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Against a backdrop of sharp slowdown in the Power Equipment sector, we initiate BUY on Tecpro Systems Ltd. (TPRO) with DCF based target price of Rs269 based on 1) Robust O/B of Rs45 bn (1.8x FY12E revenue) assuring visibility over next 2 years 2) diversified orders inflows from Power, Material handling (Steel and Cement) sectors and 3) rising in-house manufacturing led by technological tie-ups enabling higher backward integration and increased order inflows (including WHR). We expect TPRO’s OPM to contract to 13.0% led by shift in revenue-mix towards large BoP contracts by FY13E. We estimate TPRO’s revenue/earnings CAGR at 29/20% over FY11-13E. BoP projects such as Rayalaseema, CSPGCL Korba and Kakatiya cumulatively contribute 32/27% of FY12/13E revenue. At CMP of Rs220, the stock trades at 6.8/5.9x of our FY12/13E EPS of Rs32.5/37.5 respectively. Investment Highlights
12th plan fuel linkage ~50GW; order inflow healthy despite coal shortage
We expect the 12th plan (FY13-17) thermal capacity addition to be lower i.e. ~62.5GW (CEA target of 76GW) on the back of 1) domestic coal shortage 2) SEB financial problems and 3) unavailability of import coal based projects. TPRO posted an impressive O/B/revenue CAGR of 74%/71% to Rs43.7/19.4 bn over FY07-11. Further, it gradually moved-up the value chain to become a full-fledged BoP player from small scale package manufacturer in 2007. The 12th plan thermal capacity addition translates to BoP opportunity worth Rs1,250 bn (CHP/AHP, BoP and MHP orders). For TPRO this translates to Rs24-69 bn p.a. opportunity over FY12-16E, respectively.
No overcapacity scenario in BoP
There is no overcapacity in the BoP segment vis-à-vis BTG implying comparatively lower pricing pressure. The large players like BHEL and L&T are focusing more on higher margin BTG portion in the BTG-BoP or EPC contracts. Secondly, utility owned players (Lanco, Tata Projects and Reliance Infra) are busy executing contracts for their flagship companies and are hardly bidding outside. Finally, smaller players are relegated to lower scale due to large number of packages involved in BoP. Thus, competitive environment is still benign for a dedicated BoP player like TPRO with only few meaningful competitors (McNally, TPRO, BGR, Indure and Elecon).Thus, going forward, TPRO is likely to restrict margin compression.
O/B - Rs45 bn translates to earnings CAGR of 20% over FY11/13E
TPRO’s O/B grew 87% to Rs45 bn (1.8x FY12E revenue) post IPO (Sept. ‘10) with average execution of 25 months. The company bagged two BoP orders worth Rs19.8 bn from APGENCO recently. These two BoP projects, Rayalaseema and Kakatiya (1*600MW each), are worth Rs12.5 bn and Rs7.3 bn, respectively and have average execution period of 30 months. We estimate revenue/earnings CAGR at 29/20% over FY11/13E (v/s management revenue guidance of 35%).
Outlook and Valuation: Potential upside 22% – BUY
With three BoP projects under execution, TPRO is well positioned to capture the 12th plan BoP opportunity. However, we estimate margin contraction of 350bps to 13.0% by FY13E owing to revenue-mix shift towards BoP. Presently, its peer group companies (BGR, McNally, TRF and Elecon) are trading at an average of 6.1x P/E and 4.9x EV/EBITDA on FY13E. We believe TPRO can command a premium over peers owing to 1) Higher return ratios 2) Strong visibility led by sustained order inflows 3) Technological tie-ups to consistently improve scope of operations and 4) Increased backward integration with entry into civil works and water segment. We have assigned a DCF-based TP of Rs269, translating to 7.2x FY13E EPS of Rs37.5. Initiate with BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Against a backdrop of sharp slowdown in the Power Equipment sector, we initiate BUY on Tecpro Systems Ltd. (TPRO) with DCF based target price of Rs269 based on 1) Robust O/B of Rs45 bn (1.8x FY12E revenue) assuring visibility over next 2 years 2) diversified orders inflows from Power, Material handling (Steel and Cement) sectors and 3) rising in-house manufacturing led by technological tie-ups enabling higher backward integration and increased order inflows (including WHR). We expect TPRO’s OPM to contract to 13.0% led by shift in revenue-mix towards large BoP contracts by FY13E. We estimate TPRO’s revenue/earnings CAGR at 29/20% over FY11-13E. BoP projects such as Rayalaseema, CSPGCL Korba and Kakatiya cumulatively contribute 32/27% of FY12/13E revenue. At CMP of Rs220, the stock trades at 6.8/5.9x of our FY12/13E EPS of Rs32.5/37.5 respectively. Investment Highlights
12th plan fuel linkage ~50GW; order inflow healthy despite coal shortage
We expect the 12th plan (FY13-17) thermal capacity addition to be lower i.e. ~62.5GW (CEA target of 76GW) on the back of 1) domestic coal shortage 2) SEB financial problems and 3) unavailability of import coal based projects. TPRO posted an impressive O/B/revenue CAGR of 74%/71% to Rs43.7/19.4 bn over FY07-11. Further, it gradually moved-up the value chain to become a full-fledged BoP player from small scale package manufacturer in 2007. The 12th plan thermal capacity addition translates to BoP opportunity worth Rs1,250 bn (CHP/AHP, BoP and MHP orders). For TPRO this translates to Rs24-69 bn p.a. opportunity over FY12-16E, respectively.
No overcapacity scenario in BoP
There is no overcapacity in the BoP segment vis-à-vis BTG implying comparatively lower pricing pressure. The large players like BHEL and L&T are focusing more on higher margin BTG portion in the BTG-BoP or EPC contracts. Secondly, utility owned players (Lanco, Tata Projects and Reliance Infra) are busy executing contracts for their flagship companies and are hardly bidding outside. Finally, smaller players are relegated to lower scale due to large number of packages involved in BoP. Thus, competitive environment is still benign for a dedicated BoP player like TPRO with only few meaningful competitors (McNally, TPRO, BGR, Indure and Elecon).Thus, going forward, TPRO is likely to restrict margin compression.
O/B - Rs45 bn translates to earnings CAGR of 20% over FY11/13E
TPRO’s O/B grew 87% to Rs45 bn (1.8x FY12E revenue) post IPO (Sept. ‘10) with average execution of 25 months. The company bagged two BoP orders worth Rs19.8 bn from APGENCO recently. These two BoP projects, Rayalaseema and Kakatiya (1*600MW each), are worth Rs12.5 bn and Rs7.3 bn, respectively and have average execution period of 30 months. We estimate revenue/earnings CAGR at 29/20% over FY11/13E (v/s management revenue guidance of 35%).
Outlook and Valuation: Potential upside 22% – BUY
With three BoP projects under execution, TPRO is well positioned to capture the 12th plan BoP opportunity. However, we estimate margin contraction of 350bps to 13.0% by FY13E owing to revenue-mix shift towards BoP. Presently, its peer group companies (BGR, McNally, TRF and Elecon) are trading at an average of 6.1x P/E and 4.9x EV/EBITDA on FY13E. We believe TPRO can command a premium over peers owing to 1) Higher return ratios 2) Strong visibility led by sustained order inflows 3) Technological tie-ups to consistently improve scope of operations and 4) Increased backward integration with entry into civil works and water segment. We have assigned a DCF-based TP of Rs269, translating to 7.2x FY13E EPS of Rs37.5. Initiate with BUY.
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