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Lumpy inflows spruce up growth outlook; to step up payout

Techno Electric reported miss on our estimates given weak execution in EPC segment. Net sales were down 9% YoY (24% below vs JMFe), while EBITDA declined by 14% YoY (inline vs our estimates). Lower execution was made up by better margins EPC segment and higher PLF in wind segment. Management reiterated its EPC segment revenue growth guidance of 20-25% in FY23, with EBIT margins of 13%. Order inflows were robust at INR19bn in 1QFY23, resulting in 74% increase in order book to INR32.1bn (3.3x TTM sales). In FY23, company expects order inflows of atleast INR30bn, implying additional inflows of INR11bn in balance 9M period. Further, company intends to sell 45MW of its wind assets at a consideration of INR40-45mn/MW and will retain balance 85MW for its data centre power requirement. With a robust cash and cash equivalents of INR12bn, management outlined a broad capital allocation plan over next 3 years, including INR5bn payout through dividend/buyback, INR2-3bn for expansion of EPC business and INR5-7bn for data centre projects. We maintain BUY with Sep’23 TP of INR350, as we roll forward by 6 months.

* Target to maintain growth rate with sustainable margins: Net sales declined by 9% YoY to INR1.7bn, mainly on account of weak execution in EPC segment, where revenue declined by 11% YoY. Power segment revenue grew by 14% YoY. Management highlighted that pace of execution to improve in 1HFY23, as execution on large FGD orders commences. In 1QFY23, EBITDA witnessed decline of 14% YoY, as margins came in at 27.6%, -150bps YoY, due to elevated raw material and freight cost. However, management highlighted that 80% of its EPC order book consists of orders booked at peak of commodity cycle in last 6 months and it can sustain EPC margins 13%.

* Robust order inflow in FY23, trend to continue for coming years: Order book increased by 74% YoY to INR32.1bn (3.3x TTM sales), as order inflows improved significantly to INR18.6bn. Major orders received by the company were a) 2 FGD projects from RRVUNL at Jhalawar and Kota for INR14.55bn (at INR8.1mn per MW), b) transmission orders from PGCIL and Chhattisgarh SEB for INR4.5bn. Order inflows of 1QFY23 are higher than annual inflows of any of the past years and improve the growth outlook materially.

* Maintains 20-25 % revenue growth guidance: Management guided for 20-25% growth in EPC segment revenue with EBIT margins of 13%, based on current order backlog. It guided for order inflows of INR30bn in FY23, of which orders worth INR19bn are already booked and it is L1 in orders worth INR7.5bn. Management highlighted that it will commission Phase-1 of its Chennai data centre project by Jun’23, incurring INR5.5bn capex and will restrict its equity investment to INR1.5-1.6bn. Revenue or order inflow guidance of FY23 does not include data centre EPC.

* Maintain BUY with TP of INR350: We maintain BUY with revised TP of INR350, led by an improved revenue visibility, healthy balance sheet with cash and equivalents of INR12bn (40% of mkt cap), recovery of ICDs and a strong payout plan of INR5bn in 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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