Transrail Lighting IPO analysis

Transrail Lighting Limited IPO (initial public offering) will open for subscription on December 19, 2024, and close on December 23, 2024. Below is a breakdown of the EPC (engineering, procurement and construction) company's strengths, weaknesses and growth prospects to help investors make an informed decision.

Transrail Lighting IPO in a nutshell

• Quality : Between FY22 and FY24, the company reported a three-year average ROE and ROCE of around 17.8 and 21.3 per cent, respectively.
  
• Growth : Between FY22 and FY24, its revenue and profit after tax grew by 32 and 90 per cent annually.
  
• Valuation : At the upper end of the price band, the stock has a P/E and a P/B ratio of 24.9 and 3.8 times, respectively.
  
• Overview: Transrail Lighting stands to benefit from India's rapid infrastructure development and electrification drive, fueled by initiatives like 'Power for All' and 'Make in India.' The company's growth prospects may be further boosted by sectoral tailwinds such as increased investments in power transmission, railway electrification and renewable energy integration. However, challenges such as fluctuating raw material prices and intense competition in the EPC sector could affect Transrail Lighting's financials.

About Transrail Lighting

Transrail Lighting is an Indian EPC company with integrated manufacturing capabilities for lattice structures, conductors and monopoles (used in electricity transmission in the infrastructure and energy sectors). As of June 30, 2024, the company has designed, engineered, procured and constructed 34,654 CKM (circuit kilometres) of transmission lines and 30,000 CKM of distribution lines. It has also supplied 1.3 million metric tons of towers, nearly 1.95 lakh kilometres of conductors and 4.59 lakh poles.

Transrail Lighting's revenue comes from power transmission and distribution (83.83 per cent), civil construction (9.33 per cent), poles and lighting (4.40 per cent) and railways (2.43 per cent). Presently, its order book value stands at Rs 10,213 crore, of which 55-60 per cent is expected to translate into revenue in the next 12 months.

The company also has global operations, spread across 58 countries, including key markets like Bangladesh, Finland, Kenya and Nigeria, with revenue from outside India comprising a 58 per cent share in FY24.

Strengths of Transrail Lighting

• Strong track record: Transrail Lighting operates in the specialised power transmission and distribution industry and has completed over 200 projects since its inception in 2008. The company excels in fostering long-term client relationships, which is evident from its emphasis on repeat business and successful execution of multi-phase projects like the last mile connectivity initiative in Kenya.

Weaknesses of Transrail Lighting

• Heavy reliance on government contracts: Transrail Lighting derives a sizable portion of its revenue from tenders floated by government authorities and PSUs (including government contracts from countries like Bangladesh and Kenya). As of June 30, 2024, government contracts alone constituted 70 per cent of Transrail Lighting's revenue. A high reliance on government contracts makes the company prone to delays or changes in government policies, tendering processes and budget allocations. This is evident in its financials, where Transrail Lighting's three-year cumulative cash flow from operations was less than its cumulative profit after tax, indicating that a major portion may be stuck in working capital.
  
• Revenue concentration: A small number of clients contribute significantly to Transrail Lighting's revenue. As of the Q1 FY25, the top ten clients alone accounted for 67.5 per cent of the company's total revenue. This high reliance on a small group of customers poses risks, as any reduction in their business, financial difficulties or contract terminations could negatively impact the company's financials.

Risk report

Company and business

• Are earnings before tax of Transrail Lighting more than Rs 50 crore in the last 12 months?
  Yes. The company reported a profit before tax of Rs 318 crore in FY24.
  
• Will Transrail Lighting be able to scale up its business?
  Yes. A surge in global demand for energy infrastructure, government initiatives in electrification, and the transition to renewable energy is expected to help the company scale its business.
  
• Does Transrail Lighting have recognisable brands with client stickiness?
  Yes. The company enters into long-term infrastructure agreements with its clients, with some offering repeat projects.
  
• Does the company have a credible moat?
  No, since it operates in an industry where technical expertise and project execution are replicable by other established players.

Management

• Do any of the company's founders still hold at least a 5 per cent stake? Or do promoters hold over a 25 per cent stake in the company?
  Yes. Post the IPO, Transrail Lighting's promoters will hold a 71.1 per cent stake in the company.
  
• Do the top three managers have over 15 years of combined leadership at Transrail Lighting?
  Yes. Mr Digamber Bagde, Executive Chairman of Transrail Lighting, has been associated with the company since 2008.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. There is no information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. There is no information to suggest otherwise.
  
• Is Transrail Lighting free of promoter pledging of its shares?
  Yes. No shares have been pledged.

Financials

• Did the company generate a current and three-year average return on equity of over 15 per cent and a return on capital employed of over 18 per cent?
  Yes. The company reported a three-year average ROE and ROCE of 17.8 and 21.3 per cent, respectively, while in FY24, its ROE and ROCE were 26.1 and 27.8 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. The company reported positive cash flows during FY22-24.
  
• Is the company's net debt-to-equity ratio less than one?
  Yes. The company has a net debt-to-equity ratio of 0.3 times as of June 2024.
  
• Is Transrail Lighting free from reliance on huge working capital for day-to-day affairs?
  No. The company's business is working capital intensive.
  
• Can the company run its business without relying on external funding in the next three years?
  No. Since Transrail Lighting's business is working capital intensive, it will have to rely on external funding for scaling up its operations.
  
• Is Transrail Lighting free from meaningful contingent liabilities?
  No. As of the quarter ending June FY25, the company's contingent liabilities and commitments as a percentage of total equity were greater than 25 per cent.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock offers an operating earnings yield of 7.5 per cent on its enterprise value.
  
• Is the stock's price-to-earnings (P/E) ratio less than its peers' median level?
  Yes. It is valued at a P/E ratio of over 24.9 times compared to its peers' median of 61.4 times.
  
• Is the stock's price-to-book (P/B) value less than its peers' average level?
  Yes. It is valued at a P/B ratio of over 3.8 times compared to its peers' average of 4.9 times.

Assessing an IPO requires a careful evaluation of the company's strengths, weaknesses, and growth potential, just like we've outlined for Transrail Lighting. However, sustainable wealth creation can only be achieved by building a well-researched, balanced stock portfolio. This requires expert insights and actionable recommendations. Our Value Research Stock Advisor can help you with that. The service provides meticulously researched stock recommendations and ready-to-invest portfolios, updated every month to help you build a long-term stock portfolio.

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Disclaimer: This story is not a stock recommendation. Investors should do their due diligence before investing.

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