TD Power Systems coming with a public issue to raise Rs 227 crore

22 Aug 2011 Evaluate

TD Power Systems

  • TD Power Systems is coming out with a 100% book building; initial public issue in a price band Rs 256 -261per equity share.
  • Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
  • The issue will open on August 24, 2011 and will close on August 26, 2011.The shares will be listed on BSE and NSE.
  • The face value of the share is Rs 10 and is priced 25.6 times of its face value on the lower side and 26.1 times on the higher side.
  • Book running lead managers to the issue are Enam Securities Private Limited, Antique Capital Markets Private Limited and Equirus Capital Private Limited.
  • Company Secretary and Compliance Officer for the issue is N. Srivatsa.

Profile of the company

TD Power Systems is one of the leading manufacturers of AC Generators with output capacity in the range of 1 MW to 52 MW for prime movers such as steam turbines, gas turbines, hydro turbines, wind turbines, diesel and gas engines. It focuses on manufacturing custom-designed generators for its customers who are based across the world. The company has been promoted by Nikhil Kumar, Hitoshi Matsuo, Mohib N. Khericha and Saphire Finman Services Private Limited

In addition to manufacturing AC Generators Company also executes Turbine Generator island projects for steam turbine power plants with output capacity up to 52 MW using a Japanese turbine combined with its generator. The scope of work of the TG island projects consists of design services, procurement and supply of equipment, assembly, installation & commissioning. From the inception of its Company and as of December 31, 2010 the Company has completed a total of 87 TG island projects with an aggregate output capacity of 1,720 MW which includes projects executed in Uganda, Kenya, Zambia and Philippines.

The Company has entered into a Product Development Cooperation and Manufacturing Agreement dated May 12, 2009 with Voith Hydro Holding GmbH & Co.KG for jointly developing electric generators. Under the agreement, the parties are to jointly develop and design electric generators the Company will manufacture such generators for Voith Hydro Group.

IPO Grading

CARE has assigned IPO grade of ‘4/5’ indicating above average fundamentals to the Initial Public Offering of the company.

Proceeds is being used for

  • Financing the expansion of the company’s manufacturing plant in Dabaspet;
  • Constructing a project office in Bangalore city;
  • Repaying debt;
  • Funding working capital requirements of the company; and
  • Funding the general corporate purposes.

Industry Overview

The Indian power sector has undergone a variety of reforms intended to encourage private sector participation since the early 1990s. While the reforms have enhanced the viability of state electricity boards by unbundling them into generation, transmission and distribution utilities, privatizing distribution and providing a choice to some categories of consumers these reforms however have not been very successful in attracting private sector investment, especially in the transmission and distribution segments.The Government had launched an ambitious mission of “Power for all by 2012” in 2005. This necessitated significant capacity additions, especially towards expanding the regional transmission network and interregional capacity to transmit power. Therefore, the Government announced capacity additions of around 40,000 MW and 66,000MW under the Tenth and Eleventh Plans, respectively. However, the Tenth Plan witnessed capacity additions of only 21,095 MW. Accordingly, the revised estimate for the Eleventh Plan was adjusted to 78,700MW. But in view of the progress of the projects, this target has been revised downwards to about 62,000MW in the mid-term appraisal of Eleventh Plan.

Capacity additions are expected to fall short of the targets set by the Government. In the first three years of the Eleventh Plan (2007-08 to 2011-12), 22 GW of capacities have been added as against the target of 62 GW during the Plan period. After a detailed project-by-project status check, CRISIL Research expects total capacity additions of 48 GW to be commissioned during the Eleventh Plan.

Between 2010-11 and 2014-15 capacity additions of 82 GW is expected. Of this, about 90 per cent is likely to be thermal, while the balance would be hydro and nuclear-based. The capacities include the Mundra and Sasan UMPPs, which are scheduled to be commissioned by 2014-15. Apart from these, projects via the Case I and Case II bidding routes as well as memorandum of understanding (MoU)-based projects are expected to become commercially operational over the next five years.

Pros and strengths

Diversified product portfolio – The company is having a diverse product range which includes, steam turbine generators, horizontal hydro generators, vertical hydro generators, diesel engine generators, wind turbine generators, gas engine generators, gas turbine generators, high voltage motors and generators for Geo Thermal and Solar thermal applications. It is among the very few Indian manufacturers with the capability to manufacture generators with output capacities ranging from 1MW - 52MW and its generators have been supplied to customers across 33 countries.

Technology ownership and collaborations – The company is having a well established track record of successfully absorbing new technologies for manufacturing generators. It has entered into arrangements with international power equipment manufacturers such as Siemens Aktiengesellschaft  and Sicme Motori SrL which gives it access to the latest know-how, design and technology to manufacture AC Generators. Also the Company has an in-house product development team comprising 43 technical personnel. Its product development team works in conjunction with its technical partners to focus on new product development at lower costs, improving quality and design. It has developed in-house capability to manufacture generators up to 40 MW through the efforts of its product development team. In 2007, the Company granted a limited license to General Electric Company, USA to manufacture generators using its design for the Brazilian market, and if on a co-manufacturing basis, to other countries in Central and South America. Its technological collaboration and in-house design expertise enable it to provide its customers innovative and customized solutions.

Advanced manufacturing facilities and cost efficient production – The company’s two manufacturing units are spread over 931,305.60 sq. ft. of industrial land and are equipped with advanced machines and tools and are ISO 9001:2008 compliant. The company has invested in the latest technology to meet the quality expectations of its customers. It has a precision machine shop that can machine large components to very close tolerances, a sophisticated coil shop with automation and cutting edge quality control equipment to accurately measure process standards. In the past, its generators have been approved by leading engineering consultants. Further, its IT infrastructure assists in ensuring seamless interaction between various teams and processes within the company.

Customer centric approach – The company is having customer centric approach that has enabled it to understand and respond to the requirements of its customers. Its ability to provide customized solutions enables it to expand and innovate its product and project portfolio in line with current and future requirements of the customers. It work closely with its customers from the pre-order phase through manufacturing, installation & commissioning up to monitoring the performance of the machines supplied to ensure customer satisfaction. It continues to lay strong emphasis on its post-delivery customer service to ensure it is quick and responsive. It also provide after sales service that is centralized in Bangalore and through a dedicated customer support and a technically qualified team. Its branch office in Japan markets and sells its products and services to international customers in the Asia Pacific region.

Risks and Concerns:

Dependence on limited number of customers- The company derive a significant portion of its total income from a limited number of customers. The top ten customers are not necessarily the same every year, these customers contribute a significant portion of the total income. For the periods ended March 31, 2011, March 31, 2010 and March 31, 2009, its top ten customers accounted for 76.60%, 68.15% and 43.01%, respectively, of its restated consolidated net sales. Since there is competition for the products it provide and may not be the exclusive supplier to its major customers, the level of total income from its major customers could vary from period to period. The loss of, or a significant reduction in the total income it receive from, one or more of these customers, may adversely affect the business.

Foreign currency exchange risk- A certain percentage of company’s total income is denominated in foreign currency and a significant percentage of its cost is denominated in Indian Rupees. The exchange rate between the Rupee and the other foreign currencies has changed substantially in recent years and may continue to fluctuate significantly in the future. At the same time, a substantial proportion of its costs are denominated in Indian Rupees. It is expected that a portion of its total income will continue to be generated in foreign currencies and that a significant portion of its expenses will continue to be denominated in Indian Rupees. Accordingly, its operating results have been and will continue to be impacted by fluctuations in the exchange rate between the Indian Rupee and other foreign currencies. Any strengthening of the Indian Rupee against any foreign currency could adversely affect the financial condition and results of operations.

Shift in technology from steam turbine generators- Company’s significant percentage of net sales are derived from the sale of steam turbine generators, For the period ended March 31, 2011, the sale of steam turbine generators contributed 76.14% of its restated stand-alone net sales.. While it is in the process of growing its product portfolio, any radical change in the technology adopted by the consumers or the development of newer products in the manufacturing industry that prove superior in quality or effectiveness to its generators, could result in it losing a market for its steam turbine generators. The occurrence of any of these types of events could result in a decrease in the net sales and consequently, adversely affect the financial condition and result of operations. The future success will depend in part on its ability to respond to technological advances and emerging power generation industry standards and practices on a cost-effective and timely basis.

Dependence on technology transfer- The company is dependent on certain technology transfer agreements for the technology to manufacture some of its products. In will continue to rely upon, the provision of technology from certain technology and license agreements it has executed for its manufacturing business. Through these agreements, it has been licensed certain key technologies and intellectual property which it utilize to manufacture some of its products. Certain of its technology licensing agreements have provided that upon the expiry of the term of the agreement, it is generally free to continue using the technology free of additional royalty or other payments, but the licensor is also free to license the technology to a third party. If a former licensor were to license the technology that it had previously licensed to its competitor, the business may be adversely affected. Also the termination or alteration of the terms of these agreements would materially affect the total income and operations.

Peer Group Comparison (Rs. in Millions)

Company NameYear EndNet SalesPBDITPATEPSPBIDTM %PATM %ROCE %RONW %

BHEL

201003

332596.70

33410.20

43106.40

88.06

10.05

12.96

45.47

29.88

Siemens

201009

93555.01

12569.08

8272.12

24.53

13.43

8.84

39.96

25.88

Crompton Greaves

201003

52839.90

8577.60

6173.40

9.62

16.23

11.68

57.68

41.47

TD Power Systems

201003

4335.89

567.77

330.23

52.05

13.09

7.62

35.72

30.17

BGR Energy Systems

201003

30692.49

3921.40

2010.22

20.92

12.78

6.55

29.30

31.80

Outlook

TD Power Systems is its business includes manufacturing of AC Generators and executing power plant projects. Its wide portfolio of products gives it a competitive advantage, as it can cater to all the major verticals of the power generation industry it cater to both conventional and renewable fuel based power plants. Also with its technological collaborations with the leading power equipment manufacturers, it also holds the ability to design and manufacture a complete range of generators required to cater to the renewable fuel based segment of the power generation market.

On the concern side the company is dependent on limited customers and company derives a significant portion of its total income from them. Also its manufacturing business and Power Project Business have a long gestation period and require substantial capital outlay before it realize any benefits or returns on investments. The other factor that may impact the profitability of the company is its exposure to the foreign currency as it derives a good percentage of its revenue denominated in foreign currency, any appreciation in rupee against the currency which it is dealing may impact its total financial result.

TD Power Systems has come up with a public issue to raise Rs 227 crore by issuing shares of face value Rs 10 each.  It has fixed price band at Rs 256-261 per equity share and based on the EPS of Rs 18.44 for the year ended March 31, 2011 the P/E at the lower price band comes at 13.88x while at the higher price band it comes at 14.15x. It is the leading producer of AC generator in the country and is having a good global reach too, having a robust business model. During the passing fiscal the company reported 14% growth in revenue on the back of good order in EPC and manufacturing division. The company proposes to continue to expand its product portfolio by upgrading and introducing new products under its business verticals. It is also exploring opportunities to expand its manufacturing capabilities to produce generators up to 300MW. Also the company plan to further expand its geographical coverage by selling its products to global OEMs manufacturing prime movers who are located in developed countries such as Japan, Germany, Austria, Italy, etc. The company is vying for expanding its operations and its further growth will largely depend on that, anyhow the issue sounds a good bet and can be opted with a long term outlook.

Financial Highlights of the Company (Rs. in Millions)

ParticularsMar 2010Mar 2009Mar 2008Mar 2007Mar 2006

Net Sales

4335.89 

4688.17 

5290.36 

4252.53 

1723.82 

Total Income

4388.00 

4759.58 

5333.40 

4274.80 

1728.30 

PBIDT

619.88 

609.55 

575.18 

318.45 

66.42 

PBT

521.82 

550.83 

535.17 

293.22 

50.20 

PAT

330.23 

365.93 

355.61 

161.15 

24.15 

Reserves and Surplus

1177.51 

884.39 

552.77 

212.04 

58.51 

Net Worth

1240.95 

947.83 

616.21 

255.48 

101.95 

Total Debt

682.20 

287.15 

229.36 

134.60 

99.35 

ROCE

35.72 

55.45 

89.02 

102.38 

27.31 

RONW

30.17 

46.79 

81.59 

90.17 

23.69 

PATM(%)

7.31 

7.47 

6.33 

3.59 

1.32 

CPM(%)

8.54 

8.13 

6.77 

3.94 

1.94 

CEPS

60.85 

62.83 

60.02 

40.72 

8.20 

Enterprise Value

4.56 

-391.04 

-226.49 

-119.82 

-37.38 

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