LKP BYTES : Tecpro Systems : (Buy@Rs.152, Target Rs.225)

The story so far ………..

Tecpro began in a small way by manufacturing screens & crushers for material handling and then progressed towards coal handling systems for power projects. It acquired the ash handling company – Mahindra Ashtech in 2008 and then started manufacturing Balance of Plant equipments to become a Rs15bn enterprise in 2008. Tecpro acquired Ambika Projects in 2011 to enter the water treatment space and then acquired Eversun Energy to enter the EPC space for solar power.

Tecpro today is a Rs25bn company well entrenched into Material Handling, BOP and waste heat recovery. Material Handling forms 65% of its order book and BOP & others accounts for the balance 35%. The power sector accounts for 70% of its order book while the balance 30% comes from core sectors like Cement & Steel.

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What went wrong in FY’12?.......prolonged slowdown in the investment cycle led to procedural delays and logistic issues in projects which could not get executed thereby impacting release of retention money and straining the working capital position in an industry like capital goods. This resulted in a complete drying of BOP orders and delays in execution of material handling orders thereby increasing inventories and receivables on elongated payment cycles.

The result: despite revenues growing at a healthy 28% to Rs25bn, finance charges ballooned to almost Rs2bn as debt rose from Rs7.5bn to Rs13bn and net profit margins dipped below 5% to Rs1.25bn in FY’12 and investors did not want to remain invested in a mid cap player in capital goods given the state of the industry. This explains the reason for a capital goods player like Tecpro to fall more than 50% in a year from a high of 308 to 150 at present.

The story ahead ………..

We now believe that investors would like to take a call on the sector as headwinds tend to moderate this fiscal thereby ending the dry spell of BOP orders from large players like NTPC and NLC. Although we expect revenue growth to moderate from 28% to 18% this fiscal, prudent working capital management would enable collections to improve as retention money gets released which coupled with reduction in interest rates should enable Tecpro to improve its net profit margins by 100bps this fiscal as we believe the business model is sound enough to return a 15% gross margin at an ROE  of 15%. Tecpro should deliver a 15% growth in profits over FY’12 -14 and the stock trading at 5x forward earnings is a good investment bet with a one year price target of Rs225

Thanks and Regards

LKP Advisory