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We met the management of Techno Electric & Engineering Company Limited (Techno) recently
in Mumbai. Following are the key takeaways:
The company has been in the business of undertaking and executing contracts in the
BoP (Balance of Plant) segment of power projects for over 35 years.
Over the years, it has developed strong competency in executing 7-8 packages of the
addressable 17 packages, usually contracted out in BoP segment. It thus has the potential
to capture around INR8-9m/MW spend of a power plant.
Techno also undertakes turnkey projects in setting up captive/waste heat recovery power
plants for process industries like Sponge iron, Steel, Chemicals, Aluminium, etc. It has
an enviable niche positioning in executing electrical systems in evacuation, transmission,
and distribution systems up to 765kv range.
The business model of the company is quite unique as its operating block is minuscule
( <INR200m). This is largely due to the fact that most of its manufacturing requirements
are outsourced. Its strong design and engineering capabilities have thus enabled it to
emerge as a scalable player.
The company has an outstanding order book of INR12.8bn, which is 2x its FY10 EPC
revenues of INR6.2bn. The order spread is across diverse clientele spanning across
state utilities, power companies, transmission tower companies and EPC companies.
Over the last few quarters, it has managed to build a portfolio of renewable energy
generation portfolio through acquisitions. It currently owns and operates around 71
wind mills (capacities ranging from 0.6-1.25MW each) with an aggregate generation
capacity of 95.5MW spread across Tamil Nadu and Karnataka.
These generating assets have been reporting PLFs of 28-29% and have PPA with state
government undertakings - INR3.39/unit with TNEB and INR3.4/unit with KSEB. The
acquisition agreement entails free O&M for the next five years and the same imparts a
high degree of predictability to earnings from the assets.
The company operates on a tight working cash conversion cycle in its EPC business with
a working capital cycle of less than 60 days.
For FY10, the company reported revenues of INR6.31bn from its EPC business and
INR700m from its power generation business. While EPC segment EBIDTA was ~INR771m
(margin of 12.2%), the power generation business EBIDTA was INR654m. This underscores
the robustness and quality of its earnings.
Corporate restructuring
In the last fiscal, the company undertook a corporate restructuring, in which it reverse
merged itself with its 100% subsidiary namely M/Super wind projects Limited. The
latter was one of its acquisitions with a renewable energy power generation capacity
of 45MW, and had fiscal benefits which offered synergies to erstwhile Techno. The
merger was effective from April 01, 2009. There has been no alteration in the equity
capital of Techno, pre and post merger.
The company now has an equity base of INR114m (~57m shares of FV INR2 each), a
net worth of INR4.6bn and a debt of INR2.5bn.
New foray
The company recently won a bid (on a consortium basis) to set up a 400kv/1,500MVA
power transmission network spanning 100kms on a Design, Build, operate and transfer
basis. Located in the state of Haryana, this would be catering to the evacuation need of
the Jhajjar power plant of China Light and Power company.
The project is estimated to cost around INR4.4bn and would entail an equity outflow of
INR760m by the consortium and also entail a Viability gap funding of around INR930m.
The concession period is for 25 years with a renewal of 10 years. Back of the envelope
calculations convey that the equity IRR could be close to 16%, making it an attractive
annuity project.
This would be a logical extension of the project execution capability of the company,
and its balance sheet strength would come handy in further such forays. The PPP model
has been slowly getting accepted in transmission and distribution in recent times and
offer huge promise.
Our view
The company is one of the strong and established players with a niche presence and
capabilities in the BoP space in the domestic power sector. It has a decent order book
of INR12.8bn, which offers visibility on revenues of almost two years.
Low working capital requirement and stable margins (around 12-13%) in its mainstay
EPC business have ensured high RoE and strong cash generation over the past many
years. This along with negligible capex in its core business has ensured that the company
has been a FCF positive for many years.
Techno has been judicious in utilising its cash hoard over past few years. From deploying
capital in financial instruments, it has now built a clutch of assets in the renewable
energy sector by leveraging its balance sheet. This has enabled it to have a strong
predictable income stream and cash flows which generate IRRs much higher than
financial instruments. The consistent cash flows from the current renewable power asset
base would be able to liquidate the debt raised for their acquisition in five years.
Plans are afoot to build a string of assets in the BOT space wherein the free cash flow
generated from its EPC business would be utilised to build annuity/high equity IRR
business. The Jhajjar transmission project a step in that direction. Ability to execute a
large part of these projects through its EPC operations would enable it to recover a
substantial part of its equity infusion into the SPV from its EPC operations.
The company is undoubtedly an attractive proxy play on the ongoing power sector
capex cycle of India on account of its niche positioning/capabilities, stable operating
margins and tight capital management. Added to this, the increasing annuity income
stream offers a high degree of predictability in cash flows and profits. Thus, the company
has the potential to scale up (in operations) as well as predictability (in income and
profits).
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