Techno Electric & Engineering Ltd(TEEL)

- Market Share gains to drive Growth

Content Index

•Techno Electric & Engineering Limited – Investment Snapshot :- Slide #3

• T&D Industry – An Overview:- Slide #5

• Investment Arguments :- Slide #19

•P&L - Slide #29

• Concerns & Reasoning :- Slide #31

Techno Electric & Engineering Ltd– Investment Snapshot (as on Dec 04, 2015)

Recommendation :- BUY

Maximum Portfolio Allocation :- 5%

Investment Phases & Buying Strategy

1st Phase (Now) of Accumulation :- 80%

Current Accumulation Range :- 560-570 Rs

TEEL is our typical Multibagger stock, but a Stock which is a GoodInvestment due to the enormous growth opportunities due toincreasing transmission capacity and increasing Infra spend bythe government. It has a differentiated business model which willdeliver superior returns in the long run.

Core Investment Thesis :

The company is in Generation Transmission & distribution spacewhich has been growing at a fast clip due to increasing capex inthe space. The company has strong order book which providesvisibility in the medium term.

Current Market Price – Rs.553

Current Dividend Yield – 0.71%

Bloomberg / Reuters Code –TEEC. IN/ TEEC.NS

BSE / NSE Code – 533281/TECHNO

Market Cap (Rs. Cr) – 3156

P/E - 26.96

Face Value – Rs.2

52 Week High / Low – Rs. 590.00 / Rs.328.60

Promoter’s Holding – 57.98%FII - 8.62%DII - 16.29%Other Holdings -17.11%

Key Investment Highlights

1.) Presence in a growing segment :- Company caters to the power sector with dominance in T&D spacewhich has been growing rapidly which provides immense opportunities to the companies in the sector.2)International markets drive growth- Company has been consistently looking for investments inInternational markets which will drive its growth.

3.) Improvement in Market Share :- The company has been continuously increasing its market share fromabout 2% to 8% currently.

4.) Reduction in Working Capital cycle :- The company bids only for contracts where the financials of thecompany to pay is secure which also enables the company to have the lowest working capital cycle.

5) Asset Light Business :- The company’s average fixed asset turnover over last five-to-six years has been 43x versus an industry trend of 5-6x.

6.) Growing ahead of the Industry :- The company has delivered an above average performance in the past. In the past six years, it has outpaced the industry average in almost all key financial parameters.

7.) Increasing market share in EHV Sub-Station- The company has bagged about 62% and 100% EHV Sub-Station orders in FY14 & FY15 respectively.

8) Increasing Capex Spending:- The company has benefitted by increased capex spending by theGovernment and SEB’s which has increased its order book.

9.) Management/ Corporate Governance :- The company has a good management and adhere to strongcorporate governance norms. The company is run professionally by a team of professionals who have astrong understanding of the business and have a strong vision about its business.10.) Compelling Valuations :- In spite of so many advantages, the company is quoting at reasonableValuations. The company is quoting at 26.58x its trailing FY15 Earnings which is reasonable for the Quality ofthis stock which has a strong order book and provides revenue visibility.

Industry Opportunity & Potential- An Overview

Global T&D Investments

• The demand for the transmission sector, globally, for the next 5-7 years is bright because of rising energydemand in developed and developing markets.

•Globally , the power T&D sector experienced 13.7% CAGR over 2006-14, primarily because of strong growthin Asia, America, Middle East and Africa.

• The T&D sector, globally, is expected to attract investment of $1trn over the next 5-6 years which provideshuge opportunities for KEC due to its vast experience and project execution skills.

• Most power-transmission companies in India (L&T, KEC, Kalpataru Power, Skipper) have clearly identifiedopportunities in these strongly growing markets and set up bases there, becoming well-establishedoperators.

Region Wise T&D Investment

Transmission Lines(CKM)

SUB-STATION

Industry Outlook- T&D International

Huge T&D Investments in India

• The India’s transmission network is around 318,422 circuit km of transmission lines and 614,875 MVA ofsub-station capacity.

•About 72% of the transmission network is under state transmission utilities (STU’s) ,about 23% is owned by the Power Grid Corp of India and 5% by private operators.

• During the 12th and 13th Plans, the expected investment in T&D in India is $75bn.However, such aninvestment in the transmission sector is still inadequate which signals the potential in the space.

• Power transmission requires investment at least equal to that in power generation. In India, this now is40:60 or 30:70. To make up for this power-transmission-investment deficit, India needs to invest more intransmission than in generation.

T&D Industry Outlook

Renewed Govt Interest driving capex

•According to the 12th Five-Year Plan (FY13–FY17), investment required in power transmission is about`Rs.1,800bn, of which about `Rs.1,000bn is planned to come from the Power Grid and `550bn from states.The remaining Rs.250bn is expected to be invests from private players.

•The government’s renewed interest has been shown in its willingness to make up the shortfall intransmission capacity by announcing projects worth `260bn through tariff-based competitive bidding (TBCB)in FY16.

• The huge government spending is likely to benefit companies in the T&D space such as KEC International,Kalpataru Power, Sterlite Grid, L&T Infrastructure Development, Essel Infra, Tata Projects and Adani Powermay capture a larger share in the Indian transmission arena. The capex will also benefit product and serviceopportunities for companies such as Skipper, Techno Electric, etc.

Increasing SEB Capex

• As intra-state transmission is the responsibility of states, this segment has lacked the requisite investmentdue to the poor financial health of SEB’s.

•The increasing greater investment by the Power Grid Corporation for inter-state transmission capacity putspressure on states to expedite intra-state capacity addition.

• Major orders worth 1 Trillion are expected from Maharashtra, Rajasthan, Andhra Pradesh, Telangana,Bihar, Karnataka, Tamil Nadu, Gujarat, Madhya Pradesh, etc.

•Recently awarded projects such as the transmission system for the Gadarwara STPS (2 x 800 MW) Part Aand B, and the transmission-system strengthening for Vindhyachal-V would see award of sub-contractswhich will further increase capex spending.

Green Energy Capex – Growth Trigger

• The ‘green-energy corridor’ is a term used for power-evacuation infrastructure specially designed andconstructed for evacuation of power generated by renewable sources (mainly wind and solar). This is aimedat synchronizing electricity produced from renewable sources with conventional power stations in the grid.• As renewable energy generation is growing rapidly, the country needs separate infrastructure for this freshsource, which might create an unstable national grid due to its characteristics of intermittency andvariability.•With the government’s ambitious plans to install 100 GW of solar power capacity by 2022 and 10 GW ofwind power every year, evacuation of this would require vast investment on infrastructure. For this purposePower Grid Corp has been assigned the task of developing nine high capacity green-transmission corridors.Powergrid estimates that an investment of about Rs.430bn would be required for intra-/inter-statetransmission-system strengthening, other facilities such as flexible generation, and establishing renewableenergy management centres, etc.

Increasing Infra Spend

Transmission Loss Reduction & Rural Power – Next Trigger

• The Indian government has announced a feeder-separation scheme named Deen Dayal Upadhyaya Gram Jyoti Yojana (DDUGJY) with an initial allocation of Rs.`5bn. This has been launched to augment power supply to rural areas and to strengthen sub-transmission and distribution systems by separating electricity feeders for domestic and agriculture consumption.

• According to the CEA’s preliminary estimates and its study, Rs.`1trn is required over five years. Thisinvestment is aimed at reducing India’s transmission and distribution (T&D) losses by five percentage pointsfrom the present ~23% , which would suffice to recoup such investment requirements from its existingcustomers.

•The proposed investment would benefit companies that manufacture electric conductors, transformers,insulators, poles, towers and capacitors in addition to construction contractors.

TEEL– Investment Arguments

Company Snapshot

•TEEL has over 3 decades’ experience in the EPC business and is present across the entire power sector valuechain-generation, transmission and distribution.

•In generation, while the company has capability to set up captive power plants up to 250MW, it is currentlyfocusing only on specific areas like switchyards. In T&D, 765kV substation projects are its forte, besidesdistribution projects.

•On the industrial front, the tie up with Canmec Industriel (Canada) has equiped TEEL to service EPCrequirements of power guzzling industrial units via high precision fabrication and machining.

• TEEL has ventured into BOOT business in 2010 and currently has 2 projects with plans to scale it up to 5projects by FY17.

Strong Order Book

•TEEL has outstanding order book of Rs.2025 Cr as on Mar-15 awhich provides order visibility for the medium term.

Company’s Niche

•TEEL has developed a competitive advantage over its peers, as reflected through its above averageperformance in a market which is not so niche.

•TEEL is well positioned in the T&D market that is likely to post accelerated growth and provide it withsignificant growth opportunities.

•TEEL has delivered above average results in the past, driven by its Prudent bidding practice, Impeccableexecution skill, Focused approach, and Asset light business model.

• TEEL has always ensured strict control over its working capital management which has enabled thecompany to have receivable days of 82 days which is the lowest in the industry.

Prudent Bidding Practice

•TEEL’s management has by far followed a strict and disciplined bidding process, as reflected in the lastseven years data.

•TEEL’s Bidding has remained selective and during FY10-11, the company did not bag a single order in ahighly competitive environment.

•Although TEEL bid for eight out of a total of 24 projects awarded by PGCIL in the past 7 years it did not win a single one which clearly highlights the management's preference for profitability over turnover.

Focus in key states

•Geographically, Techno has gradually expanded in the eastern parts of the country. From its geographicalfootprints it is clear that its presence is centered in clusters.

•TEEL is focused on eastern states and mainly operates in Andhra Pradesh/Rajasthan/Madhya Pradesh in thesouthern/western/central regions, respectively.

• TEEL’s focus on eastern states and select regions approach helps in better execution and logistics withEastern state being its dominant region.

Focused Customer Selection

•TEEL’s management follows a focused approach in its operations as far as its customers, geography andbusiness operations are concerned. TEEL’s customers can be broadly divided into three categories viz: i)Public sector units (PSUs), ii) State generation, transmission and distribution companies, and iii) Privatesector players.

•Almost 60% of its projects since CY01 have been from central PSUs and private sector players. State discomsconstituted only 13% of projects over the same period.

•TEEL bids for those projects in which payments seem to be secured: either the project should be fundedthrough reputable agencies or customers should have the capacity to pay.

Increasing Market Share - EHV Sub Station

•TEEL has bagged over 62% & 100% EHV substation orders during FY14 and FY15 respectively. The companybagged all orders in the EHV substation space during FY15, beating players like Bharat Heavy Electricals,Siemens, Alstom T&D, L&T, ABB India, and Jyoti Structures.

• In Apr-15, TEEL bagged its first gas-insulated substation (GIS) substation order from PGCIL, where China'sXian XD Switchgear Electric Co is the main contractor.

•In Jul-15, the company also bagged a high-end static compensator (STATCOM) installation at 400kVsubstation in Solapur, Satna and Aurangabad.

T&D Focus

•With presence across the value chain, TEEC is well geared to tap opportunities across the power sector,besides industrial and export markets.

• In FY-15, generation does not comprise more than 15% of its order backlog while T&D has steadily scaledup from 56% in FY12 to 88% in FY15.

•In the government’s sharpened focus on T&D spending, we envisage overall T&D opportunity at Rs.3.9tnover the next 5 years; of this TEEL is expected to be in fray for contracts worth over Rs.2.6tn.

Industrial Segment

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• In the industrial segment, the company has presence and expertise in certain niche areas in handlingcomplex projects, which includes high precision fabrication and machining skills in power guzzling industrialunits.

• TEEL’s specialization extends to installation of certain high end (360KA) aluminium bus bar system foraluminium smelters where with low voltage it is able to generate high output.

•TEEL’s success in its first international T&D project in Uganda, the company is looking to expand its presenceand eyeing opportunities in select neighbouring geographies along with Middle East and the African region.

5 Year Financial Snapshot

Financials- Consolidated P&L

Financials- Consolidated Balance Sheet

Concerns & Reasoning1.) Commodity Price Increase :TEEL deals with various commodities, such as steel, zinc, copper and aluminium. Fixed price contracts can

have a negative impact if input costs rise, if it is not appropriately hedged in time.

2.) Slow down in Infrastructure Investment :

Infrastructure investment slowdown can lead to lower order intake and lower sales. However the Company’sbusiness will get impacted during investment slowdown in the country.

3.)Lower utilization & evacuation issues in wind power assets :

Evacuation issues continue to plague the company’s Tamil Nadu wind assets, affecting overall PLF. If thesituation fails to improve, PLF is likely to remain low and TEEL will desist from additional investment in windpower assets. Further deterioration in the dynamics of the wind power business could affect the company’soverall profitability, in turn dampening chances of it divesting wind assets at attractive valuation.

4.) Deffered Uptick in Industrial Capex :

Continued delay in uptick in the economy is likely to further delay private sector capex, especially from power-intensive industries like aluminium smelter and oil refineries, which involve huge capital investment. These projects require specialized capabilities and tend to be high margin businesses.

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