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Tecpro Systems (TPRO)
Industrials
Mounting debt levels raise concerns; skeptical on aggressive inflow guidance.
Tecpro reported a strong increase in debt levels to Rs8.9 bn at end-1QFY12 versus
FY2011-end debt of Rs7.5 bn on higher working capital requirements. We believe this
trend is likely to remain with increased execution straining cash flows and balance sheet.
We remain skeptical on aggressive FY2012E order inflow guidance of 35-40%, especially
on a high base (strong inflows of Rs45 bn in FY2011). Downgrade to ADD (TP: Rs300).
Debt levels rise further (to Rs8.5 bn) to fund working capital requirements, a key concern
Tecpro Systems reported gross debt of Rs8.9 bn at end-1QFY12, Rs1.4 bn higher than FY2011-
end levels of Rs7.5 bn. The sharp rise in debt was attributed to higher working capital requirement
for execution of the large BoP orders. We believe these debt levels would continue for the
remainder of the year as well as working capital gets tied up for existing business. This remains a
key concern on the company, especially in a rising interest rate environment. Tecpro reported high
interest cost of Rs330 mn in 1QFY12, significantly higher than 1QFY11’s interest cost of Rs176 mn.
The management cited that it expects debt levels to increase in proportion to growth in sales.
Maintains strong guidance; while revenue growth may pan out, remain skeptical on inflows
Tecpro management maintained its FY2012E aggressive growth guidance of 35-40% in both
revenues as well as order inflows. The revenue guidance may pan out (primarily on execution of
existing backlog), however, we remain skeptical on the order inflow guidance. Note that this
growth guidance is off a very high base of Rs45 bn in FY2011 (up 180% yoy) which was led by
two large BoP orders (from APGENCO) worth Rs20 bn. We, in fact, build in a 28% decline in order
inflows for FY2012E to Rs28-30 bn.
Downgrade to ADD as concerns on rising debt levels constrain our outlook
We downgrade our rating on the stock to ADD (from BUY) as continuously increasing working
capital requirements for large BoP orders may strain the balance sheet, especially in a high interest
rate environment Other key risks include concentration of order backlog on a few large orders,
unexpected fluctuation in commodity prices leading to margin risk, and relatively new in the
turnkey-BoP project space.
Revise estimates and target price to Rs300/share (from Rs365/share)
We revise our estimates on the company to Rs29.4 and Rs32.7 from Rs31 and Rs36.5 on higher
interest cost estimates led by a rise in debt levels as well as cost of borrowing. We correspondingly
revise our target price to Rs300/share (from Rs365/share) based on 9X FY2013E EPS - broadly in
line with target multiple for other contracting companies.
