Avoid TD Power Systems IPO: KR Choksey

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Avoid TD Power Systems IPO: KR Choksey

According to KR Choksey TD Power is an attractive engineering player with strong RoE (~30%), high margins (10%) and market leadership position but the issue seem to be expensive on valuation in current macro environment. Hence, the research firm recommended AVOID to the issue.

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TD Power Systems (TDPS), is raising around Rs 227 crore from the market through IPO which opens on August 24, 2011. According to KR Choksey it is an attractive engineering player with strong RoE (~30%), high margins (10%) and market leadership position but the issue seem to be expensive on valuation in current macro environment. Hence, the research firm recommended AVOID to the issue.

KRChoksey reports on TD Power Systems IPO:

"Expensive on valuation"

TD Power Systems Ltd (TDPS), incorporated in 1999, is raising around Rs 227 crore from the market through IPO which opens on August 24, 2011. TDPS is the market leader in the steam and hydro generators market in India with market share of ~80% and 60% respectively. Net revenues have grown at 19% CAGR over FY07-FY11 while earnings grew at 37% CAGR. TDPS has been able to improve its operating margins consistently from 7% in FY07 to 10.4% in FY11. Current order book of Rs 1,095 crore provides revenue visibility for more than a year (1.2x on FY11 revenues) where EPC contributes around 48% to total backlog. TDPS is an attractive engineering player with strong RoE (~30%), high margins (10%) and market leadership position but the issue seem to be expensive on valuation in current macro environment. Hence we recommend AVOID to the issue.

Challenging macro environment

High interest rates, commodity prices remaining at elevated levels, regulatory hindrances and fuel uncertainty are some of the headwinds in current business environment. Investment activities have slowed down to defer the industrial capex which largely drives the demand for TDPS's products. We believe that stable order inflow would be a challenge for TDPS in the current environment and would impact top line growth of the company. 65% of current backlog is executable over a period of more than 14 months.

Competitive threat from global giants

TDPS manufactures and supplies power generators and engines upto 52MW range in India. Design and technology are important and critical components in generator manufacturing and installation. However with global giants like Mistubishi, ABB, Areva, Alstom etc are looking to explore domestic market through local channels, we believe that getting access to latest technology would not be difficult for new players who have required infrastructure. BHEL which dominates the Indian BTG market may also pose threat to leadership position of TDPS given its strong expertise and scale.

Expensive valuation

EPC business contributes around 48% of current backlog of Rs 1,095 crore. EPC business commands lower margins (5-5.5%) while manufacturing business earns margins in the range of 18-19%. We believe that margins of TDSP may come under pressure based on the composition of current backlog. On the valuations front, the IPO has been priced at current PER of 15.2x on FY11 EPS of Rs 17 (post-IPO) and PBR of 2x on FY11 BVPS of Rs 125 (post IPO). At upper band of Rs 261, market capitalization to sales ratio stood at 1x which seems expensive comparing to industry average and peers comparison.

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