Bharat Bijlee
Bharat Bijlee manufactures and distributes transformers, motors, and drivers for escalator but major revenue comes from transformers. It has been generating positive operating cash flow over the last 7-8 years, has been paying dividend and don’t have to make significant investment in next 2-3 years. It has also made little non-strategic investment over the year amounting to 400-450/Share at current market price.
It operates in a pretty much commoditized industry (transformer up 220 Kv) and faces significant cost and margin pressure. It has done commendable job in managing cost and has improved productivity to manage profitability but future remains uncertain. In FY10 its revenue increased to 655 Cr from 545 Cr in FY 09 but PAT came down to 41 Cr from 48 Cr in FY09.
Company has leadership position in 220KV is trying to expand the product portfolio. The company has a plan to upgrade the plant for manufacturing 132 / 220 KV transformers and intends to increase focus on project business. Gearless machine for elevators will also add to overall revenue.
Industry Analysis
Indian economy is likely to grow around 8% over next few years. The government has increased focus on power sector albeit execution remains concerns should propel the growth in power distribution business. In FY 09-10, transformer industry was estimated to be 12,000 Cr as is expected to grow around 15 % CAGR over next 5 years.
The investments in and growth of Transmission, sub-Transmission and Distribution Systems have not matched the increase in generating capacity. However, transformer manufacturing capacity has, especially upto 220 Kv, has increased significantly over last few years resulting in fiercely competitive market. Reduction in price realization and slow down resulted in erosion of profit.
The focus on building National Grid will tilt the demand in favor of higher rating (400 KV and above) transformer where Bharat Bijlee does not have presence.
Competition
Transformer Industry in India has evolved and now has a well matured technology base up to 800 KV class. India has a field-proven technology & capacity to manufacture a wide range of power transformers, distribution transformers and other types of special transformers for welding, traction, furnace etc. Today, about 95% of the transformers installed in the Indian Power Network are of indigenous origin. Energy efficient transformer with low losses and low noise levels can be available to meet international requirements.
Majority of competition is in lower rating transformer, upto 220KV, where Bharat Bijlee operates. There are around 200 companies operates in this space but 75% of market share is captured by top 30 players (Bharat Bijlee, Emco, Voltamp, Transformer and Rectifiers etc). Crompton Greaves operate in 400 KV to 765 KV, and ABB is the only player for 765 KV and above transformers.
Financial Performance
Company’s sales and profit has improved 4 and 9 times respectively over last 10 years. It has deliver over 25% RoE and RONW over the last 10 years and has been generating significant amount of cash. The company is almost debt free and has made investment amounting to 450/share at current market price. The company also has good dividend record over last 5 years.
Management
The management seems to be quite conservative though I think disclosure should improve, though they have improved the reporting in recent times. Management compensation appears reasonable.
Conclusion
The company will ride on focus on power sector especially on power distribution. Due to overcapacity there would be some near term challenges on margin but given the focus on power generation demand for transformer will exceed supply in another 2 years. However, companies is trading at around 15 PE (TTM) and if we exclude the non-strategic investment at 10 PE (TTM). I will not any further investment in the stock at current level. My average cost for the stock is Rs 427 / share which gives me around 6% of dividend return which is likely to increase so I don’t plan to sell it.
It operates in a pretty much commoditized industry (transformer up 220 Kv) and faces significant cost and margin pressure. It has done commendable job in managing cost and has improved productivity to manage profitability but future remains uncertain. In FY10 its revenue increased to 655 Cr from 545 Cr in FY 09 but PAT came down to 41 Cr from 48 Cr in FY09.
Company has leadership position in 220KV is trying to expand the product portfolio. The company has a plan to upgrade the plant for manufacturing 132 / 220 KV transformers and intends to increase focus on project business. Gearless machine for elevators will also add to overall revenue.
Industry Analysis
Indian economy is likely to grow around 8% over next few years. The government has increased focus on power sector albeit execution remains concerns should propel the growth in power distribution business. In FY 09-10, transformer industry was estimated to be 12,000 Cr as is expected to grow around 15 % CAGR over next 5 years.
The investments in and growth of Transmission, sub-Transmission and Distribution Systems have not matched the increase in generating capacity. However, transformer manufacturing capacity has, especially upto 220 Kv, has increased significantly over last few years resulting in fiercely competitive market. Reduction in price realization and slow down resulted in erosion of profit.
The focus on building National Grid will tilt the demand in favor of higher rating (400 KV and above) transformer where Bharat Bijlee does not have presence.
Competition
Transformer Industry in India has evolved and now has a well matured technology base up to 800 KV class. India has a field-proven technology & capacity to manufacture a wide range of power transformers, distribution transformers and other types of special transformers for welding, traction, furnace etc. Today, about 95% of the transformers installed in the Indian Power Network are of indigenous origin. Energy efficient transformer with low losses and low noise levels can be available to meet international requirements.
Majority of competition is in lower rating transformer, upto 220KV, where Bharat Bijlee operates. There are around 200 companies operates in this space but 75% of market share is captured by top 30 players (Bharat Bijlee, Emco, Voltamp, Transformer and Rectifiers etc). Crompton Greaves operate in 400 KV to 765 KV, and ABB is the only player for 765 KV and above transformers.
Financial Performance
Company’s sales and profit has improved 4 and 9 times respectively over last 10 years. It has deliver over 25% RoE and RONW over the last 10 years and has been generating significant amount of cash. The company is almost debt free and has made investment amounting to 450/share at current market price. The company also has good dividend record over last 5 years.
Management
The management seems to be quite conservative though I think disclosure should improve, though they have improved the reporting in recent times. Management compensation appears reasonable.
Conclusion
The company will ride on focus on power sector especially on power distribution. Due to overcapacity there would be some near term challenges on margin but given the focus on power generation demand for transformer will exceed supply in another 2 years. However, companies is trading at around 15 PE (TTM) and if we exclude the non-strategic investment at 10 PE (TTM). I will not any further investment in the stock at current level. My average cost for the stock is Rs 427 / share which gives me around 6% of dividend return which is likely to increase so I don’t plan to sell it.
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