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Salient features of the IPO:

* Quality Power Electrical Equipments Ltd. (QPEEL), a technology-driven Indian company serving global clients in critical energy transition equipment and power technologies, is coming up with an IPO to raise around Rs. 822.9 - 858.7cr, which opens on 14th Feb. and closes on 18th Feb. 2025. The price band is Rs. 401 - 425 per share.

* The IPO is a combination of fresh issue (Rs. 225cr) and OFS portion of (Rs. 597.9 - 633.7cr). From the fresh issue net proceeds, the company will be utilizing Rs. 117.0cr for payment of the purchase consideration for the acquisition of Mehru Electrical and Mechanical Engineers Pvt. Ltd. (Mehru); and Rs. 27.21cr for funding capital expenditure requirements of the company for purchase plant and machinery. Residual proceeds will be used for funding inorganic growth through unidentified acquisitions and other strategic initiatives and general corporate purposes.

* Consequently, post-IPO, the P&PG and public shareholders will have 73.91% and 26.09% stake in the company, respectively.

Key competitive strengths:

* Global energy transition and power technology player catering to diverse industry segment

* Diversified customer base of global businesses with long lasting relationships

* Comprehensive product portfolio in India and abroad with high trade barriers

* Demonstrated record of strategic acquisitions along with an enhanced order book contributing to growth

* Research and development capabilities to offer future ready solutions

* Management team with domain experience

Risk and concerns:

* General slowdown in the global economic activities

* Majority of the revenue is derived from international market

* Foreign currency exchange fluctuation risk

* Client revenue concentration risk

* Competition

Below are the key highlights of the company:

* The global transmission sector has experienced significant growth, expanding at a CAGR of 8% from USD 78,736mn in 2019 to USD 105,903mn in 2023 and is expected to grow at a CAGR of 6% from USD 112,290mn in CY24 to USD 143,467mn in CY28. This growth is driven by the rising global electricity demand and the increasing need to integrate renewable energy into main power grids. Transmission lines, which transport high-voltage electricity over long distances from power plants to local distribution networks, play a crucial role in the energy transition and advancements in power technologies worldwide.

* The global installation of High Voltage Direct Current (HVDC) and Flexible AC Transmission Systems (FACTS) systems are accelerating, driven by increasing renewable energy capacity, growing cross-regional electricity trade, and the rising demand for a more reliable power supply. Economic feasibility has further supported HVDC adoption for strengthening grid connections. The market has grown at a CAGR of 11%, from USD 10,162mn in FY19 to USD 13,217mn in FY23. With expanding renewable energy adoption and a backlog of HVDC and FACTS projects worldwide, the market is projected to grow at a remarkable CAGR of 75-80% by CY28.

* QPEEL, incorporated on September 20, 2001, is an Indian company specializing in high-voltage electrical equipment and power solutions. It serves global clients in critical energy transition technologies, offering products and services for power generation, transmission, distribution, and automation.

* The company is one of the few global manufacturers of essential high-voltage equipment used in High Voltage Direct Current (HVDC) and Flexible AC Transmission Systems (FACTS) networks. These systems play a vital role in integrating renewable energy into traditional power grids, supporting a smoother energy transition. As a technology-driven company, QPEEL plays a key role in electrical grid connectivity and energy transition, supporting the evolving power infrastructure.

* QPEEL has over two decades of experience in the energy transition space, providing a wide range of products essential for efficient power transmission and advanced power automation. The company's offerings include reactors, transformers, line traps, instrument transformers, capacitor banks, converters, harmonic filters, and reactive power compensation systems.

* QPEEL also provides grid interconnection solutions, featuring advanced technologies like STATCOM and Static Var Compensator (SVC) systems. With a presence in over 100 countries across six continents, the company serves industries such as automotive, oil & gas, cement, chemicals, renewables, railways, steel & metals, and power utilities.

* Its equipment and solutions are designed for emerging applications, including large-scale renewable energy projects. By supporting decarbonization, sustainability, and green energy initiatives, QPEEL's products play a crucial role in the global energy transition. The adoption of HVDC and STATCOM technologies is key to integrating renewable energy efficiently and ensuring grid stability.

* Since its inception, the company has been committed to delivering high-quality high-voltage electrical equipment and solutions for grid connectivity, energy transition, and related services. As of September 30, 2024, it had 143 customers, including major business conglomerates listed in the Fortune 500. These customers prioritize technology, scale, reliability, and quality, particularly for their energy projects. The company serves both domestic and international markets, reaching key regions such as Asia, the Middle East, North America, South America, Australia, and Europe.

* Over the years, its revenue has varied between domestic and international markets. Domestic sales contributed 21.61% of total revenue in FY22 (Rs. 39.47cr), 20.49% in FY23 (Rs. 51.88cr), 16.30% in FY24 (Rs. 48.98cr), and 22.63% as of September 30, 2024 (Rs. 35.24cr). Meanwhile, international sales have been the primary revenue driver, accounting for 74.27% in FY22 (Rs. 135.65cr), 76.93% in FY23 (Rs. 194.83cr), and 80.68% in FY24 (Rs. 242.51cr). As of September 30, 2024, international sales contributed 75.77% of total revenue, amounting to Rs. 117.99cr.

Key highlights of the company (Contd…):

* QPEEL has a strong track record of strategic acquisitions that enhance its capabilities, expand its asset base, and improve its customer reach and product offerings. These acquisitions have strengthened its position in the energy transmission sector, allowing the company to provide more comprehensive solutions to its clients. The company believes it has successfully integrated these acquired businesses and assets into its operations, improving its role in the energy transition value chain. A key recent acquisition was by its subsidiary, Quality Power Engineering Projects Private Limited, which acquired a 15.45% stake in Nebeskie Labs Private Limited, a Chennai-based company.

* Additionally, previous acquisitions of S&S Transformers & Accessories Private Limited and Endoks have played a significant role in diversifying QPEEL’s operations. Nebeskie’s expertise in real-time monitoring and data analytics enhances QPEEL’s Industry 4.0 solutions. Endoks contributes to energy transformation and sustainability through its innovative products. Meanwhile, S&S Transformers has expanded QPEEL’s product portfolio by adding cast resin transformers and medium voltage instrument transformers. These acquisitions align with QPEEL’s vision for growth and innovation, positioning the company as a leader in the evolving energy sector.

* QPEEL has signed a Share Purchase Agreement (SPA) to acquire a 51% stake in Mehru from its promoters. Mehru specializes in manufacturing high-voltage and extra-high-voltage instrument transformers up to 400kV. It operates eight NABL-accredited testing labs for routine, raw material, and high-voltage partial discharge tests.

* With clients in 53 countries as of September 30, 2024, Mehru’s acquisition strengthens the company’s market presence, boosts revenue potential, and enhances operational efficiency. It also expands its product range, creating cross-selling opportunities and driving business growth. Additionally, the new manufacturing facilities will streamline production, improve supply chain efficiency, and enhance the company’s ability to meet market demands.

* QPEEL currently operates seven facilities across India and Turkey. In India, the company has manufacturing units in Sangli, Maharashtra, and Aluva, Kerala, while its Turkish facility is located in Ankara. The Sangli plants focus on producing HVDC components, reactors, and transmitters, catering to the growing needs of the energy transition and power technology sectors. Meanwhile, the Aluva facility specializes in manufacturing coils, enhancing the company's product offerings and operational strength.

* To meet the increasing demand for its high-voltage electrical equipment, both in India and globally, QPEEL plans to set up a new manufacturing facility in Sangli, Maharashtra. The company's Board approved this expansion through a resolution dated April 3, 2023. This new facility will play a key role in strengthening QPEEL’s production capabilities and market presence.

* In the Sangli unit, the capacity utilization for coil products has steadily increased over the years. It was 51% in FY22, rose to 71% in FY23, and further improved to 85% in FY24. However, as of September 30, 2024, it stood at 65%. For transformers, including instrument transformers, utilization was lower, starting at 21% in FY22, increasing to 28% in FY23, but dropping to 6% in FY24. As of September 30, 2024, it had slightly improved to 8%. In the Aluva unit, Kerala, the coil production utilization reached full capacity (100%) in FY24. However, as of September 30, 2024, it had decreased to 41%.

Peer comparison and valuation:

QPEEL is a technology-driven company specializing in power products and solutions across the power generation, transmission, distribution, and automation sectors. It provides high-voltage electrical equipment and advanced solutions for grid connectivity and energy transition. When comparing the company's margins on a restated and proforma basis for FY24 and for H1FY25, there is a noticeable decline in both proforma’s EBITDA and PAT margins. Following the completion of Mehru’s stake acquisition, the company is expected to see growth in both revenue and profitability. However, margins may come under pressure, as evidenced by the first half of the year’s performance.

At the upper price band, QPEEL is demanding a EV/S multiple of 5.9x, which is at discount to peer average. Considering its over two decades of experience in the energy transition sector and wide range of products & solutions, we believe the company is well positioned to benefit from the rising demand of energy transition equipments, which would assist in generating a profitable business growth. Thus, we assign a “SUBSCRIBE” rating for the issue.

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