TD Power IPO: There are questions galore

Companies that approach the primary market to raise money in a dull market are normally desperate or very confident of raising money based on their fundamentals. TD Power Systems’ (TDPS) financials do not show the desperation for an initial public offer (IPO), given the state of the current market. Nor are its numbers so strong that people would rush to apply for the issue.

[caption id=“attachment_68657” align=“alignleft” width=“380” caption=“The current TD Power IPO aims to raise Rs 227 crore in a price band of Rs 256-261 per share. Reuters”] [/caption]

TDPS is one of the leading manufacturers of AC generators in the country in the 1-52 mw range. The company also has a power plant projects where it executes turbine generator (TG) projects and EPC (erection, procurement and construction) projects. TDPS has manufactured a total of 1,538 generators with an aggregate output capacity of 12,657 mw.

Quality of TDPS products and its service can be judged from the fact that 97 percent of manufacturing orders have been from existing customers. The company is sitting on an orderbook of Rs 1,095 crore, which is equivalent to 1.25 times its financial year 2011 turnover.

The present IPO aims to raise Rs 227 crore in a price band of Rs 256-261 per share. On a fully diluted post equity capital of Rs 33.2 crore, its financial year 2011 profit of Rs 57 crore is discounted by nearly 15 times. Post-issue public holding in the company will be in the range of 26.3 percent to 26.7 percent.

Out of the entire proceeds from the issue, Rs 123.5 crore will be utilised for expansion of its manufacturing plant and constructing its project site, Rs 30.2 crore will be used for repayment of term loans and Rs 40 crore will go into its working capital requirement. This is where the purpose of coming out with an IPO becomes questionable. The company has a very comfortable debt equity ratio of 0.45 (debt of Rs 86 crore on a capital of Rs 187 crore), its interest outgo is Rs 7 crore on an operating profit of Rs 100 crore. Furthermore, the company has cash and bank balance of Rs 208 crore for March ending 2011. The actual need for expansion is only Rs 123 crore, nearly half of the issue size.

From the proceeds, the company will be able to manufacture generators of higher capacities. There is no doubting the company’s ability to deliver. However, the current market condition can give a better price entry, post listing, as the main benefit of the IPO proceed will accrue only in 2014.