Initiate coverage on TD Power Systems (TDPS) with a ‘buy’ rating and a price target...
Initiate coverage on TD Power Systems (TDPS) with a ‘buy’ rating and a price target of R696, valuing the company at 25x its FY17e earnings. Any revival in the domestic capex cycle is an added bonus. We have compared TDPS with similar companies in the turbine generator (TG) space. At the current market price, TDPS discounts it two year forward earnings at 15x, which is at a 40% discount to its nearest peer, Triveni Turbines.
Post the tie-up with global OEMs, international revenues are expected to increase from 25-30% of FY12-14 revenues to 70% in FY17e. Management expects business from GE Jenbacher to treble over the next two years, while deliveries to Voith Hydro are expected to grow at a robust pace from the existing R150 crore. The global addressable market size for TDPS’ product range is pegged at $6 billion. Going forward, we can expect similar supply agreements to be inked with the same and other OEMs for various generator products.
Backed by strong traction in export order flows, capacity utilisation is expected to increase from 40% in FY15e to 65% by FY17e. We expect the operating leverage benefits to drive margin expansion from 4% (FY14) to 20% (FY17e) leading to a strong 60% CAGR (FY14- FY17e) in earnings and improvement in RoIC from 2% (FY14) to 34% (FY17e).