TECHNOFAB Engineering

Technofab seems to be an attractive bet for investors considering its strong order book and superior EBITDA margins

IPO details

Company Name: Technofab Engineering

Issue Size: Rs 70 crore

Price Band: Rs 230-240

Issue Date: June 29 to July 02

TECHNOFAB Engineering (TEL) is coming out with its initial public offer of around 29 lakhs shares with a price band of Rs 230-240 per share to raise Rs 70 crore. The issue being made through the book-building process represents equity dilution of 28.5% valuing the company around Rs 245 crore.

   Nearly half of the capital raised through fresh issue of shares will be utilised to meet the working capital requirements. The company is in engineering procurement and construction (EPC) business that typically has high working capital requirement as companies in the sector receive payments for the projects over a period of time. The balance will be utilised for buying construction equipment, setting up of storage facility for construction equipment and setting up training centre for employees.

BUSINESS:

TEL started off as company providing piping, valves and vessel fabricator in 1971 and has evolved to EPC firm for balance of plant (BOP) turnkey projects. Under this, companies provide engineering service for putting up plant. It caters to various sectors including power (thermal power & nuclear power), oil & gas, water & water waste management, industrial infrastructure and electrical equipment distribution. The power sector accounted for a little over half of the total revenue for the financial year ended March 2010, followed by 20% from the industrial sector and rest by other sectors. Its closest peers among the medium size companies are Sunil Hitech and Hindustan Dorr -Oliver. As far as its revenue model goes, TEL banked on its top five clients for almost two thirds of total revenues for the year ended March but these customers comprise only a third of the total order book. This means the company has relatively de-risked its business from the fortunes of these handful of clients. No single company has more than 20% share of its outstanding projects.

   To bid for bigger projects through a consortium three years ago, TEL divested 9% of it's holding to infrastructure major Gammon India and a 6.7% stake to Associate Transil Structure (that is now merged with Gammon India).

   TEL has an order book of Rs 533 crore as of March 31, 2010, which is 2.66 times its revenue for the 12 months ended March 2010. Half of its order book comprises projects in industrial & infrastructure. Industrial Infrastructure comprises setting up plant for industry like steel, sugar etc. Around a quarter of outstanding projects related to power sector with the balance related to water and electrical equipment distribution. These orders are to be executed over the next eighteen months.

   The company has relatively limited exposure to overseas markets compared to many large EPC firms in the country. Turnkey projects outside India in regions such as Kenya, Ethiopia and Fiji contributed less than a fifth of its total revenue during FY10.

FINANCES:

TEL's revenues grew with a compounded annual growth of 48% over the past three years, while net profits grew 190% year on year during the same period. A large part of the growth was due to revenues between 2007 and 2009 as it completed a number of overseas contracts during this period. For the financial year ended March 2010, TEL revenue stood at Rs 200 crore, while net profit grew 62% to Rs 19.15 crore. This was led by execution of power projects, which is relatively higher margin segment. The company was able to boost operating margins by 200 basis points to 17% for FY'10.

VALUATIONS:

At the upper-end of the price band, the issue is priced at around 13 times its net profit for year ended March 2010 and little over 2.3 times its post-IPO book value per share.

   The valuation looks favourable compared to industry average P/E multiple of 15-18 times for small and medium turnkey civil construction players. For instance, it peers such as Sunil Hitech and Hindustan Dorr Oliver are currently valued at 16.5 and 15.5 times their 12 months trailing earnings, respectively. As the company's fundamentals are strong with reasonable order book size and superior EBITDA margins, investors can consider subscribing to the offer but should not expect high listing gains in the current market.