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Strong order inflows and increasing payout augurs well

Techno Electric (TEEC) reported in line performance on revenue front, but EBITDA saw a miss. Net sales were up 43% YoY (+4% vs. JMFe), led by strong recovery in EPC segment at INR 3bn (+46%), while EBITDA saw a rise of mere 2.5% YoY (-50% QoQ), 28% lower than JMFe, as margins came in at 14% (-560bps YoY; JMFe: 20%). The contraction in margins was led by lower margins in EPC segment, but management highlighted that all contracts have a price variation clause and expects reimbursements for cost escalations over next 2 quarters. Wind segment operating loss was a tad higher than estimate, due to lower PLF. Order inflows stood at INR6bn during 9MFY22, not comparable on low base of last year, but the company is L1 in orders worth INR18.5bn, which will lead to year end order book of INR30bn (3x FY22E EPC sales). Management guides for 25% revenue CAGR over FY21-23 and expects to increase dividend payout to INR25/share, implying yield of 10%. Its data centre in Chennai has moved into construction stage and progress will depend on getting a JV partner on board as it involves capex of INR12bn. We maintain BUY with revised SOTP based TP of INR340, on Mar’24 earnings.

* Healthy growth in EPC segment supported top line:

Net sales grew by 43% YoY (11% QoQ) to INR3bn, 4% above JMFe, as EPC segment sales witnessed sharp recovery. However, wind energy segment revenue de-grew by 23% YoY to INR69mn, largely due to low PLFs. Management guided for revenue CAGR over FY21-23 as it is L1 in large FGD and transmission orders worth INR18.5bn. Continued traction in FGD, smart meters and upcoming data centre projects (in-house opportunity of 4-5 data centres in 5 years) is likely to drive order inflow growth in future.

* Margins continue to disappoint:

EBITDA was up 2.5% YoY to INR426mn, with contraction of 560 bps YoY in margins (14.0%; 31.2% in 2Q22). Segmental margins in EPC segment contracted by 430bps to 13.5%, while energy segment reported operating higher operating loss. While margins are likely to be impacted in the near term due to inflation and supply chain issues, management expects sustainable margins of 15%.

* FGD orders will continue to come by with material contribution from data centres from FY23:

While order inflows of INR6bn in 9M are not comparable on YoY basis, they were weak vs 9M revenue of INR7bn. However, large orders in the pipeline are expected to materialise by 4QFY22, resulting in order inflows of INR18.5bn. This is likely to drive year end order book to c.INR 30bn (3x FY2E sales). 9MFY22 order book stood at INR 18bn.

* Maintain BUY with revised TP of INR340:

We believe improved order inflows in FGD, data centres and smart meters (new business areas) are likely to improve revenue growth trajectory, while increased dividend payout (10% yield) present a sound capital allocation policy vs past. We tweak our estimates to factor in lower margins in new business areas vs traditional transmission EPC segment. Maintain BUY with revised SOTP based TP of INR340, as we reduce our EPC earnings growth CAGR over FY21-24E to 10% vs 15% earlier. Key risks: Delays in order awards and aggressive bids by competition.

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