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Headed for Electrifying Growth

Capitalizing on its Electro-mechanical capabilities, Techno Electric & Engineering Co. (Techno) is at the cusp of embarking upon a new journey in the area of Data Centres. Data centre capacity in India is likely to grow multi-fold in the coming years. Data is the new oil and early foray of Techno will place it in the leading position to cash in on the burgeoning Data Centre market in India. Further, the existing business too is offering few alluring opportunities like FGDs and Smart Metering. After demonstrating its ability to execute its own Data Centre, the company is likely to become one of the very few EPC player in the country with ability to execute such projects. We initiate coverage on Techno Electric & Engineering with BUY rating and Target price (TP) of Rs466.

* Data Centre a new gold mine:

Faster digital adoption driven by pandemic, supported by high growth in e-commerce, increase in usage of social media, greater preference for OverThe Top (OTT) entertainment platforms, the Government’s impetus to the Digital India initiative and rapid digitalisation of services across industries will push the existing demand growth of 15-20% over FY15-19 to 25-30% over FY20-25E. The current 360MW Data Centre capacity is expected to treble over the next four to five years to 1.5GW by FY25. Our initial estimates suggest an incremental investment to the tune of $5-6 billion in building the domestic Data Centre infrastructure in India over this period.

* FGD and Smart Metering New Verticals of growth:

Techno identifies Fuel Gas Desulfurization (FGD) and Smart Metering Infrastructure as two emerging engines of growth for the coming years. Thermal Power Gencos will spend ~Rs1.2tn on FGD as 80GW of thermal power has to migrate to prescribed emission norms. Techno will be bidding for 12000MW or Rs60bn worth of projects and expects Rs5bn of order inflow annually from this segment in the coming years. Smart Metering too offers a significantly large EPC opportunity for the company as the Govt. of India is planning to replace 220mn conventional meters over the next three years, with a capital outlay of Rs1.8-2.0tn. Techno remains one of key player in the smart metering space and is already executing a project in J&K funded by REC.

* Strong Free Cash Flow generation (cash & its equivalents stood at Rs.55/share in FY20) and generous reward to Minority Shareholders: Techno’s capital light model and smart management of working capital led to strong free cash generation. The company has generated free cash of Rs12.8bn over the last five years and is expected to generate Rs4.5bn of cash in the next three years, despite our assumption of higher working capital requirement over the same period. The company has rewarded its minority shareholders in the form of share buyback/ dividends – company did buyback of shares to the tune of Rs1100mn in 2019 (buyback price was Rs.410/share, which was at over 40% premium to the VWAP price as on 4th Dec 2018), without the participation of promoters; further, company had declared two interim dividends for FY21 aggregating to Rs6/share.

* Valuation & Risks:

We have valued Techno’s EPC business at 18xFY23E P/E and its Wind Power Asset at Book Value. We have not included Kohima Mariani Transmission Asset separately in our SOTP Valuation as its sale consideration has been captured in the cash component. Consequently, the SOTP valuation of Techno Electric & Engineering works out to be Rs466, giving an upside of 43% from the current levels. A sharp recovery in order inflow on account of new business verticals and its entry into burgeoning Data Centre business, which is yet not fully captured in its valuation, makes Techno an attractive play in the domestic infrastructure space. The company’s robust RoIC profile and unlevered balance sheet offer significant headroom for valuation expansion. We initiate coverage on Techno Electric & Engineering with BUY rating and target price (TP) of Rs466.

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