Tarapur Transformers Limited (NSEI:TARAPUR), a INR₹173.36M small-cap, is an electrical equipment company operating in an industry, which often track the broad economic cycle. During growth, businesses have excess cash, and are comfortable buying ancillary equipement. However, when economic conditions are challenging, businesses may try to repair equipment instead. Capital goods analysts are forecasting for the entire industry, a positive double-digit growth of 24.87% in the upcoming year . Today, I will analyse the industry outlook, as well as evaluate whether Tarapur Transformers is lagging or leading in the industry. View our latest analysis for Tarapur Transformers

What’s the catalyst for Tarapur Transformers’s sector growth?

The electrical equipment industry is relatively fragmented, with an exception of few dominant players with a large portion of sales. Operating structures involve high fixed costs, as well as fluctuating cost of raw materials used in manufacture of products, which impacts the companies’ earnings performance. In the previous year, the industry saw growth in the teens, beating the Indian market growth of 12.84%. Tarapur Transformers lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means Tarapur Transformers may be trading cheaper than its peers.

Is Tarapur Transformers and the sector relatively cheap?

The electrical equipment products sector’s PE is currently hovering around 30x, in-line with the Indian stock market PE of 29x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 8.29% on equities compared to the market’s 9.78%. Since Tarapur Transformers’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge Tarapur Transformers’s value is to assume the stock should be relatively in-line with its industry.

What this means for you:

Are you a shareholder? Tarapur Transformers recently delivered an industry-beating growth rate in earnings, which is a positive for shareholders. If you’re bullish on the stock and well-diversified by industry, you may decide to hold onto Tarapur Transformers as part of your portfolio. However, if you’re relatively concentrated in electrical equipment, you may want to value Tarapur Transformers based on its cash flows to determine if it is overpriced based on its current growth outlook.