Transmission and distribution (T&D) sector has been at the forefront of government expenditure with efficient evacuation requirements rising on the back of increasing contribution of renewable energy, alongside others tailwinds powering it (refer Big Story in our edition dated December 15, 2024). And with all the engineering procurement and construction (EPC) players in this space sitting on record high order backlogs and trading at not-cheap-at-all valuations, Transrail Lighting (TLL), another player in the T&D space, is out with its IPO. It is a mix of fresh issue - ₹400 crore and offer for sale - ₹438.9 crore, totaling to ₹838.9 crore.

Of the funds raised, ₹217 crore of funds is earmarked to meet working capital requirements, ₹90.7 towards capital expenditure and the remaining for general corporate purposes.

TLL is an EPC player, diversified yet significantly skewed towards T&D. With presence in both domestic and international markets, it is backward integrated into towers, conductors and poles, which primarily is captively consumed in the T&D space.

The company’s revenue/ EBITDA/ PAT growing at a healthy CAGR of 32/ 52/ 90 per cent during FY22-24 and a record order backlog with orderbook to FY24 revenue at a healthy 2.5 times, places TLL at par with its peers. However, two things that set out TLL are the backward integration and the solid improvement in EBITDA margins which is the second best amongst its peers.

Valued at a PE of around 25 times its FY24 earnings, the company leaves a fair bit on the table for the new investors. Its closest peers KEC, Kalpataru Projects International and Techno Electric & Engineering Company are trading at a much higher PE of 89/ 41/ 69 times respectively.

Thus, investors could consider subscribing to the IPO as TLL offers an opportunity to play the transmission and transformation sector in India and overseas, with the right mix of growth and valuation.

The business

The company operates with four revenue verticals – T&D, civil, railways and poles and lighting. T&D contributed 84 per cent of the topline in FY24. While it was at 67 per cent in FY22, a drop in order intake in other segments, coupled with a revival in the T&D space meant increasing contribution from the T&D segment. In line with the trends observed in revenue, overseas and domestic T&D account for the bulk - 65 per cent and 26 per cent respectively - of the unexecuted orderbook as of June 30, 2024. Africa and SAARC countries contributed, on average, to around 90 per cent of the overseas revenue, in the last 3 years.

The poles and lighting segment is a relatively new venture by the company. With a diverse set of offerings ranging from T&D monopoles to stadium lighting to signages to solar streetlights, the company expects to scale up this segment in the coming years.

Geographically, TLL currently has a footprint in 50+ countries. Domestic business brought in around 62 per cent of the revenue in FY22 and while the same improved on an actual basis, the overseas business ramped up faster to contribute 59 per cent to the pie in FY24. The management noted that while there was no real shift in geographic focus, prioritizing profitability margins resulted in the above tilt in scales towards overseas projects.

Operational metrics

Revenue grew 29 per cent year-on-year in FY24 to ₹4076.5 crore, while EBITDA and PAT grew 62 per cent and 117 per cent to ₹477.6 crore and ₹233.2 respectively.

The faster growth in EBITDA and PAT is owed to the margin expansion from 8.8/ 2.8 per cent in FY22 to 11.7/ 5.7 per cent in FY24 respectively. Relatively stable commodity prices post FY22, and backward integration helped in the same. To compare, the EBITDA margins of KEC, Kalpataru and Techno Electric stood at 6.2/ 8.3/ 14 per cent for FY24.

Net debt to equity is at a healthy 0.5 times, comparable and relatively better than its peers. Working capital days stood at 73 for TLL, slightly higher than the peer average. The allocation of IPO funds to the working capital requirements should aid in operations, considering the working capital intensive nature of the industry.

The company has hedged against volatility in aluminium prices, a key raw material in manufacturing of conductors. Orderbook stood at a record ₹10,213 crore as of June 30, 2024.

What works

The backward integration helps the company control 60 per cent of total costs of a T&D project, thus reducing third-party dependence. The proposed capital expenditure from IPO funds is aimed at increasing the manufacturing capacity of towers, conductors and poles by 25-30 per which is expected to meet the entire captive requirement. KEC International is the only other peer backward integrating and also only into conductor manufacturing (the plant is yet to be commercialized though).

TLL seems to have hit the sweet spot with improving profit margins with solid revenue growth. Though the order intakes from railway and civil segments have dropped since FY22, the company has built pre-qualification in both those segments and projects with the right risk and margin profiles and will continue to be taken up, according to the management.

Around 99.9 per cent of the unexecuted overseas orderbook as of June 30, 2024 are projects either funded by multinational funding agencies such as World Bank, African Development Bank and Asian Development Bank, amidst others, or backed by letters of credit. This, to a significant extent, minimizes the counterparty risk and credit risk.

What does not work

TLL has contingent liabilities on litigations both from the taxation front, and the operations front. The same is at 21 per cent of its networth pre-IPO, and post-IPO will get diluted to 16 per cent, which is still on the higher side. While they are not probable liabilities, any adverse developments could impact the company’s balance sheet in the future, if not provided for conservatively.

Published on December 20, 2024