Alpha Invesco has sent stock recommendation IMP Powers Limited

Discussion in 'Ask A Query About Your Stock Picks And Portfolio' started by Srouta Mukherjee, May 11, 2017.

  1. Srouta Mukherjee

    Srouta Mukherjee Well-Known Member

    Mar 28, 2015
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    IMP Powers Limited : Transformer Sector Turnaround Is Here? 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.

    Anybody is going for stock? :)