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Strong inflows continue to improve growth outlook

Techno Electric reported miss on our estimates given weak execution in EPC segment. Net sales were down 17% YoY to INR2.3bn, 26% below vs JMFe. However, EBITDA declined by 17% YoY to INR 710mn (7% above our estimates), as the beat was led by higher wind energy revenue and treasury income. EPC segment margins were lower for the quarter at 15.3%, leading to margin decline of 300bps YoY. Adjusted net profit was lower by 9% YoY to INR588mn, owing to lower revenue growth. Revenue booking is expected to pick up pace in 2H (INR8bn vs INR4bn in 1H) and management has guided for 25% CAGR in revenue and expects to nearly double its EPC segment sales to INR18bn+ by FY25, with EPC segment EBIT margins in 12.5-13% range. Order inflows were robust at INR4bn in 2QFY23, resulting in 79% increase in order book to INR36bn (3.9x TTM sales). Further, the company intends to sell 79MW of its wind assets at a consideration of INR40mn/MW and will retain balance 51MW for its captive power requirement for data centre. With a robust cash position (INR11bn), management outlined a broad capital allocation plans including payout through dividend/buyback, expansion of EPC business and investment in data centre projects. We maintain BUY with Mar’24 TP of INR370, as we roll forward by 6 months.

* Expects lumpy revenue booking in 2HFY23: Net sales were down by 17% YoY to INR2.3bn, 26% lower vs JMFe, mainly on account of weak execution in EPC segment (- 20% YoY), due to low opening order book position at start-FY23. However, power revenues remain flat YoY at INR 474mn, while corporate revenues came in at INR 190mn up by 85% YoY. Management expects INR8bn EPC revenue in 2H vs INR4bn in 1H.

* Order book position buoyant: Order book increased by 79% YoY to INR36bn (3.9x TTM sales), as order inflows improved significantly to INR4bn. Major orders received by the company were a) Powergrid order for Ladakh region INR1.6bn and b) Tripura SEB order INR2.4bn. Order inflows of 1HFY23 jumped to INR22bn vs last 5 year annual average of INR7.5bn and management highlighted that it expects new orders worth INR10-15bn (L1 in INR5bn) in 2H and expects to reach an order book position of INR40bn+ by end-FY23.

* Margins declined given inflation: EBITDA saw a decline of 17% YoY (despite lower base), but were 7% above JMFe, due to higher treasury income and better wind segment PLF. EBITDA margin came in at 31.2% (-10bps YoY; JMFe: 21.6%). The contraction in margins was primarily on account of lower margins in EPC segment, which declined by 300bps YoY to 15.3%, while wind segment reported an operating profit of INR332mn on better than expected PLF. Management guided for 20-25% CAGR in EPC segment revenue over FY22-25E with EBIT margins in 12.5-13% range, based on current order backlog.

* Maintain BUY with TP of INR370: We maintain BUY with revised TP of INR370, led by an improved revenue visibility, healthy balance sheet with cash position of INR12bn (38% of mkt cap), recovery of ICDs and a strong payout plan over next 3 years. Orders booked at peak of commodity cycle present low risk to margin profile. Key risks: Negative surprise from new business margins and cash burn in data centre segment.

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