Pick of the week 26 Dec 2016

RETAIL RESEARCH
Techno Electric & Engineering Co. Ltd. (TEEC)
Industry CMP Recommendation Add on Dips to band Target Time Horizon
Heavy Elect- Equipment Rs. 299 Buy at CMP and add on dips Rs. 269-274 Rs. 343 1-2 quarters

HDFC Scrip Code TECELEEQNR Techno Electric & Engineering Co. Ltd (TEEC) was established in 1963. The current promoter Mr. P P Gupta acquired the
company in early 1980s. TEEC is a cross functional contractor that operates across the segments in the power space. With
BSE Code 533281
over 30 years of experience TEEC is a leading provider of high quality engineering, procurement and construction (EPC)
NSE Code TECHNO services to Indias core sector industries; both in the public and private domain which is driven by a strong team of 150
Bloomberg TEEC IN engineers supported by 200 skilled professionals. Building substations and switchyards is TEECs primary revenue generator.
The Company owns 162.9MW of wind assets and 2 transmission projects.
CMP 23 Dec 2016 Rs. 299
Equity Capital(Rs crs) Rs. 22.8 Investment Rationale:
Face Value (Rs) 2.0 Strong execution capabilities and specialized in substation commissioning
Power Grid corporations incremental substation orders to benefit TEEC
Equity Sh. O/s (Cr) 11.4
Divestment of the wind assets to improve ROCE, enable focusing more on EPC vertical and improve strength for bidding
Market Cap (Rs crs) Rs.3408.6 for more PPP projects in transmission sector.
Book Value (Rs) Rs. 88.8
Concerns:
Avg. 52 Week Vols 11616 Competition
52 Week High 360 Delay in sale of wind assets
52 Week Low 209 Delays in execution of projects
Lackluster capex from private players resulting in overdependence on PSU projects

Shareholding Pattern-% Sept 2016 View and Valuation:

States increased focused on the Renewable Energy needs immediate up gradation of transmission and sub transmission
Promoters 57.98
infrastructure leading to more investment. With TEECs specialization in substation side and Power Grid Corporations
Institutions 25.87 increased investment on these will ultimately create more opportunities on orders front for TEEC. Healthy current order
Non Institutions 16.16 book of the company at ~ Rs 2600 cr (2.5xFY16 EPC sales) gives enough visibility for the next few years. A quick divestment
of wind assets will enable TECC to release the low return yielding funds which can then be deployed in its core EPC business
Total 100.0
as well as in bidding for more PPP transmission orders.

Fundamental Research Analyst: We feel investors could look to buy the stock at CMP and add on dips to Rs.269-Rs.274 (SOTP value derived based on
Abdul Karim, 13XFY18E T&D EPC business EPS) band for a target of Rs 343 under SOTP method (including 18xFY18E T&D EPC business
abdul.karim@hdfcsec.com.
EPS) in the next 1-2 quarters.

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Financial Summary: (Consolidated)

Particulars, Rs in Mn Q2FY17 Q2FY16 YoY-% Q1FY17 QoQ-% FY15 FY16 FY17E FY18E
Net Sales 3,676 3,167 16.1% 2,709 35.7% 7,939 10,972 14,222 17,048
EBITDA 1,115 370 201.7% 712 56.7% 2,080 2,213 2,952 3,300
APAT 702 288 143.5% 484 45.2% 1,051 1,228 1,820 2,200
Diluted EPS (Rs) 6.15 2.53 143.5% 4.24 45.2% 9.2 12.3 15.9 19.3
P/E (x) 37.3 27.8 21.5 17.8
EV/EBITDA (x) 21.0 19.1 13.8 12.0
RoE (%) 12.3 13.0 17.3 18.6
(Source: Company, HDFC sec)
Company Description:
Techno Electric & Engineering Co. Ltd (TEEC) was established in 1963. The current promoter Mr. P P Gupta acquired the
company in early 1980s. Mr P P Gupta is a key promoter and Managing Director, is a Bachelor in Engineering and Post
Graduate in Business Management from the Indian Institute of Management, Ahmedabad. He was associated with the
Planning Commission, Government of India as a Financial Analyst, Management Consultant deputed to Bharat Heavy
Electricals Limited (BHEL) and as an Advisor in the merchant banking division of the erstwhile ANZ Grindlays Bank, Kolkata.
Contrary to popular perception of a niche substation contractor TEEC is a cross functional contractor that operates across
the segments in the power space. With over 30 years of experience TEEC is a leading provider of high quality engineering,
procurement and construction (EPC) services to Indias core sector industries; both in the public and private domain which
is driven by a strong team of 150 engineers supported by 200 skilled professionals. Building substations and switchyards is
TEECs primary revenue generator.

The company provides solutions for captive power plants, balance of plant (BOP) for thermal and hydro power projects and
utilities for power projects. It provides services, such as construction of both air-insulated and gas-insulated substations.
The Company installs overhead lines for transmission projects for captive power plant projects. The Company offers
solutions for a range of projects, from power generation plants to plant packages systems supplied by others. The Company
also provides solutions for extra high voltage (EHV) substations and distribution system. The Company is also a renewable
energy producer with approximately 162.9 megawatts (MW) wind energy capacity.

TEEC has subsidiary namely Simran Wind Project Limited (SWPL). SWPL is engaged in the business of green power
generation with a capacity of 117.9 MW spreading across Tamilnadu and Karnataka and has generated 132.90 million units
during FY16.

Jhajjar KT Transco is a joint venture between TEECL (49%) and Kalpataru Power Transmission Limited (51%). It
commissioned a 400 kV intrastate power transmission project in Haryana in 2012. It became the first transmission project
to receive a viability gap funding support from the Government of India. The transmission network includes two substations
of 400/200 kV of 24 bays each at Rohtak and Sonepat. It comprises a double circuit quad moose line that extends from

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Jharli to Rohtak (35 kilometres) and extending to Sonepat (64 kilometres). The project is designed to evacuate 2,400 MW of
power from the Jhajjar Power Plant. The project generates annual revenues worth Rs. 540 mn with the DBFOT arrangement
spanning 25 years (extendable by 10 years). If the contract is not extended, the terminal value to be derived from this
project will be 60 months of revenue (following 25 years of concession period).

TEEC has one associate company namely, Patran Transmission Company Ltd. (PTCL). In 2013, TEEC received a concession
from PFC Consulting Limited to build a transmission network at Patran, Punjab. The Rs. 2 bn project under the BOOM
transmission network possesses an evacuation capacity of 1,000 mVA. This projects total revenue is estimated at Rs. 10 bn
over the entire concession period of 35 years.

(Source: Company, HDFC sec)

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Recent Quarter Update:

Revenue for Q2FY17 grew 45% YoY with growth across both segments. EPC margins were stable at 15.2% (-90bps YoY).
Importantly wind segment EBIT grew 39% YoY (Rs 534mn) led by 90% grid availability. The management stated that the
ticket size of the projects have increased (Rs 250-500mn). It expects finalization of few large orders which should lead to
improved orders inflows in 2HFY17E. The management expects order inflows of Rs 15-20bn in FY17E. The company expects
to sell 45 MW of wind assets in FY17E. TEECs continues to selectively focus on T&D BOOT projects. It has bid for another
T&D BOT project (worth ~Rs 11bn) in JV with Kalpataru Power (bids to open in 4QFY17E).
Investment Rationale:
Strong track record in EPC segment and specialized in substation commissioning
TEEC has a strong history of selective bidding, thereby chasing profitability over growth and having an asset-light business
model, wherein it has the best asset turns in the T&D EPC space. Within EPC, TEEC can execute BOP packages, switchyard/
substation works and distribution/rural electrification works. However, it has built a niche in the substation space, which is
likely to be the companys focus in the future. TEEC is also pre-qualified to execute 765kV GIS substations. In comparison to
transmission line EPC, substation EPC is low on project management. However, it requires strong designing/engineering
skills, sourcing of equipment and a good understanding/tie-up with the GIS equipment supplier. There are only 4-5 players
in 765kV GIS substation, thereby, making it relatively less competitive than transmission line EPC. This is also reflected in
the margin profile of TEEC vs. KEC/KPP.

(Source: Company, HDFC sec)

Power Grids (PGCIL) incremental substation orders to benefit TEEC
Given the long history of sub-par transformation capacity, PGCILs investments in substation EPC have increased
tremendously in the past 2-3 years. This augurs well for TEEC. With increasing costs/other issues related to land acquisition,
incremental investments are leaning towards GIS instead of AIS. With a limited number of players in the EHV GIS substation
EPC space, TEEC is well placed for growth over the next 4-5 years. TEEC (jointly with the Chinese company Rongxin) recently
won the first STATCOM order in the country. With increasing contribution from renewables, STATCOM will be extremely

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important to maintain grid stability. India has been a late entrant in this space. PGCIL now plans to install 50 STATCOMS
over the next 3-4 years, with an expected investment of Rs 80bn.
Even though the Power Grids budget remained at same level for the year but it reflected shift in its investment pattern.
Traditionally the ratio of Power Grids investment in lines and substation was 80:20 respectively but in FY17 it has witnessed
more investment in the substation side which took the ratio of line to substation to 65:35 respectively; which goes well with
TEECs capabilities and increases companys addressable market.

Building a good portfolio of T&D BOT assets

Insulating itself from the EPC business cyclicality, the company is building a portfolio of infrastructure assets with regular
cash flows and decent IRRs. Historically, the company ventured into building on a portfolio of wind assets. TEEC has a wind
asset portfolio of 163MW (45MW in the standalone entity and another 118MW in its subsidiary, Simran Wind Projects).
However, given the issues in monetising the renewable energy certificates (REC), the returns have been lower than
expected. The company recently demerged 45MW of wind assets in the standalone company and plans to exit the entire
business in the next year. TEEC is focused on expanding its T&D BOOM asset portfolio. In the past two years, it has won two
projects (equity capex of Rs 900mn, one operational and other soon to be operational), which have multiple benefits in
terms of captive EPC opportunity and annuity-based cash flows/decent IRRs. We estimate TEEC projects to have an IRR of
14-15%. Even in the T&D BOOM projects, TEEC is focused on ones with higher substation component and lower line
component to maximise the captive EPC opportunity. The company plans to bid for many such projects, albeit selectively.
While it is comfortably placed in terms of leverage and operational cash flow, the sale of wind power assets will free up
capital to be invested in T&D BOOM projects and reduce variability in earnings over the medium term. This will also
enhance revenue visibility of its EPC business.

TEEL (Standalone) Simran Wind Project Ltd.

Capacity 45 MW 6 MW 111.90 MW
COD During 200910 During 200910 March 31, 2011 February 24, 2012
Location Karnataka (12 MW) and Tamil Karnataka Tamil Nadu
No. of turbines Nadu
30 turbines
(33 MW)
at 3 wind farms 4 turbines at 2 wind farms 67 turbines at 2 wind farms
Capacity 30 turbines * 1.5 MW each 4 turbines * 1.5 MW each 48 turbines * 1.5 MW each, 19
PLF 18% 26% 19% 26% 19% 26%
Tariff Rs 3.40 (Karnataka) and Rs 3.39 Preferential tariff - Rs 3.40 APPC tariff Rs 2.54 (TN)
(Tamil Nadu) (Karnataka) (Source: Company, HDFC sec)
Large order book provides visibility to revenue growth:
The current order book of TEEC is close to Rs.2600 cr which is almost 2.5xFY16 EPS sales. The order book has grown at a
healthy CAGR pace of 25% over FY13-FY16. Though dependence on PGCIL from an orders perspective is large, it plans to
derisk its business going ahead by bidding for orders from SEBs and private players too. It has identified north east India as
a focus area.

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Concerns:
Competition could hurt growth
TEEC follows a very conservative bidding approach and the competition in the substation space is a bit more benign than
transmission EPC. However, in case of aggression from competitors, TEEC order inflows could be impacted.
Delay in sale of wind assets
TEEC plans to sell its 163MW of wind assets and use the proceeds to expand its portfolio of transmission assets. A
substantial delay in the sale could impact the ramp-up in T&D BOOM projects, which has dual benefits of better IRRs and
captive EPC order.
Delay in project completion
Even though TEEC has very strong track record of completing the projects on a timely manner but any delay in completion
of project may lead to cost overrun and paralyze the cash management system.
Lacklustre capex from private players
As there is very little Capex from the private players TEEC is over dependent on the public sector and the government
spending which creates the concern over medium to long term on the order inflow side.
View and Valuation:
States increased focused on the Renewable Energy needs immediate upgradation of transmission and sub transmission
infrastructure leading to more investment. With TEECs specialization in substation side and PowerGrid Corporations
increased investment on these will ultimately create more opportunities on orders front for TEEC. Healthy current order
book of the company at ~ Rs 2600 cr (2.5xFY16 EPC sales) gives enough visibility for the next few years. A quick divestment
of wind assets will enable TECC to release the low return yielding funds which can then be deployed in its core EPC business
as well as in bidding for more PPP transmission orders.
SOTP Valuation:
Business Head Parameter PAT/ Book Multiple Value (Rs mn) Target
Standalone business 33,855 291
T&D EPC business 18x Sep-18E P/E 1,617 20 32,350 255
Wind projects capacity FCFF @ 12% WACC 1,505 13
Cash & Cash Equivalents 1x 2,558 1 2,558 22
Tranmission projects 897 8
Jhajjar FCFE @ 14% CoE 733 6
Patran FCFE @ 14% CoE 164 1
Simran Wind FCFF @ 12% WACC 4,987 44
Target price 343
(Source: Company, HDFC sec)

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We feel investors could look to buy the stock at CMP and add on dips to Rs.269-Rs.274 (SOTP value derived based on
13XFY18E T&D EPC business EPS) band for a target of Rs 343 under SOTP method (including 18xFY18E T&D EPC business
EPS) in the next 1-2 quarters.

Quarterly Financials (Consolidated)

Rs mn Q2FY17 Q2FY16 YoY-% Q1FY17 QoQ-% H1FY17 H1FY16 YoY-%
Net Sales 3676.1 2530.8 45.3% 2709.3 35.7% 6385.5 4545.4 40.5%
Consumption of materials & stores 2170.3 1438.3 50.9% 1474.6 47.2% 3644.8 2813.5 29.5%
Change in inventory 98.3 47.8 105.5% 276.6 -64.5% 374.9 7.4 4959.7%
Material Expenses 2268.6 1486.1 52.6% 1751.1 29.6% 4019.7 2820.9 42.5%
Employee Expenses 100.3 74.2 35.1% 72.2 39.0% 172.5 143.2 20.4%
Other Operating Expenses 191.8 139.5 37.5% 174.4 10.0% 366.3 274.8 33.3%
Expenses 2560.7 1699.9 50.6% 1997.7 28.2% 4558.4 3239.0 40.7%
EBIDTA 1115.4 830.9 34.2% 711.6 56.7% 1827.0 1306.5 39.8%
Depreciation 132.8 118.2 12.3% 132.6 0.2% 265.4 237.2 11.9%
EBIT 982.6 712.7 37.9% 579.0 69.7% 1561.7 1069.2 46.1%
Interest cost 125.8 98.0 28.3% 92.1 36.5% 217.9 212.7 2.5%
Other Income 56.5 59.8 -5.5% 82.3 -31.3% 138.7 106.1 30.7%
Profit before tax 913.3 674.4 35.4% 569.2 60.5% 1482.5 962.7 54.0%
Tax 199.9 249.6 -19.9% 84.5 136.6% 284.4 407.6 -30.2%
APAT 713.4 424.8 67.9% 484.7 47.2% 1198.1 555.2 115.8%
E/o inc/(loss) 4.5 -4.5 200.7% -4.5 200.7% 0.0 242.7 -100.0%
Minority Interest 12.0 -23.3 -151.4% 0.2 7406.3% 12.2 -23.3 -152.1%
Reported PAT 706.0 443.7 59.1% 480.0 47.1% 1186.0 821.2 44.4%
APAT (after MI) 702.4 446.5 57.3% 483.8 45.2% 1186.0 821.2 44.4%
EPS 6.2 3.9 57.3% 4.2 45.2% 10.4 7.2 44.4%
(Source: Company, HDFC sec)

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Financials (Consolidated)
Income Statement: Cash Flow Analysis:
Particulars, Rs in Mn FY15 FY16 FY17E FY18E Particulars, Rs in Mn FY15 FY16 FY17E FY18E
Net Revenues 7,939 10,972 14,222 17,048 Reported PBT 1,248 1,894 2,276 2,735
Material Expenses 5,022 7,816 10,063 12,329 Non-operating & EO items -202 -619 -275 -288
Employee Expenses 274 302 361 414 Interest Expenses 431 443 430 320
SG&A Expenses 563 642 846 1,005 Depreciation 603 495 521 533
Total Expenses 5,859 8,759 11,270 13,748 Working capital change -1,590 -1,206 150 -838
EBITDA 2,080 2,213 2,952 3,300 Tax Paid -185 -486 -445 -537
Depreciation 603 495 521 533 Other operating items -84 -1,217 0 0
EBIT 1,477 1,718 2,432 2,767 OPERATING CASH FLOW (a) 221 -696 2,657 1,925
Other Income (Incl EO Items) 202 619 275 288 Capex -91 2,424 -250 -250
Interest 431 443 430 320 Free Cash Flow 131 1,728 2,407 1,675
PBT 1,248 1,894 2,276 2,735 Investments 4 -243 -7 0
Tax (Incl Deferred) 185 486 445 537 Non-operating Income 202 619 275 288
RPAT 1,051 1,410 1,820 2,200 INVESTING CASH FLOW (b) 116 2,800 18 38
Minority Interest 12 -2 12 -2 Debt Issuance/(Repaid) -427 -527 -1,125 -920
EO (Loss) / Profit (Net Of Tax) 0 182 0 0 Interest -431 -443 -430 -320
APAT 1,051 1,228 1,820 2,200 FCFE -728 758 852 435
Adjusted EPS (Rs) 9 12 16 19 Share Capital Issuance 0 0 0 0
Minority Interest 0 0 0 0
Dividend -230 -309 -662 -662
FINANCING CASH FLOW (c) -1,089 -1,279 -2,217 -1,903
NET CASH FLOW (a+b+c) -752 825 458 60
Closing Cash & Equivalents 1,215 2,040 2,498 2,558
(Source: Company, HDFC sec)

Balance Sheet: Ratios:

Particulars, Rs in Mn FY15 FY16 FY17E FY18E Particulars FY15 FY16 FY17E FY18E
SOURCES OF FUNDS PROFITABILITY %
Share Capital 228 228 228 228 GPM 36.7 28.8 29.2 27.7
Reserves 8,919 9,917 11,074 12,612 EBITDA margin 26.2 20.2 20.8 19.4
TOTAL SHAREHOLDERS FUNDS 9,147 10,145 11,302 12,840 APAT margin 13.2 11.2 12.8 12.9
Minority Interest 199 0 12 9 RoE 12.3 13.0 17.3 18.6
Long Term Debt 3,967 3,068 2,602 2,082 Core RoCE 9.3 9.4 15.0 17.0
Short Term Debt 1,682 2,054 1,395 995 RoCE 9.3 10.2 14.1 15.7

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TOTAL DEBT 5,649 5,122 3,998 3,077 EFFICIENCY

Net Deferred Taxes 7 8 8 8 Tax Rate (%) 14.8 25.7 19.6 19.6
Long Term Provisions & Others 185 98 0 0 Fixed Asset Turnover (x) 0.8 1.3 1.8 2.2
TOTAL SOURCES OF FUNDS 15,187 15,373 15,319 15,934 Inventory (days) 2.9 12.6 5.0 5.0
APPLICATION OF FUNDS Debtors (days) 158.6 165.1 130.0 130.0
Net Block 10,209 8,246 7,975 7,692 Other Current Assets (days) 50.3 70.4 68.9 68.9
CWIP 38 0 0 0 Payables (days) 68.5 99.7 100.0 100.0
Goodwill 0 0 0 0 Other Current Liab & Provns (days) 6.3 5.5 7.0 7.0
Investments 380 623 629 629 Cash conversion cycle (days) 136.9 142.8 96.9 96.9
LT Loans & Advances 367 171 440 528 Debt/EBITDA (x) 2.7 2.3 1.4 0.9
Total Non-current Assets 10,995 9,040 9,045 8,849 Net D/E (x) 0.5 0.3 0.1 0.0
Inventories 63 379 195 234 Interest Coverage (x) 3.4 3.9 5.6 8.6
Debtors 3,449 4,963 5,065 6,072 PER SHARE DATA (Rs)
Other Current Assets 1,093 2,115 2,686 3,219 EPS 9.2 12.3 15.9 19.3
Cash & Equivalents 1,215 2,040 2,498 2,558 CEPS 14.5 15.1 20.5 23.9
TOTAL CURRENT ASSETS 5,820 9,497 10,444 12,083 Dividend 2.0 2.5 5.0 5.0
Creditors 1,491 2,997 3,896 4,671 Book Value 80.1 88.8 99.0 112.5
Other Current Liabilities & Provns 137 166 273 327 VALUATION
TOTAL CURRENT LIABILITIES 1,627 3,164 4,169 4,998 P/E (x) 37.3 27.8 21.5 17.8
NET CURRENT ASSETS 4,193 6,333 6,274 7,085 P/BV (x) 4.3 3.9 3.5 3.1
TOTAL APPLICATION OF FUNDS 15,187 15,373 15,319 15,934 EV/EBITDA (x) 21.0 19.1 13.8 12.0
EV/Revenues (x) 5.5 3.9 2.9 2.3
OCF/EV (%) 0.5 (1.6) 6.5 4.9
FCF/EV (%) 0.3 4.1 5.9 4.2
FCFE/Mkt Cap (%) (1.7) 1.8 2.1 1.1
Dividend yield (%) 0.6 0.7 1.5 1.5
(Source: Company, HDFC sec)

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Fundamental Research Analyst: Abdul Karim, abdul.karim@hdfcsec.com

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office

HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066
Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com.

"HDFC Securities Ltd. is a SEBI Registered Research Analyst having registration no. INH000002475."

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