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Sunday, March 1, 2009

Accurate Transformers Ltd:-A small cap wonder

Hemant bhai penned a nice lil report on a small cap gem.Heres its for you folks

Scripscan:Accurate Transformers Ltd

Story:Incorporated in 1988 and promoted by C.L. Sharma, ATL is engaged in the business of Power and Distribution Transformers used in the Power Industry. These Transformers are mainly supplied to various SEBs including those of U.P., Rajasthan, Punjab, West Bengal. It has 6 manufacturing units in U.P. and Uttaranchal.Scrip is being recommended as, Power Sector in India will continue to grow and hence growing demand for its products. We are all aware that the demand for power has consistently outstripped the supply.In order to bridge this demand supply gap, Govt. of India's National Electricity Policy stipulates 'Power For All by 2012' and aims to achieve a per capita consumption of 1,000 Kwh by the end of XIth Plan, by adding a capacity of over 1,00,000 MW. This requires massive investment of over Rs. 10,00,000 crore during this Plan period including establishment of requisite transmission and distribution system.The initiative of the Govt. of India for adding the requisite capacity, have already started yielding the desired results. A testimony to this is the commissioning of over 9,250 MW capacity during the 1st year of the XIth plans period, compared to about 21,000 MW commissioned during all the 5 years of Xth Plan. In addition, over 66,000 MW is already under construction and will be supplemented by about 28000 MW from renewable energy sources and captive power plants. The above capacity addition programme excludes capacity addition of 12,000 MW through UMPPs which has already been awarded and necessary work is under progress for the commissioning in a phased manner in the initial years of XI Plan.Further the Government is planning 40,000 MW of power by 2020 through its nuclear programme.To provide thrust to investment in power sector, Govt. of India has announced setting up of a 'National Fund for Transmission and Distribution Reform' in the Budget for Financial Year 2008-09. The proposed fund is expected to facilitate higher inflow of investment for strengthening and augmenting the T&D loss reduction by providing grants on achievement of loss reduction, thus benefiting the ultimate consumer in terms of reliable and quality power.The above plans of the Govt. of India for generation capacity addition and facilitation of investments in the T&D system would provide buoyant conditions for growth, especially for Transformer Sector.The Transformer Industry in India has been in the forefront for over 50 years and has a well matured technology base up to 800 KV class. There is a strong base of about 150 Transformer Companies in India, with an overall production of over 90,000 MVA per annum. The production capacity is estimated to increase to 1,50,000 MVA per annum by 2012. Besides meeting the domestic requirement, India is exporting transformers to over 50 countries covering USA, Europe, South Africa, Cyprus, Syria, Iraq and other Middle East and Far East countries all over the world.With every Megawatt of generating capacity being added, an additional requirement of 5 times transformer capacity is needed. This provides opportunity for players in the transformer manufacturing space to benefit to the most. This demand coupled with demand arising out of the replacement market also poses a promising future for the players in the sector. The average life of a transformer is 20-30 years, which means that the transformers installed during the IVth to VIIth plans would be replaced now.In 07-08, its turnover increased by 6.28 crs. to 180.59 crs. and PAT increased by 66 lakhs to 7.10 crs. Earlier, company had been selling its Transformers only to Govt. sector. However, with a view to diversify its marketing strategy, it started supplies to private sector as well. Company also implemented 2 projects of Rural Electrification in Nainital and Etah District. Company is making efforts to procure more such projects. Stock is available at 1x FY09 EPS.Company has excellent relations with SEBs and wishes to expand its production capacities.Company was in talks with some private Equity investors for funding the expansion plans.However, same have been put on hold due to crash in share market. Company's strength is very low overheads. However its interest cost is very high as company has very small working capital limits but has to give 120 days credit to its customers and consequently has to buy R/M on credit (leading to higher R/M cost).Once market conditions improve and if company can raise money for expansion and working capital needs, its profit margins can more than double.However,even though company is not able to register growth,based upon current performance, fundamentally scrip is underpriced. Market cap is just Rs. 7.00 crs. and P.E. ratio of 1 is really low considering that company has been registering reasonably good results.Last year share price had gone up to Rs. 172/-and currently, appears almost risk free.Scrip has potential to deliver 50% appreciation in 3-6 months.A great buy altogether.

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