>Transformer Sector (EMKAY)

The growth engine of the transformer sector, fuelled by supply shortage and input cost inflation during FY03-FY08, is likely to splutter in FY10E. The strong buoyancy during the FY03-09E period triggered off a series of ambitious capacity expansion plans by exisiting players and entry of new players in the market. With an 80% addition in installed capacity in FY07-10E period, we expect the transformer industry to reel under overcapacity. We expect an oversupply of 14% of installed capacity or 45,012 MVA- highest in last 9 years, despite optimistic demand assumptions.

With an absence of momentum drivers and room for downward revision in earnings estimates, we give thumbs down to the transformer sector. Our transformer universe is expected to report disappointing performance with a 24% decline in net profit in FY10E. We expect ROE and ROACE to decline by 1800 bps and 1300 bps to 17% and 14% respectively during FY08-10E. Our transformer universe is available at a PER of 4.7 x FY10E and PBV of 0.7xFY10E, at a premium to a bouquet of companies with similar demand drives.

To see full report: TRANSFORMER SECTOR