TRIS Rating has affirmed the company and senior debenture ratings of Tirathai PLC (TRT) at “BBB+” with “stable” outlook. The ratings reflect 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’s efforts to enter new markets. The ratings also take into consideration the rising electricity consumption in Thailand and potential opportunities in export markets. These strengths are partially offset by customer concentration risk on electricity authorities, a reliance on local agents to service export markets, and intensifying competition. The “stable” outlook reflects the expectation that TRT will maintain its competitive position and continue to improve its profitability, despite increasing competition. The operating performance of its two subsidiaries is expected to support TRT’s cash flow generation. Including TRT’s future investments, TRT’s financial leverage is not expected to rise above 50%.
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 remained the company’s major shareholders with a combined stake of 32% as of December 2013. TRT is able to manufacture both power and distribution transformers. The product offered are power transformers with capacities up to 300 megavolt-amperes (MVA) at system voltages up to 230 kilovolts (kV). The distribution transformers produced are in the range of 1 kilovolt-amperes (KVA) to 100 MVA capacity at system voltages up to 36 kV.
TRT has expanded into assembling and distributing hydraulic crane trucks business in 2011 via its wholly-owned subsidiary, Tirathai E&S Co., Ltd. (E&S). In 2012, TRT acquired an 85% stake in L. D. S. Metal Work Co., Ltd. (LDS), a manufacturer of custom-made metalwork, to support the supply of transformer casing. The acquisition was made with TRT’s plan to expand LDS’s production capacity so as to serve growing demand for power transformers and other custom-made metalwork.
In 2013, the sale of power transformers contributed 44% of TRT’s total revenue, follows by the sale of distribution transformers (40%), the revenue from two subsidiaries (E&S and LDS) (11%), and service revenue (5%). TRT’s customer base comprises state enterprises (38% of total revenue), private companies (35%), and export customers (11%) in 2013. Three electricity authorities are TRT’s major customers and account for about one-third of its total revenue. As a result, TRT faces some customer concentration risk. The three electricity authorities remain the largest users of transformers 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 and good payment record.
In the power transformer segment, TRT is the only Thai producer who could produce the large size power transformer. Competition is considered less intense in the power transformer segment compared with the distribution transformer segment. Power transformers have more complicated engineering and product requirements. Hence, the reliability and quality of the transformers are the key product features for transformer buyers. A producer’s track record and references are normally required as purchase conditions.
The power transformer industry has become increasingly competitive over the past few years. More competition comes from imported products from Chinese manufacturers with international licenses, a capacity expansion of existing operator, and a newcomer expanding from distribution transformer segment. However, the competitive environment pressure has eased to some extent after the import tariff for large size power transformer (capacities ranging between 200-300 MVA) was raised from 1% of the product value to 10%. The new tax scheme was effective from 27 April 2012. TRT’s competitive position is partly strengthened by the license from Siemens which is well-recognized globally. Under the license agreement, Siemens provides support on product designs and market reference for power transformers.
For distribution transformers, there are more than 20 manufacturers in Thailand. Nevertheless, TRT has been a major player with a wider range of products. TRT ranks the third in terms of the sales of distribution transformers, with a market share of 10%-13% in 2010-2011. The tumbling in TRT’s distribution sales in 2012 resulted in a decline in market share to 8%. However, TRT’s distribution transformer sales rose by 27% year-on-year (y-o-y) in 2013.
TRT’s financial profile in 2013 partially recovered after having a poor performance in 2012. Revenue in 2013 increased by 31.1% to Bt2,518 million in 2013, from Bt1,921 million in 2012. The rise in revenue was largely driven by more orders from state enterprises and private sector customers. Additionally, TRT’s two subsidiaries brought in revenue of Bt296 million in 2013, up from Bt197 million in 2012. At the end of 2013, TRT posted a high backlog of Bt1,581 million. About 77% of the backlog was products scheduled to be delivered in 2014. As of December 2013, TRT bided for new orders worth approximately Bt8,000 million. From the past record, TRT has a bidding success ratio of about 20%-25%.
TRT’s gross margin recovered to 26.1% in 2013 after slipping to 19.5% in 2012. However, the 2013 level is lower than the 30% gross margin the company achieved in 2010 and 2011. The recent improvement in the gross margin was attributed to the higher import tariff and less volatility in the price of raw materials. The very low margin in 2012 was due to intense competition in the power transformer segment from Chinese suppliers, losses from export sales in India, and delay orders from some customers due to falling raw material price. TRT’s operating profit margin before depreciation and amortization improved to 12.5% in 2013, from 5% in 2012.
Cash flow protection has improved. The ratio of funds from operations (FFO) to total debt rebounded to 38.9% in 2013, from 14.8% recorded in 2012. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio also improved to 7.3 times in 2013. At the end of 2013, TRT’s debt to capitalization ratio was 42.6%, improved from 48.3% in 2012. The lower debt level was partially due to lower short term financing requirement. The ratio is expected to rise moderately in the medium term as the company will continue its expansion plan. TRT plans to make capital expenditures of approximately Bt500 million in total during 2014-2015 for capacity expansion. In addition, TRT may need to refinance its debentures worth Bt600 million. The debentures are due in June 2015.
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