Techno Electric & Engineering - Strong margins, healthy growth outlook - ICICI Securities

Techno Electric & Engineering (TEEC) has reported better than expected margins as it witnessed strong improvement in gross margins and turnaround in the wind segment, which supported the overall margin uptick. Company won orders worth Rs6bn in 9MFY21 and is L1 in Rs6.65bn. Current orderbook of Rs20bn (2.5x TTM sales) lends growth visibility. Order intake is likely to pick up in Q4FY21E 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 two years - it expects 20% RoE from the same. Factoring-in the better than expected margins, we raise earnings by 16% and 3% for FY21E and FY22E 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 Rs336 (previously: Rs285).

- Healthy margins, despite muted execution: EPC revenues declined 21% YoY to Rs2bn; however, margins improved by 90 bps YoY to 17.8%. Furthermore, energy segment margins turned around supporting the overall growth in the earnings.

- Healthy order intake pipeline: Order intake in 9MFY21 stood at Rs6bn. Company is L1 in Rs6.63bn orders and is close to finalisation of two mid-size orders under FGD. TEEC has bid in NTPC Lot-6 and is targeting ~Rs9bn worth of FGD orders in the near to medium term. Other opportunities that will support order intake in FY22E include, data centre related ordering, smart meters, Power Grid orders, and green energy corridor.

- Maintain BUY on healthy cashflows and benign valuation: Despite challenges, the company is confident of maintaining margins at ~15%. Factoring-in the better than expected margins, we raise earnings by 16% and 3% for FY21E and FY22E respectively. Given healthy growth outlook and cashflows, we maintain BUY with a revised SoTP-based target price of Rs336 (previously: Rs285). 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 provide the company a foothold in a promising growth segment. Using the SoTP methodology, we value standalone EPC business at Rs224 (15x Sep'22E earnings), discounted cashflows from wind assets at Rs44, transmission assets at Rs10 per share, and cash and equivalents at Rs57 per share.

Valuation and outlook

Given healthy orderbook and growth prospects, we estimate revenue CAGR of 27% over FY20-FY23E with an earnings CAGR of 12%; hence we maintain BUY with a revised SoTP-based target price of Rs336 (previously: Rs285).

The stock is trading at 12.7x FY22E earnings. Using the SoTP methodology, we value standalone EPC business at Rs224 (15x Sep'22E earnings), discounted cashflows from wind assets at Rs44 and transmission assets at Rs10 per share, and cash and equivalents at Rs57 per share.

Shares of Techno Electric & Engineering Company Ltd was last trading in BSE at Rs.284.4 as compared to the previous close of Rs. 288.3. The total number of shares traded during the day was 18575 in over 597 trades.

The stock hit an intraday high of Rs. 288 and intraday low of 273. The net turnover during the day was Rs. 5189077.

Source : Equity Bulls

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