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Improved ordering outlook to lead the way

Techno Electric & Engineering Company’s (TEEC) FY22 annual report highlights its strong business from FGD segment mainly led by States and private sector. The company sees tremendous opportunities in the smart metering segment as India plans to install around 250mn smart metres by FY25 from 4.2mn as of Apr’22. Its future focus area is to develop 250MW hyper-density data centre across India by 2030. It spent Rs320mn on lease hold land in Chennai for the upcoming data centre project. Free cashflow generation more than doubled to Rs2.9bn during the year on account of strong execution and improvement in working capital cycle. Investments increased by Rs3.3bn over FY21, mainly in MFs. The current orderbook stands at Rs32bn (3x FY22 EPC revenue) against Rs14.4bn at the end of FY22, mainly led by two new orders received in Q1FY23, which were L1 in FY22. EPC segment RoCE continues to be higher at 59.1% in FY22 compared to 57.6% in FY21, mainly on account of improved operating leverage and asset light business model of the company. Balance sheet remains robust with net cash of Rs11bn at the end of FY22. Given strong balance sheet, healthy execution and expected pick up in order intake, we maintain our BUY rating on the stock with target price of Rs471.

* EPC execution picks up in FY22: After a consistent declining trend between FY18- 21, FY22 saw strong pick up in execution with 25% YoY growth. However, profitability was impacted on account of spike in raw material prices and supply-chain constraints. EBITDA margin fell 110bps YoY to 13.9%, lowest in FY18-22. For FY23, management has guided for revenue of Rs12bn with EBITDA margin of 15%.

* FY22 order inflow was muted, outlook is encouraging: Order inflow for FY22 was muted at Rs8bn and order backlog fell to Rs14.4bn (Rs19bn in FY21). This was led by slowdown in T&D ordering. Q1FY23 order intake was impressive at Rs19bn, mainly from FGD (Rs14.5bn) and balance from T&D. For FY23, management maintained its order inflow guidance of Rs30bn across FGD, T&D, smart metering and data centre.

*- Balance sheet continues to be robust: TEEC’s balance sheet continues to be robust with net cash of Rs11bn at the end of FY22 compared to Rs7.2bn in FY21. Operating cashflow more than doubled to Rs2.6bn, led by improvement in net working capital days from 204 in FY21 to 175 days in FY22. FCF generation for FY22 stood at Rs2.9bn against Rs1.3bn in FY21.

* Spent Rs337mn on upcoming Chennai data centre: TEEC has planned to develop ~250MW hyper-density data centre by FY30 across India. Currently, the company has shortlisted three cities viz. Chennai, Kolkata and possibly Mumbai. Each will be in the range of 25-30MW of IT load and facility load of ~36-42MW. Capex would be Rs450mn/MW of IT load and company will be adding capacity in phases of 6MW of IT load. Phase-1 is expected to complete by Jun’23 with the addition of 6MW capacity each quarter till Mar’24. The required capex for phase-1 is of Rs5.5bn. TEEC has spent Rs1bn (including Rs337mn in FY22) towards land acquisitions and construction, and would be spending Rs1bn each in Q3 and Q4FY23 and balance Rs2.5bn in Q1FY24. It would be limiting its exposure to Rs2bn towards the data centre with balance investment from debt or equity investment from a partner.

* Steady growth from AMI segment: TEEC anticipates tremendous opportunities in the smart metering segment as India plans to install around 250mn smart metres by 2025 from 4.2mn as of April 2022. The company has already received an order of installing 0.2 mn smart metres worth Rs2bn in the state of Jammu & Kashmir. TEEC’s goal is to get new orders worth Rs3-4bn of AMI projects per year in the next 3-4 years.

* Wind division accounts’ receivable continues to mount: With pick up in execution, EPC debtors have moved up from 62 days to 69 days, although much lower compared to pre-covid levels of 80-90 days. On the other side, wind business continues to see account receivables moving higher from 397 days in FY19 to 746 days in FY22 due to delays in payments by SEBs.

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