Stock review: Techno Electric and Engineering Company

Techno Electric's entry into renewable power generation gives it a new growth opportunity

 

KOLKATA-BASED Techno Electric and Engineering Company is investing heavily in renewable power. The growth opportunities that the company is pursuing in transmission and distribution and renewable power generation are lucrative, but one needs to watch how successfully it exploits them.

BUSINESS:

Techno Electric and Engineering Company (TEEC) has had a long list of successful projects and renowned clients in thermal power and process industries such as petrochemicals or metals. In 2009, it entered into the business of wind power by acquiring two companies — Simran Wind Project and Super Wind Projects with a total capacity of 95.5 MW. The company subsequently merged itself with Super Wind Project, which was renamed Techno Electric. For this purpose, it was de-listed temporarily and was listed back in the second week of November 2010. Simran Wind Project operates as its subsidiary. The company has also entered into the transmission & distribution sector.

GROWTH DRIVERS:

The company is carrying an unexecuted order book of 1,330 crore that is nearly double its revenues for the past 12 months. The order book may have remained stagnant over the past 12 months, however, that is mainly due to the management's philosophy of not running after projects, but choosing them based on healthy margins. During FY11 so far, the company has added fresh orders worth 470 crore and is regularly adding new ones. Recently, it received an order worth 85 crore for three 400 KV stations in Madhya Pradesh 

   A consortium, in which TEEC holds a 49% stake, bagged a 435-crore order for 400 KV, 100-km long transmission lines with associated infrastructure in public private partnership (PPP) in Haryana. The project is scheduled to commence operations by December 2011 and will be run by the consortium for 25 years. Besides 205 crore of EPC work, running the project will generate revenues of 50-55 crore annually to the company. The management aims at adding one such transmission project every year. 

   The company has aggressive investment plans in renewable energy business to benefit from the government's generation based incentives (GBI) and higher tariffs due to renewable energy certificates (RECs). It has already placed an order with Suzlon for equipment for 200 MW worth 1,150 crore. First phase with 100 MW is set to commission by June 2011 in Tamil Nadu and the rest by March 2012 in Gujarat. In future, it will also invest in biomass and small hydropower projects. The profitability of company's EPC business is set to improve in FY12 as its various projects are finished the initial construction phase and entered equipment supply phase.

FINANCIALS:

On a consolidated basis, the company's topline has grown by a CAGR of 29% over the past four years. Moreover, operating margins have improved from 12% in FY07 to 20% in FY10. The company is carrying debt of 200 crore, with debt-to-equity ratio of around 0.5. The company plans to raise 750 crore debt from IFC and other banks for its 1,150-crore investment in wind power. In the first nine months of the current fiscal, the EPC business contributed 84.3% to the company's revenues. Power generation contributed 11.3%, while treasury income stood at 4.4%. In the coming quarters, the income from power generation is set to rise in line with capacity additions, while treasury income would dry up. The EPC business is set to maintain around 15-20% annual growth rate.