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.


Momentum in the EPC business, especially process & metallurgy
segment
As of Q2FY11, SEPC had a standalone order backlog of | 2491 crore, the
highest ever order backlog for the company (2x its TTM revenues).This
was is mainly on the back of robust order inflows in H1FY11 to the tune of
|1842 crore. Out of these P&M segment commands majority of the share
followed by the municipal segment. With demand & consumption drivers
back in the economy there are clear signs of pick up in the industrial
segments like steel, cement, aluminium which are key exposure areas for
SEPC. The management sounds confident of bagging significant orders in
H2FY11 from the P&M segment, specifically from the steel and allied
sectors.

Subsidiaries to add value going ahead.
Going forward we expect the various associates and subsidiaries will add
significant value. The key contribution will come in from Orient green
power (SEPC holds 25.5% stake) plans to add ~800 MW of power
generation capacity by 2013. Timely execution and commissioning of the
same is highly critical for value creation in SEPC. Also, SEPC expects to
execute 80 units of MW turbines in FY11 from the Leitner Shriram JV.

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The traction in the EPC business in terms of order inflows and the likely
contribution from the JV and subsidiaries renders positive outlook. We do
not have a rating on the stock.