Tarapur Transformers IPO Analysis

Tarapur Transformers is engaged in manufacture, rehabilitation, upgradation and refurbishment of transformers including power and distribution transformers. Praful Dharia, Rajesh Kumar Shah and Praful Shah promoted the company in 1988. It was acquired by Bilpower (a listed company) in 2006-2007. In 2007 it acquired the Varsha Engineers, a proprietorship concern at Vadodara (Gujarat). Currently Bilpower holds 73.50% of the total share capital of the company and along with its promoters controls 100% stake in the company. Post issue, the holding of Bilpower will come down to 41.46%. Including holding of promoters of Bilpower, total promoter holding post issue will be 56.41%.

As of now the company is capable of manufacturing transformers up to 220 KV class with an aggregate transformer manufacturing capacity of 1839.40 MVA and repairing capacity of 1800 MVA per annum spread across three plants. The first plant at Boisar near Thane in Maharashtra undertakes repairing and refurbishment, rehabilitation and up-gradation of transformers with an installed capacity of 600 MVA for manufacturing and 1,200 MVA for repairing of transformers per annum. On the other hand the second unit at Pali near Wada in Maharashtra equipped with modern state of the art equipment with an installed capacity to manufacture 1,200 MVA of transformers and repairing capacity of 600 MVA. The third unit at Vadodara in Gujarat manufactures CTPT (Current Transformers Potential Transformer) and Distribution Transformers ranging from 10 KVa/11Kv to 100KVa/11Kv with an installed capacity of 39.40 MVA per annum. The company, predominantly a transformer repairing company, has started focusing on manufacturing of transformers with the share of manufacturing of transformer at about 55-60% with balance 40-45% coming from transformer repairing.

Of the issue proceeds, Rs 22.05 crore is to be used to expand and modernize the Pali unit, Rs 25 crore will be used to fund acquisition through which the company intends to diversify to related segment, about Rs 8 crore to part finance the incremental working capital requirements and another Rs 2 crore for brand building.

Strengths

Strong industry experience of Bilpower (the promoter of the company) in manufacture of transformer core and its knowledge/ ability in sourcing CRGO steel globally will ensure timely supply of crucial component of transformer core for the company. Moreover, the company will also derive cost saving of 10-15% on account of lower working capital on inventory and lower freight cost.

The company is of late diversifying its revenue stream from Government and Government controlled entities to private sector. The share of Government entities to top line for the nine months ended December 2009 has come down to 55.5% from over 75% in 2007-08.

The current order book of the company is about Rs 20 crore, which is to be executed by September-October of the current fiscal. The order book comprises orders from State Electricity Boards of Bihar and Gujarat as well as from private players such as North Delhi Power (NDPL), a joint venture between Tata Power and the Government of Delhi.

Weaknesses

The transformer industry is facing surplus capacity and delay in order placement by key customers like PowerGrid Corporation of India and SEBs. This led to intense competition among transformer players leading to lower realization. Moreover the competition from Chinese and Korean players has heightened in the recent past. On the positive side, the demand potential is good with strong investment in the pipeline in the power transmission & distribution segment. But the conversion into orders and execution depends largely on the pace of progress in power generation projects in the country.

The company's capacity is currently underutilized, especially of the Boisar and Pali facilities. The utilization of Pali (Wada) unit was a mere 14.5 MVA during 2008-09 as against its installed capacity to manufacture transformers of 1200 MVA. Similarly the utilization at the Boisar unit was zero as against an installed capacity of 600 MVA. Only the Vadodara plant is operating at full capacity. Similarly, in repairing of transformers, the utilization of the Boisar unit was just 206.5 MVA compared to an installed capacity of 1,200 MVA and that of Wada unit 167 MVA as against an installed capacity of 600 MVA.

Nik-San Engineering Company, a promoter group company, is engaged in a similar line of business. Since there is no formal non-compete agreement, the possibility of conflict of interest is higher. Likewise the company sources transformer core from its parent company and there is no formal mechanism for arms length pricing.

Significant portion of the issue proceed is meant to be utilized to fund acquisition through which it likes to diversify to related segments. However, there is no information on the company to be acquired and the nature of business it is in and the synergy to the company.

Lack of expertise and experience in manufacture of higher range of power transformers over 220 kV.

The company has reported negative operating cash flow continuously for three years up to March 2009. However, for the nine months ended December 2009 it has returned to positive cash flow.

Transformer repairing business is highly competitive with lot of unorganized players. Moreover, established players with large installations will naturally get the repair work for the supplies they made, with little room for other players.

Bilpower, the promoter of the company has violated Regulations 6 (2) and 6(4) for fiscal 1997 and Regulation 8(3) for fiscals 1998, 1999, 2000, 2001 and 2002 of SEBI (SAST) Regulations, 1997. SEBI has issued a letter to its promoter to opt for a consent order by paying an amount of Rs 175000.

Outlook

The sales of the company for the fiscal ended March 2009 were higher by 125% to Rs 24.01 crore and net profit was higher by 43% to Rs 2.16 crore. For the nine months ended December 2009, the net profit was Rs 1.55 crore on net sale of Rs 22.88 crore. On post-IPO equity, while EPS for FY 2009 was Rs 1.1. The annualized EPS for nine months ended December 2009 was also Rs 1.1.

The offer price of Rs 65-75 discounts its FY 2009 EPS by 59-68 times. In comparison, established players such as EMCO, Voltamp, Transformers & Rectifiers are available at PE multiples of 11 times, 8 times and 11 times their FY 2009 EPS.