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StocksInsights Hidden Treasure November 2015 pick - Techno Electric
1. Techno Electric & Engineering
Ltd(TEEL)
- Market Share gains to drive Growth
2. Content Index
•Techno Electric & Engineering Limited – Investment Snapshot :- Slide #3
• T&D Industry – An Overview:- Slide #5
• Investment Arguments :- Slide #19
•P&L - Slide #29
• Concerns & Reasoning :- Slide #31
3. Techno Electric & Engineering Ltd– Investment Snapshot
(as on Dec 04, 2015)
Recommendation :- BUY
Maximum Portfolio Allocation :- 5%
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 80%
Current Accumulation Range :- 560-570 Rs
TEEL is our typical Multibagger stock, but a Stock which is a Good
Investment due to the enormous growth opportunities due to
increasing transmission capacity and increasing Infra spend by
the government. It has a differentiated business model which will
deliver superior returns in the long run.
Core Investment Thesis :
The company is in Generation Transmission & distribution space
which has been growing at a fast clip due to increasing capex in
the space. The company has strong order book which provides
visibility in the medium term.
Current Market Price – Rs.553
Current Dividend Yield – 0.71%
Bloomberg / Reuters Code –TEEC. IN/
TEEC.NS
BSE / NSE Code – 533281/TECHNO
Market Cap (Rs. Cr) – 3156
P/E - 26.96
Face Value – Rs.2
52 Week High / Low – Rs. 590.00 /
Rs.328.60
Promoter’s Holding – 57.98%
FII - 8.62%
DII - 16.29%
Other Holdings -17.11%
4. Key Investment Highlights
1.) Presence in a growing segment :- Company caters to the power sector with dominance in T&D space
which has been growing rapidly which provides immense opportunities to the companies in the sector.
2)International markets drive growth- Company has been consistently looking for investments in
International markets which will drive its growth.
3.) Improvement in Market Share :- The company has been continuously increasing its market share from
about 2% to 8% currently.
4.) Reduction in Working Capital cycle :- The company bids only for contracts where the financials of the
company to pay is secure which also enables the company to have the lowest working capital cycle.
5) Asset Light Business :- The company’s average fixed asset turnover over last five-to-six years has been 43x
versus an industry trend of 5-6x.
6.) Growing ahead of the Industry :- The company has delivered an above average performance in the past.
In the past six years, it has outpaced the industry average in almost all key financial parameters.
7.) Increasing market share in EHV Sub-Station- The company has bagged about 62% and 100% EHV Sub-
Station orders in FY14 & FY15 respectively.
8) Increasing Capex Spending:- The company has benefitted by increased capex spending by the
Government and SEB’s which has increased its order book.
9.) Management/ Corporate Governance :- The company has a good management and adhere to strong
corporate governance norms. The company is run professionally by a team of professionals who have a
strong understanding of the business and have a strong vision about its business.
10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at reasonable
Valuations. The company is quoting at 26.58x its trailing FY15 Earnings which is reasonable for the Quality of
this stock which has a strong order book and provides revenue visibility.
6. Global T&D Investments
• The demand for the transmission sector, globally, for the next 5-7 years is bright because of rising energy
demand in developed and developing markets.
•Globally , the power T&D sector experienced 13.7% CAGR over 2006-14, primarily because of strong growth
in Asia, America, Middle East and Africa.
• The T&D sector, globally, is expected to attract investment of $1trn over the next 5-6 years which provides
huge opportunities for KEC due to its vast experience and project execution skills.
• Most power-transmission companies in India (L&T, KEC, Kalpataru Power, Skipper) have clearly identified
opportunities in these strongly growing markets and set up bases there, becoming well-established
operators.
11. Huge T&D Investments in India
• The India’s transmission network is around 318,422 circuit km of transmission lines and 614,875 MVA of
sub-station capacity.
•About 72% of the transmission network is under state transmission utilities (STU’s) ,about 23% is owned
by the Power Grid Corp of India and 5% by private operators.
• During the 12th and 13th Plans, the expected investment in T&D in India is $75bn.However, such an
investment in the transmission sector is still inadequate which signals the potential in the space.
• Power transmission requires investment at least equal to that in power generation. In India, this now is
40:60 or 30:70. To make up for this power-transmission-investment deficit, India needs to invest more in
transmission than in generation.
13. Renewed Govt Interest driving capex
•According to the 12th Five-Year Plan (FY13–FY17), investment required in power transmission is about
`Rs.1,800bn, of which about `Rs.1,000bn is planned to come from the Power Grid and `550bn from states.
The remaining Rs.250bn is expected to be invests from private players.
•The government’s renewed interest has been shown in its willingness to make up the shortfall in
transmission capacity by announcing projects worth `260bn through tariff-based competitive bidding (TBCB)
in FY16.
• The huge government spending is likely to benefit companies in the T&D space such as KEC International,
Kalpataru Power, Sterlite Grid, L&T Infrastructure Development, Essel Infra, Tata Projects and Adani Power
may capture a larger share in the Indian transmission arena. The capex will also benefit product and service
opportunities for companies such as Skipper, Techno Electric, etc.
14. Increasing SEB Capex
• As intra-state transmission is the responsibility of states, this segment has lacked the requisite investment
due to the poor financial health of SEB’s.
•The increasing greater investment by the Power Grid Corporation for inter-state transmission capacity puts
pressure on states to expedite intra-state capacity addition.
• Major orders worth 1 Trillion are expected from Maharashtra, Rajasthan, Andhra Pradesh, Telangana,
Bihar, Karnataka, Tamil Nadu, Gujarat, Madhya Pradesh, etc.
•Recently awarded projects such as the transmission system for the Gadarwara STPS (2 x 800 MW) Part A
and B, and the transmission-system strengthening for Vindhyachal-V would see award of sub-contracts
which will further increase capex spending.
15. Green Energy Capex – Growth Trigger
• The ‘green-energy corridor’ is a term used for power-evacuation infrastructure specially designed and
constructed for evacuation of power generated by renewable sources (mainly wind and solar). This is aimed
at synchronizing electricity produced from renewable sources with conventional power stations in the grid.
• As renewable energy generation is growing rapidly, the country needs separate infrastructure for this fresh
source, which might create an unstable national grid due to its characteristics of intermittency and
variability.
•With the government’s ambitious plans to install 100 GW of solar power capacity by 2022 and 10 GW of
wind power every year, evacuation of this would require vast investment on infrastructure. For this purpose
Power Grid Corp has been assigned the task of developing nine high capacity green-transmission corridors.
Powergrid estimates that an investment of about Rs.430bn would be required for intra-/inter-state
transmission-system strengthening, other facilities such as flexible generation, and establishing renewable
energy management centres, etc.
17. Transmission Loss Reduction & Rural Power – Next Trigger
• The Indian government has announced a feeder-separation scheme named Deen Dayal Upadhyaya Gram
Jyoti Yojana (DDUGJY) with an initial allocation of Rs.`5bn. This has been launched to augment power supply
to rural areas and to strengthen sub-transmission and distribution systems by separating electricity feeders
for domestic and agriculture consumption.
• According to the CEA’s preliminary estimates and its study, Rs.`1trn is required over five years. This
investment is aimed at reducing India’s transmission and distribution (T&D) losses by five percentage points
from the present ~23% , which would suffice to recoup such investment requirements from its existing
customers.
•The proposed investment would benefit companies that manufacture electric conductors, transformers,
insulators, poles, towers and capacitors in addition to construction contractors.
19. Company Snapshot
•TEEL has over 3 decades’ experience in the EPC business and is present across the entire power sector value
chain-generation, transmission and distribution.
•In generation, while the company has capability to set up captive power plants up to 250MW, it is currently
focusing only on specific areas like switchyards. In T&D, 765kV substation projects are its forte, besides
distribution projects.
•On the industrial front, the tie up with Canmec Industriel (Canada) has equiped TEEL to service EPC
requirements of power guzzling industrial units via high precision fabrication and machining.
• TEEL has ventured into BOOT business in 2010 and currently has 2 projects with plans to scale it up to 5
projects by FY17.
20. Strong Order Book
•TEEL has outstanding order book of Rs.2025 Cr as on Mar-15 awhich provides order visibility for the
medium term.
21. Company’s Niche
•TEEL has developed a competitive advantage over its peers, as reflected through its above average
performance in a market which is not so niche.
•TEEL is well positioned in the T&D market that is likely to post accelerated growth and provide it with
significant growth opportunities.
•TEEL has delivered above average results in the past, driven by its Prudent bidding practice, Impeccable
execution skill, Focused approach, and Asset light business model.
• TEEL has always ensured strict control over its working capital management which has enabled the
company to have receivable days of 82 days which is the lowest in the industry.
22. Prudent Bidding Practice
•TEEL’s management has by far followed a strict and disciplined bidding process, as reflected in the last
seven years data.
•TEEL’s Bidding has remained selective and during FY10-11, the company did not bag a single order in a
highly competitive environment.
•Although TEEL bid for eight out of a total of 24 projects awarded by PGCIL in the past 7 years it did not win a
single one which clearly highlights the management's preference for profitability over turnover.
23. Focus in key states
•Geographically, Techno has gradually expanded in the eastern parts of the country. From its geographical
footprints it is clear that its presence is centered in clusters.
•TEEL is focused on eastern states and mainly operates in Andhra Pradesh/Rajasthan/Madhya Pradesh in the
southern/western/central regions, respectively.
• TEEL’s focus on eastern states and select regions approach helps in better execution and logistics with
Eastern state being its dominant region.
24. Focused Customer Selection
•TEEL’s management follows a focused approach in its operations as far as its customers, geography and
business operations are concerned. TEEL’s customers can be broadly divided into three categories viz: i)
Public sector units (PSUs), ii) State generation, transmission and distribution companies, and iii) Private
sector players.
•Almost 60% of its projects since CY01 have been from central PSUs and private sector players. State discoms
constituted only 13% of projects over the same period.
•TEEL bids for those projects in which payments seem to be secured: either the project should be funded
through reputable agencies or customers should have the capacity to pay.
25. Increasing Market Share - EHV Sub Station
•TEEL has bagged over 62% & 100% EHV substation orders during FY14 and FY15 respectively. The company
bagged all orders in the EHV substation space during FY15, beating players like Bharat Heavy Electricals,
Siemens, Alstom T&D, L&T, ABB India, and Jyoti Structures.
• In Apr-15, TEEL bagged its first gas-insulated substation (GIS) substation order from PGCIL, where China's
Xian XD Switchgear Electric Co is the main contractor.
•In Jul-15, the company also bagged a high-end static compensator (STATCOM) installation at 400kV
substation in Solapur, Satna and Aurangabad.
26. T&D Focus
•With presence across the value chain, TEEC is well geared to tap opportunities across the power sector,
besides industrial and export markets.
• In FY-15, generation does not comprise more than 15% of its order backlog while T&D has steadily scaled
up from 56% in FY12 to 88% in FY15.
•In the government’s sharpened focus on T&D spending, we envisage overall T&D opportunity at Rs.3.9tn
over the next 5 years; of this TEEL is expected to be in fray for contracts worth over Rs.2.6tn.
27. Industrial Segment
i
• In the industrial segment, the company has presence and expertise in certain niche areas in handling
complex projects, which includes high precision fabrication and machining skills in power guzzling industrial
units.
• TEEL’s specialization extends to installation of certain high end (360KA) aluminium bus bar system for
aluminium smelters where with low voltage it is able to generate high output.
•TEEL’s success in its first international T&D project in Uganda, the company is looking to expand its presence
and eyeing opportunities in select neighbouring geographies along with Middle East and the African region.
31. Concerns & Reasoning
1.) Commodity Price Increase :
TEEL deals with various commodities, such as steel, zinc, copper and aluminium. Fixed price contracts can
have a negative impact if input costs rise, if it is not appropriately hedged in time.
2.) Slow down in Infrastructure Investment :
Infrastructure investment slowdown can lead to lower order intake and lower sales. However the Company’s
business will get impacted during investment slowdown in the country.
3.)Lower utilization & evacuation issues in wind power assets :
Evacuation issues continue to plague the company’s Tamil Nadu wind assets, affecting overall PLF. If the
situation fails to improve, PLF is likely to remain low and TEEL will desist from additional investment in wind
power assets. Further deterioration in the dynamics of the wind power business could affect the company’s
overall profitability, in turn dampening chances of it divesting wind assets at attractive valuation.
4.) Deffered Uptick in Industrial Capex :
Continued delay in uptick in the economy is likely to further delay private sector capex, especially from
power-intensive industries like aluminium smelter and oil refineries, which involve huge capital investment.
These projects require specialized capabilities and tend to be high margin businesses.