Sowmya Sundar

Foray into higher range engines and gensets is a positive strategy.

MR YASH BIRLA, Chairman.

Investors with a high appetite for risk can consider the seasoned offer of Birla Power. The offer is priced between Rs 40 and Rs 48. The stock now trades at Rs 50. The key risk is that the revenues from Birla Power's portfolio of products may continue to be volatile due to the fluid demand situation. This may suppress the earnings even if the new products do well.

Valuations

At Rs 48, the Birla Power issue is valued at 15 times its trailing 12-month post-offer per share earnings. Its close competitor, Greaves Cotton, which offers a wide range of engines and has a steady revenue profile, trades at 20 times the trailing 12-month per share earnings.

We think the Birla Power offer to be a tad expensive, considering that the revenues and profitability from its core businesses have been extremely volatile. Its agency business too has been highly uncertain. The issue will also lead to substantial equity dilution (100 per cent), which may have a negative impact on the company's net worth if it faces any hiccups in executing its plans.

Birla Power plans to use the funds raised to upgrade to products that are growing at a much better pace than the existing ones. Medium-range engines find application in construction, industrial machinery and automobiles. Higher range gensets are in demand from the telecom sector, big offices and shopping complexes.

A broader product range and a presence in the fast-growing medium-range segment could help the company mitigate the tough business environment in the existing product range.

Competition

At the higher end of the product range, Birla Power will face competition from Cummins and Kirloskar Oil Engines. The competition would be more on quality, services provided and the ability to keep up with emission norms rather than price. Gaining a foothold in the higher range segment will be a challenge. However, the expanding market for these products provides scope for a new player such as Birla Power.

Birla plans to introduce LPG-based gensets, yet another promising market. Moreover, a presence in the LPG segment will provide a comprehensive product portfolio of gensets across fuels such as diesel, kerosene and gas. This would also enable it cater to rural and urban users, whose fuel preferences differ.

Recently, the company set up a facility to manufacture inverters instead of importing it for sale. Inverters are used in the household segment and small offices instead of gensets. The decision to make them in-house could improve margins. This allows the company to showcase a broad range of products and gives it the advantage of retaining the genset customers who want to convert to inverters.

Small engine segment

The existing range of Birla Power's gensets and engines finds applications in small offices, household segment and agricultural machinery used by small landowners. This segment is shrinking and is hugely competitive and price-sensitive. The segment faces competition from Chinese products and alternative products such as inverters.

Birla Power's foray into the new product segment could be a good move but lack of consistency in its existing businesses is a key risk. Resurgence in rural income aided by the Government's rural thrust could, however, lead to higher offtake for Birla Power's engine range, where it has a 35 per cent market share.

Issue details: The company plans to issue 1.2 crore shares. It is managed by Keynote Corporate. The issue closes on March 29.

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