techno electric & engineering co - india...

Techno Electric & Engineering Co

Engineered for superior growth

Analyst: Tarang Bhanushali

[email protected]

Stock Data

Sensex: 24,793

52 Week h/l (Rs): 580 / 365

Market cap (Rscr) : 2,711

6m Avg t/o (Rscr): 1

Bloomberg code: TEEC IB

BSE code: 533281

NSE code: TECHNO

FV (Rs): 2

Div yield (%): 0.9

Prices as on Mar 09, 2016

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Shareholding Pattern

Jun‐15 Sep‐15 Dec‐15

Promoters 58.0 58.0 58.0

FII+DII 21.5 24.9 25.3

Others 20.5 17.1 16.7

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Techno Electric Sensex

Techno Electric & Engg Co Engineered for superior growth

BUY Sector: Industrials Sector View: Positive

CMP: Rs457 1‐yr Target: Rs607 Upside: 32.8%

This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc. The views and opinions expressed in this document may at times be contrary in terms of rating, target prices,

estimates and views on sectors and markets… (Read the complete disclaimer at the back of this report)

Company Report

March 10, 2016

We initiate coverage on Techno Electric and Engineering Co (TEEC), a niche player in the power transmission and distribution (T&D) space. We expect TEEC to benefit from strong capex in the T&D space over the next three years. TEEC’s return ratios and margins have outperformed the industry, driven by superior execution skills, cherry picking of orders, and an asset light model. Considering the strong order book, huge ordering pipeline, and high capex spend in Northeast India, we estimate 28% revenue CAGR over FY15‐18. The company has initiated the process of selling its wind assets, which would reduce the overhang of lower RoCE. Investments in transmission BOOT/BOOM projects would provide fixed returns and improve revenue visibility. We value the EPC business at 16x FY18E EPS, which is at a premium compared with peers, backed by a strong order book and above‐industry margins and return ratios. Based on SOTP methodology, we arrive at a fair value of Rs. 607, which implies 32.8% upside from the current level. Recommend BUY.

EPC business earnings to surge Over the years, TEEC has focused on complex projects that generate higher margins and better cash flows. Despite a selective bidding strategy, the order book has doubled over the past two years. We expect order inflows to remain robust, as investments in power T&D grow and the company gains ground in specific orders related to STATCOMS, solar EPC, and focuses on improving T&D infrastructure in Northeast. TEEC has bid for orders worth Rs. 1,500cr and expects healthy conversion over the next three months. Backed by robust order book and strong execution, revenues will clock 28% CAGR over FY15‐18 for the EPC business. We expect operating profit of the EPC business at 28.3% over the same period backed by a slight increase in margins.

Efficient capital allocation to reduce overhang TEEC has sold 44.45MW of wind power for Rs. 215cr and intends to divest the balance portfolio (163MW) to improve strength for bidding more PPP projects in transmission sector, improve ROCE & focus on EPC. Currently, TEEC has two BOOT/BOOM projects and is looking to add one‐two projects annually over the next three years.

Financial Highlights Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenues 794 1,056 1,282 1,524

yoy growth (%) 12.1 33.0 21.5 18.8

Operating profit 208 220 281 327

OPM (%) 26.2 20.8 21.9 21.5

Reported PAT 105 144 206 251

yoy growth (%) 20.1 37.0 43.4 21.6

EPS (Rs) 18.4 25.2 36.2 44.0

P/E (x) 24.8 18.1 12.6 10.4

EV/EBITDA (x) 14.7 13.3 10.0 8.1

Debt/Equity (x) 0.5 0.4 0.3 0.2

RoE (%) 12.0 14.8 18.6 19.2

RoCE (%) 12.0 14.7 18.4 20.0 Source: Company, India Infoline Research

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Techno Electric & Engineering Co Ltd

Ratio of investments of capacity addition in power generation and investment in the T&D segment has remained at 1:0.5x as against an ideal scenario of 1:1

According to the draft perspective transmission plan for 20 years, total planned transmission expenditure during the 13th Plan is Rs. 2.6tn

Power T&D spending to surge Investments in power T&D have lagged those in the power generation sector over the past decade, as the country faced a high power deficit. Majority of power sector investments were therefore concentrated in augmentation of power generation capacities, which created congestion in the T&D segment. Ratio of investments of capacity addition in power generation and investment in the T&D segment has remained at 1:0.5x as against an ideal scenario of 1:1. India’s power generation capacity doubled in the past seven years with the addition of 110GW between FY08 and FY15. However, transmission capacity grew only 50% in ckm terms and 66% in MVA terms during this period, implying the need for more capex. Merchant tariffs in South India jumped because of lack of transmission capacity and low PLFs at power plants that stem from unavailability of transmission lines and grid failures.

The 12th Plan expenditure has increased the share of T&D capex in overall power capex to ease transmission constraints. Planned investments in the T&D sector during the 12th Plan stand at Rs. 4.86tn, which is 1.1x the power generation capex of Rs. 4.5tn. The 12th Plan envisages close to 110,000 circuit km (ckm), including lines below 400kV, line additions of 270,000MVA including lines below 400kV substation capacity and excluding a high‐voltage direct current (HVDC) line. Further, according to the draft perspective transmission plan for 20 years, total planned transmission expenditure during the 13th Plan is Rs. 2.6tn. The increased spending represents higher opportunity for companies providing transmission equipment and EPC services.

Business prospects over the next two years look quite promising, as we expect strong ordering in the domestic market from Power Grid and SEBs. Ordering from SEBs in FY16 would be similar to that of Power Grid (Rs. 20,000cr).

Capex in the T&D space in the 13th Plan is expected to jump 2.73x over 11th Plan capex

Share of T&D of overall power capex to increase to 52% in 12th Plan from 32% in 11th Plan

Source: Company, India Infoline Research

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Orders to be awarded over the next two years stand at Rs. 80,000‐100,000cr, of which, the share of states and PGCIL is likely to remain the same

High capacity of 765kV technology can easily facilitate efficient and economical integration of large‐scale generation projects into the nation’s complex transmission grid

Over the past five years, backed by strong capex, PGCIL has managed to link most of the states to the central grid. The company has also initiated the process of increasing its capacity, creating more pressure on state governments to execute transmission projects. Orders to be awarded over the next two years stand at Rs. 80,000‐100,000cr, of which, the share of states and PGCIL is likely to remain the same. In addition to a strong pipeline, PGCIL has focused on improving domestic manufacturing capabilities for most of the products for the government’s ‘Make in India’ program. Further, in line with its vision of power for all by FY19, the government has launched two key schemes, Deendayal UpadhyayaGram Jyoti Yojana (DDUGJY) and Integrated Power Development Scheme (IPDS), which envisages a total investment of Rs. 7,500cr. DDUGJY's emphasis is on feeder separation in rural areas, while IPDS focuses on strengthening distribution systems in urban areas.

Share of high voltage systems to rise sharply India has one of the highest levels of electricity transmission and distribution (T&D) losses in the world. Electricity losses stem from technical inefficiency and theft. Technical losses occur because of resistance of wires and equipment as electricity passes through. Most of the generation sources are located in the resource‐rich areas of northeastern and eastern parts of the country, while the load centers are in the northern, western, and southern parts of the country. Transmission at a higher voltage can offer huge advantages in terms of increased power‐transfer capacity per unit right‐of‐way, reduced transmission losses, and reduced environmental impact. Thus, future capex would be largely concentrated on high voltage lines. The high capacity of 765kV technology can easily facilitate efficient and economical integration of large‐scale generation projects into the nation’s complex transmission grid. The 765kV system is expected to play a higher role in the development of a National Grid backed by its ability to deliver bulk power from clusters of generation projects efficiently with lower/reduced losses. Share to 440KV and above to rise to 62% in 13th plan from 43% in 11th plan


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Focus on high voltage would continue in the 13th Plan. We expect the share of 765Kv to increase to 32% from 26% in 12

th Plan The government has aggressively promoted renewable power generation and in June ’15, it revised its target of 20GW solar capacity addition by 2022, under the Jawaharlal Nehru National Solar Mission (JNNSM) to 100GW India has registered impressive growth in solar capacity installations over last year, clocking 50% CAGR over FY12‐16

The transmission system in India was pre‐dominantly dominated by 220 kV and 400 kV transmission tower lines. During the 11th plan, the share of 400kV lines increased marginally from 36% to 37%, but the share of 220kV reduced to 61% from 54% at the end of the 10th Plan. During the same period, 765Kv increased from nil to 6.1%. During the 12th Plan, the share of low voltage is expected to reduce further to 45% and the share of 765Kv is expected to surge to 26%. Focus on high voltage would continue further in the 13th Plan. We expect the share of 765Kv to increase to 32%.

Solar capex: faster execution and lower margins Solar power generation has been a key focus area of the government over last year. The government has aggressively promoted renewable power generation and in June ’15, it revised its target of 20GW solar capacity addition by 2022, under the Jawaharlal Nehru National Solar Mission (JNNSM) to 100GW, which is a jump of 5x over the original target. 60GW out of the targeted 100GW will be set up on utility scale, whereas the remaining 40GW will be in the form of rooftop and other small grid‐connected projects. Of the targeted 60GW utility scale capacity addition, 40GW capacity will be added by the Central and state governments and 20GW by private sector developers. The country’s solar capacity stands at around 5.4GW. India has registered impressive growth in solar capacity installations over last year, clocking 50% CAGR over FY12‐16. The ministry of new and renewable energy (MNRE) has also fixed year‐wise targets to monitor solar power generation in the country. The target for the current year is 2GW and that for next year is 12GW. MNRE expects over 4 GW of solar power capacity addition during this financial year, which is twice the target. As of January ’16, the country has added 1.5GW of solar power.

India has managed to solar capacity at 50% CAGR over FY101‐FY16YTD

It targets to add 60GW of solar ground mounted capacity by FY22


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The company plans to emerge as a strong EPC player in the solar generation as well. Though these contracts would be margin dilative for the company, the space provides huge opportunity for the company

The Government plans to install 50 STATCOMs at a total investment of around Rs. 8,000cr over a period of three to five years

TEEC emerged as the first service provider to win comprehensive STATCOM orders at Solapur, Satna, and Aurangabad jointly with the Rongxin

TEEC has signed an agreement with TMBM of China, which is a fortune 500 company in this segment. The JV has already participated in projects in Rajasthan and MP for NTPC and has plans to participate in a project in Andhra Pradesh. Initially, the company would like to go as an EPC to acquire more capability to handle these projects and subsequently explore investment opportunities. The company plans to emerge as a strong EPC player in the solar generation as well. Though these contracts would be margin dilative for the company, the space provides huge opportunity for the company. Execution cycle is quite lower compared with power T&D and hence would require lower capital. Solar power capacity in India is expected to shoot up rapidly over the next few years as the central government and several state governments have lined up large tenders. In addition, sharp fall in capital cost has made the Indian solar sector an attractive proposition for investors globally. We believe this provides a huge opportunity for TEEC in addition to the strong capex in the power T&D space.

Statcom capex: A niche area for the company After the Northern grid collapse in July ’12, the government is aiming to prevent recurrence of such incidents. In 2012, a grid failure led to the largest known outage in world history, affecting 620mn people. After this event, the government has worked toward setting up a grid that is capable of handling demand‐supply variations. Furthermore, considering the rising investments in renewable energy, the government has shifted its focus toward the use of STATCOM technology. The company believes STATCOM represents one of the most exciting opportunities in India's transmission space. It addresses a transmission network's dynamic response requirements, especially when the network is periodically fed by renewable energy. The solution makes it possible to deliver full reactive current even during falling voltages. STATCOM systems offer rapid response to systemic malfunctions, ensure improved voltage and power system stabilisation, enhance reliability, real and reactive power flow control, and increase power transfer limits. The Government plans to install 50 STATCOMs at a total investment of around Rs. 8,000cr over a period of three to five years. The company is also witnessing large investments in infrastructure in other states such as Telangana and Andhra Pradesh and selectively in MP. TEEC emerged as the first service provider to win comprehensive STATCOM orders at Solapur, Satna, and Aurangabad jointly with the Rongxin. The scope of work for TEEC in the order stood at Rs. 268cr. Rongxin Power is a Dubai‐based company with a manufacturing facility in China and design office in the UK. The partner would give the technological component of the project and house the STATCOMS in the existing facilities of Power Grid; the scope belongs to TEEC thereafter. The scope for TEEC would be ~51% of total execution and partner’s scope is 49% in this package on a like‐to‐like basis.

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The Central Government has rolled out the ambitious 'green energy corridor' project at an estimated cost of ~Rs. 43,000cr to facilitate the flow of renewable energy into the national grid

Power Grid plans to construct transmission links for 10GW solar capacity that may involve an investment of about Rs. 9,000cr

Green corridor a huge opportunity The Green Energy Corridor project is aimed at transmission of renewable energy from generation points to the load centers by creating intra‐state and inter‐state transmission infrastructure. Over the last two years, capex into renewable energy has surged on account of various policies, regulatory and fiscal incentives. Due to such initiatives, large capacity addition though renewable generation is envisaged in the 12th Plan period. India has commissioned 33GW of renewable energy as on December, 2014 and is expected to surge 7.5x over the next seven years to 250GW. Recognizing the criticality of large scale development of RE capacity and its integration with grid, Ministry of New & Renewable Energy (MNRE) and Forum of Regulators (FOR)/CERC entrusted POWERGRID to prepare a comprehensive report with estimation of capex requirement and financing strategy. Stability of the grid will be important in the transmission of green energy as it will have to factor in the variation in solar and wind energy generated. In addition to this as the locations for RE are often far from load centers, this requires disproportionate transmission system investment and expansion to connect them to the grid. As per the report prepared by Power Grid, the intra‐state transmission component is being implemented by respective states while PGCIL is executing the inter‐state part. It seeks to address intermittency and variability aspects as well as grid integration issues of large‐scale renewable energy generation. As per Power Grid management, managing the huge quantum of solar and wind power on the grid would require forecasting the generation and setting up of renewable energy management centers in the states and at the levels of state load dispatch centers, regional load dispatch centers and national load dispatch centre. The Central Government has rolled out the ambitious 'green energy corridor' project at an estimated cost of ~Rs. 43,000cr to facilitate the flow of renewable energy into the national grid. The project will be implemented with the assistance of Germany which has promised to provide developmental and technical assistance worth €1bn (around Rs.7,030 crore) for the project. The Indian Government has already created green corridors in Rajasthan, Gujarat and Tamil Nadu in the first phase followed by Maharashtra, Andhra Pradesh and Madhya Pradesh in the second phase (funded by KFW, Germany). In addition to this, Power Grid plans to construct transmission links for 10GW solar capacity that may involve an investment of about Rs. 9,000cr. TEEC was amongst the first few companies to get order worth Rs. 370cr for substation package at Chittorgarh, Tuticorin & Ajmer associated with Green Energy Corridors: Inter‐State Transmission Scheme (ISTS) – Part A.

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Order inflow has remained subdued at Rs. 710cr in 9M FY16 and is expected to see a jump in Q4 FY16 Of the current order book, transmission orders accounted for Rs. 1,379cr (72.4% share), followed by distribution with a share of Rs. 283cr (12.8%) and generation accounting for Rs. 243cr Power Grid continued to account for a major share of TEEC’s order book with 46.7%

Order book strong at 2.1x BTB

Over the years, TEEC has focused on complex projects that generate higher margins and better cash flow. It is also focused on projects that are funded by government agencies such as PFC and REC. Despite selective bidding strategy, the company’s order book has doubled over the past two years. After two year of sluggish order inflow and slow project execution in FY12‐13, the company has seen positive traction in order inflow as well as execution. Total order book at the end of Q3 FY16 stood at Rs. 1,905cr, doubling from an order book of Rs. 1,000cr at the end of FY13. Order inflow has been quite strong over the past two years led by strong ordering from Power Grid and improved orders from SEBs. Order inflow has remained subdued at Rs. 710cr in 9M FY16 and is expected to see a jump in Q4 FY16. Ordering in Q2 FY16 and Q3 FY16 has been lower from Power Grid, as the company is focused on commissioning its North‐East Agra UHVDC link. We believe new order announcements would increase from Q4 FY16. The company has ventured into EPC for solar projects through a JV with a Chinese company. In the initial stage, the company would execute a single project and post the execution of this project, it would decide on whther it seeks to continue with the business or not. Furthermore, the company has forayed into international markets by executing an order in Africa. The company plans to expand its reach to neighbouring SAARC nations and in the African region. Of the current order book, transmission orders accounted for Rs. 1,379cr (72.4% share), followed by distribution with a share of Rs. 283cr (12.8%) and generation accounting for Rs. 243cr. Power Grid continued to account for a major share of TEEC’s order book with 46.7%. TEEC’s selective approach to orders has ensured that it takes on limited and relatively risk‐free projects. Driven by strong execution capabilities, a large part of the new orders received were repeat orders. Order book composition as on Q3 FY16

Name of the Client Amount (in cr) % of total

Power Grid Corporation Ltd. 890 47%

North Bihar Power Distribution Co Ltd 283 15%

NTPC Ltd. 213 11%

Rajasthan Rajya Vidyut Prasaran Nigam Ltd. 155 8%

Bihar State Electricity Board 151 8%

Patran Transmission Co Ltd 78 4%

APTRANSCO 51 3%

Meja Urja Nigam Ltd 32 2%

Others 54 3%

Total 1,905 100% Source: Company, India Infoline Research

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The company bid in various new tenders worth Rs. 1,500cr and remains hopeful of achieving reasonable success

The company expects orders to increase on the back of strong spending in the North East and green corridors. Diversification into solar EPC business through a JV with a Chinese player would boost the company’s revenue from FY17. The company over last year has secured prestigious orders such as static compensator (STATCOM) installation at 400kV substation in Solapur, Satna, and Aurangabad, and switchyard package for Tanda Thermal power station of NTPC stage II 2 x 660 megawatts. The company bid in various new tenders worth Rs. 1,500cr and remains hopeful of achieving reasonable success. It expects order booking for H1 FY17 to remain strong on the back of orders it bid for and strong opportunities in the domestic market. Of the total bid of Rs. 1,500cr, the company expects to secure orders worth Rs. 500‐800cr in Q4 FY16. It expects healthy conversion as the order pipeline includes orders in the North‐east region. In solar EPC, the company has participated in NTPC’s Anantpur solar project and expects to bag one block of the six blocks of 125MW, each valued at ~Rs. 750cr.We expect order inflow to remain strong at 13% CAGR over the period FY15‐18E,driven by superior ordering in extra‐high voltage segment and rising capex in the North‐East region.

New orders booked in FY15 jumped 94% yoy Book‐To‐Bill for the company has declined due to faster execution in 9M FY16 and delay in order finalization


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TEEC: well ahead of peers The management over the years has followed a strict and disciplined bidding process. The company prefers to bid only for projects that are funded by either bilateral, multilateral, or government funding agencies such as PFC or REC, which has eliminated cash flow related risks. In addition, the management bids largely for complex projects that entail higher margins and face minimal competition. TEEC’s forte over the years has been its strong engineering capabilities. The management prefers timely completion of projects over aggressive bidding and cost overruns. TEEC’s strategy of cherry picking orders with complex designs providing higher margins and steady cash flow enabled the company to outperform peers in terms of margins and RoCE.

Operating margin: Has consistently been above industry average Company (%) FY11 FY12 FY13 FY14 FY15

TEEC 15.5 15.4 11.1 10.5 14.0

Kalpataru 11.5 10.9 9.8 9.5 9.6

KEC 10.3 8.1 5.5 6.2 6.0

Jyoti 11.5 10.8 10.0 7.8 2.7

Alstom T&D 10.6 10.5 8.3 10.1 9.3

Industry Average 11.9 11.1 8.9 8.8 8.3 Source: Company, India Infoline Research

Return on Capital Employed: EPC business RoCE has been quite high on the back of its asset light model and low working capital requirement Company (%) FY11 FY12 FY13 FY14 FY15

TEEC 89.7 90.4 52.5 54.8 48.1

Kalpataru 18.4 15.5 14.0 14.4 13.9

KEC 21.4 21.0 13.8 15.3 17.6

Jyoti 26.9 22.8 18.8 16.2 5.4

Alstom T&D 20.2 17.1 13.7 17.1 15.3

Industry Average 35.3 33.4 22.6 23.6 20.1 Source: Company, India Infoline Research

Operating margin has been quite higher than peers over the last five years

RoCE too has been quite higher due to lower WC requirement and higher margin


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We expect FY16 revenue to increase 45.5% yoy to Rs. 972cr, marginally lower than its guidance due to slower execution in Bihar project

We expect FY17 revenue to grow at 20.2% to Rs. 1,169cr and then pick up in FY18 to reach Rs. 1,396cr, higher by 19.7% yoy.

EPC revenue to surge over FY15-18E

Led by a robust order book and plethora of opportunities in the domestic T&D market over the next three years, we expect revenue to surge over FY15‐18. At the current order book of Rs. 1,905cr, book to bill (BTB) stands at 2.1x, which indicates healthy revenue visibility over the next two years. This coupled with the company’s impeccable track record in execution drive our revenue CAGR estimate of 28.1% over FY15‐18E. The company is targeting Rs. 1,000cr of revenue from the EPC business in FY16 on the back of strong order inflow. We expect FY16 revenue to increase 45.5% yoy to Rs. 972cr, marginally lower than its guidance due to slower execution in Bihar project (9M FY16 revenue of Rs. 692cr was higher by 53.4% yoy). Revenue growth is expected to lower in FY17 compared with FY16, as carry forward order book at the start of FY17 is lower than expected due to the sharp pickup in execution in FY16 and delay in order inflows from Power Grid. As mentioned above, Power Grid ordering has been quite lower than expected in Q2 and Q3 FY16; execution pickup would be lower in H1 FY17. We expect FY17 revenue to grow at 20.2% to Rs. 1,169cr and then pick up in FY18 to reach Rs. 1,396cr, higher by 19.7% yoy. Pickup in ordering by Power Grid and solar EPC revenue would lead execution growth over the next two years.

EPC revenue growth to remain robust over FY15‐18E

9M FY16 revenue growth stood at 53.4% yoy


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Led by strong execution and margin expansion, EPC operating profit is estimated to clock 28.3% CAGR over FY15‐18

Strong execution to drive operating profit growth TEEC operating margins have been superior compared with peers due to its project selection and bidding strategy. Management’s vast experience has aided the company to cherry pick orders with better profitability, low execution risk, and low receivable risk. We believe that margins would improve further from current levels on the back of faster execution, lower competitive intensity, and increase in revenue share of high‐voltage substations. We believe spending in the 765KV+ segment would account for a major share of overall spending in domestic T&D, which is TEEC’s forte and witnessed lower competition. With an increase in execution of high‐voltage substations, margins are bound to increase for the company. We estimate EPC margins to expand 20bps over FY15‐18. Led by strong execution and margin expansion, EPC operating profit is estimated to clock 28.3% CAGR over FY15‐18.

EPC operating profit to double over FY15‐18E


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Backed by strong cash flows, the company forayed into the wind power generation business to generate high and stable returns.

The company has already sold 44.45MW Wind Power Assets situated in Tamil Nadu at an effective valuation of Rs. 215cr in May ‘15

Efficient capital allocation: Shift from Wind power to transmission BOOT projects TEEC over the years has been working on an asset light model and has been a steady cash generating company. Backed by strong cash flows, the company forayed into the wind power generation business to generate high and stable returns. The company entered into the wind energy space by acquiring two companies, i.e., Simran Wind Project Private Limited (Simran) and Super Wind Project Private Limited (merged with TEEC now). TEEC purchased 95MW of wind assets from Suzlon Energy on a slump sale basis in FY10 for Rs. 440cr. Further, it increased its capacity by 112MW at an investment of Rs. 665cr, raising its total capacity to 207MW. Of the 207MW total capacity, 45MW of wind power is in the standalone entity and the rest is under its subsidiary, Simran Wind Projects. The entire capacity is tied up with long‐term PPA with Tamil Nadu and Karnataka SEBs. The company has also tied up part of the capacity for benefits under generation‐based incentives (GBI), renewable energy certificates (RE), and carbon credits. In its initial years, the assets were working at desired levels with PLF touching a high of 26%. However, due to issues related to power evacuation and poor implementation of renewable energy certificates (RECs), PLFs kept on declining. This led to lower cash flows and returns for the company. The management has decided to exit the wind energy business as against its previous target of raising its wind capacity to 1,000MW. The company has already sold 44.45MW Wind Power Assets situated in Tamil Nadu at an effective valuation of Rs. 215cr in May ‘15. Post this transaction, SWPL continues to hold 117.9 MW of wind power assets. The management said it would sell off the remaining wind mills (163MW) as and when the opportunity arises. The company had invested a total of Rs. 1,100crin wind assets of 207MW. The management expects to fetch roughly Rs. 900cr from the remaining wind projects (163MW). Wind energy assets post asset sale in Q1 FY16 TEEC Simran Wind Project Capacity 45MW 6MW 111.9MW Location Tamil Nadu (12MW) &

Karnataka (33MW) Karnataka (6MW) Tamil Nadu (111.9MW)

O&M Free for first 5 years; 5% escalation from Rs.1mn/MW

Free for first 5 years; 5% escalation from Rs.1mn/MW

Free for first 4.5 years; 5% escalation from Rs.1mn/MW

PPA / Tariff

Rs. 3.4 (Karnataka) & Rs 3.39 (TN)

Rs 3.4 (Karnataka) APPC tariff – Rs. 2.54 (TN)

CDM benefit

33MW registered with UNFCC

111.9MW registered with UNFCC

GBI benefit

111.9MW registered with IREDA

PLF range 18‐26% 19‐26% 19‐26%


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Wind power performance has deteriorated over the last two years FY11 FY12 FY13 FY14 FY15

Installed capacity (MW) 96 207 207 207 207

Units Generated (MWh) 203 291 472 345 300

Average realisation (Rs/unit) 3.3 4 3.9 4 4.2

Average PLF 24.2% 16.0% 26.0% 19.0% 16.5%

Revenue (Rs cr) 678 1,158 1,835 1,380 1,258

Operating income (Rs. cr) 664 1,115 1,765 1,324 1,194

PAT (Rs cr) 267 372 805 439 388 Source: Company, India Infoline Research Wind power performance in FY16 remained subdued due to transmission constraints and lower wind in its peak season. We estimate PLFs to be marginally lower on a yoy basis in FY16. Consolidated power generated would also be lower on a yoy basis due to asset sale in Q1 FY16. Revenue from the wind power segment is expected to decline 24% yoy in FY16 due to lower power generation. Post FY16, we expect marginal improvement in generation as transmission constraints are expected to ease out. Share of wind energy of overall revenues would decline sharply from 15.9% in FY15 to 7% in FY18.

Operating profit growth to remain subdued


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Generation to improve from FY17E …leading to a topline growth of 10% yoy each in FY17 and FY18


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BOOT projects to provide annuity income coupled with EPC opportunity Diversification from wind assets and opening of BOOT/BOOM projects in the transmission space provided TEEC an opportunity to foray into the BOOT/BOOM business in FY11. The company would bid for projects where it expects to bag sizeable EPC business, in addition to annual charges under operation and maintenance (O&M). The management’s experience in executing substation projects would lead to rational bids for these projects and the company will undertake a better risk assessment of these tenders. The management has indicated that it would bid for projects, wherein the IRR ranges between 18% and 20%. As mentioned earlier, the company will bid for projects that entail sizeable EPC proportion, enabling it to recover a large part of equity investment through the EPC business during its construction phase. The company executed its first project under this route in FY11 via a JV with Kalpataru Power (share of TEEC in the JV at 49%). The company also bagged a concession from PFC to build a transmission network at Patran (Punjab) on BOOM (Build, Own, Operate and Maintain) basis for 35 years. The management is looking to add 1 or 2 projects annually targeting a portfolio of five projects by FY17 end. BOOT/BOOM portfolio details Project name Jhajjar KT Patran Location Haryana Punjab JV/wholly owned JV with Kalpataru Power.

TEEC share of 49% Wholly owned

Project model BOOT BOOM Project cost 440cr 200cr Debt/Equity 70/30 75/25 TEEC's equity share 37cr 50cr Government grant 92cr Project awarded May ‘10 Nov ‘13 Commercial operation declaration

May ‘12 May ‘16

Concession period 25 years (extendable by 10yrs)

35 years

Project status Commissioned in 15 months. Current revenue of Rs. 58cr

Financial closure achieved. Expected to be commissioned by May ‘16

EPC portion 225cr 175cr Details 400kV transmission system

designed to evacuate 2,400MW power

400kV transmission system designed with evacuation facility of 1,000MVA


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TEEC to trade at premium to peers TEEC would be a major beneficiary of strong capex expected in the power T&D space over the next three years. TEEC’s strong execution capabilities coupled with strong spending would lead to robust earnings growth over the next three years. We estimate TEEC’s EPC division to deliver 28% revenue CAGR over FY15‐18E, given a robust order book position of Rs. 1,905cr (2.1x TTM sales). Led by higher execution, lower competitive intensity, and lower material costs, we estimate operating margin to expand 30bps over the same period. However, this would be marginally negated by lower contribution from wind assets. Consolidated operating profit is likely to clock 16.1% CAGR over FY15‐18 as against 28.3% for the EPC business. Other income for the company is expected to remain strong on the back of asset sale. Led by strong contribution from the EPC business and higher other income, we estimate a profit CAGR of 33.7% over FY15‐18. We value TEEC on a SOTP methodology, valuing the EPC business at 16x FY18E EPS, which is at a premium to its peers backed by a strong order book and above‐industry margins and return ratios. We value the wind business at 1x the equity book value and BOOT projects at 1.5x the equity book value. Thus, we arrive at a fair value of Rs. 607, 32.8% upside from the current level.

Re‐rating to continue led by strong execution in EPC business and reducing overhang of wind power


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Relative comparison: TEEC would continue to trade at premium due to higher earnings growth

Comparison Mkt Cap

(Rs cr)

Revenue CAGR (%) EBIDTA (%) EPS (Rs) P/E(x) RoE (%)

FY15‐18E FY17E FY18E FY17E FY18E FY17E FY18E FY17E FY18E

TEEC 2,670 21.0 14.6 14.9 22.8 25.7 20.5 18.2 14.7 16.2

Kalpataru Power Transmission*

2,860 6.9 11.1 11.1 15.0 19.1 11.1 8.8 10 11.7

KEC International 2,914 8.9 8.2 8.2 11.6 13.6 9.7 8.3 18.5 18.4

Alstom T&D India Ltd. 10,050 10.0 10.3 11.3 9.8 13.1 39.9 30.1 16.8 19.9

Source: Company, India Infoline Research, * standalone # prices as on 8th March

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Company background Techno Electric & Engineering Company Ltd (TEEC) was founded in 1963 and provides EPC services to power generation, transmission, and distribution sectors. Since its inception in 1963, TEECL has groomed itself in the field of comprehensive engineering, procurement, and construction services for fuel oil storage and handling system, comprehensive piping systems, including power cycle piping, process plant installation, fire protection systems, EHV switchyards, EHV sub stations, power plant cabling system, plant electrical distribution system including plant earthing systems, lightning protection system, and plant illumination systems installed nationwide. The company is headquartered in Kolkata, West Bengal (India) with marketing offices in three Indian states.

TEEC is involved in APDRP and Rajiv Gandhi Rural Electrification Program of the Government of India. TEEC entered into the wind power business by acquiring Super Wind (45MW) and Simran Wind (50.45MW) from Suzlon in FY10. While 45MW of capacity of Super is in parent company, Simran Wind continues to be a wholly‐owned subsidiary of TEEC. Subsequent to this TEEC has expanded its power capacity in Simran Wind from 50MW to 167MW by doing a Greenfield expansion. The company has sold 44.45MW of wind power at an effective valuation of Rs. 215cr and intends to divest the balance portfolio to improve strength for bidding more PPP projects in transmission sector, improve ROCE & focus on EPC. The company entered BOOT/BOOM business with a JV with Kalpataru Power in FY11 and secured a second project in FY15 at Patran. Currently, it has two projects and is looking to add one or two projects annually and is targeting a portfolio of five projects by FY17.

Techno’s operating structure


EPC

Simran Wind Projects Ltd.

Jhajjar KT Transco Private Limited

Patran Transmission Company Limited

Transmission &

Distribution

117.90 MW Wind Energy Generation

Design, Build, Finance, Operate and Transfer a

400kv /1500 MVA Transmission network in

Haryana capable of transferring 2,430 MW

Build a transmission network at patran Punjab on build, Own, Operate and Maintain (BOOM) basis for 35 years

45 MW Wind

Industrial

Generation

Techno Electric & Engineering Company

Limited

100% 49%

Green Power Linkages

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Financials Income statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Revenue 794 1,056 1,282 1,524

Operating profit 208 220 281 327

Depreciation (60) (51) (52) (52)

Interest expense (43) (37) (35) (32)

Other income 20 44 52 57

Profit before tax 125 175 247 300

Taxes (19) (30) (39) (48)

Minorities and other (1) (1) (1) (2)

Adj. profit 105 144 206 251

Net profit 105 144 206 251

Balance sheet Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Equity capital 11 11 11 11

Reserves 903 1,013 1,185 1,402

Net worth 915 1,024 1,197 1,413

Minority interest 20 21 23 24

Debt 472 425 361 307

Deferred tax liab (net) 1 1 1 1

Total liabilities 1,408 1,472 1,581 1,745

Fixed assets 1,025 802 805 808

Investments 135 272 272 272

Net working capital 224 280 344 411

Inventories 6 9 11 13

Sundry debtors 345 436 529 629

Other current assets 146 194 236 280

Sundry creditors (258) (343) (417) (496)

Other current liabilities (16) (16) (16) (16)

Cash 25 117 161 254

Total assets 1,408 1,472 1,581 1,745

Cash flow statement Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Profit before tax 125 175 247 300

Depreciation 60 51 52 52

Tax paid (19) (30) (39) (48)

Working capital ∆ (134) (57) (63) (68)

Operating cashflow 32 140 196 237

Capital expenditure (12) 171 (54) (55)

Free cash flow 20 311 142 182

Equity raised (0) ‐ ‐ ‐

Investments 52 (137) ‐ ‐ Debt financing/ disposal (67) (47) (64) (54)

Dividends paid (27) (34) (34) (34)

Other items (1) ‐ ‐ ‐

Net ∆ in cash (23) 92 44 93

Key ratios Y/e 31 Mar FY15 FY16E FY17E FY18E

Growth matrix (%)

Revenue growth 12.1 33.0 21.5 18.8

Op profit growth 8.0 5.7 27.8 16.4

EBIT growth 21.8 26.3 32.7 18.1

Net profit growth 20.1 37.0 43.4 21.6

Profitability ratios (%)

OPM 26.2 20.8 21.9 21.5

EBIT margin 21.2 20.1 22.0 21.8

Net profit margin 13.2 13.6 16.1 16.5

RoCE 12.0 14.7 18.4 20.0

RoNW 12.0 14.8 18.6 19.2

RoA 6.3 8.2 10.7 11.8

Per share ratios

EPS 18.4 25.2 36.2 44.0

Dividend per share 4.0 5.0 5.0 5.0

Cash EPS 29.0 34.2 45.2 53.1

Book value per share 160.2 179.4 209.6 247.6

Valuation ratios (x)

P/E 24.8 18.1 12.6 10.4

P/CEPS 15.8 13.4 10.1 8.6

P/B 2.9 2.5 2.2 1.8

EV/EBIDTA 14.7 13.3 10.0 8.1

Payout (%)

Dividend payout 26.1 23.8 16.6 13.6

Tax payout 14.8 17.0 15.8 15.9

Liquidity ratios

Debtor days 159 151 151 151

Inventory days 3 3 3 3

Creditor days 119 119 119 119

Leverage ratios

Interest coverage 3.9 5.7 8.1 10.3

Net debt / equity 0.5 0.3 0.2 0.0

Net debt / op. profit 2.2 1.4 0.7 0.2

Du‐Pont Analysis Y/e 31 Mar (Rs cr) FY15 FY16E FY17E FY18E

Tax burden (x) 0.84 0.82 0.84 0.84

Interest burden (x) 0.74 0.82 0.88 0.90

EBIT margin (x) 0.21 0.20 0.22 0.22

Asset turnover (x) 0.48 0.60 0.67 0.71

Financial leverage (x) 1.90 1.81 1.73 1.64

RoE (%) 12.0 14.8 18.6 19.2

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‘Best Broker of the Year’ – by Zee Business for contribution to broking Nirmal Jain, Chairman, IIFL, received the award for The Best Broker of the Year (for contribution to broking in India) at India's Best Market Analyst Awards 2014 organised by the Zee Business in Mumbai. The award was presented by the guest of Honour Amit Shah, president of the Bharatiya Janata Party and Piyush Goel, Minister of state with independent charge for power, coal new and renewable energy.

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