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A2Z Maintenance & Engineering Services (A2Z) an established engineering, procurement and construction (EPC) company, providing services to the power transmission and distribution sector plans to raise about Rs 8.6bn to primarily fund its biomass-based power projects, MSW projects and meet working capital requirements. Investment Rationale Key beneficiary from Government initiatives: The Government’s attempts to curb power distribution losses (currently at 26.91%) through schemes like R-APDRP and RGGVY and emphasis on waste management due to increasing population, are expected to prove beneficiary for the company.
Diversification: A2Z is diversifying into providing EPC services to power generation companies and companies in road and telecom besides T&D. Further it is entering the renewable energy space integrating from its municipal solid waste (MSW) service. It is also looking at developing IT solutions for power utilities.
Capex plan (over FY11-FY12)=FY10 turnover: The company has a huge capex lined-up over 2010-2011, thereby pulling-up long term growth prospects.
Integration to enable margin expansion: Integrating into larger EPC services in Power and entering renewable energy generation from collection and transportation of MSW, is expected to enable margin expansion.
New businesses to enable overcome stressed working capital: The Company executes power T&D projects on EPC-basis, which are mainly for public sector undertakings, leading to strained working capital. Newer ventures including renewable power are expected to bring respite.
Valuation A2Z is an established EPC service provider to Power T&D sector primarily focusing on distribution. EPC contributes 90-95% of the turnover and has recorded CAGR of 57% over FY08-FY10. The company reported net sales and net profit CAGR of 60% and 40% over FY08-FY10. We recommend a ‘Subscribe’.
Industry Overview Power The power sector in India is slowly moving from a regulated return framework to a market driven pricing mechanism. This has provided a major boost for private entrepreneurs to enter the power sector and set up projects. Currently significant traction has been achieved in the generation space, while the transmission and the distribution segment is slowly opening to the private sector.
Demand for engineering, procurement and construction services in the power transmission lines and power distribution businesses is largely dependent on development, demand and new investments in the power generation, transmission and distribution sectors. For FY 10, India faced an energy shortage of approximately 11.7% of total energy requirements and 13.3% of peak demand requirements. Each successive FYP has increased power generation capacity addition targets. The XIth FYP envisaged a planned additional capacity of 78.7 GW through investments of Rs. 4,951 billion, an additional 92.5 GW generation capacity is envisaged in the XIIth FYP through an investment of Rs. 5,917 billion. The Ministry of Power has projected an installed capacity of 212,000 MW by 2012. This requires substantial augmentation of power generation capacity.
Investment in power generation sector is expected to lead to increased investment in power transmission and distribution sector as well so as to make the power available to the required end consumers in the country
Distribution Distribution is typically considered to be the transfer of less than 66 KV range of power to end consumers. After the un-bundling of the state electricity boards in the country, most of the states have separate distribution corporations engaged in the business of electricity distribution. Distribution is considered as the weakest link in the power sector due to the large energy losses occurring at the distribution end. T&D losses in India are very high at 26.91% as per PFC in 2008. In order to accelerate and upgrade the Indian T&D infrastructure, the Government of India consolidated various distribution schemes during the Xth FYP including Accelerated Power Development and Reforms Program
(APDRP) & Rajiv Gandhi Grameen Vidyutikaran Yojana (RGGVY) schemes. Municipal solid waste management Municipal Solid Waste is a waste type which predominantly includes household waste (domestic waste) and sometimes with the addition of commercial wastes collected by a municipality within a given area.
Need for Urban Sector Development According to the 2001 census, India has a population of 1,027 million with approximately 28% or 285 million people living in urban areas. As a result of the liberalization policies adopted by the Government of India, the urban population is expected to increase to about 40% of total population by the year 2021. Investment Requirements in the Urban Sector It is estimated that over a seven-year period, the urban local bodies (ULBs) would require a total investment of Rs. 1,205,360 million. This includes an investment in basic infrastructure and services, that is, annual funding requirement of Rs. 172,190 million. It is well recognised that in order to fructify these investments, a national level initiative is required that would bring together the State Governments and enable ULBs to catalyze investment flows in the urban infrastructure sector. Jawaharlal Nehru National Urban Renewal Mission Urban renewal is one of the thrust areas in the National Common Minimum Programme of the Government and accordingly, JNNURM was launched on December 3, 2005 with an investment of Rs. 1,000,000 million during the mission period of seven years beginning 2005-06. Renewable Energy in India Renewable energy-based power capacities have registered the highest pace of growth in the overall capacity additions in India compared to non renewable sources, increasing their share of total power capacity from 2% in FY 2003 to around 10% in FY 2010.
Nonetheless, contribution from renewable energy sources towards overall generation has been low at around 3% due to low plant load factors of renewable capacities.
The aim for the XIth FYP, as stated by the working group of the
Planning Commission in its Report of the Working Group on New
and Renewable Energy for the XIth FYP (2007-2012) (published in
December 2006), is a capacity addition of 14,000 MW from
renewable energy (grid-interactive). In the report, the Planning
Commission estimates that by the end of the XIth FYP, renewable
energy power capacity in India could be around 23,000 MW out of
total capacity of around 211,000 MW (or approximately 11% of total
capacity).
Company Background
A2Z Maintenance & Engineering Services Ltd (A2Z) operates in
facility management services (FMS) and engineering, procurement
and construction (EPC) projects.
FMS includes engineering maintenance (mechanical, plumbing,
electrical, HVAC, DG Set), energy-saving solutions, janitorial
services, parking management, property lease management,
telecommunication tower maintenance and security services to
public and private sector clients.
Under EPC, the company provides services to the power
transmission and distribution sector, with primary focus on the
distribution segment. It is also diversifying into providing EPC
services to power generation companies and companies in other
sectors, including road and telecommunication.
A2Z has been operating the EPC business since fiscal 2006 and has
historically focused on the power distribution sector. EPC services
include the installation of distribution line infrastructure with
capacities of up to 33 KV, the construction of substations of up to 33
KV and participation in system-strengthening projects and rural
electrification projects.
In the power transmission sector, it has undertaken select EPC
projects like the construction of extra high voltage (EHV)
substations of up to 400 KV and EHV transmission lines of up to
765 KV. Its customers in EPC business are state power utilities and
central public sector utilities such as PGCIL, NTPC and NHPC.
In addition to this, the company is diversifying its focus on to other
businesses that include the following:
Generating power from renewable energy sources
Providing municipal solid waste management services
The capex is concentrated towards renewable energy projects to
be commissioned in 2011 at Punjab, Rajasthan and Kanpur.
Valuation & Recommendation
A2Z Maintenance & Engineering Services is an established EPC
service provider to Power T&D sector primarily focusing on
distribution. EPC contributes 90-95% of the turnover and has
recorded CAGR of 57% over FY08-FY10. Other segments
including facility management and waste management though
small are high growth businesses. The company reported net sales
and net profit CAGR of 60% and 40% over FY08-FY10. We
recommend a ‘Subscribe’ to the issue.
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