TRIS Rating has affirmed the company rating of Tirathai PLC (TRT) at “BBB+” with “stable” outlook. The rating reflects the company’s position as the leading electrical transformer manufacturer in Thailand, plus its ability to provide both power and distribution transformers across a diverse range of capacities and system voltages. TRT’s competitive edge is enhanced by a license agreement with Siemens Transformers Austria GmbH & Co KG (Siemens) from Austria, which supports the company to enter the new markets. The rating also takes into consideration the growth prospects for local electricity consumption and potential demand in export markets. These strengths are partially offset by customer concentration risk on electricity authorities, reliance on local agents for export markets, and intensifying competition. In the medium term, TRT’s competitive position will be weighed on the benefit of increased import tariff for power transformers and the continuation of license contract with Siemens. The “stable” outlook is based on the expectation that TRT could maintain its competitive position and recover its operating performance. Owing to the volatile market environment, the company is expected to maintain sufficient liquidity at all times. The deteriorated profitability and cash flow generation, if sustained in the longer period, could negatively impact its credit quality.
TRT was established in 1987 and listed on the Market for Alternative Investment (mai) in May 2006. Mr. Sumpan Vongphan, the managing director, and key managers remain the company’s major shareholders with a combined stake of 32% as of December 2012. TRT is one of two transformer manufacturers in Thailand which produce both power and distribution transformers. TRT could provide power transformers with capacities up to 300 megavolt-amperes (MVA) at system voltages up to 230 kilo volts (kV). The distribution transformers produced are in the range of 1 KVA-100 MVA capacity at system voltages up to 36 kV.
During the last two years, TRT has implemented some business expansion. In 2011, Tirathai E&S Co., Ltd. (E&S), its wholly-owned subsidiary, commenced the operation as an assembler and distributor of hydraulic crane trucks. The main target customers are electricity authorities. In October 2012, TRT acquired an 85% stake in L. D. S. Metal Work Co., Ltd. (LDS), a manufacturer of custom-made metal work. LDS’s products include casing transformers, equipment parts, steel sleeves, jigs & equipment parts, and oven dip galvanization. LDS is one of TRT’s major suppliers of casing transformers. The acquisition was made with the plan to expand LDS production capacity in order to serve growing demand, especially demand for power transformers.
In 2012, sales of power transformers and distribution transformers each comprised around 41% of TRT’s total revenue. Contribution from two subsidiaries accounted for 10% of revenue combined, and estimated to be in the portion of 15% upon the full operations. TRT faces some customer concentration risk as three electricity authorities have been its major customers and accounted for one-third of total revenue on average. In 2012, TRT’s customer base comprises state enterprises (34% of total revenue), private companies (34%), and export customers (14%). Those electricity authorities remain the key transformer users as they are responsible for the development and maintenance of the national transmission grid. Their credit quality is considered acceptable reflecting the position as government agencies.
In the power transformer segment, TRT is one of four producers, but only TRT and one other producer can manufacture rated up to 300 MVA and 230 kV. Competition is considered less intense in the power transformer segment compared with the distribution transformer segment, due to the more complicated engineering and product requirements of power transformers. Hence, the reliability and quality of the transformers are the key criteria for transformer buyers. A producer’s track record and references are normally required as purchase conditions. During the past two years, the power transformer industry has become increasingly competitive due to the entry of Chinese manufacturers with international licenses. The competitive environment was eased in some extent because the import tax for large size power transformer was raised on 27 April 2012. Under the new tax scheme, the import tax for transformers with capacities ranging between 200-300 MVA was revised up from 1% of the product value to 10%. TRT’s competitive position is partly strengthened by the license from Siemens which is well-recognized globally. Under the license contract, Siemens provides support on product designs and market reference for power transformers. The current contract will be valid till 2014. Continued renewals of the contract are expected to help TRT maintain its competitive advantage, especially as its attempts to access new export markets. For distribution transformers, there are more than 20 manufacturers. Nevertheless, TRT has been a major player with wider range of product capacity and ranked the third in terms of revenue in 2011.
The value of orders that TRT received increased by 90.5% in 2011, climbing to Bt2,137 million in 2011 from Bt1,122 million in 2010. The significant increase was attributable to two factors: the resumption of several suspended industrial projects in the Map Ta Phut area, and the easing of the political turmoil experienced. Consequently, in 2011, TRT recorded total revenue of Bt1,855 million, a 24.3% increase from Bt1,492 million in 2010. In 2012, however, TRT received orders of Bt1,968 million, a 7.9% year-on-year decline. The drop was due to delays in some state enterprise projects in the aftermath of the severe flood in late 2011. Moreover, some orders of private and export customers were also postponed. As a result, the revenue from transformer sales and services fell by 6.2% to Bt1,724 million in 2012, from Bt1,838 million in 2011. However, once the revenue from two subsidiaries was included, total revenue grew by 3.6% compared with the previous year. At the end of 2012, TRT posted the high backlogs of Bt1,241 million. All of these backlogs were scheduled to be delivered in 2013. As at the first quarter of 2013, TRT is bidding for new orders worth approximately Bt7,000 million. From the past record, TRT has a bidding success ratio of about 20%-25%.
TRT’s profitability in 2012 was weaker than expected. The gross margin declined considerably to 19.5% in 2012, significantly lower than the gross margin of 30% achieved in 2010 through 2011. The gross margin fell due to intense competition in the power transformer segment from Chinese suppliers, which TRT has lowered its margin to protect its market share. In addition, TRT incurred some losses from export sales in India, as its local agent aggressively cut the price. As a result, TRT’s operating profit margin before depreciation and amortization plunged to 5.0% in 2012, from 15.5% in 2011. In 2013, the profit margin will continue to be under pressure because there are some low-margin orders in the backlogs, awaiting delivery.
In June 2012, TRT issued Bt600 million in debentures to finance its transformer and metal work expansion projects. At the end of 2012, TRT’s total debt increased from Bt532 million in 2011 to Bt987 million in 2012. The debt to capitalization ratio worsened to 49.0% in 2012 from 33.3% in 2011. The higher debt level and lower operating profit deteriorated its cash flow protection. The ratio of funds from operations (FFO) to total debt dropped to 13.6% in 2012, lower than the very strong level of approximately 60% recorded in 2010 through 2011. In the same manner, earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio declined to 3.1 times in 2012 from the fairly high level in the past. TRT’s financial profile is expected to gradually improve in the medium term weighed on the baseline of profit margin recovery benefited from increased import tariff, against the high level of leverage as TRT plans to make capital expenditures totaling Bt510 million during 2013-2014.
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