This Transformer Stock is About to Hit Rs 10,000. Is it Still Value for Money?

The role of transformers in this clean energy revolution is becoming imminent.

Transformers shift the voltage - step it up or down - to meet the needs of transmission and distribution.

You see, the renewable energy sources can be erratic depending on weather and time.

As such, the relevance of transformers in the evolving energy mix gets even stronger.

They help adjust the irregular energy input and supply.

A good transformer should be able to perform in harsh environmental conditions, that comes along with reliance on wind and solar energy.

In the last one year, the word 'transformer' has done wonders for companies.

Performance of Transformer Stocks

Company	Current Price (Rs)	1-Year Gains (%)
Apar Industries Ltd.	7,836.0	188%
Bharat Bijlee Ltd.	3,130.8	131%
CG Power and Industrial Solutions Ltd.	542.1	76%
Indo Tech Transformers Ltd.	1,870.0	817%
Pitti Engineering Ltd.	859.3	175%
Shilchar Technologies Ltd.	5,818.6	536%
Transformers & Rectifiers (India) Ltd.	658.7	857%
Voltamp Transformers Ltd.	10,429.0	246%

Source: Equitymaster

At the top of the list, a little-known power player that generated mediocre returns year after year, has suddenly shot up from Rs 3,000 a year ago to Rs 9,700 at present.

About Hitachi Energy

Following the demerger of ABB India's power grid business unit, Hitachi Energy India was formed to provides product, system, software, and service solutions across the entire power value chain.

At present, the company's portfolio includes an extensive range of high-voltage transformers, grid automation products, and power quality products and systems.

The company has a strong market position in the power grid equipment and automation solutions segments. As part of ABB India, it has completed several major orders in the past.

The company was instrumental in bringing the Hitachi patented HVDC technology to India.

The parent company acquired majority stake in Hitachi Energy a couple of years ago. This solidified its position in India.

Lately, shares of the company have been in focus owing to Hitachi's continued work towards three major growth sectors:

• Renewable energy
• Electrification of Indian Railways
• Metro expansion and improving connectivity

Why Hitachi Energy Share Price is Rising all of a Sudden?

The sharp run up in the company's stock price in recent weeks comes after the company said it's looking to open more global capability centres in India.

The Zurich based company, which makes transformers and large-scale power transmitters, operates in a country where high power demand has led to the government ramping up generation.

The company is currently looking at Hyderabad and Pune for these capability centres.

This development has surprised so many investors because the company's stock price was around Rs 800 not many years ago and yesterday, the stock went up by Rs 800 in a single trading session.

The parent company views India as a high-growth market. It not only manufactures an extensive range of products locally for the Indian market, but also exports to group entities globally.

The company's management has many times highlighted the need for supporting entities globally in managing the semiconductor shortages.

Over the years, the company's margins have reduced.

Financial Snapshot

Rs m, standalone	FY20	FY21	FY22	FY23
Net Sales	32,361	34,204	48,840	44,685
Growth (%)	-	6%	43%	-9%
Operating Profit	3,376	2,865	3,890	2,651
OPM (%)	10%	8%	8%	6%
Net Profit	1,654	998	2,034	939
Net Margin (%)	5%	3%	4%	2%
ROE (%)	19.7	11.3	19.7	8.0
ROCE (%)	20.9	16.4	30.1	13.5
Dividend (Rs)	0.0	2.0	3.0	3.4
Debt to Equity (x)	0.4	0.0	0.1	0.2

Data Source: Ace Equity

Going forward, the company is expected to improve margins as it executes the orders received in the past year.

However, analysts are now concerned that the biggest beneficiaries of this upcoming transmission capex have already priced in the growth for the coming year.

Take a look at some of the ratios of Hitachi along with its peers.

Comparative Analysis

Company	Hitachi	CG Power	V-Guard Ind	ABB India	HPL Electric
ROE (%)	8.0	37.2	12.3	22.9	3.6
ROCE (%)	13.5	43.8	15.1	30.8	8.6
Latest EPS (Rs)	23.8	6.6	4.6	58.9	6.1
TTM PE (x)	392.3	82.3	75.0	108.8	61.8
TTM Price to book (x)	31.7	25.8	8.8	22.9	2.9
Dividend yield (%)	0.1	0.3	0.4	0.5	0.3
Industry PE	88.5
Industry PB	14.6

Data Source: Ace Equity

Low Float Company

That apart, one more reason behind the sharp rally is the low float that Hitachi Energy commands.

Promoters of the company hold 75% stake. That means out of the 42 million shares, 31.5 million shares are with promoters.

From the remaining shares, a huge chunk is also owned by domestic mutual funds.

When you combine low float with a steady moat and narratives driving the growth, this is what you get.

In the past three weeks, despite high valuations, many fund houses and PMS managers entered the stock.

In fact, mutual funds have added stake in this company for the past eight quarters, taking their stake from 2.1% to 6.4% at present.

Value Stocks: For People Who Never Like Overpaying for Anything

What Next?

In the third quarter, Hitachi has received major orders worth Rs 12.4 billion (bn), with a focus on solar, wind energy, data centres, and transmission.

Its order backlog stood at Rs 75.5 bn, providing revenue visibility for almost 22 months.

Towards ESG, the company is focusing on improving waste flow management to reduce water and air pollution.

It has ongoing sustainability projects such as water conservation, rainwater harvesting, and installation of rooftop solar.

Going forward, with projected demand to generate at least 3-4 times of what's being currently done, the company's order book is expected to swell, and it will be interesting to see how Hitachi's execution comes into play.

How Hitachi Energy Share Price has Performed Recently

Hitachi Energy share price is up 15% in the past 5 days. In the month gone by, the stock is up 33%.

Hitachi Energy has a 52-week high of Rs 9,765 touched on 25 April 2024 and a 52-week low of Rs 3,244 touched on 26 April 2023.

In the past one year, shares of the company have rallied 183%.

In fact, the company is all set to join the list of elite stocks that command a share price of Rs 10,000 or above.

Indian Stocks with 'High Price Tag'

Company	Current Price (Rs)	Marketcap (Rs m)
MRF Ltd.	129,600	549,652
Honeywell Automation India Ltd.	44,923	397,184
Page Industries Ltd.	35,541	396,416
3M India Ltd.	29,948	337,371
Bosch Ltd.	28,908	852,602
Kaycee Industries Ltd.	26,125	1,658
The Yamuna Syndicate Ltd.	25,990	7,988
Abbott India Ltd.	25,664	545,331
Shree Cement Ltd.	23,946	863,982
Bombay Oxygen Investments Ltd.	18,700	2,805
Lakshmi Machine Works Ltd.	16,734	178,766
Procter & Gamble Hygiene and Health Care Ltd.	16,121	523,308
ZF Commercial Vehicle Control Systems India Ltd.	13,991	265,366
Disa India Ltd.	13,850	20,141
Polson Ltd.	13,150	1,578
Wendt (India) Ltd.	12,928	25,856
Maruti Suzuki India Ltd.	12,906	4,057,711
Tasty Bite Eatables Ltd.	11,711	30,050
Voltamp Transformers Ltd.	10,429	105,511

Source: Equitymaster

In Conclusion

At Equitymaster, we've been writing about this major transformer theme for months.

Going forward, the Indian transformer industry is poised for substantial growth, buoyed by favourable demand for transmission and distribution products.

Additionally, increased international orders, rising infrastructure spending globally, the "China plus one" strategy, the embrace of renewable energy, and supplier consolidation collectively contribute to a promising future for the industry.

For more, check out the below video where Zill Jain talks about the top 5 transformer stocks in India.

Stay tuned to this space and happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...