Ghalla Bhansali Stock Brokers Pvt. Ltd.

18th April, 2011

Transformer Industry
Overview The power sector value chain comprises generation, transmission and distribution (T&D). Electricity generated at a power plant is transmitted to the nearest grid via step-up transformers and then to the state grid (via step-up or step-down transformers). Then it is transmitted to a power substation via stepdown transformers. Finally, distribution transformers are used to transmit power from the sub-transmission point to end consumers.

Power transformers account for 70-75% of the total installed capacity while distribution transformer accounts for the remaining 20-25%. In the power transformer segment, step-down transformers account for 75-80% of the total installed capacity while step-up transformers account for the rest.

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18th April, 2011 India has set for itself ambitious targets of investments in the power sector, in view of the significant power deficit and sustaining the economic growth momentum. The momentum of capacity addition is expected to improve in the later half of the Eleventh Plan and continue at a higher rate during the Twelfth Plan, with large capacity additions lined up by the private sector. Investments of INR3.5 trillion and INR4.7 trillion are expected in the power sector during the eleventh and twelfth five-year plan periods, respectively. Capacity addition of 54,000MW is expected during the eleventh plan and ~1,00,000MW is planned for the twelfth plan periods. With huge power plants coming up, the need for transmission will drive demand for transformers. Industry is going to witness a turnaround in FY12. Going forward; transformer segment is going to witness a turnaround, even in face of intensifying competition, as a Capex of approximately Rs.640,000 crore in T&D sector over the next 5-6 years will ensure the optimum capacity utilization for major players. Key demand drivers will be PGCIL capex for 12th five year plan, capex by the SEBs and revival in industrial capex cycle. As for import threat from China and Korea, there is a clear policy shift towards preference to local manufactures, evident by PGCIL making it mandatory to have 50% local manufacturing content, a qualification to bid for 765 KV transformers.
20.00% 15.00% 10.00% 5.00% -5.36% 0.00% -5.00% -10.00% -15.00% Power Transformers Distribution Transformers Total Transformers -0.53% -3.29% 3.65% -9.58% 1.69% 12.43% 9.09% 3.00% 17.16%

-3.89% HY 2009-10

Q1 2009-10

-6.42% Q3 2009-10

FY 2009-10

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18th April, 2011 Export and Import Status of The Transformer Industry In The Global market, performance of Indian product is acknowledged as technically at par with the leading international companies Since the transformer industry has matured enough as a reliable supplier, it is exporting transformer in various parts of the world including countries like USA, Europe, South Africa, Cyprus, Syria, Iraq and other Middle East countries and Far East countries. Exports of Transformers grew by 63.97% for FY 2008-09 to Rs 18163 million, whereas import increased by 41.13% to Rs 2705 million. Statistic Related to export-import is provided below: Export-Import of Transformers Import Rs. Million Transformers - upto 650 kVA Transformers - above 650 kVA Total Export Growth 2007-08 1,028 888 1,916 2008-09 416 2,289 2,705 41.13% 2009-10 791 7,143 7,934 193.29% 2007-08 637 10,417 11,054 Export 2008-09 1,993 16,170 18,163 63.79% 2009-10 2,788 15,192 17,980 -1.01%

For the financial year 2009-10, Overall Exports growth was slightly negative (-1.01%) with improvement in export of Transformer upto 650 KVA. For Year 2009-10, import increased at staggering rate of 193.29%. Considerable imports of industrial transformers, mainly from Korea and China was reported. Technological Trend in the Industry India has technology and capacity to manufacture a wide range of power transformers, distribution transformers and other type of special transformers for welding, traction, furnace etc. Indian Companies are capable of manufacturing energy efficient transformers with low losses and low noise levels. Towards introduction of next voltage level in High Voltage Direct Current (HVDC), implementation of +/-800KV, 6000 MW HVDC Bi-pole line From north eastern region to northern region have commenced. www.ghallabhansali.com 3

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18th April, 2011 The Link shall pass through chicken neck area of north eastern region and shall be transmitting power over an distance of more than 2000 kms. With regards to alternative current (AC), establishment of 1200 KV Ultra High Voltage(UHV)AC test station at Bina in Western region is under process as a collaborative effort with manufacturers, who would be able to field test their indigenously developed 1200 Kv equipment on long term basis. Indian Companies are capable of Producing 420 KV Class transformers, as HDVC/UHV system is being developed due to capacity addition requirement during 11th and 12th Plan period. Growth in 765 Kv Transmission during 11th plan period is expected to be from 1704 circuit Kilo meter (ckm) at the end of 10th plan to about 7132 ckm by year end of 11th Plan. 765kv substation transformation capacity would increase from 2000 MVA at the end of 10th plan to 53000 MVA by end of 11th plan. Power grid is developing 1200Kv Transmission to transfer Huge power as required by 11th and 12th plan. The Transformer at UHV Level will assume priority due to operation of national grid, currently having capacity of 20000 MW, which will be augmented to 38000 MW by 2012 and linking the trunk lines for inter-transfer of bulk power from surplus to deficit states. The Bureau of Energy Efficiency (BEE) is actively working to ensure that quality products are procured by the electricity boards and has accordingly stipulated mandatory star rating for distribution transformers. It has issued an mandate on 9th January 2010, that all distribution transformers to be purchased shall be minimum of 3-star ratings. Most manufacturers have upgraded pr are planning to upgrade to meet these requirements. Players in Transformer industry have updated their manufacturing facilities to cope with technical requirement at national and international levels. They have established in house R&D Labs and are regularly updating their technical capabilities to develop transformers of latest technology and design. Few big players are also considering setting up manufacturing unit to cater new 765 KV and higher category. This technical competency provides them competitive advantage in global market place.

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18th April, 2011 Demand Analysis of Industry These are the key drivers of demand for the transformer industry: 1. Demand generated from capacity additions: Large scale capacity additions with matching transmission & distribution infrastructure and reduction of Technical & Commercial (AT&T) losses will create huge demand for transformer industry. A target of capacity additions of 78,700 MW was set in 11th five year plan. The working group of power has recommended capacity additions of 82,200 MW for 12th plan. At 60% target achievement, estimated generation capacity works out to be: Estimated Generation Capacity Additions For 11th & 12th Plan period Capacity in MW Installed capacity at the end of 10th plan Installed capacity as on 31 march 2010 Capacity additions till march, 2010 (for first 3 years of 11th plan) Capacity addition targets for plan period Target capacity addition (For remaining 2 years of 11th plan) % Target achievement (assumed) Estimated Capacity Additions 2. Replacement Demand Approximately 97,456 MVA of transformer capacity was added during 1983-887 & 238,150 MVA during 1987-91. As average life of a transformer is 25 years, these transformers are expected to be replaced during the 11th and 12th plan period. Thus demand from replacement for the remaining 1 year of 11th plan and 5 years of 12th plan work out to be: Estimated Replacement Demand MVA Transformer Capacity Added Average yearly Demand Years Average Total Demand for the period 1983-87 97,456 11th plan 19491 1 19,491 1987-91 2,38,150 12th plan 47630 5 2,38,150 11th plan 1,32,329 1,59,398 27,069 78,700 51,631 60% 30,979 60% 49,320 82,200 12th plan

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18th April, 2011 According to Annual report 2009-10 of Transformers & Rectifiers (India) Ltd., about 10 MVA transformer demand per MW of generation capacity added has been observed. MVA demand per MW of generation capacity has improved due to more emphasis on curtailing AT&C losses. On this basis future demand from generation capacity addition works out to be as under: Estimated Transformer Requirement (in MVA) For the period 2011-2017 Total Years by end of 12th Plan Period A. Demand from added generation Expected Capacity Addition for 11th and 12th plan period Transformer Capacity requirement /MW A. Demand from added generation B. Replacement Demand For remaining year of 11th plan For 12th five year plan B. Total Replacement Demand Total Transformer Demand (A+B) Average Yearly Demand 3. Transmission lines expansion Besides capacity addition, a strong inter-state and inter-regional transmission system has also been planned not only to evacuate the planned generation capacity but also to provide open access for transfer of power from surplus to deficit areas. Programme of expansion of inter-regional transmission capacity from 14,100 MW at the end of 10th plan to 37,700 MW at the end of 11th plan has been given. 4. Industrial Sector demand Industrial sector demand is the largest consumer of electric energy in India. Industrial segment demand has been from various power consuming industries viz. steel, aluminum, cement, oil & gas, automobiles, engineering, mining & minerals, paper, chemical and petrochemicals etc. www.ghallabhansali.com 6 19491 238150 257641 1060627 176771 80,299 10 802986 6

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18th April, 2011 With the growth of Indian economy in last decade, industries have increased their manufacturing capabilities by many folds and this has increased their power usage. Industries are now increasingly relying on captive power plant as it is much more economical and reliable as compared to power supply from the grid. Revival in the economy will increase the Capital Expenditure incurred by the industries. Industries are expected to incur part of this amount on captive power plant, which in turn will generate demand for transformers. The installed capacity of captive power plants was 24,680 MW in march 2007. it is envisaged that during the 11th plan period about 12,000 MW capacity power plants would be added to the system which will take care of the demand of the industry and also power to the grid. The GoI has reserved coal block with reserves of 3.2 billion tones of coal for allotment by Screening Committee of Ministry of Coal for merchant and captive plants. About 10,000 MW capacity is expected to be developed through this imitative. 5. Export Demand Indian export of transformers for the year 2009-10 plummeted by 1.01% and grew by 63.79% for previous year 2008-09. Export demand declined for the year 2009-10 as worldwide economies were affected by economic slowdown. Though there exists significant export opportunity for Indian companies to grab, with the expected economic revival. Indian players have built considerable presence in accordance with global standards. Indian players are expected to tap markets like Australia, Oman, Eygpt, Srilanka, Bangladesh, Thailand, Indonesia and middle East. Conclusion: The massive program of generation, transmission and distribution outlined in 11th & 12th plan envisages huge demand of transformers and generators. Going forward, transformer segment is going to witness a turnaround, as a Capex of approximately Rs.640,000 crore in T&D sector over the next 5-6 years will ensure the optimum capacity utilization for major players. Growing Indian economy, growth in electricity consumption, growing industrial demand, expanding export market, large scale generation capacity addition, setting up of national grid, rapid expansion of urban and rural distribution infrastructure have been key drivers of the transformer market in India. Thrust and policy of GoI to electrify all villages by 2020 and publicly funded programmes like the Rajiv Gandhi Gramin Vidyutikaran Yojana a is one of the factor which will provide opportunities to transformer manufacturer and propel growth in the transformer industry. www.ghallabhansali.com 7

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18th April, 2011 Peer Group Profile The Indian transformer industry (including unorganized players) was astimated to be around Rs. 130 billion as of FY10. The industry is fragmented with only a few organized players such as BHEL, ABB, Crompton Greaves, Areva T&D, EMCO, Bharat Bijlee, Indo Tech Transformers Ltd, Voltamp, and IMP Powers. Market share of organised players is to be approximately 80-85% per cent. Among players who primarily manufacture transformers, EMCO is the largest by capacity followed by Voltamp, and IMP Powers. Most players have significantly expanded capacity to tap demand. Over the past four years, capacity utilization has improved to 80%, on the back of strong demand and as expansion projects were under construction for majority of the companies. The industry is typically characterized by high revenue growth, healthy return ratios, and negligible debt Particulars Net Sales (Rs.cr) Sales CAGR FY06-10 OPM % NPM % EPS (Rs.) D/E % RONW % ROCE % EMCO 978.55 19.27 11.99 4 21.38 0.06 8.03 12.87 Voltamp 541.96 16.87 21.61 13.83 79.48 0 27.64 41.21 IMP Powers 192.7 23.37 10.5 2.2 5.5 0.8 5.5 12.2

o Over the past five years, the industry has recorded strong sales growth CAGR of more than 15% back by demand and rise in commodity prices. o Over the years operating margins have also improved owing to strong demand and limited supply (as capacity expansion plans were under construction during the period). o The industry is characterized by healthy return ratios. Players such as Voltamp have outperformed the industry with ROCE and RONW in excess of 40% owing to focus on the industrial segment. Voltamp sold customized products to industrial clients, which fetched better margins. It also enjoyed lower working capital requirement on account of faster recovery of dues from industrial clients. o Most players have negligible debt as well as investments in liquid funds. www.ghallabhansali.com 8

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18th April, 2011

Voltamp Transformers Ltd BUY CMP: Rs. 580 Target: Rs. 950- 1000
Investment Horizon: 2 Yrs
BSE Code: 532757 NSE Symbol: VOLTAMP Par Value: Rs.10 Sensex

Established in 1963, VTL was initially incorporated as a private limited company in Vadodara. It converted into a private company in 2006. The company is a leading designer and manufacturer of power & distribution as well dry type and cast resin transformers. It has facilities to manufacture oil-filled power and distribution transformers up to 160MVA, 220KV class, resin impregnated dry type transformers up to 5 MVA, 11KV class (in technical collaboration with Mora, Germany) and cast resin dry type transformers up to 12.5 MVA, 33 KV class (in technical collaboration with HTT, Germany). The companys clients include Bharat Heavy Electricals Ltd, New Government Electric Factory Ltd, Crompton Greaves Ltd, Transformers and Electricals Kerala Ltd, General Electric Co and ABB Ltd. The company also does overhauling of transformers for Nalco, ONGC, GSFC, Indian Oil, BPCL, NTPC, etc.

Share Price Data Paid up Equity (Rs.Cr) Market Cap (Rs. Cr.) 52 week High (Rs.) 52 week low (Rs.) Book Value (Rs.) PE Ratio Shareholding Pattern (%) Promoters FIIs Institutions Public & Others Non Promoters Corp. 45.06 29.1 5.69 10.08 9.32 10.12 595 1136 543 360 10

Valuations: At the current price of Rs.580, Voltamp Transformers Ltd is trading at 6.28x 20011-12E and 5.69x 2012-13E earnings. Based on Forward Earnings Estimates, the expected value of Voltamp Transformers Ltd is in range of Rs.950-1000. Hence we recommend a BUY call for Voltamp Transformers Ltd for long-term (2 year) perspective.

Year End (Rs.Cr) Net sales PBIDT PBIDTM PAT PATM EPS (Basic) Rs. PE Dividend (%)

2007-08 555.35 128.61 23.16 79.9 14.39 78.98 16.46 125

2008-09 648.91 173.83 26.79 114.8 17.69 113.47 3.05 125

2009-10 541.97 128.89 23.78 82.53 15.23 81.58 10.67 125

2010-11E 650.36 130.07 20.00 84.55 13.00 83.54 6.94 --

2011-12E 747.92 157.06 21.00 93.49 12.50 92.38 6.28 --

2012-13E 860.11 189.22 22.00 103.21 12.00 101.99 5.69 --

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18th April, 2011

IMP Powers Ltd BUY CMP: Rs. 80 Target: Rs. 200

Investment Horizon: 2 Yrs
BSE Code: 517571 NSE Symbol: INDLMETER Par Value: Rs.10 Sensex

IMP Powers Ltd (IMP) is one of the leading manufacturers of power transformers up to 330 kv class with the market share of around 7%. It also manufactures electrical measuring equipments such as analog meters, digital meters, TTB shunts and meter testing equipments. Majority of its revenues come from dominant power sector transformers. IMPs key customers include state electricity boards (SEBs), EPC Contractors and industrial customers. Its caters to various SEBs in Maharashtra, Gujarat, Rajasthan, Haryana among others. Private sector (EPC contractors) clients include L&T, UB Engineering, A2Z, Areva, Siemens, Shreem Capacitors, Kalpataru Sunil Hitech, KEC International, Jyoti Structures, Nagarjuna Constructions, etc. IMP has recently finished its capacity expansion of transformers at Silvassa, which has enhanced its capability to manufacture transformers up to 330 kv class. IMP was manufacturing transformers up to 220 kv class prior to this expansion. IMP has manufactured and exported 71 MVA, 330 kv class transformer to Zesco, Zambia during FY09. The company has already excecuted the order for 200 MVA up to 220 kv class transformers by MSETCL. Valuations:
47.04 0.41 4.23 24.4 23.92

Share Price Data Paid up Equity (Rs.Cr) Market Cap (Rs. Cr.) 52 week High (Rs.) 52 week low (Rs.) Book Value (Rs.) PE Ratio 8.14 62.88 132.05 55 106.58 11.09

Shareholding Pattern (%) Promoters FIIs Institutions Public & Others Non Promoters Corp.

At the current price of Rs.80, IMP Powers Ltd is trading at 5.72x 20011-12E and 4.01x 2012-13E earnings. Based on Forward Earnings Estimates, the expected value IMP Powers Ltd at Rs.235/share (10x of FY2013 EPS). Hence we recommend a BUY call for IMP Powers Ltd for long-term (2 years) perspective. 2007-08 134.29 21.27 15.84 10.12 6.97 11.48 9.02 0 2008-09 190.66 32.84 17.22 15.72 8.25 20.52 4.84 0 2009-10 192.7 21.9 11.36 4.59 2.38 5.52 21.18 0 2010-11E 270.00 33.08 12.25 10.00 3.70 12.29 6.51 -2011-12E 350.00 42.88 12.25 14.00 4.00 17.20 4.65 -2012-13E 450.00 56.25 12.50 19.13 4.25 23.50 3.40 --

Year End (Rs.Cr) Net sales PBIDT PBIDTM PAT PATM EPS (Basic) Rs. PE Dividend (%)

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18th April, 2011 Mittal Chheda mittald@ghallabhansali.com Rajesh Dedhia rajeshd@ghallabhansali.com Disclaimer:This document has been prepared by Ghalla Bhansali Stock Brokers Pvt. Limited (Ghalla Bhansali). This document does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable, but we do not represent that it is accurate or complete and it should not be relied on as such.Ghalla Bhansali or any of its affiliates/ group companies shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigation as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult his own advisors to determine the merits and risks of such investment. The investment discussed or views expressed may not be suitable for all investors. This information is strictly confidential and is being furnished to you solely for your information. This information should not be reproduced or redistributed or passed on directly or indirectly in any form to any other person or published, copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Ghalla Bhansali and affiliates/ group companies to any registration or licensing requirements within such jurisdiction. The distribution of this document in certain jurisdictions may be restricted by law, and persons in whose possession this document comes, should inform themselves about and observe, any such restrictions. The information given in this document is as of the date of this report and there can be no assurance that future results or events will be consistent with this information. This information is subject to change without any prior notice. Ghalla Bhansali reserves the right to make modifications and alterations to this statement as may be required from time to time. However, Ghalla Bhansali is under no obligation to update or keep the information current. Nevertheless, Ghalla Bhansali is committed to providing independent and transparent recommendation to its client and would be happy to provide any information in response to specific client queries. Neither Ghalla Bhansali nor any of its affiliates, group companies, directors, employees, agents or representatives shall be liable for any damages whether direct, indirect, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Past performance is not necessarily a guide to future performance. The disclosures of interest statements incorporated in this document are provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. Ghalla Bhansali Stock Brokers Pvt. Limited generally prohibits its analysts, persons reporting to analysts and their family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this report.

Information Sources: Capitaline Misc.

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