Pick of the week 26 Dec 2016

RETAIL RESEARCH
Techno Electric & Engineering Co. Ltd. (TEEC)
Industry CMP Recommendation Add on Dips to band Target Time Horizon
Heavy Elect- Equipment Rs. 299 Buy at CMP and add on dips Rs. 269-274 Rs. 343 1-2 quarters

HDFC Scrip Code TECELEEQNR Techno Electric & Engineering Co. Ltd (TEEC) was established in 1963. The current promoter Mr. P P Gupta acquired the
company in early 1980s. TEEC is a cross functional contractor that operates across the segments in the power space. With
BSE Code 533281
over 30 years of experience TEEC is a leading provider of high quality engineering, procurement and construction (EPC)
NSE Code TECHNO services to India’s core sector industries; both in the public and private domain which is driven by a strong team of 150
Bloomberg TEEC IN engineers supported by 200 skilled professionals. Building substations and switchyards is TEEC’s primary revenue generator.
The Company owns 162.9MW of wind assets and 2 transmission projects.
CMP 23 Dec 2016 Rs. 299
Equity Capital(Rs crs) Rs. 22.8 Investment Rationale:
Face Value (Rs) 2.0  Strong execution capabilities and specialized in substation commissioning
 Power Grid corporation’s incremental substation orders to benefit TEEC
Equity Sh. O/s (Cr) 11.4
 Divestment of the wind assets to improve ROCE, enable focusing more on EPC vertical and improve strength for bidding
Market Cap (Rs crs) Rs.3408.6 for more PPP projects in transmission sector.
Book Value (Rs) Rs. 88.8
Concerns:
Avg. 52 Week Vols 11616  Competition
52 Week High 360  Delay in sale of wind assets
52 Week Low 209  Delays in execution of projects
 Lackluster capex from private players resulting in overdependence on PSU projects

Shareholding Pattern-% Sept 2016 View and Valuation:
States’ increased focused on the Renewable Energy needs immediate up gradation of transmission and sub transmission
Promoters 57.98
infrastructure leading to more investment. With TEEC’s specialization in substation side and Power Grid Corporation’s
Institutions 25.87 increased investment on these will ultimately create more opportunities on orders front for TEEC. Healthy current order
Non Institutions 16.16 book of the company at ~ Rs 2600 cr (2.5xFY16 EPC sales) gives enough visibility for the next few years. A quick divestment
of wind assets will enable TECC to release the low return yielding funds which can then be deployed in its core EPC business
Total 100.0
as well as in bidding for more PPP transmission orders.

Fundamental Research Analyst: We feel investors could look to buy the stock at CMP and add on dips to Rs.269-Rs.274 (SOTP value derived based on
Abdul Karim, 13XFY18E T&D EPC business EPS) band for a target of Rs 343 under SOTP method (including 18xFY18E T&D EPC business
abdul.karim@hdfcsec.com.
EPS) in the next 1-2 quarters.

RETAIL RESEARCH P age |1

2 12. Jhajjar KT Transco is a joint venture between TEECL (49%) and Kalpataru Power Transmission Limited (51%).676 3.7% 2.0 19. The transmission network includes two substations of 400/200 kV of 24 bays each at Rohtak and Sonepat.9 MW spreading across Tamilnadu and Karnataka and has generated 132.228 1. Management Consultant deputed to Bharat Heavy Electricals Limited (BHEL) and as an Advisor in the merchant banking division of the erstwhile ANZ Grindlays Bank. Government of India as a Financial Analyst. Kolkata.9 19.53 143. It provides services.167 16. The Company offers solutions for a range of projects. SWPL is engaged in the business of green power generation with a capacity of 117.15 2.2% 9. With over 30 years of experience TEEC is a leading provider of high quality engineering. from power generation plants to plant packages systems supplied by others. The Company also provides solutions for extra high voltage (EHV) substations and distribution system.222 17. It commissioned a 400 kV intrastate power transmission project in Haryana in 2012.051 1.7% 712 56.709 35. RETAIL RESEARCH Financial Summary: (Consolidated) Particulars. The Company installs overhead lines for transmission projects for captive power plant projects.5% 4. It became the first transmission project to receive a viability gap funding support from the Government of India.9 megawatts (MW) wind energy capacity.080 2.24 45. Contrary to popular perception of a niche substation contractor TEEC is a cross functional contractor that operates across the segments in the power space.2% 1. Mr P P Gupta is a key promoter and Managing Director.3 27.7% 7.972 14. TEEC has subsidiary namely Simran Wind Project Limited (SWPL). balance of plant (BOP) for thermal and hydro power projects and utilities for power projects.0 RoE (%) 12.5% 484 45.200 Diluted EPS (Rs) 6.6 (Source: Company.3 13.939 10.213 2.8 12. is a Bachelor in Engineering and Post Graduate in Business Management from the Indian Institute of Management.8 21. procurement and construction (EPC) services to India’s core sector industries. The current promoter Mr.8 EV/EBITDA (x) 21. Ltd (TEEC) was established in 1963.300 APAT 702 288 143.5 17. such as construction of both air-insulated and gas-insulated substations. both in the public and private domain which is driven by a strong team of 150 engineers supported by 200 skilled professionals. HDFC sec) Company Description: Techno Electric & Engineering Co. The Company is also a renewable energy producer with approximately 162.90 million units during FY16.3 P/E (x) 37. Building substations and switchyards is TEEC’s primary revenue generator. The company provides solutions for captive power plants. Rs in Mn Q2FY17 Q2FY16 YoY-% Q1FY17 QoQ-% FY15 FY16 FY17E FY18E Net Sales 3.1 13.115 370 201. P P Gupta acquired the company in early 1980s.820 2.3 18.3 15. It comprises a double circuit quad moose line that extends from RETAIL RESEARCH P age |2 .1% 2. He was associated with the Planning Commission.952 3.0 17. Ahmedabad.048 EBITDA 1.

10 bn over the entire concession period of 35 years. The project is designed to evacuate 2. RETAIL RESEARCH Jharli to Rohtak (35 kilometres) and extending to Sonepat (64 kilometres). This project’s total revenue is estimated at Rs. The project generates annual revenues worth Rs. Punjab. In 2013. TEEC has one associate company namely. TEEC received a concession from PFC Consulting Limited to build a transmission network at Patran. 2 bn project under the BOOM transmission network possesses an evacuation capacity of 1. Patran Transmission Company Ltd. the terminal value to be derived from this project will be 60 months of revenue (following 25 years of concession period). 540 mn with the DBFOT arrangement spanning 25 years (extendable by 10 years). (PTCL).400 MW of power from the Jhajjar Power Plant. The Rs. HDFC sec) RETAIL RESEARCH P age |3 . (Source: Company.000 mVA. If the contract is not extended.

(Source: Company. With increasing costs/other issues related to land acquisition. it requires strong designing/engineering skills. thereby. making it relatively less competitive than transmission line EPC. TEEC’s continues to selectively focus on T&D BOOT projects. Investment Rationale: Strong track record in EPC segment and specialized in substation commissioning TEEC has a strong history of selective bidding. STATCOM will be extremely RETAIL RESEARCH P age |4 . incremental investments are leaning towards GIS instead of AIS. thereby chasing profitability over growth and having an asset-light business model. TEEC is well placed for growth over the next 4-5 years. EPC margins were stable at 15.2% (-90bps YoY). It expects finalization of few large orders which should lead to improved orders inflows in 2HFY17E. which is likely to be the company’s focus in the future. sourcing of equipment and a good understanding/tie-up with the GIS equipment supplier. However. KEC/KPP. switchyard/ substation works and distribution/rural electrification works. With a limited number of players in the EHV GIS substation EPC space. The management expects order inflows of Rs 15-20bn in FY17E. it has built a niche in the substation space. HDFC sec) Power Grid’s (PGCIL) incremental substation orders to benefit TEEC Given the long history of sub-par transformation capacity. wherein it has the best asset turns in the T&D EPC space. This is also reflected in the margin profile of TEEC vs. Within EPC. This augurs well for TEEC. TEEC (jointly with the Chinese company Rongxin) recently won the first STATCOM order in the country. The company expects to sell 45 MW of wind assets in FY17E. RETAIL RESEARCH Recent Quarter Update: Revenue for Q2FY17 grew 45% YoY with growth across both segments. There are only 4-5 players in 765kV GIS substation. substation EPC is low on project management. However. PGCIL’s investments in substation EPC have increased tremendously in the past 2-3 years. TEEC is also pre-qualified to execute 765kV GIS substations. It has bid for another T&D BOT project (worth ~Rs 11bn) in JV with Kalpataru Power (bids to open in 4QFY17E). Importantly wind segment EBIT grew 39% YoY (Rs 534mn) led by 90% grid availability. With increasing contribution from renewables. TEEC can execute BOP packages. The management stated that the ticket size of the projects have increased (Rs 250-500mn). In comparison to transmission line EPC.

2011 ‐ February 24. TEEC is focused on expanding its T&D BOOM asset portfolio. Capacity 45 MW 6 MW 111.2600 cr which is almost 2. In the past two years.40 APPC tariff – Rs 2. with an expected investment of Rs 80bn. the company is building a portfolio of infrastructure assets with regular cash flows and decent IRRs. 19 PLF 18% ‐ 26% 19% ‐ 26% 19% ‐ 26% Tariff Rs 3. Traditionally the ratio of Power Grid’s investment in lines and substation was 80:20 respectively but in FY17 it has witnessed more investment in the substation side which took the ratio of line to substation to 65:35 respectively. TEEC is focused on ones with higher substation component and lower line component to maximise the captive EPC opportunity.5xFY16 EPS sales. The order book has grown at a healthy CAGR pace of 25% over FY13-FY16. While it is comfortably placed in terms of leverage and operational cash flow. Even in the T&D BOOM projects. of turbines Nadu 30 turbines (33 MW) at 3 wind farms 4 turbines at 2 wind farms 67 turbines at 2 wind farms Capacity 30 turbines * 1. albeit selectively. Historically. The company recently demerged 45MW of wind assets in the standalone company and plans to exit the entire business in the next year. RETAIL RESEARCH important to maintain grid stability. Building a good portfolio of T&D BOT assets Insulating itself from the EPC business’ cyclicality. TEEC has a wind asset portfolio of 163MW (45MW in the standalone entity and another 118MW in its subsidiary. one operational and other soon to be operational). the sale of wind power assets will free up capital to be invested in T&D BOOM projects and reduce variability in earnings over the medium term. the returns have been lower than expected.40 (Karnataka) and Rs 3. it plans to derisk its business going ahead by bidding for orders from SEBs and private players too.39 Preferential tariff . However. given the issues in monetising the renewable energy certificates (REC). 2012 Location Karnataka (12 MW) and Tamil Karnataka Tamil Nadu No.Rs 3. We estimate TEEC projects to have an IRR of 14-15%. HDFC sec) Large order book provides visibility to revenue growth: The current order book of TEEC is close to Rs. Though dependence on PGCIL from an orders perspective is large. Even though the Power Grid’s budget remained at same level for the year but it reflected shift in its investment pattern. India has been a late entrant in this space. it has won two projects (equity capex of Rs 900mn.5 MW each. the company ventured into building on a portfolio of wind assets.5 MW each 48 turbines * 1. TEEL (Standalone) Simran Wind Project Ltd. Simran Wind Projects). This will also enhance revenue visibility of its EPC business. RETAIL RESEARCH P age |5 . which goes well with TEEC’s capabilities and increases company’s addressable market.90 MW COD During 2009‐10 During 2009‐10 March 31. It has identified north east India as a focus area. which have multiple benefits in terms of captive EPC opportunity and annuity-based cash flows/decent IRRs. The company plans to bid for many such projects.5 MW each 4 turbines * 1. PGCIL now plans to install 50 STATCOMS over the next 3-4 years.54 (TN) (Tamil Nadu) (Karnataka) (Source: Company.

Healthy current order book of the company at ~ Rs 2600 cr (2. in case of aggression from competitors.5xFY16 EPC sales) gives enough visibility for the next few years.350 255 Wind projects capacity FCFF @ 12% WACC 1.987 44 Target price 343 (Source: Company.558 22 Tranmission projects 897 8 Jhajjar FCFE @ 14% CoE 733 6 Patran FCFE @ 14% CoE 164 1 Simran Wind FCFF @ 12% WACC 4.558 1 2. A substantial delay in the sale could impact the ramp-up in T&D BOOM projects. SOTP Valuation: Business Head Parameter PAT/ Book Multiple Value (Rs mn) Target Standalone business 33. Lacklustre capex from private players As there is very little Capex from the private players TEEC is over dependent on the public sector and the government spending which creates the concern over medium to long term on the order inflow side. Delay in sale of wind assets TEEC plans to sell its 163MW of wind assets and use the proceeds to expand its portfolio of transmission assets.505 13 Cash & Cash Equivalents 1x 2.855 291 T&D EPC business 18x Sep-18E P/E 1. With TEEC’s specialization in substation side and PowerGrid Corporation’s increased investment on these will ultimately create more opportunities on orders front for TEEC. Delay in project completion Even though TEEC has very strong track record of completing the projects on a timely manner but any delay in completion of project may lead to cost overrun and paralyze the cash management system.617 20 32. However. View and Valuation: States’ increased focused on the Renewable Energy needs immediate upgradation of transmission and sub transmission infrastructure leading to more investment. A quick divestment of wind assets will enable TECC to release the low return yielding funds which can then be deployed in its core EPC business as well as in bidding for more PPP transmission orders. TEEC order inflows could be impacted. RETAIL RESEARCH Concerns: Competition could hurt growth TEEC follows a very conservative bidding approach and the competition in the substation space is a bit more benign than transmission EPC. HDFC sec) RETAIL RESEARCH P age |6 . which has dual benefits of better IRRs and captive EPC order.

0 821.8% Depreciation 132.6 0.7 1069.2% 711.0 28.1% 480.4% (Source: Company.2% 4558.5 57.0% Tax 199.2 60.6 56.5% 276.0 242.9 249.0 47.7% -4.3 -31.5 -4.0 821.5% Other Income 56.5% 374.9% 484.7% 6385.274 (SOTP value derived based on 13XFY18E T&D EPC business EPS) band for a target of Rs 343 under SOTP method (including 18xFY18E T&D EPC business EPS) in the next 1-2 quarters.4 40.2 44.2% 265.0 443.8% E/o inc/(loss) 4.1% Interest cost 125.8 67.4% EPS 6.5 200.3 35.8 118.2 44.7 1699.9 57.3% 132.3% 2709.1% 1186.5% 174.8 45.8 33.9 50.4% 569.8 105.7 2820.7 54.6 47.7 106.0 40.1 2530.2% 1186.3% 12.5% 1482.6 -19.8 45.7 59.7% Material Expenses 2268.4 237.6% 284.7% 1561.4% 0.3 -152.0% 172.9 7.1% 72.5 4545.3% 483.4% Other Operating Expenses 191.5 29.7% Profit before tax 913.5% 82.3% 138.4 3239.4 10.2% 3644.7 2.8 139.6% 1751.7 -100.2 -23.2 35.5 39.2% 10.5% Consumption of materials & stores 2170.4 7.6% 4019.6 712.2% 1198.7 28.1 52.7% EBIDTA 1115.3 47.3% 4.6 -64.9% 84.3 274.4 830.5% Change in inventory 98.0 1306.6 1486. RETAIL RESEARCH We feel investors could look to buy the stock at CMP and add on dips to Rs.9 34.0% 366.2% APAT 713.9% EBIT 982.4% APAT (after MI) 702.1 36.5% Employee Expenses 100.1 555.0% Minority Interest 12.5% 217.6 -30.3 74.5 59.2 44.2 46.0 -23.0 69.8 98.2 45. Quarterly Financials (Consolidated) Rs mn Q2FY17 Q2FY16 YoY-% Q1FY17 QoQ-% H1FY17 H1FY16 YoY-% Net Sales 3676.4 446.7 47.2 20.3% Expenses 2560.6% 1997.3 1438.4 407.2 11.1 29.1% Reported PAT 706.2 7406.2 3.269-Rs.7% 1827.3 674.9 212. HDFC sec) RETAIL RESEARCH P age |7 .2 115.1 30.7% 0.4 35.5 143.3 -151.3 50.5 962.8 -5.5 200.4 4959.4 424.9 42.2 12.5 136.2 39.7 37.8 2813.5 37.9% 1474.9% 579.3% 92.

820 2.894 2.217 -1.4 15.816 10.080 2.145 11.0 17.657 1.200 FCFE -728 758 852 435 Adjusted EPS (Rs) 9 12 16 19 Share Capital Issuance 0 0 0 0 Minority Interest 0 0 0 0 Dividend -230 -309 -662 -662 FINANCING CASH FLOW (c) -1. Rs in Mn FY15 FY16 FY17E FY18E Particulars FY15 FY16 FY17E FY18E SOURCES OF FUNDS PROFITABILITY % Share Capital 228 228 228 228 GPM 36.967 3.919 9.903 NET CASH FLOW (a+b+c) -752 825 458 60 Closing Cash & Equivalents 1.2 14.074 12.498 2.590 -1.800 18 38 Minority Interest 12 -2 12 -2 Debt Issuance/(Repaid) -427 -527 -1.276 2.8 29.558 (Source: Company.302 12.767 OPERATING CASH FLOW (a) 221 -696 2.048 Reported PBT 1.005 Depreciation 603 495 521 533 Total Expenses 5.718 2.9 Minority Interest 199 0 12 9 RoE 12.051 1.279 -2.820 2. RETAIL RESEARCH Financials (Consolidated) Income Statement: Cash Flow Analysis: Particulars.917 11.248 1.217 0 0 EBIT 1.248 1.728 2.407 1.3 18.952 3.8 19.894 2.8 12.063 12.0 17.068 2.213 2.022 7.0 Short Term Debt 1.228 1.4 TOTAL SHAREHOLDERS FUNDS 9.054 1.2 12.2 20.270 13.215 2.748 Working capital change -1.735 Material Expenses 5.395 995 RoCE 9.200 INVESTING CASH FLOW (b) 116 2.329 Non-operating & EO items -202 -619 -275 -288 Employee Expenses 274 302 361 414 Interest Expenses 431 443 430 320 SG&A Expenses 563 642 846 1. HDFC sec) Balance Sheet: Ratios: Particulars.6 Long Term Debt 3.3 9.477 1.859 8.276 2.040 2.432 2.735 Investments 4 -243 -7 0 Tax (Incl Deferred) 185 486 445 537 Non-operating Income 202 619 275 288 RPAT 1.1 15.612 EBITDA margin 26.206 150 -838 EBITDA 2.840 APAT margin 13.082 Core RoCE 9.7 Reserves 8.675 PBT 1.300 Tax Paid -185 -486 -445 -537 Depreciation 603 495 521 533 Other operating items -84 -1.3 13.939 10.972 14.2 11.7 28. Rs in Mn FY15 FY16 FY17E FY18E Particulars.2 27.7 RETAIL RESEARCH P age |8 .125 -920 EO (Loss) / Profit (Net Of Tax) 0 182 0 0 Interest -431 -443 -430 -320 APAT 1.3 10.147 10.089 -1.682 2. Rs in Mn FY15 FY16 FY17E FY18E Net Revenues 7.2 20.424 -250 -250 Interest 431 443 430 320 Free Cash Flow 131 1.051 1.602 2.925 Other Income (Incl EO Items) 202 619 275 288 Capex -91 2.222 17.759 11.410 1.

9 142.6 Debtors 3.7 1.9 FCF/EV (%) 0.5 7. HDFC sec) rt RETAIL RESEARCH P age |9 .3 5.1 20.4 0.077 EFFICIENCY Net Deferred Taxes 7 8 8 8 Tax Rate (%) 14.1 5.9 12.219 EPS 9.083 Dividend 2.995 9.045 8.215 2.8 2.6 165.5 15.0 Investments 380 623 629 629 Cash conversion cycle (days) 136.0 Inventories 63 379 195 234 Interest Coverage (x) 3.997 3.558 CEPS 14.7 2.1 Dividend yield (%) 0.193 6.9 Total Non-current Assets 10.093 2.187 15.0 Net Block 10.686 3.1 0.319 15.934 EV/EBITDA (x) 21.998 P/E (x) 37.0 7.4 3.5 23.9 96.8 96.6 Long Term Provisions & Others 185 98 0 0 Fixed Asset Turnover (x) 0.3 15.3 70.0 130.449 4.0 100.5 3.491 2.3 4.8 1.9 3.998 3.975 7.085 P/BV (x) 4.963 5.9 2.5 1.3 27.246 7.498 2.5 (1.209 8.5 Other Current Liabilities & Provns 137 166 273 327 VALUATION TOTAL CURRENT LIABILITIES 1.849 Net D/E (x) 0.9 TOTAL CURRENT ASSETS 5.0 5.9 68.040 9.5 3.820 9.649 5.065 6. RETAIL RESEARCH TOTAL DEBT 5.9 5.1 TOTAL APPLICATION OF FUNDS 15.0 Creditors 1.2 FCFE/Mkt Cap (%) (1.6) 6.8 99.8 21.0 Goodwill 0 0 0 0 Other Current Liab & Provns (days) 6.373 15.5 99.7 100.6 8.164 4.2 12.6 0.1 88.8 25.0 112.3 Cash & Equivalents 1.896 4.692 Other Current Assets (days) 50.8 2.934 Inventory (days) 2.5 5.9 2.9 CWIP 38 0 0 0 Payables (days) 68.6 19.1 1.6 5.3 OCF/EV (%) 0.9 19.444 12.072 PER SHARE DATA (Rs) Other Current Assets 1.0 2.627 3.3 1.3 3.3 0.5 17.274 7.3 1.115 2.319 15.040 2.1 13.2 TOTAL SOURCES OF FUNDS 15.187 15.8 NET CURRENT ASSETS 4.0 5.4 68.169 4.0 EV/Revenues (x) 5.373 15.671 Book Value 80.0 APPLICATION OF FUNDS Debtors (days) 158.9 LT Loans & Advances 367 171 440 528 Debt/EBITDA (x) 2.8 12.9 4.5 0.1 130.122 3.7 19.0 19.497 10.7) 1.5 (Source: Company.5 4.333 6.

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