IPO Size: Rs. 859 cr

• Fresh Issue of Rs. 225 cr for (i) funding Rs. 117 cr acquisition (ii) capex Rs. 27 cr
• Offer for Sale (OFS) of Rs. 634 cr by the promoter (100% to shrink to 74%)

Price band: Rs. 401-425 per share

• 75% reserved for institutional investors and only 10% for retail, as cash equivalents exceed 50% of Rs. 185 cr net worth  

M cap: Rs. 3,291 cr, implying 26% dilution

IPO Date: Fri 14^th Feb to Tue 18^th Feb 2025, Listing Mon 24^th Feb 2025

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

B2B Electrical Products Maker

Quality Power Electrical is a Sangli-headquartered manufacturer of high voltage power products, such as reactor and line trap, transformer, instrument transformer, capacitor bank, composite etc. Company has manufacturing facilities in India (Maharashtra and Kerala) and Turkey, with 3/4^th of Rs. 300 cr revenue generated from outside India.

Large Acquisition Planned

It plans to use Rs. 117 cr of fresh issue proceeds to acquire 51% stake in in Alwar-based Mehru Electrical, manufacturing switch gear panel, current transformer, potential transformer stabilizer, invertor, UPS capacitor, resistor etc. with annual topline of Rs. 220 cr. This will be a sizeable acquisition, as the earlier 3 acquisitions (in past 13 years) by Quality Power were only of Rs. 1-2 cr each.

Inferior Margins of Target Company

Mehru’s EBITDA margin of 7-8% is nearly half of Quality Power’s 13-20%. Thus, former’s net margin of 4.4%-5% is significantly lower than latter’s 18%-20%. This planned acquisition, besides being margin-dilutive, is being undertaken at a PE multiple of 24x, which is not cheap for mid-single digit margin and stagnant topline of target company (Rs. 188 cr in FY22).  

In addition, Quality Power has Rs. 126 cr cash equivalents and dilution for inorganic growth looks structured for IPO. 

Other Income is half the Profits

Quality’s FY24 revenue was at Rs. 301 cr ,with profit before tax (PBT) of Rs. 63 cr. Half of this, or Rs. 31 cr comprises other income, mainly interest income and forex gain. Similarly in H1FY25, on Rs. 156 cr revenue, PBT was at Rs. 55 cr with other income a  Rs. 27 cr. Thus, half of company’s income is non-operating.

Proforma FY24 revenue (including Mehru’s acquisition) is at Rs. 519 cr, with PAT for owners (excluding 49% in Turkish subsidiary) is at Rs. 43 cr, translating into 8% net margin. Excluding non-operating income, effective margin is mid-single digit.

Tax sops in Turkey, lowers company’s effective tax rate to 12-14%.

Aggressive Pricing

H1FY25 proforma revenue stood at Rs.267 cr, with EPS of Rs. 4.8, against Rs. 5.9 for FY24. Based on FY25E proforma EPS of around Rs. 11, IPO is priced at a PE of 40x on current year basis, which is seen steep for single-digit effective net margin, 16% RoE going forward and peer comparison.

While some power equipment peers like TARIL are presently ruling higher at a PE of 45x, new capacity addition and bigger size (topline 4x of Quality) partly justify the multiples. But some like Voltamp Transformer (not included in comparison in RHP, for obvious reasons!) are trading at a PE of 24x, on a much higher topline of Rs. 2,000 cr and better margin (18% net).