TD Power Systems IPO - Not Powerful Enough

TD Power Systems, a Bangalore-based company, is coming out with an IPO in the capital market on August 24, 2011. The issue will close on August 26, 2011. The intention of the IPO is to raise Rs 227 crore, which will mainly be used for the expansion activity of its manufacturing plant in Dabaspet (Rs 94 crore). The proceeds will also be used for generating working capital requirement (Rs 40 crore), debt repayment (Rs 32 crore) and the construction of a project office in Bangalore (Rs 28.9 crore).

The expansion activity will be completed by August 2012, while the construction of its Bangalore office will be completed by December 2013. On the FV of Rs 10, the price band has been fixed within the range of Rs 256-261 per share. This is a 100 per cent book building issue. The growth plan of the company includes expansion of the product portfolio by increasing its manufacturing capability, to produce 300 MW generators. The strategic plan includes increasing its geological presence and expanding its power projects business.

Business Overview

TD Power Systems is engaged in three business segments. Its primary business mainly comprises the manufacture and sales of AC generators. Its projects business comprises BOP (balance of plants) equipments supply, sale of turbines and TG islands (turbine generators), while the third segment, its EPC business, consists of the supply and installments of boilers, turbines, generators and power plant equipment. The EPC business is executed through its subsidy DF Power Systems. The company has two manufacturing units in Dabaspet near Bangalore. It also has branch offices in Japan and Hong Kong, mainly for sales of their equipments. Some of their overseas projects have been executed in countries like Uganda, Kenya, Zambia and Philippines.

The output capacity of AC generators and turbine generator islands is in the range of 1 MW to 52 MW, while the BTG capacity is from 52 MW to 150 MW. Since its inception, TD Power Systems has manufactured 1538 AC generators with aggregate capacity of 12657 MW. The company has also completed 92 orders for TG island projects and two orders of BTG island projects, with aggregate output capacity 1799 MW and 111 MW respectively. It has signed license agreements with well-established international companies, like Siemens AG and General Electric, for the use of updated technology. The company mainly focuses on captive power producers, while IPPs (Independent Power Producers) are under consideration. The competitiveness of TD Power Systems largely depends upon its ability to serve the niche segment of captive power plants and on repeat orders.

Revenue Mix

The revenue mix of the company has changed over the years. It currently derives 37 per cent of its revenue from manufacturing, five per cent from its India projects’ business, 13 per cent from its Japanese projects’ business and 43 per cent from the EPC segment. The share of EPC business, which includes power plant equipments, has grown from five per cent in FY09 to 43 per cent in FY11. The company has booked orders for the next 16 months, and the current status is as follows:

Current Order Book Status

Financials and Valuation

The company has witnessed topline growth of 30 per cent and bottomline growth of 18 per cent on a YoY basis in FY11. The EBITDA margin remained at 11 per cent, which is in line with its peer group companies SMPL Infra (11 per cent) and Sunil Hitech (12 per cent). Its net profit margin of six per cent in FY11 is better than that of both its peers (four per cent). TD Power Systems currently has Rs 85 crore of debt, out of which Rs 25 crore is long-term debt. It does not wish to raise any more debt, and with the issue of this new equity and debt repayment, its debt-to-equity ratio will come down from 0.45 to 0.28. The company has been growing with a topline CAGR of 19 per cent and a bottomline CAGR of 37 per cent in the last 10 years.

The EPS of TD Power Systems, as per the FY11 report, is 25, which will come down to 17 with the dilution of equity post the IPO. Considering 100 per cent subscription, the PE multiple comes to 15x, compared to 17x of SMPL Infra and 3x of Sunil Hitech. The PE multiple of Techno Electric, another company engaged in similar business, is 11x. On that front, TD Power Systems looks expensive. Also, given the present economic uncertainties, companies in the manufacturing sector may slow down.

Revenue recognition in engineering business takes place at a slower pace due to the long gestation periods of projects. This will affect the topline and bottomline growth of the company. In this industry, there are large players like BHEL and Larsen & Toubro, who dominate the power generators market. Further, there also are low-cost Chinese and Korean players, who have recently bagged significantly large orders in the power sector. We recommend that our readers avoid this IPO on the basis of its capital structure, valuation and the current economic scenario.

Issue Information

Shareholding Pattern

Financial Performance