EPC segment growth and margin concerns warrant a cautious stance; earnings revised; TP cut to `231
Techno Electric & Engineering Company Ltd (TEECL) got re-listed post amalgamation of the company with Simran, a wholly owned subsidiary. The company was able to sell its 46% holding in Patran at an enterprise value of Rs 2.3 bn to India Grid which will boost the overall cash flows. EPC segment growth outlook remains challenging and management is betting on overseas markets and new areas like Flue Gas De-sulphurisation (FGD).
TEECL should be able to overcome these challenging times given its strong balance sheet; however, near-term EPC segment growth and margin concerns warrant a cautious stance on the stock. We factor in 4% decline in FY18-20e earnings CAGR and maintain Reduce with a revised SoTP target price of Rs 231 (Rs 189 for EPC business, Rs 37 for wind assets, Rs 6 for transmission assets).
Weak order intake to impact growth
Order intake in H1FY19 remained subdued at Rs 2.25 bn, resulting in an order book of Rs 17.5 bn where transmission comprised 75%, distribution accounted for 21%, and generation contributed 4%. Company is hopeful about finalisation of $87 mn EXIM funded order from Kenya, of which 30% will be subcontracted to Kalpataru. It is also eyeing FGD related opportunities from Damodar Valley Corporation, expansion programme of Vendanta and other mid-size domestic and overseas orders. Delay in finalisation of these orders, competitive pricing environment and terms of payment can impact the earnings growth of the EPC segment.
Strong balance sheet comes to rescue
Techno has a strong balance sheet with Rs 3.6 bn cash and current investment against debt of Rs 500 mn. Proceeds from the sale of Patran will further boost the overall cash flows and company is planning a share buyback which will boost the return on equity.
Weak order intake, EPC segment stress
Given higher other income due to proceeds from Patran sale and wind power performance we have revised earnings upward for TEECL. However, EPC segment earnings will remain under stress, impacting overall valuations. Hence, we maintain Reduce with a revised target price of Rs 231 (EPC business is valued 20x FY20e earnings at Rs 189 per share).