TD Power Systems

Given the increasing demand for power and the government’s support for creating additional infrastructure for power generation and distribution, TD Power Systems is in the right space at the right time to reap the benefits of this momentum.

Incorporated in 1999, TD Power Systems Ltd. is one of the leaders in the production of AC generators worldwide, manufacturing units with outputs ranging from 1 MW to 200 MW for prime movers including steam turbines, gas turbines, hydro turbines, wind turbines and diesel engines. The company specialises in creating unique and custom-designed generators for its global customers and also manufactures special application generators for geo thermal and solar thermal applications. Generators are developed to be as efficient as possible and their reliability is ensured by world-class manufacturing processes and quality control.

The company has a vast global network with service partners in 52 countries spanning all continents and has supplied thousands of generators to more than 100 countries. The majority of the company’s clients are businesses in the industrial sector, such as manufacturers of cement, steel, paper, chemicals, metals and hydroelectric power plants. Its customers include companies like Shree Cements, Nava Bharat Ventures, Chettinad Cement Corporation, Balrampur Chini Mills, etc. DF Power Systems Private Limited, the company’s wholly owned subsidiary, is in the engineering, procurement and construction (EPC) business. The EPC business scope of work includes design services, civil works, equipment procurement and supply, assembly, installation and commissioning. 

Sector Overview

The heavy electrical equipment industry is a key manufacturing sector that serves the needs of the energy sector and other industrial sectors and its performance is closely connected to the country’s power capacity addition programme. The industry includes power generation, transmission and distribution and utilisation equipment. It includes items such as generators, boilers, turbines, transformers, switchgears, and so on. The establishment of Heavy Electricals (India) Ltd. in 1956 marked the beginning of this industry. After a new business called Bharat Heavy Electricals was established, the two entities were eventually merged to create Bharat Heavy Electricals Ltd. (BHEL). 

BHEL is a significant turning point in the growth of the heavy electrical equipment industry in India. Today, India ranks third in both the production and consumption of electricity globally. Any developing country must have enough power generation, transmission and distribution systems, and given the size and population of India, this requires significant infrastructure development. Although the country has enough capacity to generate electricity, a sizeable section of the population still lacks access to suitable transmission and distribution systems. India’s need for electrical equipment is very high as the country tries to ensure that all of its citizens have access to electricity. 

From 2021 to 2025, the industry’s growth rate is expected to accelerate at a CAGR of 9 per cent with the electrical equipment market in India projected to grow by USD 33.74 billion to USD 70 billion. The cable market will account for more than a third of this expansion, with the remaining market made up of switchgears, boilers, transformers and transmission lines. The Asia Pacific region is expected to witness a robust demand for switchgears in the forecast period. The region is expected to account for a major industry share, driven by the expansion of the power distribution equipment industry and the rising investments toward rural electrification in developing nations like India, China and Indonesia. 
 

Financial Overview

Taking into account the company’s financial performance, on a consolidated basis it reported a growth of 14.17 per cent from ₹179.81 crore registered in Q3FY22, recording total revenue of ₹205.28 crore in Q3FY23. It has reported strong EBITDA growth of 52.93 per cent. However, when compared to the same quarter last year, the net profit for the third quarter of FY23 edged up by only 2.72 per cent, from ₹19.54 crore to ₹20.07 crore. As regards its yearly performance, the net profit of the company surged upwards, registering growth of 56.29 per cent to ₹70.65 crore as against ₹45.20 crore during the previous year. Also, net sales rose by 34.34 per cent to ₹797.43 crore as against ₹593.58 crore during the previous year ended on March 2021.

At the time of writing, the company had a market value of ₹2,210 crore. Promoters owned 58.45 per cent share in the company, of which Indian promoters controlled a sizeable 48.09 per cent. Institutional investors own a total of 14.73 per cent while non-institutional investors own a considerable 26.81 per cent. The company announced a stock split of each existing equity share with a face value of ₹10 into five equity shares of face value of ₹2. Additionally, it declared a final dividend of ₹3.50 and an interim dividend of ₹0.50 per share. Shares of TD Power Systems have soared by leaps and bounds, skyrocketing more than 100 per cent in the last year. In the last six months, shares have remained in a narrow range with very little growth. 

On the BSE, shares are currently trading at close to ₹142 per share, with a 52-week high and low of ₹167.10 and ₹65.80, respectively. Many factors have attracted investors to this Small-Cap profit-making stock, but the high price-to-earnings (PE) ratio may be a cause of concern for them. Shares of the company are trading at price-to-book value (PBV) and PE multiples of 4 and 26, respectively, making it expensive at the moment. With a return on capital employed (ROCE) of 16 per cent, the company produced average profitability per unit of total capital. However, since its ROCE is higher than ROE, the company is actually generating higher returns for debt holders than for equity holders.
 

Outlook

The electrical equipment industry has found a new market in semi-urban and rural India as a result of the country’s improved electricity access. A favourable environment for the industry is being enabled by tailwinds like the government’s emphasis on infrastructure, the real estate sector’s revival, and healthy demand visibility across numerous end-user industries. Furthermore, the 100 per cent foreign direct investments (FDI) authorised in the power industry has driven up FDI inflows. A sizeable amount was allotted for a PLI scheme to increase production of high-efficiency solar modules and the government announced the issuance of sovereign green bonds as well as the granting of infrastructure status to energy storage systems. 

The demand for electrical machinery will rise even more as power generation capacity expansion incentives are offered. The power sector’s new domestic sourcing rules and the ‘Make in India’ initiative are giving the electric equipment market a boost. Additionally, the recent push to make India selfsufficient is encouraging for the industry. Making India a preferred location for the production of electrical equipment is the goal of the Indian Electrical Equipment Industry Mission Plan (2012-22). Indian manufacturers are stepping up their game in terms of facility capabilities for manufacturing, testing and product design. The Indian Energy Exchange Limited (IEX) is India’s first and largest power exchange. It controls over 98 per cent of the traded volume in electricity and has a diverse registered participant base.

The Central Electricity Regulatory Commission (CERC) has approved and regulated IEX, which has been in operation since June 2008. Initiating trade with Nepal allowed IEX to pioneer cross-border electricity trade (CBET). The grid initially linked countries in South Asia like Bangladesh, Nepal and Bhutan. The industry can be greatly aided in overcoming obstacles by expanding cross-border trade in electricity. Electricity trading can help reduce energy costs, safeguard against power surges, relieve shortages, speed up carbon reduction and offer incentives for market expansion and integration. Returning to the company, it is a core manufacturer in the power sector with great growth prospects and zero debt. 

The company’s success is driven by ownership of the technology, enduring relationships and in-house design expertise. The company has a healthy and diversified order book with orders from railways accounting for a sizeable portion. In terms of financials, the company has delivered considerable profit growth of 76.8 per cent CAGR over the last five years but its shares appear to be overvalued, trading at price-to-book value (PBV) and PE multiples of 4 and 26, respectively. Given the optimistic outlook for the heavy electrical equipment industry and the company’s improved financial and operational performance, one should hold the stock but avoid making new investments. Hence, we recommend HOLD.