TD Power Systems Q2 FY26: Robust Growth Continues, But Valuation Raises Concerns

However, beneath the impressive growth numbers lies a critical investment dilemma. The stock currently trades at a P/E ratio of 51 times trailing twelve-month earnings, placing it at a significant premium to the industry average of 35 times. This "Very Expensive" valuation, as categorised by fundamental analysis, raises important questions about the sustainability of returns from current levels, particularly for fresh investors considering an entry point.

The September 2025 quarter marked the company's seventh consecutive quarter of robust year-on-year profit growth, demonstrating the strength of TD Power Systems' operational execution. Revenue growth has been particularly impressive, with net sales climbing 47.65% year-on-year to ₹452.47 crores, whilst maintaining healthy operating margins above 18%. The sequential momentum has been equally strong, with net profit advancing 20.21% quarter-on-quarter from ₹50.07 crores in Q1 FY26.

Financial Performance: Accelerating Growth with Stable Profitability

TD Power Systems' Q2 FY26 financial performance reflects a company firing on all cylinders. Net sales of ₹452.47 crores represent a remarkable acceleration from the previous quarter's ₹371.90 crores, marking a 21.66% quarter-on-quarter expansion. On a year-on-year basis, the growth trajectory appears even more impressive at 47.65%, significantly outpacing the heavy electrical equipment industry's anaemic -0.07% return over the same period.

The company's profitability metrics have remained resilient despite the rapid top-line expansion. Operating profit before depreciation, interest, and tax (excluding other income) stood at ₹82.62 crores in Q2 FY26, translating to an operating margin of 18.26%. Whilst this represents a marginal 25 basis points contraction from the previous quarter's 18.51%, it marks an improvement of 11 basis points year-on-year, suggesting that the company has successfully managed cost pressures whilst scaling operations.

Net profit margin for Q2 FY26 came in at 13.30%, marginally lower than the 13.46% recorded in Q1 FY26 but broadly in line with the company's recent performance. The tax rate of 26.44% remained stable and within the normalised range, indicating no unusual tax-related distortions in reported earnings. Employee costs rose to ₹40.99 crores from ₹36.83 crores quarter-on-quarter, reflecting the company's continued investment in human capital to support its growth ambitions.

The quality of earnings remains robust, with other income contributing ₹5.09 crores in Q2 FY26, down from ₹10.74 crores in the year-ago quarter. This normalisation of other income ensures that the company's profit growth is driven primarily by core operational performance rather than non-recurring items. Interest costs remained negligible at ₹0.68 crores, reflecting the company's virtually debt-free balance sheet—a significant competitive advantage in capital-intensive manufacturing.

Operational Excellence: Capital Efficiency Reaches New Heights

TD Power Systems' operational metrics paint the picture of a company that has mastered the art of capital efficiency. The company's return on equity (ROE) has climbed to an impressive 21.66% in the latest period, substantially higher than the five-year average of 16.65%. This elevated ROE demonstrates management's ability to generate superior returns on shareholder capital—a hallmark of quality businesses that deserve premium valuations.

Return on capital employed (ROCE) tells an even more compelling story, with the latest figure standing at 32.03%, significantly above the five-year average of 25.43%. This remarkable capital efficiency is particularly noteworthy in the heavy electrical equipment sector, where capital intensity can often constrain returns. The company's ability to generate such high returns whilst simultaneously funding aggressive growth speaks to the strength of its competitive positioning and operational execution.

The balance sheet strength provides a solid foundation for sustained growth. With shareholder funds of ₹860.30 crores as of March 2025 and zero long-term debt, TD Power Systems operates with one of the cleanest balance sheets in its peer group. The company's net debt-to-equity ratio of -0.16 indicates it is actually a net cash company, providing significant financial flexibility for future investments, acquisitions, or shareholder returns.

Working capital management has required increased attention, with current assets rising to ₹1,112.32 crores in FY25 from ₹820.96 crores in FY24. This expansion reflects the company's rapid revenue growth and the need to maintain higher inventory and receivables to support customer demand. The cash flow statement for FY25 shows that changes in working capital consumed ₹145.00 crores, significantly higher than the ₹51.00 crores in FY24, representing the primary challenge in an otherwise strong operational performance.

Industry Context: Outperforming a Sluggish Sector

TD Power Systems' stellar performance stands in stark contrast to the broader heavy electrical equipment sector, which has struggled to generate meaningful returns for investors. Over the past year, whilst TD Power Systems delivered an 88.86% return, the heavy electrical equipment sector posted a marginal decline of -0.07%, resulting in an alpha of 88.93 percentage points—a testament to the company's superior execution and market positioning.

The company's outperformance extends across multiple timeframes. Over three years, TD Power Systems has generated a remarkable 417.64% return compared to the Sensex's 39.16%, whilst the five-year return of 2,531.52% places it amongst the top wealth creators in the Indian equity market. This consistent outperformance reflects not just cyclical tailwinds but structural advantages in the company's business model and market positioning.

The heavy electrical equipment sector faces several headwinds, including intense competition, pricing pressures, and cyclical demand patterns tied to capital expenditure cycles. However, TD Power Systems appears to have carved out a defensible niche, with its focus on AC generators and electric motors for various applications providing diversification across end-user industries. The company's ability to maintain operating margins above 18% whilst growing revenues rapidly suggests it possesses pricing power—a rare attribute in the manufacturing sector.

Peer Comparison: Premium Valuation with Mid-Tier Returns

When positioned against its peer group, TD Power Systems commands one of the highest valuation multiples whilst delivering mid-tier return on equity. The company's P/E ratio of 50.74 times places it at the higher end of the peer spectrum, exceeded only by Schneider Electric at 66.63 times and Thermax at 56.10 times. This premium valuation reflects market expectations of sustained high growth, but also raises questions about the margin of safety available to investors at current levels.

The price-to-book value ratio of 10.99 times is similarly elevated, suggesting the market is pricing in substantial future value creation beyond the company's current asset base. For context, Triveni Turbine trades at 11.83 times book value with a superior ROE of 22.31%, whilst Thermax commands just 6.59 times book despite comparable growth prospects. This valuation gap suggests TD Power Systems may be priced for perfection, with limited room for execution missteps.

TD Power Systems' ROE of 16.65% positions it in the middle of the peer group—superior to Thermax's 11.85% and Suzlon Energy's 14.45%, but well below Schneider Electric's exceptional 73.96% and Triveni Turbine's 22.31%. This ROE profile, whilst healthy in absolute terms, does not immediately justify the premium valuation multiple relative to peers. The company's competitive advantage appears to stem more from its growth trajectory and balance sheet strength than from superior capital efficiency.

The dividend yield of 0.24% is amongst the lowest in the peer group, with the company retaining the bulk of its earnings for reinvestment. This strategy makes sense given the high-growth phase the company is navigating, but it does mean that investors are entirely dependent on capital appreciation rather than income generation. The dividend payout ratio of 14.52% indicates management's preference for funding growth organically rather than returning cash to shareholders.

Valuation Analysis: Expensive by Any Measure

TD Power Systems' current valuation metrics flash warning signals across multiple parameters. The P/E ratio of 51 times trailing earnings represents a 45% premium to the industry average of 35 times, placing the stock firmly in "Very Expensive" territory. This valuation grade has persisted since March 2025, with brief periods of respite when the stock dipped to merely "Expensive" levels.

The PEG ratio of 0.95, whilst below the concerning threshold of 1.0, offers limited comfort. This metric, which adjusts the P/E ratio for growth, suggests the valuation is broadly in line with the company's earnings growth trajectory. However, this calculation assumes that the current growth rate of approximately 50% year-on-year is sustainable over the medium term—a heroic assumption for any manufacturing business operating in a competitive sector.

Enterprise value multiples paint a similar picture of stretched valuations. The EV/EBITDA ratio of 37.41 times and EV/EBIT ratio of 40.39 times are substantially elevated, reflecting not just high equity valuations but also the company's net cash position, which reduces enterprise value relative to market capitalisation. The EV/Sales ratio of 6.83 times is particularly noteworthy in a manufacturing context, where such multiples are typically reserved for high-margin technology or pharmaceutical businesses.

The stock's distance from its 52-week high of ₹850.05 provides some perspective on recent price action. Currently trading 20.44% below that peak, the shares have consolidated after a spectacular run that saw them more than double from the 52-week low of ₹292.85. This consolidation phase, combined with continued earnings growth, has marginally improved the valuation picture, but the stock remains expensive by historical standards and relative to peers.

Shareholding Pattern: Diverging Institutional Sentiment

The shareholding pattern reveals intriguing shifts in institutional sentiment towards TD Power Systems. Promoter holding has declined from 34.27% in December 2024 to 26.87% in December 2025, with a significant reduction of 6.34 percentage points occurring in the June 2025 quarter. This reduction, likely due to dilution from equity issuances or stake sales, has been absorbed by institutional and retail investors, reflecting continued confidence in the company's prospects.

Foreign institutional investors (FIIs) have been consistent buyers, increasing their stake from 17.80% in December 2024 to 24.36% in December 2025. The most recent quarter saw FII holding rise by 0.81 percentage points, suggesting continued interest from global investors attracted to the company's growth story. This FII accumulation provides a measure of validation for the premium valuation, as sophisticated international investors typically conduct rigorous due diligence before committing capital.

Mutual fund holding presents a more cautious picture, declining from 25.08% in December 2024 to 19.18% in December 2025. The most recent quarter saw a notable reduction of 2.69 percentage points, suggesting some domestic institutional investors have chosen to book profits after the stock's spectacular run. This divergence between FII accumulation and mutual fund reduction reflects differing risk appetites and investment horizons, with domestic funds perhaps more sensitive to valuation concerns.

Non-institutional holdings have risen from 21.03% to 25.57% over the past year, indicating strong retail investor interest. This retail accumulation, combined with the overall institutional holding of 47.56%, suggests a broad-based investor confidence in the company's prospects. However, the absence of insurance company participation (0.00% holding) is noteworthy, as these long-term investors typically favour stable, mature businesses over high-growth, high-valuation stories.

Stock Performance: Exceptional Returns with High Volatility

TD Power Systems has been a phenomenal wealth creator for long-term investors, with returns that significantly outpace both the broader market and sector peers. The one-year return of 88.86% compares favourably to the Sensex's 7.88%, generating an alpha of 80.98 percentage points. This outperformance extends across longer timeframes, with the three-year return of 417.64% and five-year return of 2,531.52% placing the stock amongst the top performers in the Indian equity market.

However, these exceptional returns have come with considerable volatility. The stock's beta of 1.69 indicates it is significantly more volatile than the broader market, with price swings that can be uncomfortable for risk-averse investors. The annualised volatility of 46.95% over the past year—more than four times the Sensex's 11.23%—underscores the high-risk, high-return nature of this investment. Investors must be prepared for sharp corrections, as evidenced by the stock's 20.44% decline from its 52-week high.

Recent price action shows signs of consolidation, with the stock trading below its 20-day, 50-day, and 100-day moving averages. The technical trend has shifted from "Bullish" to "Mildly Bullish" as of December 29, 2025, suggesting some loss of upward momentum. The year-to-date return of -3.59% indicates profit-booking has dominated in early 2026, with the stock giving back some of its spectacular 2025 gains.

Delivery volumes have shown interesting patterns, with the trailing one-month average of 2.87 lakh shares representing 44.67% of total volume—up from 38.97% in the previous month. This increase in delivery-based trading suggests genuine investor accumulation rather than speculative activity, which is a positive sign for the stock's medium-term trajectory. However, the recent one-day delivery volume of 2.48 lakh shares (46.68% of total) was marginally below the five-day average, indicating some caution amongst buyers.

Investment Thesis: Quality Business, Questionable Entry Point

TD Power Systems presents a compelling case study in the tension between business quality and valuation. The company scores well on multiple quality parameters: it operates with zero debt, generates strong returns on capital (32.03% ROCE), maintains healthy margins, and has delivered consistent earnings growth. The five-year sales CAGR of 22.93% and EBIT CAGR of 60.96% demonstrate a business in structural growth mode, capitalising on favourable industry dynamics.

The overall quality grade of "Good" reflects the company's solid fundamentals and clean balance sheet. With no promoter pledging, healthy institutional participation at 47.56%, and an average EBIT-to-interest coverage ratio of 81.83 times, TD Power Systems exhibits the characteristics of a well-managed business with strong corporate governance. The company's ability to fund aggressive growth whilst remaining debt-free is particularly impressive in the capital-intensive manufacturing sector.

However, the valuation remains the Achilles' heel of the investment case. At 51 times trailing earnings and 10.99 times book value, the stock prices in several years of strong earnings growth. Any disappointment in execution, margin pressure, or cyclical downturn in end-user industries could trigger a sharp valuation reset. The "Very Expensive" grade has persisted since March 2025, suggesting the market has been consistently willing to pay premium multiples for this growth story.

The financial trend remains positive, with the company delivering its highest-ever quarterly ROCE of 28.19% in H1 FY26. Net sales growth of 26.36% and PAT growth of 25.40% in the most recent quarter demonstrate continued operational momentum. The absence of any key negative triggers in the short-term financial trend analysis provides comfort that the business trajectory remains intact, even if the valuation appears stretched.

Key Strengths & Risk Factors

Outlook: What Lies Ahead

The company's operational trajectory remains firmly positive, with all key financial metrics pointing towards sustained growth momentum. The September 2025 quarter results validate the thesis that TD Power Systems has successfully positioned itself to capitalise on the capital goods cycle in India. Management's ability to scale operations whilst maintaining margins and generating strong cash returns on invested capital deserves recognition.

However, investors must weigh this operational excellence against the reality of current valuations. At 51 times earnings, the stock has priced in multiple years of strong performance, leaving limited margin of safety. Any stumble in execution, margin pressure from raw material inflation, or cyclical downturn in end-user industries could result in a painful valuation reset. The recent shift in technical trend from "Bullish" to "Mildly Bullish" and the stock's position below key moving averages suggest some near-term consolidation may be necessary before the next leg of the rally.