Transformers And Rectifiers (India) is entering the capital market on 7^th December 07, with a public issue of 29.95 lakh equity shares of Rs.10 each in the band of Rs.425 to Rs.465 per share. At the upper band, issue size is close to Rs.140 crores.

The company is presently manufacturing transformers upto 220 kV class with an installed capacity of 7,200 MVA, through two manufacturing facilities located near Ahmedabad. The product break up of the company are mainly power transformers (77%), furnace transformers (13%) and others about 10%.

For FY 07, the net sales of the company was at Rs.217 crores with EBITDA of Rs.34.51 crores, resulting into a margin of 15.90%. PBT was at Rs.25.86 crores while PAT was at Rs.16.72 crores translating into an EPS of Rs.16.84 on equity of Rs.9.93 crores. For six months ending September 07, net sales was at Rs.125 crores with EBITDA at Rs.24.88 crores with margin at 19.90%. PBT was placed at Rs.19.94 crores and PAT at Rs.12.51 crores. Though topline grew by just 15% on pro-rata basis, from FY 07 to FY 08, EBITDA margin improved by about 4%.

The company is now setting up a new plant of 220 kV and 400 kV class with a capacity of 16,000 MVA per annum with estimated outlay of Rs.67 crores. Rs.35 crores is earmarked for enhanced working capital requirements. In transformer industry, though capital cost is low, it has huge working capital requirements, due to longer credit availed by its buyers like State Electricity Board. The debtor cycle is generally of 4 months. The new plant would be partly operational in FY 09.

The growth of the company in FY 08 is lower against industry and peer growth. Based on H1 results of FY 08, the topline of the company maybe about Rs.280 crores with PAT of Rs.28 crores which would translate into an EPS of Rs28. Based on this, and at the upper band of Rs.465, the share is issued at abut 17 PE multiple.

When we compare this with listed peers, this looks almost fully priced, thus leaving very little room for appreciation. Indo Tech Transformers, having highest EBITDA margin in the industry is likely to post an EPS of Rs.42 for FY 08and share is now ruling at Rs.700, resulting in a PE multiple of 17 times. Bharat Bijlee is likely to post an EPS of Rs.150 for FY 08, rules at Rs.3,440, resulting in a PER of 23 times. Voltamp Transformer is ruling at PER of 21 if EPS of Rs.85 is considered for FY 08. Though Voltamp and Bharat Bijlee are quite large compared to the company, Indo Tech could be the right companion.

Indo Tech has also been carrying out expansions and raising its operations with improved profitability. It is available at a same PER of 17 in the secondary market, hence the issue at PER of 17 looks expensive. However, promoter's stake of 77% instills confidence against 54% held in Indo Tech Transformers. The track record of the promoters also needs to be closely watched, post IPO.

The company falls in highly fancied sector of Transformer, which is discounted favourably by the market. But issue at upper band of Rs.465 is issued at a PE multiple of close to 17, leaving very little room for appreciation. Similar plays are available in the secondary market almost at the similar valuations. So, where is the room for appreciation for new set of investors?