Maintain ‘hold’ on TEEC with revised TP of Rs 407

By: |
July 02, 2021 8:24 AM

TEEC plans to enter the data centre market with an investment outlay of Rs7.5bn over the next 2 years – it expects 20% RoE from the same.

marketCompany is L1 in Rs 6.63bn orders, majority of which are close to finalisation.

Techno Electric & Engineering (TEEC) performance was below par due to delay in project execution and loss in the wind segment. Current orderbook at Rs20bn (2.1x TTM sales) lends growth visibility. Order intake is likely to pick up in FY22E led by FGD and Power Grid ordering. TEEC plans to enter the data centre market with an investment outlay of Rs7.5bn over the next 2 years – it expects 20% RoE from the same. Factoring-in the near term stress in margins and delay in order finalisation, we cut earnings by 20% and 7% for FY22E and FY23E respectively. Given strong balance sheet with cash and equivalents of Rs8bn, healthy order intake outlook and recent foray towards the lucrative data centre segment, we maintain BUY on the stock with a revised SoTP-based target price of Rs 407 (previously: Rs 336).

Lower than expected EPC execution and wind division loss impact PAT: EPC revenues marginally grew 5% QoQ to Rs2.1bn in Q4FY21, over a low base and was below consensus and management expectations; margins dropped 260bps QoQ to 15.2%. Furthermore, the energy segment booked Rs 231mn of loss impacting the overall earnings.
Healthy order intake pipeline: Order intake in FY21 stood at Rs 5bn. Company is L1 in Rs 6.63bn orders, majority of which are close to finalisation. Other opportunities that will support order intake in FY22E include, data centre related ordering, smart meters, Power Grid orders, and flue gas desulphurisation (FGD).

Maintain BUY on healthy cashflows and benign valuation: Despite challenges, the company is confident of maintaining margins at ~15%. Given healthy growth outlook and cashflows, we maintain BUY with a revised SoTP-based target price of Rs 407 (previously: Rs 336). We believe, the foray towards data centre business will be positive in the long run as it gives an avenue to utilise the wind power efficiently and provides the company a foothold in a promising growth segment. Using the SoTP methodology, we value the standalone EPC business at Rs 297 (20x FY23E earnings), discounted cashflows from wind assets at Rs 44, transmission assets at Rs 10 per share, and cash and equivalents at Rs 60 per share.

Valuation and outlook: The stock is trading at 15x FY23E earnings. Using the SoTP methodology, we value the standalone EPC business at Rs 297 (20x FY23E earnings), discounted cashflows from wind assets at Rs 44 and transmission assets at Rs 10 per share, and cash and equivalents at Rs 60 per share.

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