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Muted execution; order intake impressive

Techno Electric & Engineering’s (TEEC) Q1FY23 revenue declined 8.7% YoY to Rs1.7bn impacted by lower execution in EPC segment. Gross margin expanded 130bps YoY to 41% on account of lower RM purchases due to closure of most projects. However, due to operating deleverage, EBITDA margin contracted 150bps YoY to 27.6%. Order intake was impressive at Rs19bn, mainly from FGD and transmission. Current orderbook stands at Rs32.1bn. As during the quarter company completed many projects, we expect execution of new orders to begin in Q3FY23 and revenue to catch up in H2FY23. As FGD and transmission ordering activity picks up, we expect order intake to continue at similar pace in FY23E/24E and thereby, execution to remain healthy. The company has a net cash balance of Rs12bn. It has decided to sell ~40MW of its 129MW wind asset and offload the balance to a separate SPV. This is expected to improve receivables going forward. Given strong balance sheet, healthy execution and expected pick up in order intake, we maintain our BUY rating on the stock and maintain our SoTP-based target price of Rs471.

* EPC execution impacted by closure of orders: EPC revenue declined 11% YoY to Rs1.4bn as during the quarter company completed a large number of projects. Revenue offtake from wind segment increased 14% YoY to Rs309mn. Management expects the execution momentum to gather pace in H2FY23 as it begins the execution of its recently booked orders

? Margins remain stable: EPC segment margin contracted 330bps YoY to 16.3%, impacted by high commodity and freight costs. Management guided for EPC margin to remain at ~13% in FY23. For Q1FY23, despite a 150bps YoY contraction, EBITDA margin remained stable at 27.6%.

? Healthy order intake: During Q1FY23, company booked orders worth Rs19bn against Rs2.5bn in Q1FY22. Current orderbook stands at Rs32.1bn. For FY23, management maintained its order inflow guidance of Rs30bn from across FGD, T&D, smart metering and data centres.

? Maintain BUY on healthy orderbook and inexpensive valuation: We believe TEEC’s foray in data centre business will be positive in the long run on increased thrust of the government as it has been granted ‘infrastructure status’. Additionally, it drives a strong impetus from its presence in T&D segment, as we expect ordering momentum to gather pace from Green Energy Corridor in the next 24 months. Given healthy execution outlook with stable margin, we maintain our BUY rating on the stock.

Valuation and outlookThe stock is trading at 10.4x FY24E earnings. Using the SoTP methodology, we value the standalone EPC business at Rs322 (20x FY24E earnings), discounted cashflow from wind assets at Rs41 and cash and equivalents at Rs108 per share. We arrive at a target price of Rs471 and maintain BUY. We have not factored in any valuation for the data centre asset as the timeline of revenue generation is still a year away. However, we await any further developments.

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