Capital Goods

India I Equities

Flash

11 October 2012

Techno Electric & Engineering

Moving up the value chain
Techno Electric & Engineering Company (TEEC) is a leading EPC service provider, specialising in executing the stockyard/switchyard component in BOP contracts for power plants. It also implements contracts for fuel-handling systems, substations and wind power development. TEEC is concurrently involved in wind-power generation, with assets of 207 MW. In a JV, it operates a 100-km 400 KV transmission link on a BOT basis in Jhajjar, Haryana.

Rating: Not rated Target Price: NA Share Price: `189

Key data

TEEC IN / TEEC.BO

52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding

`280 / `139 18,630 / 5,652 US$0.1m `11bn / US$0.2bn 57m

EPC order book at `9.5bn: The company has an order book of `9.5bn, in non-ferrous metals and power, translating to an OB/TTM sales ratio of ~1.3x. At present, a large part of the orders being executed is for substations. The company earned revenue of `7.04bn in FY12, with EBIDTA of `1.1bn and OPM of 16% in this vertical. Wind business stable, further expansions planned. With capacity of 207 MW across farms in Tamil Nadu and Karnataka, the companys assets operate at an average PLF of 25-29%. In FY12, it sold ~81,440 Renewable Energy Certificates (REC) at an average of `2,900 each. From its wind-energy businesses it earned `2.8bn in revenues, with PAT of `824m in FY12 (consolidated). Ahead, it is in the process of tying up funding for greenfield capacity of 150 MW and expects to commission this by 4QFY14. Diversification into transmission-network management. The company has a 49:51 joint venture with Kalpataru Power Transmission to operate a 400 KV 100-km power line to evacuate 1,320 MW of power from the Jhajjar power plant. Valuation. At the CMP of `189, the stock trades at a P/E of 8.9x, discounting its FY12 figures.
FY08 FY09 FY10 FY11 FY12

Shareholding pattern (%)

Jun 12 Mar 12 Dec 11

Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public

55.0 45.0 1.0 38.2 5.9

55.0 45.0 1.0 38.0 6.0

55.0 45.0 1.0 37.7 6.3

Relative price performance

270 TEEC 240 210 180 150 Oct-11 Feb-12 Jun-12 Aug-12 Dec-11 Oct-12 Apr-12 Sensex

Source: Bloomberg Key financials (YE Mar)

Sales (Rs m) Net Profit (Rs m) EPS (Rs) Growth (%) PE (x) P BV (x) RoE (%) RoCE(%) EV/EBIDTA (x) Dividend Yield (%) Net Gearing (%)
Source: Company, Anand Rathi Research

4,296 491 8.6 22.0 1.2 57.2 58.5 17.7 0.5 (14.1)

4,860 631 11.0 28.5 17.1 0.9 31.6 24.6 16.9 0.5 1.6

7,021 1,183 20.7 87.7 9.1 0.5 34.3 22.9 8.9 1.1 50.2

7,166 1,128 19.8 (4.7) 9.6 0.4 22.0 17.2 7.9 1.1 47.1

8,199 1,209 21.2 7.2 8.9 0.3 19.7 15.5 7.2 1.6 82.6

Amol Rao
+9122 6626 6615 amolrao@rathi.com

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

11 October 2012

Techno Electric & Engineering Moving up the value chain

Business segments
EPC Business
TEECs EPC business encompasses four segments:

Power generation: The company provides turnkey solutions for power plants, with the ability to take up BoP assignments in thermal power generation, covering the mechanical and electrical systems. Over the years, it has developed strong competencies in executing 7-8 packages of the addressable 17 packages usually contracted out in the BoP segment. It thus has the potential to capture around `8m9m/MW spend on a power plant. Transmission: In this segment, TEECs specialty lies in the construction of air-insulated and gas-insulated sub-stations on an EPC basis. This involves installing overhead lines for transmission projects relating to captive power plants, from 132 KV to 765 KV in the airinsulated segment and up to 400 KV in the gas-insulated sub-station segment. In FY12, it executed a 100-km 400 KV / 1,500 MVA power line in Haryana, which it operates on a BOT basis in consortium with Kapataru Power. Distribution: TEEC provides distribution solutions under the Accelerated Power Distribution Reform Programme (APDRP), apart from executing rural electrification projects under the Rajiv Gandhi Gramin Vidyutikaran Yojna (RGGVY). To date, it has executed large rural and urban distribution packages, covering Assam, Bihar and Maharashtra. Industrial: TEEC originally commenced EPC operations with projects in this segment. Its scope of operations includes designing and installing electrical and illumination systems for plants, oilhandling plants for process industries, naphtha and diesel systems for gas-turbine power plants as well as water and allied systems in various segments. It also has miscellaneous assignments such as cabling projects, water and allied systems, installing fire protection systems, etc. It also undertakes turnkey projects to set up captive/waste-heatrecovery power plants for process industries such as sponge iron, steel, chemicals, aluminium, etc., and has established solid credentials in this segment.
Unexecuted portion (`m)

Fig 1 TEEC: Unexecuted order book at end-1QFY13

Customer Segment

Power Grid Corporation of India Kalpataru Power Transmission Bihar State Electricity Board Transmission Company of Nigeria PGCIL - Xian XD Hindalco Industries-MAHAN Bharat Heavy Electricals Vedanta Alumina, Jharsuguda Assam Electricity Grid Corp. NEPCO, Kameng Total
Source: Company, Anand Rathi Research

Sub-Station Sub-Station Sub-Station Sub-Station Sub-Station Industrial Mechanical Auxiliary Industrial Sub-Station Sub-Station

3,054 1,144 496 377 325 287 220 172 145 125 6,345

Anand Rathi Research

11 October 2012

Techno Electric & Engineering Moving up the value chain

Other key features The companys business model is unique as its operating block is minuscule (~`350m). This is largely due to the fact that most of its manufacturing requirements are outsourced. Its strong design and engineering capabilities have thus enabled it to emerge as a scalable player. Low working-capital requirements and stable margins (around 12-13%) in its mainstay EPC business have ensured high RoE and strong cash generation over the past many years. This, along with negligible capex in its core business, has ensured that it has been FCF positive for many years. Unlike its peers in EPC transmission and distribution, it executes low-cycle orders. Along with successful relationships built and nurtured over the years, the company has maintained a working-capital cycle of 20 days and sundry debtors of 60 days. In its current order book of `9.5bn, the ratio of central/state PSUs to private enterprises is 70:30.

Wind Power Generation Business

TEECs wind generation business has been ramped up as follows:

45MW: It acquired Super Wind Project Pvt. Ltd. (Super) from the promoters of the Suzlon group (45 MW wind-power capacities in Tamil Nadu and Karnataka). Super had entered into 20-year PPA with the state electricity boards of Tamil Nadu and Karnataka. In FY10 TEEC undertook corporate restructuring in which it reverse merged itself with its 100% subsidiary Super. The merger was effective from 1 Apr09 and offered fiscal benefits in the form of accumulated depreciation. There has been no alteration in its equity capital, preand post-merger. 50.5MW: TEEC acquired another company Simran Wind Project Private Limited (Simran), also from the Suzlon group. Simran had wind-energy-generating capacity of 50.5 MW. At acquisition, the wind farm had been operational for nearly nine months. The wind-turbine generators (WTG) are at five locations, three in Tamil Nadu (44.5MW) and two in Karnataka (6 MW). 101.4 MW: 101.4 MW of wind power capacity was commissioned in Sep11 in Tamil Nadu. Management highlighted that the area where these wind-power plants are located have an average PLF of 28-29%. For these power plants, the company has entered into 20-year PPA with TANGEDCO at an average power purchase cost (APPC) tariff of `2.37 per unit. These units are eligible for REC and generationbased incentive (GBI) benefits. The project generated and sold 81,440 REC.

Fig 2 TEEC: Wind-power assets

Super Wind Project* Simran Wind Project Total

Capacity (MW) Turbines (x) Wind Farms (x) PLF (%)

Source: Company, Anand Rathi Research.

45 30 3 24%-29%

162.35 108 6 23%-32%

207.35 138 9

Anand Rathi Research

11 October 2012

Techno Electric & Engineering Moving up the value chain

Other key features

The capital cost for wind-power development is `600m per MW, inclusive of five-year O&M (operation and maintenance). Hence, for the company revenue from wind power is equivalent to EBITDA. Management is of the opinion there will be no Carbon Emission Reduction points (CERs) available for wind power being sold through the REC+APPC mechanism. Revenue from REC+APPC suffices for WTG viability; hence, it is impossible to prove the additionality clause under the existing Kyoto protocol to be eligible for CER. Floor prices for the REC have been fixed at `1.5/ kWh for FY12 and `1.4/kWh for FY13. In Jul11 Simran issued a 3.38% stake to IFC for $5m, valuing Simran at $148m, i.e., `7.4bn. Low cost of debt: In FY11, TEEC raised $80m in external commercial borrowings (ECB) from IFC at 8.4%, including hedging cost, with a tenure of 12 years.

Future plans The company is planning to set up an additional 150 MW of wind-powergenerating capacity for which it is securing financial closure. Management expects to conclude this by end-CY12 and commission the incremental 150 MW of capacity by end-FY13. The company has outlined an ambitious target of operating 1,250MW of wind-power-generating capacity by 2019-20.

Transmission Business
Bid details: In CY10, TEEC, in a consortium with Kalpataru Power Transmission, won a bid to operate a 400-KV 100-km power line to evacuate 1,320 MW of power from the Jhajjar power plant. The consortium set up a 51:49 special-purpose vehicle (SPV, with Kalpataru the majority stakeholder) to operate the project on a DBFOT basis (design, build, finance, operate and transfer). Project cost and commissioning: At an outlay of `4.44bn, the project was funded through equity infusion of `760m and debt of `2.76bn, in addition to a grant of `920m from the government of India. TEECs EPC division executed ~`2.1bn of work on the project, which was completed six months ahead of schedule and commissioned in Mar12. Back-of-theenvelope calculations indicate that the project would earn `26m profit in its full first year of operation. Annuity payments: The project will earn an annuity of `540m over the next 25 years. Additionally, TEEC would earn an additional `60m p.a. for the O&M contract. In case the project is transferred to Haryana Transco at the end of 25 years, the consortium will be paid `1bn. Else, the company can operate the asset for another 10 years. With the transmission sector opening up and private players being invited to participate in transmission projects, TEEC has secured a vital firstmover advantage as it has established its credentials by implementing the project well ahead of schedule. Management hopes to leverage this to secure more annuity projects in transmission and expects to bag a further four projects of similar size in the course of the XIIth Five-Year Plan.

Anand Rathi Research

11 October 2012

Techno Electric & Engineering Moving up the value chain

Summary
TEEC is one of the strong and established players, with a niche presence and capabilities in BoP in the domestic power sector. Given the present state of the power-generating sector in India, TEEC has a decent order book of `9.5bn, which offers assurance of revenues for more than a year. Low working-capital requirement and stable margins (around 12-13%) in its mainstay EPC business have ensured high RoE and strong cash generation over the past many years. This, along with negligible capex in its core business, has ensured that the company has been FCF positive for many years. In the past few years TEEC has been judicious in utilising its cash hoard. From deploying capital in financial instruments, it has now built a clutch of assets in the renewable energy sector by leveraging its balance sheet. This has enabled it to have a strong predictable income stream and cash flows which generate IRRs much higher than financial instruments. The consistent cash flows from the current renewable power asset base would be able, in the next five years, to liquidate the debt raised for their acquisition. Plans are afoot to build a string of assets in the BOT space, where the free-cash-flow generated from its EPC business would be utilised to build an annuity/high-equity IRR business. The Jhajjar transmission project is a step in that direction. The ability to execute a large part of these projects through its EPC operations would enable it to recover a substantial part of its equity infusion into the SPV. The company is undoubtedly an attractive proxy play on the ongoing power sector capex cycle of India on account of its niche positioning/ capabilities, stable operating margins and tight capital management. Besides, the increasing annuity income stream offers a high degree of predictability in cash flows and profits. Thus, the company has the potential to scale up (in operations) as well as predictability (in income and profits).

Anand Rathi Research

Appendix
Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >15% >25% Hold 5-15% 5-25% Sell <5% <5%

Anand Rathi Research Ratings Distribution (as of 15 Sep 2012) Buy Anand Rathi Research stock coverage (128) 74% % who are investment banking clients 5%

Hold 13% 6%

Sell 13% 0%

Other Disclosures This report has been issued by ARSSBL which is a SEBI regulated entity, and which is in full compliance with all rules and regulations as are applicable to its functioning and governance. The investors should note that ARSSBL is one of the companies comprising within ANAND RATHI group, and ANAND RATHI as a group consists of various companies which may include (but is not limited to) its subsidiaries, its affiliates, its group companies who may hold positions, views, stakes and may service the companies covered in this report independent of ARSSBL. Investors are cautioned to be aware that there could arise a potential conflict of interest in the views held by ARSSBL and other companies of Anand Rathi who maybe affiliated, connected or catering to the companies mentioned in the Research Report; even though, ARSSBL and Anand Rathi are fully complaint with all procedural and operational regulatory requirements. Thus, investors should not use this as a sole basis for making their investment decision and should consider the recommendations mentioned in the Research Report bearing in mind the aforementioned. Further, the information herein has been obtained from various sources which we believe is reliable, and we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities (hereinafter referred to as Related Investments). ARSSBL and/or Anand Rathi may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of the companies mentioned in the Research Report or in related investments, and may be on taking a different position from the ones which haven been taken by the public orders. ARSSBL and/or Anand Rathi and its affiliates, directors, officers, and employees may have a long or short position in any securities of the companies mentioned in the Research Report or in Related Investments. ARSSBL and/or Anand Rathi, may from time to time, perform investment banking, investment management, financial advisory or any other services not explicitly mentioned herein, or solicit investment banking or other business from, any entity and/or company mentioned in this Research Report; however, the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the other companies of Anand Rathi, even though there might exist an inherent conflict of interest. Furthermore, this Research Report is prepared for private circulation and use only. It does not have regard to the specific investment objectives, financial situation and the specific financial needs or objectives of any specific person who may receive this Research Report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this Research Report, and, should understand that statements regarding future prospects may or may not be realized, and we can not guarantee the same as analysis and valuation is a tool to enable investors to make investment decisions but, is not an exact and/or a precise science. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investments mentioned in this report. 2012 Anand Rathi Shares and Stock Brokers Limited. All rights reserved. This report or any portion thereof may not be reprinted, sold or redistributed without the prior written consent of Anand Rathi Shares and Stock Brokers Limited. Additional information on recommended securities/instruments is available on request.