52-WEEK FLOP: SHRIRAM EPC:: Business Line,

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With a 53 per cent decline over a one-year period, the stock of Shriram EPC (SEPC) was among the worst performers in the engineering and infrastructure space. Weak pace of execution as well as high interest costs in the March quarter resulted in a 30 per cent dip in profits in that period over a year ago.

SEPC's joint ventures, subsidiaries as well as association with group companies in the green energy space, did not receive favourable valuations from the market as renewable energy themes were beaten down.

Its joint venture in the wind turbine manufacturing space, Leitner Shriram Manufacturing's long-term debt rating for instance was downgraded by Fitch Ratings in June to ‘BBB-‘ from ‘BBB'.

The rating indicates moderate default risk as a result of lack lustre EBIDTA margins and leverage of 6.1 times in FY-11. The report states that the Leitner Shriram required equity level support to meet financial commitments.

Risks attached to this joint venture could be one reason for SEPC's lack lustre stock performance. For the quarter ended June, revenues expanded by 15 per cent over a year ago, even as profits dipped as the wind business was shifted to the joint venture. Consolidated order book at Rs 4,490 crore was 2.7 times FY-11 sales

Shriram EC – Confident to recover dues of Rs6.5 bn by Q2FY12 ::Emkay

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Shriram EC – Not Rated – Market Cap Rs6.4 bn – Confident to recover dues of Rs6.5 bn by Q2FY12, hence trigger meaningful upgrades to FY12E earnings

We met the management of Shriram EPC in Chennai. We met Managing Director & CEO Mr. T Shivaraman and CFO Mr. R Dharmarajan. The key takeaways from our discussion with the management are as under.

Takeaways on the Industry/Business

On Core EPC Business

n    Project finalization in the process industries and power remains weak at this juncture (2) Remains relatively confident on pick-up in order inflows especially from Steel industry, where it sees flow thru of projects from Sail, Vizag Steel and Tata Steel

n    Good pipeline of projects in municipal water and waste water, but finalizations remain slow

n    No pick-up in pipeline rehabilitation after Common Wealth games

Windmill Equipment Business

n    Believes that price drop in Windmill Equipment has been arrested, price drop from Rs63 Mn/MW to Rs58 Mn/MW

n    Players remain aggressive in new product launches with business shifting to produce tailor-made equipment, unlike one product fitting all customers

n    Consequently, R&D expenditures have increased dramatically

n    Slew of new launches in the market with introduction of 3 MW machines in the market

n    No pick-up in demand from US markets, owing to surplus in Gas availability

n    Expected pick-up in European market, owing to Germany decision to abandon 10000 MW of nuclear power plant translating into 25000 MW demand for Windmill equipment

Shriram EPC:Gaining Traction- ICICI Sec

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Gaining Traction…
We recently met the management of Shriram EPC to understand the
company’s business and future plans. Shriram EPC (SEPC), promoted by
the Shriram Group, was established in 2000. The company provides
turnkey EPC solutions in the process and metallurgy segment (Steel,
cement, copper & aluminium, coal gasification etc); Biomass based power
plants and municipal segment (mainly gamut of services catering to water
and sewerage segments). As of now majority of the order book
comprises of inflows from the process and metallurgy segment (P&M)
with municipal segment being the next significant contributor to the order
backlog. Also SEPC has entered into various JV and formed various
subsidiaries which are complementary to the core EPC business. The
major among them being Leitner Shriram Manufacturing, Strategic stake
in Orient green power (renewable energy assets portfolio) and Shriram
Hammon Cottrel Ltd. (providing solutions in the cooling towers and air
pollution segment). Since with most of these JV and subsidiaries are at an
inflection point and incremental scale up from these levels, would
contribute in significant manner to the overall revenues and profitability.