Unattractive valuations

TD Power Systems, which manufactures AC generators (used in power plants) ranging from 1 Mw to 52 Mw, has come out with an initial public offering (IPO) to raise Rs 227 crore. Since its incorporation in 1999, the company, till June, has supplied 1,538 generators aggregating to a generation capacity of 12,657 Mw to the industrial segment. Apart from the product business, it also undertakes projects and EPC (engineering, procurement and construction) projects, which accounts for over 60 per cent of its revenues.

There is not much competition in the AC generator segment, except from BHEL, with TD Power leading this category. The company is well diversified in terms of its product profile, clients and geographies, including a presence in overseas markets. It also has tie-ups with global majors like GE and Siemens that help it to grow its international business and support the company's positioning in the domestic market.

India's industrial captive power segment has grown at about 8-10 per cent and is expected to witness similar growth. However, in the near term, there could be some challenges given the slowdown in the domestic industrial capex cycle.

The company is currently operating at about 80 per cent utilisation and plans to almost double its manufacturing capacity from the current levels (equivalent to product worth of Rs 400 crore), which will be completed over the next 9-10 months. This, along with the expected increase in exports, should help it to grow its revenues. It has witnessed 19 per cent growth in revenues in the last four years. However, the benefits of the new capacity will be reflected gradually over the next two years as demand and utilisation picks up. The company is currently having an order book of Rs 1,094 crore.

The IPO at the upper band is priced at about 12 times its FY12 estimated earnings (assuming revenue growth of 35 per cent). The pricing is marginally expensive considering the growth in the near term and on a relative basis. BHEL, however, has superior capabilities and has better visibility. The company stock is trading at about 12-13 times its FY12 estimated earnings.

Additionally, there are risks over a rise in competition from global and domestic players for TD Power. The company also caters to a single segment (industrial clients), which is more volatile and has relatively less growth compared to utilities and private power companies.

Overall, while fundamentals and growth prospects look reasonable, the risk (due to client and revenue concentration) remains and valuations are not cheap.