Tarapur Transformers IPO Review

Investors can refrain from subscribing to the initial public offer of Tarapur Transformers which manufactures and refurbishes power and distribution transformers. Steep asking price, relatively late entry into the manufacture of power transformers and the highly competitive scenario in the lower range transformer market are factors that do not lend themselves well for an investment in the offer.

The offer price of Rs 65-75 discounts the annualised earnings for FY-10 by 34-39 times on the pre-issue equity base. A massive 77 per cent expansion in equity through this issue is likely to result in depressed earnings despite expansion plans, pushing price earnings ratio to over 40 times for estimated FY-11 earnings.

company and offer

Tarapur is a subsidiary of the electrical lamination maker, Bilpower, a listed company. Tarapur was predominantly into refurbishment and repair of transformers, besides manufacturing instrument and distribution transformers.

Post its acquisition by Bilpower in 2006-07, the company started a unit for power transformers. Tarapur plans to raise Rs 55-64 crore through this offer, the proceeds of which would be used towards plant expansion, especially for power transformers, to fund acquisitions and working-capital requirements.

No details of the proposed acquisition or the extent of capacity expansion are available. At the higher end of the price band, the company's market capitalisation on listing would be Rs 146 crore. The offer is open from April 26-28.

Late entry

Tarapur Transformers started off with a transformer repair unit with current capacity of 1,800 MVA per annum. In 2007, the company acquired a small plant that manufactures distribution and instrument transformers (also called CTPT or current transformers potential transformers used for measurement of power supplied through high voltage cables).

Both these businesses, while they provide decent volumes, do not promise lucrative margins. The company, therefore, more recently, entered the power transformer business with capacity to manufacture transformers of up to 220KV class. This segment, which is the low end of the transformer range, is characterised by high competition and pricing pressure. Bigger players such as Emco, Transformers & Rectifiers, Bharat Bijlee, Voltamp Transformers and Indo Tech Transformers are already present in the space and have also expanded capacities significantly.

High pricing pressure and raw material cost hikes, especially copper, have resulted in most of the players trading at a more modest price earnings multiple of 10-14 times.

Tarapur may suffer from being a late entrant into his space. While the company has stated that it would start manufacturing medium and high-range transformers, the well-entrenched presence of large players such as Crompton Greaves, apart from the above-mentioned players, does not provide sufficient ground for Tarapur to gain market share giving its lack of experience. Volumes, too, may come at the cost of denting profit margins.

Parent support

Tarapur Transformers has stated that it sources most of its cold-rolled grain oriented silicon coated sheets from its parent, Bilpower. According to the offer document, such sourcing results in lower transport costs (being located near the plant) and reduces the cost of transformers by 10-15 per cent compared with other players. This is not, however, reflected in the company's operating profit margins.

While OPMs were 20 per cent in FY-08, they slid to 15 per cent and 13 per cent for FY-09 and nine-months ended December respectively. While this is the average in which the industry operates, few players such as Voltamp and Indo Tech enjoy over 20 per cent OPMs. Cost-pressures from other key inputs such as copper, apart from lower realisations could be the reasons for the slide.

Expansion and modernisation of the plant is one of the primary objectives of this offer. With the company recently setting up its manufacturing unit for power transformers, the capacity utilisation has so far has not been very high.

Except for its Vadodara plant, which manufactures instrument transformers, the rest, including the repairing units (20 per cent utilisation in 2008-09), have been under-utilised. While moving to higher range transformers through the modernisation could improve utilisation, securing orders from State electricity boards in the new range of transformers would be a challenge.

Tarapur' sales for FY-09 and nine-months ending December 2009 were Rs 22.8 crore and Rs 24 crore respectively. Sales in FY-09 jumped eight times compared with FY-07, primarily on account of acquisition. Power transformers have now started contributing to the revenues. Net profits for the above periods were Rs 1.5 core and Rs 2.2 crore respectively. The company has managed to keep its debt equity level at less than one.

via BL