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Strong backlog provides fair revenue and margin visibility

Techno Electric reported weak set of numbers, due to weak execution. Numbers are not comparable vs JMFe due to reclassification of wind segment sales, as the company has signed MoU to exit 108.9MW of wind asses. Net sales were down 38% YoY, while EBITDA declined by 42% YoY. EPC segment sales dipped 38% YoY, due to delay in handing over of sites by customers and supply chain disruption. EPC margins were lower by 130bps to 12.2%, mainly due to lower fixed cost absorption. Adjusted PAT from continuing operations were lower by 11.2% YoY to INR305mn, owing to lower revenue growth. We believe the revenue miss is one-off and execution should normalise in coming quarters. Management has guided for revenue of INR10-11bn in FY23 and INR16bn in FY24 with EBIT margins in the range of 13.5- 14% for the EPC segment. Order inflows were robust at INR6.8bn in 3QFY23, resulting in 122% increase in order book to INR40bn (3.7x TTM EPC sales). We maintain BUY as a) robust order book position gives revenue visibility over next 24-30 months, b) overhang of low RoE wind business will fade out as nearly 80% of wind assets are sold and c) strong cash balance of INR15bn+ (including wind asset sale) will ensure healthy payout over next 3 years. We maintain BUY with revised Mar’24 TP of INR420.

* Delay in execution led to revenue miss: Net sales were down by 38% YoY to INR1.9bn, mainly on account of weak execution in EPC segment (-38% YoY) given delay in handing of sites by PGCIL at Sikar and Sterilite in Goa, supply chain disruption for semiconductors and electrical components in 765kV GIS substation. Power segment revenues remained at minimal levels due to sale of 80% of assets. Management guided for INR10-11bn EPC revenue in FY23, implying INR5-6bn EPC revenue in 4QFY23.

* Order book position buoyant: Order book increased by 122% YoY to INR40bn (3.7x TTM sales), as order execution got delayed and inflows in 3Q stood at INR6.8bn. Major orders received by the company were a) TBCB order from Sterlite Goa for INR1.3bn and b) order from REC Power distribution for 2.5 lakh smart meters under DBFOT model – INR3.4bn. Order inflows of 9MFY23 jumped to INR30bn vs last 5 year annual average of INR7.5bn and management highlighted that it expects new orders worth INR20bn, from tenders of INR50bn which are expected to close in next few quarters.

* Margins declined given inflation: EBITDA saw a decline of 42% YoY, as margins came in at 12.6% (-100bps YoY; JMFe: 13.2%). The contraction in margins was primarily on account of lower margins in EPC segment, which declined by 130bps YoY to 12.2%, due to lower absorption of fixed costs and higher overseas freight costs. Management guided for EBIT margins in 13.5-14% range, based on current order backlog.

* Maintain BUY with TP of INR420: We maintain BUY with revised TP of INR420, led by improved revenue visibility, sales of low RoE wind assets and healthy balance sheet with cash position of INR15bn (40% of mkt cap) which ensures higher payout 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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