QUALITY POWER ELECTRICAL EQUIPMENTS : IPO , 5/10

QUESTION 1 : WHAT IS THE CURRENT BUSINESS OF THE COMPNAY ? Quality Power Electrical Equipment's Limited is an Indian company that provides high voltage electrical equipment and solutions for electrical grid connectivity and energy transition.  The company serves global clients and specializes in providing power products and solutions across power generation, transmission, distribution, and automation sectors. Quality Power also offers equipment and solutions for large-scale renewables.

The company's product portfolio comprises two main categories:

Power Products: These include reactors, line traps, transformers, and instrument transformers.

Power Quality Systems: These include capacitor banks, harmonic filters, SVC Systems, and reactive power compensation systems.

Quality Power also provides other products and services, such as composites materials for electrical applications, power conditioning, and telecommunication products.  The company's products are used in a variety of industries, including:

Manufacturing and Engineering (metals, cement, chemicals, paper)

Utility (HVDC, FACTS, renewables, substations)

Power Generation (thermal, nuclear, solar, wind, hydel)

Mobility (railways, EV)

Oil & Gas

Quality Power has a global presence, with customers in over 100 countries. The company derives the majority of its revenue from international operations. Quality Power is committed to research and development and has a team of experienced engineers who are constantly working to develop new and innovative products. The company is also focused on expanding its operations and increasing its capacity. ================================== QUESTION 2 : WHAT IS THE PURPOSE OF THE FUND RASING VIA IPO ?

Quality Power Electrical Equipments Limited is raising funds via an IPO for three primary objectives:

Payment for the acquisition of Mehru Electrical and Mechanical Engineers Private Limited: The company plans to utilize ₹ 1,170.00 million from the net proceeds to complete the acquisition of Mehru Electrical and Mechanical Engineers Private Limited. This acquisition will expand Quality Power's product portfolio and enable product bundling, ultimately leading to increased margins and customer value.

Funding capital expenditure for new plant and machinery: ₹ 267.79 million will be allocated for the purchase of new plant and machinery to increase production capacity.

Funding inorganic growth through acquisitions and other strategic initiatives, and general corporate purposes: The company will allocate a portion of the net proceeds, up to 35% of the gross proceeds, for funding future acquisitions, strategic initiatives, and general corporate purposes. The specific amount will be finalized later and updated in the prospectus.

In addition to the financial objectives listed above, the IPO will also provide Quality Power with the benefits of listing on the Stock Exchanges, including enhancing its brand name and creating a public market for its shares in India. ========================================= QUESTION 3 : MANAGEMENT AND THEIR BACKGROUND : the main management team of Quality Power Electrical Equipments Limited is composed of:

Thalavaidurai Pandyan: Chairman and Managing Director. He holds a diploma in electrical engineering in industrial electronics from the State Board of Technical Education and Training, Department of Technical Education, Tamil Nadu. He has been with the company since its incorporation and possesses a total of 39 years of experience in the industry, including previous roles at Hind Rectifiers Limited as Chief Design Engineer and PS Electricals (P) Limited as Works Manager.

Bharanidharan Pandyan: Joint Managing and Whole-time Director. He has been with the company since 2002 and has 22 years of work experience. He holds a postgraduate program in management specializing in family-managed business from the S.P. Jain Institute of Management and Research, Mumbai.

Chitra Pandyan: Whole-time Director. She has 22 years of experience with the company since its incorporation. She completed her education up to matriculation.

Mahesh Vitthal Saralaya: Whole-Time Director. He has been associated with the company since 2006, initially joining as a manager in marketing. He holds a bachelor's degree in electrical engineering from Manipal Institute of Technology and is a chartered engineer registered with the Institution of Engineers (India). His total work experience is 18 years.

Family Members in Management:

there are family members within the management team:

Thalavaidurai Pandyan and Chitra Pandyan are spouses.

Bharanidharan Pandyan is the son of Thalavaidurai and Chitra Pandyan.

Therefore, the company's key management roles are primarily held by a family group, combining their expertise and experience to lead the business.

================================================= QUESTION 4: LEGAL ISSUES AGAINST COMPNAY AND MANAGMENT TEAM : Quality Power Electrical Equipments Limited, its subsidiaries, promoters, and directors have some legal issues disclosed in the sources. The company follows a Materiality Policy adopted by the Board of Directors, which defines the threshold for disclosing litigation. This policy considers a litigation as 'material' if:

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The claim amount exceeds 2% of turnover, 2% of net worth, or 5% of the average absolute profit/loss for the last three fiscal years, which is ₹ 22.93 million in this case.

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Even if the monetary value is below the threshold, the outcome could significantly impact the company's financials, business, or reputation.

●

Similar proceedings with a cumulative amount exceeding the threshold.

Here are the specific details of outstanding litigations:

Litigation Against the Company

M/s Eastern Metec Private Limited filed a money suit in 2016 against Quality Power and Endoks Engineering Systems Limited for ₹ 127.50 million. The claim involves alleged delays and failures in executing a commissioning job. Eastern Metec is seeking costs, damages, and compensation for losses, along with injunctive relief and the appointment of a receiver. While the E-courts services website indicates disposal, no formal order has been passed by the court as of the Draft Red Herring Prospectus date.

Litigation Against a Director

Phonographic Performance Limited (PPL) filed a suit in 2024 against Sadayandi Ramesh (a Quality Power Director), Pothys Private Limited, and others in the Bombay High Court. The allegation is unauthorized use of copyrighted music without a proper PPL license. As of the Draft Red Herring Prospectus date, Sadayandi Ramesh has not received any notice or documents related to this case, and the information is based solely on the E-courts services website.

Other Disclosures

The company acknowledges delays in remitting statutory dues, including employee provident fund contributions in the past. While these issues have been addressed, Quality Power cannot guarantee that future delays won't occur, which could result in penalties or legal action.

There are certain historical corporate and secretarial records that the company is unable to locate. Though no regulatory action has been initiated, Quality Power cannot assure that these records will become available in the future or that no regulatory proceedings will be initiated due to this issue.

No other outstanding criminal, material civil, or regulatory actions against the company, its subsidiaries, promoters, or directors are mentioned in the provided sources. ===================================== QUESTION 5 : COMPNAY MARKET SHARE DOMESTIC AND GLOBAL AND AFTER IPO EXPECTED GROWTH : The following table presents information about the domestic and global market demand, Quality Power's contribution to these markets, and expected growth after the IPO:

Market	Market Size (USD Mn)	Quality Power's Contribution	Expected Growth Post-IPO
Domestic (India)
Power Quality Products (2023)	798	106 (13.3% of SVC market)	9% CAGR (2023-2028)
Power Quality Products (2028F)	1,226
STATCOM (2023)	45		35-40% CAGR
STATCOM (2028F)	103
HVDC and FACTS (2023)	743		60-65% CAGR (2024-2028)
HVDC and FACTS (2028F)	9,196
High Voltage Products (2023)	3,559		8% CAGR (2023-2028)
High Voltage Products (2028F)	5,379
Global
HVDC and FACTS (2024F)	15,173		15% CAGR (2024-2028)
HVDC and FACTS (2028F)	26,354
STATCOM (2024F)	792		12% CAGR (2024-2028)
STATCOM (2028F)	1,246
Power Quality Products (2023)	11,549		8% CAGR (2023-2028)
Power Quality Products (2028F)	16,718
Power Transmission and Distribution (2024)	112,290		6% CAGR (2024-2028)
Power Transmission and Distribution (2028)	143,467

Key Insights:

• The sources provide specific market size figures for various product categories within the power sector both domestically and globally.

• Quality Power's contribution to the domestic market is only explicitly mentioned for the SVC Systems segment within the Power Quality Products category in 2023, where they hold a 13.3% market share.

• The company expects significant growth in the coming years, especially in the HVDC and FACTS market segment, both domestically and globally.

• The sources do not provide detailed figures on Quality Power's current contribution to the global market for its various product categories.

Post-IPO Growth Expectations:

• The company intends to utilize the IPO funds to enhance its production capacity and expand its business through acquisitions and strategic initiatives.

• This expansion is expected to contribute to the company's growth in both the domestic and global markets.

Note:

• The market size figures are derived from the sources provided.

• The expected growth percentages are also based on the sources and represent the projected Compound Annual Growth Rate (CAGR) for the respective periods.

• The "F" next to the year indicates a forecasted figure.

This information should provide a clear overview of the market demand and Quality Power's position within it, as well as its expected growth trajectory following the IPO.

==================================== QUESTION 6 : PRODUCT WISE PROFIT CONTRIBUTOR : The sources provide a breakdown of Quality Power Electrical Equipments Limited's revenue by product category but do not specify the profitability of each product. However, the sources do highlight the following points that could give some insight into the relative contribution of product categories to profitability:

Revenue Contribution:

Product Category	Fiscal 2024 (%)	Fiscal 2023 (%)	Fiscal 2022 (%)
Power Products	37.37	31.04	29.09
Power Quality Systems	50.59	59.15	53.62
Others	2.74	2.39	3.55

• Power Products: This category includes reactors, line traps, transformers, and instrument transformers.

• Power Quality Systems: This category includes harmonic filters, Static Var Compensators (SVC), and Static Synchronous Compensators (STATCOM).

Key Points:

• Shift in Production Focus: In Fiscal 2024, Quality Power shifted its focus towards meeting larger orders for coil products, which led to a decline in capacity utilization for transformers. This suggests that coil products, a part of the Power Products category, might have contributed significantly to profitability in Fiscal 2024.

• High-Value Products: The sources mention that Quality Power specializes in manufacturing special-purpose transformers, which are typically high-value products. This implies that despite lower capacity utilization, transformers could still contribute significantly to overall profitability.

• Growing Demand: The Power Quality Systems market, both domestically and globally, is experiencing strong growth, suggesting that this category could be a significant driver of profitability for the company.

Conclusion:

While precise product-wise profitability figures are not available in the sources, the information provided indicates that:

• Power Quality Systems and specific products within the Power Products category, like coil products and special-purpose transformers, are likely to be major contributors to Quality Power's overall profitability.

• Further analysis of the company's financial statements and market trends would be required to determine the exact profit margins for each product category.

It's important to remember that profitability is influenced by various factors, including production costs, pricing strategies, market demand, and competition. ============================== QUESTION 7 : THEIR CLIENTAL LIST AND THEIR BUSINESS CONTRIBUTION :

The sources provide limited information regarding Quality Power Electrical Equipments Limited's top 5 clients. The Draft Red Herring Prospectus names only 3 of the top 10 customers: GE T&D India Limited, Hitachi Energy Limited, and Kalpataru Projects International Limited (formerly Kalpataru Power Transmission Limited). The document mentions that the remaining customer names are withheld due to confidentiality reasons and lack of consent for disclosure.

The available information regarding customer concentration is as follows:

Particulars	Fiscal 2024	Fiscal 2023	Fiscal 2022
Top 3 Customers (%)	27.15	24.29	30.83
Top 5 Customers (%)	39.62	35.39	37.99
Top 10 Customers (%)	58.17	55.69	52.66

Key Takeaways:

• Significant Reliance on Top Clients: Quality Power derives a substantial portion of its revenue from its top 10 customers, indicating a concentration risk.

• Lack of Specific Client Data: The sources do not disclose the specific contribution of each of the top 5 clients in percentage terms year-wise.

• Potential Impact: The loss of any major customer could materially impact the company's business, results of operations, and financial condition.

Therefore, while the sources confirm a heavy reliance on a limited number of clients, a detailed breakdown of the top 5 clients and their individual contributions is not available. ================================ QUESTION 8 : THEIR BUSINESS ARE LONG TERM OR PROJECT BASES : Quality Power Electrical Equipments Limited does not engage in long-term business contracts with their clients. Their business operates on a purchase order basis. This means that customers place individual orders for specific products, rather than entering into overarching agreements for ongoing supply.

The sources highlight that this reliance on purchase orders makes the company significantly dependent on maintaining positive relationships with their customers to secure repeat business. It also creates a potential risk as purchase orders can be canceled unilaterally, which could impact the company's revenue and operations. =============================== QUESTION 9 : COMPNAY FINANICAL HEALTH :

Here is a summary of the Profit and Loss Statement, Balance Sheet, and Cash Flow Statement of Quality Power Electrical Equipments Limited, based on the provided excerpts from their Draft Red Herring Prospectus:

Profit and Loss Statement

Particulars (₹ in million)	Fiscal 2024	Fiscal 2023	Fiscal 2022
Revenue from Operations	3,005.97	2,532.50	1,826.38
Other Income	308.04	203.01	290.95
Total Income	3,314.01	2,735.51	2,117.33
Total Expenses	2,681.46	2,260.08	1,627.41
Profit Before Tax	632.55	476.43	489.94
Profit After Tax	554.74	398.92	422.27

Balance Sheet

Particulars (₹ in million)	As at March 31, 2024	As at March 31, 2023	As at March 31, 2022
Non-Current Assets	710.42	401.36	336.58
Current Assets	2,878.42	2,720.03	2,191.98
Total Assets	3,588.84	3,122.39	2,528.56
Equity & Liabilities	1,903.25	1,756.57	1,602.93
Non-Current Liabilities	435.83	116.44	15.27
Current Liabilities	1,249.76	1,249.38	910.36
Total Equity & Liabilities	3,588.84	3,122.39	2,528.56

Cash Flow Statement

Particulars (₹ in million)	Fiscal 2024	Fiscal 2023	Fiscal 2022
Cash Flow from Operations	515.16	443.05	85.35
Cash Flow from Investing	-385.93	-309.98	205.76
Cash Flow from Financing	253.80	-35.76	16.24
Net Increase/(Decrease) in Cash & Cash Equivalents	-38.80	-142.62	-29.61
Cash & Cash Equivalents at Beginning of Year	511.89	654.51	684.12
Cash & Cash Equivalents at End of Year	473.09	511.89	654.51

Company Health Analysis

• Strong Revenue Growth: The company has shown consistent revenue growth over the past three years, with a significant jump in Fiscal 2024, indicating strong demand for their products.

• Healthy Profitability: Profit after tax has also increased consistently, reflecting efficient operations and a strong market position.

• Positive Cash Flow from Operations: The company generates positive cash flow from its core operations, which is a good indicator of financial health and sustainability.

• Investments in Growth: The negative cash flow from investing activities reflects the company's focus on expanding its production capacity and capabilities for future growth.

• Dependence on Key Clients: A significant portion of revenue comes from a small number of clients, posing a potential concentration risk.

• Increased Debt:  The company has taken on more debt in Fiscal 2024 to fund its growth initiatives. This could increase financial risk if not managed effectively.

• IPO Proceeds for Expansion: The company aims to utilize IPO proceeds for further capacity expansion and potential acquisitions, indicating a proactive growth strategy.

• Favorable Industry Outlook:  The power transmission and distribution market is expected to grow steadily in the coming years, presenting a favorable environment for Quality Power.

• Competition: The company faces competition from both domestic and international players, requiring continuous innovation and strategic positioning to maintain its market share.

Overall, Quality Power Electrical Equipments Limited exhibits strong financial performance and positive growth prospects. However, investors should carefully consider the potential risks associated with client concentration and increased debt levels. ================================== QUESTION 10 : RED FLAGES : The sources do raise a few points that could be considered red flags warranting further investigation into the financial statements of Quality Power Electrical Equipments Limited:

• Untraceable Corporate Records: The company acknowledges that certain historical corporate and secretarial records are not traceable. This raises concerns about the accuracy and completeness of the information used to prepare the financial statements. The lack of proper record-keeping could potentially mask irregularities or manipulations.

• Instances of Delays in Statutory Payments: The company has a history of delays in remitting statutory dues, including employee provident fund contributions. While these issues have been addressed, the past behavior raises questions about the company's financial management practices and its commitment to compliance. Persistent delays in statutory payments could point towards potential financial distress.

• Reliance on Third-Party Payments: The company admits that it sometimes receives payments from third parties on behalf of its customers without conducting thorough due diligence on those third parties. This practice creates a risk of money laundering or other financial improprieties, as the source and legitimacy of the funds cannot be adequately verified.

• Aggressive Revenue Recognition: The company shifted its production focus towards coil products in Fiscal 2024 to meet larger orders, leading to a decline in capacity utilization for transformers. This sudden change, coupled with the significant revenue growth reported in Fiscal 2024, warrants scrutiny to ensure that revenue recognition practices are in line with accounting standards and that there is no premature or inflated revenue booking.

• Limited Disclosure of Related Party Transactions:  While the Draft Red Herring Prospectus mentions related party transactions, it does not provide a detailed breakdown of all such transactions. This lack of transparency could conceal potential conflicts of interest or transactions that are not conducted at arm's length.

These red flags, along with the company's heavy reliance on a small number of key clients and its increased debt levels, highlight the need for potential investors to exercise caution and conduct thorough due diligence before making any investment decisions.  It's crucial to consult with financial experts and scrutinize the company's financial statements in detail to assess the validity of these concerns. The sources do not specify which company placed the larger orders for coil products that led to Quality Power Electrical Equipments Limited shifting its production focus in Fiscal 2024. Furthermore, there is no information provided about the value of these orders or the percentage of sales received as cash flow from operations.

The Draft Red Herring Prospectus only mentions:

• A general increase in demand for coil products, leading to higher capacity utilization for this product category.

• The company's decision to prioritize larger orders for coil products, which resulted in a decline in capacity utilization for transformers from 28% in Fiscal 2023 to 6% in Fiscal 2024.

It's important to note that this lack of transparency regarding specific customer orders and their financial impact limits a comprehensive analysis of the company's operations and potential risks. The provided financial statements raise some concerns regarding the classification of certain items in the Cash Flow Statement of Quality Power Electrical Equipments Limited. These classifications warrant further investigation to determine whether they are appropriate or potentially aimed at manipulating the reported cash flow from operations.

Here's a breakdown of the questionable items and their potential impact:

Item	Fiscal 2024 (₹ million)	Impact on Cash from Operations	Potential Red Flag
Interest Income	209.09	Increased by 38.5%	Interest income is typically classified under investing activities, not operating activities. Including it under operations significantly inflates the reported cash flow from the core business.
Forex - PPE, Intangible Assets	-3.59	Decreased by 0.7%	This item relates to foreign exchange gains or losses on the acquisition of property, plant, and equipment (PPE) and intangible assets. Its classification under investing activities is generally appropriate.

CASHFLOW WRONG ENTRY OF INCOME IN CFO :

• Interest Income: The inclusion of ₹209.09 million as interest income under operating activities is a significant red flag. Interest income generally arises from investments and should be categorized under investing activities. By placing it under operating activities, the company is artificially boosting its cash flow from operations, creating a misleading impression of the profitability and sustainability of its core business.

• Impact: Shifting interest income to operating activities inflated the reported cash flow from operations by 38.5% in Fiscal 2024. This manipulation makes the company appear more financially sound than it might actually be.

Additional Points to Consider:

• The company has a history of delays in statutory payments and untraceable corporate records, adding to the concerns about potential financial statement manipulation.

• The lack of transparency regarding the large coil product orders and the involvement of third-party payments further emphasizes the need for a thorough audit and due diligence.

Recommendation:

It is crucial for potential investors to exercise extreme caution and seek expert financial advice to thoroughly scrutinize Quality Power Electrical Equipments Limited's financial statements. The questionable classification of interest income in the Cash Flow Statement, coupled with other red flags identified, raises serious concerns about the accuracy and reliability of the company's financial reporting.

CFO Adjustment for FY 2024: The original CFO for FY 2024 was ₹515.16 million. After removing the incorrectly classified interest income of ₹209.09 million, the adjusted CFO becomes ₹306.07 million.

Analysis of Corrected Ratios:

FY 2022 and FY 2023: The PAT to CFO ratios for these years remain unchanged from the previous analysis as no adjustments were made. Both ratios are significantly below the 70% benchmark, indicating potential problems in converting profits into cash.

FY 2024: With the adjusted CFO, the PAT to CFO ratio for FY 2024 now becomes 181.26%. This exceptionally high ratio is also a cause for concern. While it might seem counterintuitive, a ratio significantly exceeding 100% can indicate aggressive accounting practices. It suggests that the company may be recognizing revenue before cash is actually collected, potentially inflating reported profits.

Key Takeaways:

Removing the misclassified interest income exposes a consistently poor trend in Quality Power's ability to generate cash flow from its operations across all three fiscal years.

The significantly high PAT to CFO ratio in 2024 after the adjustment further heightens the suspicion of earnings manipulation.

The corrected analysis reinforces the need for extreme caution and a comprehensive audit by independent financial experts before considering any investment in Quality Power Electrical Equipments Limited. ========================================= QUESTION 11 : BORROWINGS LIST AND CONDITION : Quality Power Electrical Equipments Limited's borrowings as of August 31, 2024, drawing from the provided source:

Total Borrowings: ₹993.12 million

Type of Borrowing	Lender	Sanctioned Amount (₹ million)	Outstanding Amount (₹ million)	Interest Rate
Secured Short-Term Borrowings
Cash Credit A/cs	Axis Bank	200.00	108.60	8.5% p.a.
Export Packing Credit A/c	Axis Bank	100.00	61.70	8.5% p.a.
Ziraat Bank A/c	Ziraat Bankası	92.43	34.94	8.5% p.a.
Subtotal (Secured Short-Term)	-	392.43	205.24	-
Unsecured
Letter of Credit (Inland/Import)	-	1,682.90	787.88	Not specified
Subtotal (Unsecured)	-	1,682.90	787.88	-
Total Borrowings	-	2,075.33	993.12	-

Notes:

• The table only includes outstanding borrowings as of August 31, 2024. It does not provide a complete historical breakdown of borrowings.

• Detailed information on the long-term borrowings, such as specific loan amounts, maturity dates, and other terms, is not available in the provided source.

• The interest rate for unsecured borrowings (Letter of Credit) is not specified in the source.

• "LER" (Loan Equivalent Risk) and "Bank Guarantee" are mentioned under unsecured borrowings but with no outstanding amounts as of August 31, 2024.

• The source mentions that the company has obtained necessary consents from lenders for activities related to its initial public offering.

Key Takeaways:

• The majority of Quality Power's borrowings (approximately 79%) are unsecured, specifically Letters of Credit. This raises concerns about the company's financial risk profile.

• The lack of detailed information about long-term borrowings limits a comprehensive understanding of the company's debt obligations.

Recommendation:

• Review the company's full financial statements and related notes to get a complete picture of its borrowings, including long-term debt details and other relevant terms and conditions.

• Consider the overall financial health of the company and potential risks associated with its debt profile when making any investment decisions.

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