Tarapur Transformers tumbles on debut

Settles at Rs 56.90 on BSE

Tarapur Transformers settled at Rs 56.90 on BSE, a discount of 24.13% to the initial public offer price of Rs 75 per share.

The stock debuted at Rs 75. The stock hit a high of Rs 97.50 and a low of Rs 54.10. On BSE, 6.35 crore shares were traded on the counter.

The current price of Rs 56.90 discounts the company's year ended March 2009 EPS of Rs 1.1, by a PE multiple of 51.72. The company had priced its IPO at the top end of the Rs 65-75 per share initial public offer (IPO) price band.

The IPO of Tarapur Transformers closed on 28 April 2010 with a subscription of 1.74 times. The qualified institutional buyers category was subscribed a mere 0.03 times, non institutional investors category was subscribed 5.07 times and retail individual investors (RIIs) category was subscribed 2.73 times.

The proceeds of the IPO will be utilized mainly for expansion and modernization of a manufacturing unit at Pali in Maharashtra and to part-finance an acquisition.

Tarapur Transformers is engaged in manufacturing, rehabilitation, up-gradation, and refurbishment of transformers.

Tarapur Transformers reported net profit of Rs 1.55 crore on sales of Rs 22.88 crore for the nine months ended December 2009.

Tarapur Transformers Subscription Details

Qualified Institutional Buyers (QIBs) 0.0314
Non Institutional Investors 5.0752
Retail Individual Investors (RIIs) 2.7384

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

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.