Reduce Techno Electric Ltd for the Target Rs.1,600 by Emkay Global Financial Services Ltd
We downgrade (on recent sharp run-up in the stock price) Techno Electric (TEEC) to REDUCE with revised upwards TP of Rs1,600/sh (+2% upside). TEEC, a top EPC player with capabilities to provide solutions in T&D (EPC work for substation and distribution management system) and power generation (BoP and FGD) has recently diversified into high-growth businesses such as smart meter and data center. With a robust order backlog of Rs91bn (L1 position: Rs12bn), along with a strong enquiry pipeline, we expect TEEC’s revenue to more than double in the next 2 years. Order prospects are resilient, supported by the T&D, smart metering space, given the aggressive targets for renewable capacity adds and RDSS-led ordering. We expect multifold growth in the datacenter segment on the back of rising digitization globally benefiting TEEC.
Q1FY25 Financial Summary and Guidance TEEC recorded sustained strong growth performance during Q1FY25 with revenue/EBITDA of Rs3.7bn/523mn (+37%/+148% YoY); EBITDAM came in at 13.4% (+645bps YoY). Rise in EBITDAM is largely on account of improved gross margins i.e. 25% (+749bps YoY). Going ahead, the management maintains its revenue guidance for FY25E/26E at Rs25/35bn (FY24-26E CAGR of >50%). TEEC projects FY27E revenue growing to Rs45-50bn. The management is confident of sustaining margins in the range of 13-15% and estimate EPS from EPC business to come in at Rs50/75 during FY26E/FY27E; they expect EPS from the Data Center business to further add Rs25-30 per share post-commissioning at full utilization levels. Though our revenue estimates are in line with the management’s guidance, we are conservative towards the growth in EPS from EPC business; estimate it to be Rs42/52 per share.
Strong order backlog coupled with strong cash balance TEEC’s robust order book stands at Rs91bn (vs FY23: Rs37bn), coupled with L1 position as on date at Rs12bn, depicting strong order inquiry. The current order pipeline is over Rs50bn, for which results are yet to open; the management is hopeful of bagging orders worth at least Rs30bn. In the Data Center segment, TEEC will be commissioning its ~6MW (Phase 1) Chennai data center by Q3FY25 (delay on account of floods in Tamil Nadu); commissioning of 24MW in its entirety is currently scheduled for Mar-26. QIP inflow of Rs12.5bn has been successfully completed leading to cash (including investments) balance of Rs25bn. They recently won 2 orders under TBCB concession, requiring capex of Rs7.5bn, and having revenue potential of ~Rs800mnpa over the 35 years concession period.
Valuations We expect TEEC to benefit from sharp jump in order backlog, favorable tailwind, and robust balance sheet (raised Rs12.5bn QIP) to fund the growth in TBCB, smart metering, and Data Centre. However, with recent up-move in the stock (1M/3M: 8%/46%), we downgrade the stock from BUY to REDUCE with revised TP of Rs1,600/sh (+2% upside).
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