TD Power Systems has entered the capital market on 24^th August 2011 to raise Rs. 227 crore via a public issue of 87-89 lakh equity shares of Rs.10 each, priced between Rs. 256-261 per share. The issue, constituting about 26% of post issue paid-up capital of the company, closes on August 26.

TD Power Systems is engaged primarily in the following 3 businesses:

1. Manufactures AC generators (annual installed capacity of 360 generators p.a.) with output capacity ranging from 1 MW to 52 MW for prime movers such as steam turbines, gas turbines, hydro turbines, wind turbines, diesel and gas engines. Accounted for 37% of FY11 revenues.
2. Executes turbine generator island projects for steam turbine power plants with upto 52 MW capacity using Japanese turbine combined with its own generator. Accounted for 19% of FY11 sales.
3. Conducts EPC business executing boiler-turbine generator island projects and balance of plant portion for steam turbine power plants with output capacity from 52 MW to 150 MW. Accounted for 43% of FY11 sales.

Company's customers include both domestic and international companies operating in the cement, steel, paper, chemical, metals, sugar co-generation, bio-mass power plants and hydro-electric power plant industries.

With two manufacturing units in Bangalore, company has branch offices in Japan and Hong Kong for sourcing turbines and power plant equipments for EPC business respectively. It owns the technology used in manufacturing generators which was earlier licensed from Japan's Toyo Denki. Also, the company has entered into product development and manufacturing agreement with Germany's Voith Hydro Holding GmbH for jointly developing electric generators. In addition, company also has technology / license agreements with Siemens, Sicme and Toshiba Mitsubishi for different prime movers.

It proposes to utilise the IPO proceeds to finance expansion of manufacturing plant in Bangalore with investment of Rs. 103 crore and for construction of project office in Bangalore for Rs. 30 crore. Rs. 33 crore will go towards repayment of debt, while Rs. 40 crore will fund working capital requirements.

For FY11, company reported revenue of Rs. 864 crore, on a consolidated basis, with PAT of Rs. 57 crore, amounting to 6.6% net margins, in line with other EPC players. On equity of Rs. 24 crore, EPS for the year stood at Rs. 25.09. Its net worth is Rs. 187 crore, while total debt outstanding is Rs. 86 crore, as of 31^st March 2011, resulting in low debt-equity ratio of 0.46:1, which will only decline as partial debt is retired from IPO proceeds. Promoter holding, currently stands at 89.45%, which will decline to about 66%, post IPO.

With cash balance of Rs. 208 crore as of last balance sheet date, one fails to understand the need for the company to undertake an IPO in the current market conditions, when even front-line blue chips are out-of-flavour. This will definitely impact the valuations that the issue will be able to command, despite an IPO grade of 4 on 5, indicating above average fundamentals - quite a rare grading among the recent issues.

As June 30, 2011, company had a healthy order book of Rs 1,095 crore representing 127% of FY11 sales. However high dependence on a few customers is a big concern - For FY11, top 10 customers accounted for 77% of sales (with the largest one contributing to 23% of the top line), which has only increased over the years as top 10 customers accounted for about 43% of sales in FY09.

At the lower and upper end of price band, shares are being issued at PE multiples of 10.2 times and 10.4 times respectively. This appears a little stretched and valuation in single digit PE would be more appropriate. There is no point comparing the issue with BHEL and Alstom, as done in the RHP, as these companies, besides being much bigger and enjoying healthier double digits margins, are a play on the capital goods space, while it will be prudent to classify TD Power Systems, more as a EPC company as nearly half of its sales are contributed by that vertical alone. Thus, double digit PE multiple is quite a stretched valuation for the company. More appropriate comparison will be with BGR Energy, which is ruling at a PE of 7.5 times, on EPS of Rs. 45 posted by the company for FY11.

The issue is not very attractively priced, with likelihood of share price correcting to lower levels, post-listing, given the weak secondary market conditions. The issue can be given a miss, as comparable better opportunities are available in the secondary market.