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‘Strong EPC player in power infrastructure’

Techno Electric & Engineering Company Ltd (TEEC) is one of India’s top power Infrastructure companies. It provides end to end solutions across the electricity value chain through Engineering, Procurement and Construction (EPC) vertical, asset ownership and operations and maintenance services. Company has four decades of expertise in EPC segment which is a key strength of company, accounts about 89% of revenue and 66% of EBITDA (as on FY21). As a prominent engineering, procurement and construction (EPC) company in India’s power sector, it provides services to mainly three industry segments: generation, transmission and distribution.

Investment Rationale 

* Strong position in EPC business (T&D) with excellent execution capabilities

* Govt’s push on Smart Meter National Programme (SMNP) to boost business

* Entry into high growth data centre business

Valuation and View

* TEEC is a strong player in the power infrastructure space, focused on maintaining market leading position in EPC extra high voltage (EHV) substation segment. Besides remaining strong player in the power EPC, the company strategized to enter into new growing businesses like data centre, advance metering infrastructure (AMI) and FGD. Revenue from the EPC segment, which accounted for ~90% of total revenue, is expected to increase at brisk pace (~30% CAGR over FY21-FY23E) led by govt’s increased focus on energy transformation and entry into high growth business segments. TEEC’s order book is expected to increase to Rs3,200 cr by FY23E from Rs1,932 cr in FY21. Mgmt has guided for Rs2,000 -Rs2,500 cr order inflow for FY22E.

* TEEC is setting up data centre in Chennai which we think will help to power offtake from Tamil Nadu wind assets and also improve the RoE as it is likely to fetch higher tariffs at Rs5/unit (currently at Rs3/unit). The company planned investments of Rs750 cr for data centre business and is actively searching for the strategic partner. Besides generating income from renting data centres to global e-commerce and internet players, this new business segment will help in better utilisation of wind power assets which is struggling to generate low RoCE in the range of 5-10%. Optimistic over strong growth trend in data centre industry in India, TEEC has planned to foray into data centre in a big way and will utilise its over two decades of experience in the mechanical, electrical project execution which accounted for 50-60% of total data centres project.

* The company also expects strong business growth opportunity in the AMI space as central government announced grant towards installation of 25 crore smart meters over next five years. Govt’s AMI capex is envisaged at Rs1.5 lakh crore over the next five years.

* Owing to strong engineering skills and better project execution capabilities, TEEC has been generating industry leading EBIDTA market over 20%. Over the past five fiscals, operating revenue grew by a CAGR of 6.6% while profitability remained strong due to high profit margin helping it to maintain healthy return ratios. Debt free position, double digit return ratios and strong cash flow situation (OCF margin at 14% in FY21) reflect strong fundamentals of the company. Furthermore, cash balance of ~Rs800 cr support company to seize business growth opportunities in its expertise related segments. We expect operating revenue will increase to Rs1,519 cr in FY23E from Rs884 cr in FY21. RoE is expected to improve to 14.3% in FY23E from 11.2% in FY21. We assign ‘Buy’ rating to stock with target price of Rs370 valuing TEEC at P/E14xFY23E.

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