Company Update Institutional Equities TD Power Systems 1 September 215 Reuters: TDPS.BO; Bloomberg: TDPS IN On The Cusp Of A Turnaround; Reiterate Buy We believe TD Power Systems (TDPS) is on the cusp of a turnaround with strong scaleup opportunities in the core generator segment and impending winding up of the lossmaking EPC segment (25% of total revenue in each of the past three years). Rising penetration among existing OEMs, fresh tieups with new OEMs and diversification in untapped verticals are expected to result in a 26% revenue CAGR for the generator segment over FY15FY17E. While the generator segment posted EBITDA margin of 12.8% in FY15, consolidated margin stood at only 2.4% because of losses in the EPC segment. Post winding up of the EPC business in 2QFY16, we expect consolidated EBITDA margin to expand ~1,2bps to 14.2% in FY17E with a better revenue mix (highmargin generator segment s share in consolidated revenue likely to rise from 6% in FY15 to 84% in FY17E) and improved operating leverage in the generator segment. We reiterate our Buy rating on TDPS with an unchanged target price of Rs511 (25xFY17E earnings) and believe the riskreward ratio is extremely favourable currently considering the recent depreciation of the Indian rupee (INR) against the USD as well as the euro (from Rs64 per euro in MarchApril 215 to Rs74 now) as TDPS is a net exporter (refer Exhibit 4) and high net cash level in its books (Rs65/share in FY15, likely to rise to Rs8/share in FY17E). Bright outlook for generator business: TDPS is a key supplier of generators to renowned global OEMs like GE, Siemens and Voith Hydro. The focus on exports and ongoing association with leading global leaders enabled TDPS to reduce its dependence on the domestic market and increase contribution of exports (including deemed exports) as a percentage of sales from 49% in FY14 to 66% in FY15. Order execution in 1QFY16 was strong with a 39% YoY rise in revenue, primarily driven by exports (41% direct exports and 12% deemed). Current order book of the generator segment stands at Rs3.2bn (51% international orders). With weak domestic demand, average order inflow over the past three quarters has been soft at Rs8mn, but we expect a strong pickup in order inflow in 2HFY16 driven by three large international opportunities in locomotive, gas and steam verticals, respectively. Steam and hydro segments are core drivers: Current volume drivers are steam and hydro generators which accounted for revenue of ~Rs3bn, translating to 78% of FY15 generator revenue. The traction in steam generator (up to 52MW) revenue was strong in FY15 at ~Rs1.8bn, posting a 29% YoY growth, primarily driven by demand from global markets. However, the revenue from steam generators declined from a peak of ~Rs3.4bn in FY12 to ~Rs1.8bn in FY15 (refer Exhibit 3) because of a sharp decline in domestic market size for steam generators from 3,2MW to 7MW (up to 52MW category), where TDPS has a 7% market share. Likely revival in domestic capex for captive steam power generation, along with overall economic recovery, will strongly aid demand for TDPS steam generators because of its dominant position. Also, TDPS is in the process of finalising a contract with an existing global OEM (likely to be Siemens) to supply steam generators for larger machines (above 52MW) in export markets, which will open up new avenues for TDPS. In case of hydro generators, revenue from Voith Hydro (the largest OEM for TDPS in the hydro segment) continues to remain robust, with FY16 likely to account for bestever hydro generator despatches to Voith Hydro. Y/E March FY13 FY14 FY15 FY16E FY17E Net revenue 5,871 4,82 5,974 5,569 7,179 EBITDA 495 198 141 522 1,23 Net profit 417 227 (8) 314 679 EPS (Rs) 12.6 6.8 (.2) 9.5 2.4 EPS growth (%) (36.7) (45.6) NA NA 115.8 EBITDA margin (%) 8.4 4.1 2.4 9.4 14.2 PER (x) 22.5 41.3 NA 29.8 13.8 P/BV (x) 1.9 1.8 1.9 1.8 1.7 EV/EBITDA (x) 13.6 38.3 51.2 13.7 6.5 Dividend yield (%).7.8.9 1.4 2.5 RoIC (%) 15.2 1.4 (4.9) 6.7 22.8 RoE (%) 8.4 4.4 (.2) 6.2 12.3 BUY Sector: Capital Goods CMP: Rs282 Target Price: Rs511 Upside: 8% Chirag Muchhala chirag.muchhala@nirmalbang.com +91223926 892 Key Data Current Shares O/S (mn) 33.2 Mkt Cap (Rsbn/US$mn) 9.4/141.3 52 Wk H / L (Rs) 479/26 Daily Vol. (3M NSE Avg.) 28,142 One Year Indexed Stock Performance 15 14 13 12 11 1 9 8 7 6 5 4 Sep14 Nov14 Jan15 Mar15 May15 Jul15 Sep15 TD POWER SYSTEMS NSE CNX NIFTY INDEX Price Performance (%) 1 M 6 M 1 Yr TD Power Systems (1.9) (22.9) (13.4) Nifty Index (8.7) (1.7) (4.1) Source: Bloomberg
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 Institutional Equities 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 Scaleup of locomotive and gas segments is imminent The scaleup in generators for locomotives is imminent with three large opportunities: (1) Replacement market in the US following the change in emission norms (through a likely tieup with GE), (2) Direct supply to Indian Railways (TDPS won a maiden order in March 215 to supply 1 generators on a trial basis and once approved, it will become the third qualified bidder in a 34 units per annum market currently catered to by Bharat Heavy Electricals (BHEL) and GM, where TDPS is aiming a onethird market share), and (3) Upcoming diesel locomotive railway factory in Bihar where GE has L1 status (guaranteed offtake by Indian Railways of diesel locomotives over a 1year period). These three opportunities have the potential to make locomotive generators a game changer for TDPS in domestic as well as overseas markets. Further, in the gas generator segment, TDPS is in the final stage of concluding a contract with a global OEM (likely to be GE Jenbacher) for catering to international markets. Revenue from gas engine generators is scaling up, with its share in total generator sales rising from 2.5% in FY13 (Rs74mn) to 7.1% in FY14 (Rs231mn) to 1.6% in FY15 (Rs4mn). With regular offtake of gas generators likely by GE Jenbacher (TDPS is the second vendor empanelled with GE Jenbacher to supply generators for gas engines), further scalability in the gas segment is imminent. EPC business to be wound up in 2QFY16 The EPC business (25% of total revenue in each of the past three years) has pending order backlog worth only Rs65mn, which will be executed in 2QFY16 with exit costs of Rs6mn, after which the business will be wound up. This business has been a drag on overall profitability, as it posted operating loss of Rs119mn/Rs24mn in FY14/FY15, respectively. While the generator segment posted EBITDA margin of 12.8% in FY15, consolidated margin stood at only 2.4% because of losses in the EPC business. Post closure of EPC business in 2QFY16, TDPS will be primarily a product company leading to a healthy transformation in its financial profile. Outlook and valuation With significant scaleup opportunities available, we expect TDPS to post a 26% CAGR in generator revenue to Rs6bn in FY17E from Rs3.7bn in FY15. Generator, a product manufacturing business, operated with a peak operating margin of 2% with fixedasset turnover of 3x. With increased capacity (gross block doubled over FY12 FY15 to Rs3.6bn, refer Exhibit 8), asset turnover declined to 1.2x and operating margin stood at 12.8%, still a strong level compared to other capital goods peers. With high revenue growth profile, we expect fixedasset turnover to rise to 1.6x in FY17E along with margin expansion led by operating leverage as well as favourable currency movement (INR depreciated against the USD as well as the euro (from Rs64 per euro in MarchApril 215 to Rs74 currently) as TDPS is a net exporter. Net forex inflow of TDPS in FY15 stood at Rs827mn, up 225% YoY, translating to 13.8% of consolidated sales and 22% of generator sales (refer Exhibit 4). With improved revenue mix (following closure of EPC business, the generator segment s share in consolidated revenue is expected to rise from 6% in FY15 to 84% in FY17E) and healthy revenue traction along with improved operating leverage in generator business, consolidated EBITDA margin of TDPS is likely to rise 1,2bps from 2.4% in FY15 to 14.2% in FY17E. Strong improvement in returns ratio profile likely (RoIC expected to jump from a negative 5% in FY15 to 23% in FY17E, refer Exhibit 6), rise in fixedasset turnover (from 1.2x in FY15 to 1.6x in FY17E, refer Exhibit 8), healthy free cash flow generation (Rs1bn over FY15FY17E, refer Exhibit 7), high net cash per share (Rs65 in FY15; likely to rise to Rs8 in FY17E, refer Exhibit 9) and a stable working capital cycle will bring TDPS on a strong financial footing. We are structurally positive on the future prospects of TDPS, driven by strong scaleup likely in the generator business and a shift in the financial profile after shutdown of the EPC business. We reiterate our Buy rating on TDPS with a target price of Rs511 based on 25xFY17E earnings. The stock trades at an attractive valuation of 13.8xFY17E earnings (excash at 1xFY17E earnings). Exhibit 1: Generator segment execution and order book trend 1,6 1,4 1,2 8 6 4 2 4, 4, 3, 3, 2, Order intake Execution Closing order book (RHS) 2 TD Power Systems
1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 Institutional Equities 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 Exhibit 2: Generator segment order book mix domestic and export trend 3, 2, Domestic Exports Exhibit 3: Fuel sourcewise generator business revenue trend 4, 4, 3, 3, 2, FY1 FY11 FY12 FY13 FY14 FY15 Steam Hydro Diesel Gas others Exhibit 4: Forex position trend () () () FY11 FY12 FY13 FY14 FY15 Forex inflow Forex outflow Net forex position 3 TD Power Systems
Exhibit 5: DuPont analysis PAT margin (%) 6.6 6.4 7.1 4.7 (.1) 5.6 9.5 Total asset turnover (x) 3.2 2.1 1.1.8 1. 1. 1.1 Financial leverage (x) 1.5 1.1 1.1 1.2 1.2 1.1 1.1 RoE (%) 3.2 14.3 8.4 4.5 (.2) 6.2 12.3 Exhibit 6: Return ratios set to improve (%) 5 4 3 2 1 1 RoCE RoE RoIC Exhibit 7: Operating/free cash flow trend () () Operating cash flow Free cash flow 4 TD Power Systems
Exhibit 8: Fixedasset turnover trend of the generator segment 4, 4, 3, 3, 2, 2.6 2.7 1.6 1.4 1.2 1.3 1.2 Gross block Fixed asset turnover ratio (x) 3. 2.5 2. 1.5 1..5. Note Assuming entire gross block is towards the generator segment Exhibit 9: High net cash level per share 3, 3, 2, 81 79 65 66 8 (Rs) 9 8 7 54 53 6 5 4 3 2 () 1 () Cash Debt Net cash per share 5 TD Power Systems
Financials (consolidated) Exhibit 1: Income statement Y/E March FY13 FY14 FY15 FY16E FY17E Net sales 5,871 4,82 5,974 5,569 7,179 % growth (43.1) (18.2) 24.4 (6.8) 28.9 Raw material costs 4,365 3,516 4,533 3,815 4,824 Staff costs 532 67 652 64 747 Other overheads 479 481 648 591 585 Total expenditure 5,376 4,64 5,833 5,47 6,156 EBITDA 495 198 141 522 1,23 % growth (46.2) (59.9) (28.8) 27.4 95.8 EBITDA margin (%) 8.4 4.1 2.4 9.4 14.2 Other income 38 341 245 282 324 Interest costs 34 36 39 4 41 Depreciation 124 15 288 315 336 Profit before tax 644 354 6 449 969 Tax 227 126 68 135 291 Extraordinary items (3) PAT 417 227 (8) 314 679 PAT margin (%) 7.1 4.7 (.1) 5.6 9.5 EPS (Rs) 12.6 6.8 (.2) 9.5 2.4 % growth (36.7) (45.6) NA NA 115.8 Exhibit 12: Balance sheet Y/E March FY13 FY14 FY15 FY16E FY17E Share capital 332 332 332 332 332 Reserves 4,68 4,743 4,68 4,767 5,173 Net worth 4,941 5,76 4,94 5,99 5,56 Shortterm loans 27 63 574 574 574 Longterm loans Total loans 27 63 574 574 574 Deferred tax liability (net) 137 146 177 177 177 Total liabilities 5,348 5,851 5,691 5,85 6,256 Gross block 2,447 2,788 3,64 3,84 4,14 Depreciation 449 594 888 1,23 1,539 Net block 1,998 2,194 2,716 2,61 2,565 Capital workinprogress 162 54 1 1 Long term loans & advances 416 421 345 366 443 Inventories 53 863 76 72 865 Debtors 1,778 2,218 1,551 1,526 1,98 Cash 2,95 2,44 2,721 2,764 3,248 Short term loans & advances 63 1,4 867 763 885 Total current assets 5,844 6,525 5,9 5,755 6,96 Creditors 1,323 1,688 1,672 1,39 1,718 Other current liabilities & provisions 1,749 2,141 1,598 1,582 2,4 Total current liabilities 3,72 3,829 3,27 2,972 3,758 Net current assets 2,772 2,696 2,63 2,782 3,148 Total assets 5,348 5,851 5,691 5,85 6,256 Exhibit 11: Cash flow Y/E March FY13 FY14 FY15 FY16E FY17E EBIT 371 49 (147) 28 687 (Inc.)/dec. in working capital 328 (425) 384 (19) 118 Cash flow from operations 699 (377) 237 98 84 Other income 38 341 245 282 324 Depreciation 124 15 288 315 336 Interest paid () (34) (36) (39) (4) (41) Tax paid () (175) (118) (36) (135) (291) Net cash from operations 922 (4) 695 52 1,132 Capital expenditure () (843) (724) (27) (3) (3) Net cash after capex 79 (764) 425 22 832 Dividends paid () (75) (89) (16) (156) (272) Inc./(dec.) in shortterm borrowing (73) 36 (56) Inc./(dec.) in longterm borrowing Inc./(dec.) in total borrowings (73) 36 (56) (Inc.)/dec. in long term loans & adv (49) (5) 76 (21) (76) (Inc.)/dec. in investments Cash from financial activities (197) 266 (86) (177) (349) Others (3) (21) Opening cash balance 3,22 2,95 2,44 2,721 2,764 Closing cash balance 2,95 2,44 2,721 2,764 3,248 Change in cash balance (118) (51) 317 43 484 Exhibit 13: Key ratios Y/E March FY13 FY14 FY15 FY16E FY17E Per share (Rs) EPS 12.6 6.8 (.2) 9.5 2.4 Book value 148.7 152.7 148.6 153.4 165.6 Valuation (x) P/E 22.5 41.3 NA 29.8 13.8 P/BV 1.9 1.8 1.9 1.8 1.7 EV/EBITDA 13.6 38.3 51.2 13.7 6.5 EV/sales 1.1 1.6 1.2 1.3.9 Return ratios (%) RoCE 6.9.8 (2.6) 3.5 11. RoE 8.4 4.4 (.2) 6.2 12.3 RoIC 15.2 1.4 (4.9) 6.7 22.8 Profitability ratios (%) EBITDA margin 8.4 4.1 2.4 9.4 14.2 EBIT margin 6.3 1. (2.5) 3.7 9.6 PAT margin 7.1 4.7 (.1) 5.6 9.5 Turnover ratios Total asset turnover ratio (x) 1.1.9 1. 1. 1.2 Debtor days 111 169 95 1 97 Inventory days 33 66 46 46 44 Creditors days 111 175 135 133 13 Solvency ratios (x) Debtequity.1.1.1.1.1 6 TD Power Systems
Rating track Date Rating Market price (Rs) Target price (Rs) 22 January 215 Buy 45 628 16 February 215 Buy 4 628 15 April 215 Buy 388 628 25 May 215 Buy 39 53 8 July 215 Buy 325 53 1 August 215 Buy 288 511 7 TD Power Systems
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