that as is visible from the financial discipline it maintained during the last 7 down years. Although exit process from CDR led to lot of equity dilution of 46% since 2006.

Product offerings – IMP Powers Limited manufactures power and distribution transformers in 11kV to 400kV ratings. It has also forayed into high margin special purpose transformers and high growth solar transformers.

In 2012, it forayed into EPC work of small hydro power plants of up to 5MW.

In 2016, IMP tied-up with Germany based Smart Hydro Power GmbH Ltd for the exclusive marketing of “Kinetic energy turbines”. The latter two businesses do not contribute much to revenues as of now.

Market Position – IMP is amongst the top 5 power transformer companies in India in the 132-220 kV Class category

Clients – State TRANSCOMS, EPC players, Power Grid Corporation Of India Limited are its customers. Company is an approved vendor to all the major players in the industry.

Manufacturing capacity and infrastructure – Company has capacity to produce 15,000 MVA of transformers. By debottlenecking (using minimal capex) it can take the capacity to 17,000 MVA, a revenue potential of 730Cr at current depressed realizations. It has one manufacturing plant at Silvassa, Maharashtra. IMP also has in-house testing facility to carry all type of tests as per Indian (IS) and International Standards (IEC, BS, ANSI etc.) for transformers upto 315 MVA, 400 KV class including Impulse test, Partial Discharge and Temperature Rise.

Corporate Presentation

Download (PDF, 1.09MB)

 

Company Website :  http://www.imp-powers.com/

Recent Management Interview On Moneycontrol

http://www.moneycontrol.com/news/business/companies/see-huge-potential-in-transformer-sector-imp-powers-2264225.html

Our total order book would be close to about Rs 616 crore”, he said.

He expects margins to be significantly better in FY18 compared to FY17.

“The focus of the government on the transmission and distribution (T&D) sector is high. If the entire Gujarat model is extrapolated in the entire country, there is going to be huge potential in the T&D sector and that is what we are looking at”, he further mentioned.

IMP Power management expects an overall turnaround in India’s transformer sector.


Genesis of the idea

IMP Powers is a manufacturer of distribution and power transformers ranging from 11kV to 400kV. Transformer industry is going through a cyclical downturn and is seeing demand revival from past few quarters which is leading to good order book for the players. IMP is a well-managed company (more on this later) as visible from its past performance. Currently the company is sitting on highest ever order book in its history and is available at~20% discount to liquidation value. There seems to be very negligible downside and decent upside potential in a 3+ years’ time horizon.


What makes IMP an interesting company to look at ?

  • Cyclical revival – IMP is part of a highly cyclical industry – Transformers, a capital good used in power sector. It is very important and at the same time very difficult to know where we are in the cycle. However, commentary from management teams of different players suggests that demand revival is taking place. The same is also reflected in industry wide utilizations which have improved to 60%+ from 47% two years back. The same is visible from reported financials of most of the transformer companies in last 4 quarters. Some of the companies in this space have already started reporting increased margins and return ratios. One of the main reasons for the demand revival is increased capex in power transmission and distribution space, of which transformers is a crucial part (~13% of total spending mix)
  • Balance sheet strength – Having a strong balance sheet is a sine-qua-non to surviving the trough of the cycle. IMP has negligible long term debt and its total borrowings including working capital financing is less than its net worth.
  • Tightly run ship – IMP is very efficiently run organization, it has managed its cost structure very tightly and has maintained EBITDA margins of 9%+ (best in industry) despite significant fall in gross margins since 2010. In the same time period, it has reduced its working capital and released capital. Even at the trough of the cycle its debt/equity never crossed 1x while most of its peers were saddled with huge debt. All of this has helped IMP clock an average ROCE of 12% during 2010-17 which were the down years of the cycle.

IMP Power Financial History

  • Well positioned to capture demand revival – Current order book is highest since inception and strong balance sheet of the company allows it to execute this book without any financial hurdles on the way. IMP can also increase its capacity by 15-20% by debottlenecking with minimal capex.

Lucrative valuation 

Let’s approach the valuation from liquidation perspective.

As of Sep’16 (latest available) balance sheet, the Company has total liabilities (current + long term + any provisions for tax/dividends etc.) of 255Cr.

Against these total liabilities, IMP has current assets of 280Cr. Subtracting all the liabilities from current assets, leads to surplus of 25Cr.

To this surplus we can add, net assets worth 73Cr, actual replacement cost of the same should be much more than this and long term advances of ~5Cr. This brings total surplus to 103Cr.

IMP also has idle factory land worth 20-25Cr which it wants to sell off. Assuming, net of book value it can fetch 15Cr, total surplus becomes 118Cr.

At CMP of 110, IMP is available at market cap of 95Cr, a discount of 20% from its liquidation value.

Financial Metrics For IMP Power ( Download Excel Sheet ) :

Download (XLSX, 39KB)


Triggers to unlock value 

  • Volume growth – Foremost and the most important trigger for IMP and in general for any cyclical company is the uptick in cycle or in other words demand revival. As mentioned before, demand has started picking up in the transformers space in the last 4 quarters. Same is the case with IMP, its huge order book provides visibility on 50%+ volume growth over next 2-3 years.
  • Operating leverage – As of FY16, IMP operated at below 60% utilizations, but the current order gives visibility on IMP touching its peak capacity in next couple of years. The same will result in improved profitability because of operating leverage embedded in the business.
  • Reduction in interest costs – as profitability and cash flows improve from here on, IMP’s debt servicing ratios shall improve which would trigger a positive change in credit rating. This shall result in reduced interest costs for the company leading to increased PBT.
  • Other factors – There are few more things which can result in higher income and profits for IMP. Although these factors have not been considered while estimating return potential. These are –
  • Realizations growth which is expected to happen when industry utilization levels cross 75-80%. Orders with improved realizations/margins shall start to pour within next few months.
  • Sale of old defunct plant (value estimated to be ~20-25Cr). The proceeds can be used to finance working capital needs thereby reducing financing costs.
  • Fresh income stream from Hydro EPC subsidiary and sale of Kinetic turbines in tie up with Germany’s Smart Hydro Power GmbH
  • Tie Up With Smart Hydro Power
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Peer comparison – Last few quarters

The table below shows quarterly growth and margins trend for top 5 listed transformer companies. Growth yoy line indicates pick up in revenue for most of the companies. However, margins do not seem to have picked up steadily for most of the companies as utilization levels are still hovering around 60%. So far, TRIL ( Transformers & Rectifiers India Limited ) has been ahead in capitalizing on the demand revival.

Broadly, the company competes with Voltamp Transformers Limited, Transformers & Rectifiers India Limited, Bharat Bijlee Limited & Emco Limited.

IMP Power Peer Comparison

Peer comparison – FY 2016

IMP is smallest amongst the lot in terms of turnover and makes lowest gross margins but despite that it generates best EBITDA margins because of its lowest operating costs, which it has maintained throughout last 7 years.

IMP Power Peer Comparison FY2016

Peer comparison – Last 5 years

Interest costs as % of sales and NWC days are two metrics which depicts state of balance sheets for the players. Voltamp Transformers has always been a cash rich company while Emco the most leveraged. Only 3 companies have been able to generate positive cash flows from operations and IMP is one of them, while Transformers & Rectifiers India Limited being the best on this metric. IMP scores best on ROCE, generating 12% average ROCE during the down-cycle.

IMP Power Peer Comparison 5 Years

Valuation comparison

IMP looks cheapest on EV/sales and EV/EBITDA and on P/B it is second to only Emco, which is saddled with huge debt.

IMP Power Peer Comparison Valuations


Milestones to track

  • Order book of 616Cr to be executed over next 16 months

  • Decline in financing costs
  • Improved revenue mix of special purpose and solar transformers
  • New revenue streams coming online – Hydro EPC and Kinetic turbines
  • Sale of land leading to reduction in working capital loans

Corporate governance checklist

Corporate Governence IMP Power

Credit Rating By CARE

Download (PDF, 295KB)


Risks and challenges

  • Volatility in raw material (RM) prices – Key RM, CRGO (cold rolled grain oriented) steel forms 22% of the total RM costs. CRGO is 100% imported as it is not produced domestically. Its prices fluctuate a lot because of demand-supply mismatch as well as forex fluctuation. Prices of other RMs such as copper, oil and aluminum are also determined globally and fluctuate widely. Although there are price pass-through clauses with some time lag, any adverse sharp movement in RM prices can dent the margins.
  • Delay in product deliveries – Any delay from clients’ side in picking up the orders can result in deferment of revenue
  • Competition – from larger players, both local and MNCs, operating in India can result in margins stagnation despite cyclical upturn. Although with the implementation of GST and new BIS norms competition from unorganized players is bound to slow down. And, mandatory domestic manufacturing clause to participate in govt tenders will reduce competition from cheap Chinese and Korean imports.
  • Working Capital – Any stretch in working capital can result in higher interest charges.

Annexure 1

About the transformer industry

  • Market size and potential – Total market of power and distribution transformers is estimated to be 13,000Cr. Total demand is expected to grow by 10% while demand from TRANSCOMS, target market for IMP, is expected to grow by 23% CAGR for next 2 years.
  • Major growth drivers – State TRANSCOMS and two central government sponsored schemes— Deendayal Upadhyaya Gramin Jyoti Yojana (DDUGJY) for rural areas and Integrated Power Development Scheme (IPDS) for urban areas – will be the major drivers for pulling up the demand of transformers in next 2-3 years.
  • Market mix – Organized players mix stands at 69%. State TRANSCOMS and DISCOMS account for 23% and 35% respectively of the total industry demand; PGCIL 14%, Industrial 15% and Exports 13%

  • Segmentation –

Power transformers – 33kV to 220kV to 765kV, used by DISCOMS, TRANSCOMS, GENCOMS, and large industries

Distribution transformers – less than 33kV (11kV to 6.6kV to 3.3kV), used by DISCOMS and small industries.

Annexure 2

Charts on industry data

Transfomer Industry India2

Data sources: AceEquity, Capitalline, Edelweiss report on Transformer sector


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