2012-10-11 - Anand Rathi Update

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Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely ofARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only withinIndia and to no countries outside India. Disclosures and analyst certifications are present in Appendix.

Anand Rathi Research India Equities

Amol Rao+9122 6626 6615

[email protected]

India I Equities

Key financials (YE Mar) FY08 FY09 FY10 FY11 FY12

Sales (Rs m) 4,296 4,860 7,021 7,166 8,199

Net Profit (Rs m) 491 631 1,183 1,128 1,209

EPS (Rs) 8.6 11.0 20.7 19.8 21.2

Growth (%) - 28.5 87.7 (4.7) 7.2

PE (x) 22.0 17.1 9.1 9.6 8.9

P BV (x) 1.2 0.9 0.5 0.4 0.3

RoE (%) 57.2 31.6 34.3 22.0 19.7

RoCE(%) 58.5 24.6 22.9 17.2 15.5

EV/EBIDTA (x) 17.7 16.9 8.9 7.9 7.2

Dividend Yield (%) 0.5 0.5 1.1 1.1 1.6

Net Gearing (%) (14.1) 1.6 50.2 47.1 82.6

Source: Company, Anand Rathi Research

Capital Goods

Flash

`

Rating: Not rated

Target Price: NA

Share Price: `189

Key data TEEC IN / TEEC.BO

52-week high / low `280 /`139

Sensex / Nifty 18,630 / 5,652

3-m average volume US$0.1m

Market cap `11bn / US$0.2bn

Shares outstanding 57m

Shareholding pattern (%) Jun 12 Mar 12 Dec 11

Promoters 55.0 55.0 55.0

- of which, Pledged - - -

Free Float 45.0 45.0 45.0

- Foreign Institutions 1.0 1.0 1.0

- Domestic Institutions 38.2 38.0 37.7

- Public 5.9 6.0 6.3

11 October 2012

Techno Electric & Engineering

Moving up the value chain

Techno Electric & Engineering Company (TEEC) is a leading EPCservice provider, specialising in executing the stockyard/switchyardcomponent in BOP contracts for power plants. It also implementscontracts for fuel-handling systems, substations and wind powerdevelopment. TEEC is concurrently involved in wind-powergeneration, with assets of 207 MW. In a JV, it operates a 100-km 400 KVtransmission link on a BOT basis in Jhajjar, Haryana.

EPC order book at `9.5bn: The company has an order book of`9.5bn,in non-ferrous metals and power, translating to an OB/TTM sales ratioof ~1.3x. At present, a large part of the orders being executed is for sub-stations. The company earned revenue of `7.04bn in FY12, withEBIDTA of`1.1bn and OPM of 16% in this vertical.

Wind business stable, further expansions planned. With capacity of207 MW across farms in Tamil Nadu and Karnataka, the companysassets operate at an average PLF of 25-29%. In FY12, it sold ~81,440Renewable Energy Certificates (REC) at an average of`2,900 each. Fromits wind-energy businesses it earned `2.8bn in revenues, with PAT of

`824m in FY12 (consolidated). Ahead, it is in the process of tying upfunding for greenfield capacity of 150 MW and expects to commissionthis by 4QFY14.

Diversification into transmission-network management. Thecompany has a 49:51 joint venture with Kalpataru Power Transmission tooperate a 400 KV 100-km power line to evacuate 1,320 MW of powerfrom the Jhajjar power plant.

Valuation. At the CMP of `189, the stock trades at a P/E of 8.9x,discounting its FY12 figures.

Relative price performance

TEEC

Sensex

150

180

210

240

270

Oct-11

Dec-11

Feb-12

Apr-12

Jun-12

Aug-12

Oct-12

Source: Bloomberg


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11 October 2012 Techno Electric & Engineering Moving up the value chain

Anand Rathi Research 2

Business segments

EPC Business

TEECs EPC business encompasses four segments:

Power generation: The company provides turnkey solutions forpower plants, with the ability to take up BoP assignments in thermalpower generation, covering the mechanical and electrical systems.Over the years, it has developed strong competencies in executing 7-8packages of the addressable 17 packages usually contracted out in theBoP segment. It thus has the potential to capture around `8m-9m/MW spend on a power plant.

Transmission: In this segment, TEECs specialty lies in theconstruction of air-insulated and gas-insulated sub-stations on an EPCbasis. This involves installing overhead lines for transmission projectsrelating to captive power plants, from 132 KV to 765 KV in the air-

insulated segment and up to 400 KV in the gas-insulated sub-stationsegment. In FY12, it executed a 100-km 400 KV / 1,500 MVA powerline in Haryana, which it operates on a BOT basis in consortium withKapataru Power.

Distribution: TEEC provides distribution solutions under theAccelerated Power Distribution Reform Programme (APDRP), apartfrom executing rural electrification projects under the Rajiv GandhiGramin Vidyutikaran Yojna (RGGVY). To date, it has executed largerural and urban distribution packages, covering Assam, Bihar andMaharashtra.

Industrial: TEEC originally commenced EPC operations withprojects in this segment. Its scope of operations includes designingand installing electrical and illumination systems for plants, oil-handling plants for process industries, naphtha and diesel systems forgas-turbine power plants as well as water and allied systems in varioussegments. It also has miscellaneous assignments such as cablingprojects, water and allied systems, installing fire protection systems,etc. It also undertakes turnkey projects to set up captive/waste-heat-recovery power plants for process industries such as sponge iron,steel, chemicals, aluminium, etc., and has established solid credentialsin this segment.

Fig 1 TEEC: Unexecuted order book at end-1QFY13

Customer Segment Unexecuted portion (`m)Power Grid Corporation of India Sub-Station 3,054

Kalpataru Power Transmission Sub-Station 1,144

Bihar State Electricity Board Sub-Station 496

Transmission Company of Nigeria Sub-Station 377

PGCIL - Xian XD Sub-Station 325

Hindalco Industries-MAHAN Industrial 287

Bharat Heavy Electricals Mechanical Auxiliary 220

Vedanta Alumina, Jharsuguda Industrial 172

Assam Electricity Grid Corp. Sub-Station 145

NEPCO, Kameng Sub-Station 125

Total 6,345

Source: Company, Anand Rathi Research


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Other key features

The companys business model is unique as its operating block isminuscule (~`350m). This is largely due to the fact that most of itsmanufacturing requirements are outsourced. Its strong design andengineering capabilities have thus enabled it to emerge as a scalable player.

Low working-capital requirements and stable margins (around 12-13%) inits mainstay EPC business have ensured high RoE and strong cashgeneration over the past many years. This, along with negligible capex inits core business, has ensured that it has been FCF positive for many years.

Unlike its peers in EPC transmission and distribution, it executes low-cycleorders. Along with successful relationships built and nurtured over theyears, the company has maintained a working-capital cycle of 20 days andsundry debtors of 60 days.

In its current order book of `9.5bn, the ratio of central/state PSUs toprivate enterprises is 70:30.

Wind Power Generation Business

TEECs wind generation business has been ramped up as follows:

45MW: It acquired Super Wind Project Pvt. Ltd. (Super) from thepromoters of the Suzlon group (45 MW wind-power capacities in

Tamil Nadu and Karnataka). Super had entered into 20-year PPA withthe state electricity boards of Tamil Nadu and Karnataka.

In FY10 TEEC undertook corporate restructuring in which it reversemerged itself with its 100% subsidiary Super. The merger was effectivefrom 1 Apr09 and offered fiscal benefits in the form of accumulated

depreciation. There has been no alteration in its equity capital, pre-and post-merger.

50.5MW: TEEC acquired another company Simran Wind ProjectPrivate Limited (Simran), also from the Suzlon group. Simran had

wind-energy-generating capacity of 50.5 MW. At acquisition, the windfarm had been operational for nearly nine months. The wind-turbinegenerators (WTG) are at five locations, three in Tamil Nadu(44.5MW) and two in Karnataka (6 MW).

101.4 MW: 101.4 MW of wind power capacity was commissioned inSep11 in Tamil Nadu. Management highlighted that the area wherethese wind-power plants are located have an average PLF of 28-29%.

For these power plants, the company has entered into 20-year PPAwith TANGEDCO at an average power purchase cost (APPC) tariffof`2.37 per unit. These units are eligible for REC and generation-based incentive (GBI) benefits. The project generated and sold 81,440REC.

Fig 2 TEEC: Wind-power assets

Super Wind Project* Simran Wind Project Total

Capacity (MW) 45 162.35 207.35

Turbines (x) 30 108 138

Wind Farms (x) 3 6 9

PLF (%) 24%-29% 23%-32%

Source: Company, Anand Rathi Research.


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Other key features

The capital cost for wind-power development is `600m per MW,inclusive of five-year O&M (operation and maintenance). Hence, forthe company revenue from wind power is equivalent to EBITDA.

Management is of the opinion there will be no Carbon EmissionReduction points (CERs) available for wind power being sold throughthe REC+APPC mechanism. Revenue from REC+APPC suffices for

WTG viability; hence, it is impossible to prove the additionality clauseunder the existing Kyoto protocol to be eligible for CER.

Floor prices for the REC have been fixed at `1.5/ kWh for FY12 and`1.4/kWh for FY13.

In Jul11 Simran issued a 3.38% stake to IFC for $5m, valuing Simranat $148m, i.e., `7.4bn.

Low cost of debt: In FY11, TEEC raised $80m in external commercialborrowings (ECB) from IFC at 8.4%, including hedging cost, with a

tenure of 12 years.Future plans

The company is planning to set up an additional 150 MW of wind-power-generating capacity for which it is securing financial closure. Managementexpects to conclude this by end-CY12 and commission the incremental150 MW of capacity by end-FY13.

The company has outlined an ambitious target of operating 1,250MW ofwind-power-generating capacity by 2019-20.

Transmission Business

Bid details: In CY10, TEEC, in a consortium with Kalpataru PowerTransmission, won a bid to operate a 400-KV 100-km power line toevacuate 1,320 MW of power from the Jhajjar power plant. Theconsortium set up a 51:49 special-purpose vehicle (SPV, with Kalpataruthe majority stakeholder) to operate the project on a DBFOT basis(design, build, finance, operate and transfer).

Project cost and commissioning: At an outlay of`4.44bn, the projectwas funded through equity infusion of `760m and debt of `2.76bn, inaddition to a grant of`920m from the government of India. TEECs EPCdivision executed ~`2.1bn of work on the project, which was completedsix months ahead of schedule and commissioned in Mar12. Back-of-the-

envelope calculations indicate that the project would earn `26m profit inits full first year of operation.

Annuity payments: The project will earn an annuity of`540m over thenext 25 years. Additionally, TEEC would earn an additional `60m p.a. forthe O&M contract. In case the project is transferred to Haryana Transcoat the end of 25 years, the consortium will be paid `1bn. Else, thecompany can operate the asset for another 10 years.

With the transmission sector opening up and private players being invitedto participate in transmission projects, TEEC has secured a vital first-mover advantage as it has established its credentials by implementing theproject well ahead of schedule. Management hopes to leverage this to

secure more annuity projects in transmission and expects to bag a furtherfour projects of similar size in the course of the XIIth Five-Year Plan.


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Summary

TEEC is one of the strong and established players, with a niche presenceand capabilities in BoP in the domestic power sector. Given the presentstate of the power-generating sector in India, TEEC has a decent order

book of`9.5bn, which offers assurance of revenues for more than a year.

Low working-capital requirement and stable margins (around 12-13%) inits mainstay EPC business have ensured high RoE and strong cashgeneration over the past many years. This, along with negligible capex inits core business, has ensured that the company has been FCF positive formany years.

In the past few years TEEC has been judicious in utilising its cash hoard.From deploying capital in financial instruments, it has now built a clutchof assets in the renewable energy sector by leveraging its balance sheet.

This has enabled it to have a strong predictable income stream and cashflows which generate IRRs much higher than financial instruments. Theconsistent cash flows from the current renewable power asset base wouldbe able, in the next five years, to liquidate the debt raised for theiracquisition.

Plans are afoot to build a string of assets in the BOT space, where thefree-cash-flow generated from its EPC business would be utilised to buildan annuity/high-equity IRR business. The Jhajjar transmission project is astep in that direction. The ability to execute a large part of these projectsthrough its EPC operations would enable it to recover a substantial part ofits equity infusion into the SPV.

The company is undoubtedly an attractive proxy play on the ongoing

power sector capex cycle of India on account of its niche positioning/capabilities, stable operating margins and tight capital management.Besides, the increasing annuity income stream offers a high degree ofpredictability in cash flows and profits. Thus, the company has thepotential to scale up (in operations) as well as predictability (in income andprofits).


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Appendix

Analyst CertificationThe views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of thecompensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the researchanalyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and ExchangeBoard of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and haveno bearing whatsoever on any recommendation that they have given in the Research Report.

Anand Rathi Ratings Definitions

Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (US$1bn) >15% 5-15%

2012-10-11 - Anand Rathi Update

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