Equity Research INDIA

November 16, 2022

BSE Sensex: 61873
Techno Electric & Engineering BUY
ICICI Securities Limited Maintained
is the author and
distributor of this report Muted performance; may reverse in H2 Rs285
Techno Electric & Engineering’s (TEEC) Q2FY23 revenues declined 17% YoY to
Q2FY23 result review,
Rs2.3bn impacted by deferment of execution in the EPC segment to H2FY23.
earnings and target price
revision
Gross margin expanded by 245bps YoY to 43.1% on account of lower RM
purchases. However, due to operating deleverage, EBITDA margin came in flat at
31.2%. Order intake stood at Rs4bn, which was much lower than the Rs19bn in
Capital Goods Q1FY23. Current orderbook grew to Rs36bn from Rs32bn at Q1FY23-end.
Management indicated incremental order inflow of Rs15bn in H2FY23 (Rs23bn in
Target price: Rs461 H1). With strong order backlog, we expect execution to pick-up in H2FY23 and in
subsequent years. As FGD and transmission ordering activity gathers pace, we
Earnings revision expect order intake to continue the current momentum in FY23E/FY24E and
(%) FY23E FY24E thereby execution to remain healthy. Company has a net cash balance of Rs12bn.
Sales ↓ 7.7 ↓ 3.7 It has decided to sell ~40MW of its 129MW wind assets and offload the balance to a
EBITDA ↓ 6.8 ↓ 3.7 separate SPV. This is expected to improve receivables going forward. Given the
PAT ↓ 5.8 ↓ 3.3 strong balance sheet, healthy execution and expected pick-up in order intake, we
maintain BUY on the stock with an SoTP-based target price of Rs461 (earlier:
Target price revision Rs471).
Rs461 from Rs471
 H2FY23 to see strong execution: EPC revenue declined 20% YoY to Rs1.8bn due
to deferment of execution to H2FY23. Revenue from wind segment was broadly flat
Shareholding pattern YoY at Rs474mn, down 1% YoY. Management expects execution momentum to
Mar
’22
Jun
’22
Sep
’22
gather pace in H2FY23 due to strong order backlog and expected order inflow.
Promoters 60.2 60.2 60.2
Institutional  Weak execution impacted EPC margin: EPC segment margin contracted by
investors 28.5 28.7 28.4 300bps YoY to 15.3% due to lower execution. Management guided for EPC margin
MFs and other 27.3 27.3 26.8
Banks/FIs 0.0 0.0 0.0 to remain at ~13% in FY23. However, FY24 may see the margin at 15% on account
FIIs 1.2 1.4 1.6 of softening commodity prices and improvement in execution. Wind margin was
Others 11.3 11.1 11.4
Source: NSE
stable at ~70%.
 Healthy order intake: During Q2FY23, the company booked orders worth Rs4bn
ESG disclosure score against Rs500mn in Q2FY22 and Rs19bn in Q1FY23. Current orderbook stands at
Year 2020 2021 Chg Rs36bn. For FY23, management has maintained its order inflow guidance of Rs30bn
ESG score NA NA NA
Environment NA NA NA
from across FGD, T&D, smart metering and data centres.
Social NA NA NA
Governance NA NA NA
 Maintain BUY on healthy orderbook and inexpensive valuation: We believe
Note - Score ranges from 0 - 100 with a higher score TEEC’s foray in data centre business will be positive in the long run on increased
indicating higher ESG disclosures.
Source: Bloomberg, I-sec research thrust from the government as data centres have been granted infrastructure status.
Additionally, it derives a strong impetus from its presence in the T&D segment, as we
expect T&D ordering momentum to gather pace from Green Energy Corridor in the
next 24 months. Given healthy execution outlook with a stable margin, we maintain
our BUY rating on the stock.

Market Cap Rs31.4bn/US$385mn Year to March FY21 FY22 FY23E FY24E

Bloomberg TECHNOE IN Revenue (Rs mn) 8,892 10,739 12,008 15,434
Shares Outstanding (mn) 110.0 Adj. PAT (Rs mn) 1,818 2,639 2,245 2,878
Research Analysts: 52-week Range (Rs) 315/224 DEPS (Rs) 16.5 24.0 20.4 26.2
Free Float (%) 39.8 % Chg YoY 1.5 45.2 23.8 28.2
Rahul Modi
rahul.modi@icicisecurities.com FII (%) 1.6 P/E (x) 16.9 11.7 13.8 10.7
+91 22 6807 7373 Daily Volume (US$/'000) 410 CEPS (Rs) 20.3 27.7 24.3 30.3
Ashwani Sharma Absolute Return 3m (%) (2.6) EV/E (x) 11.1 8.9 7.5 5.7
sharma.ashwani@icicisecurities.com
+91 22 6807 7340 Absolute Return 12m (%) 15.4 Dividend Yield (%) 1.4 0.7 0.7 1.1
Aashna Manaktala Sensex Return 3m (%) 4.3 RoCE (%) 12.0 15.2 8.1 9.1
aashna.manaktala@icicisecurities.com Sensex Return 12m (%) RoE (%)
3.2 11.7 15.3 11.6 13.3
+91 22 6807 7397
Please refer to important disclosures at the end of this report
Techno Electric & Engineering, November 16, 2022 ICICI Securities

Valuation and outlook

Given that H1FY23 performance was lower than our estimates, we cut our FY23E and
FY24E earnings estimates by 6% and 3%, respectively. However, we expect H2FY23
performance to ramp-up as execution of new orders is likely to begin.

The stock is trading at 10.7x FY24E earnings. Using the SoTP methodology, we value
the standalone EPC business at Rs311 (20x FY24E earnings), discounted cashflow
from wind assets at Rs41, and cash and equivalents at Rs109 per share. We arrive at
a target price of Rs461 and maintain BUY. We have not factored-in any valuation for
the data centre asset as the timeline of its revenue generation is still a year away.
However, we await any further developments.

Key risks: i) Delay in order intake, ii) higher than expected commodity inflation (which
might impact execution and margins).

Table 1: SoTP-based target price calculation

SoTP Valuation Basis Equity Value (Rs mn) Rs/sh
EPC Business PE: 20x FY24E 34,223 311
Wind Assets DCF 4,526 41
Cash & equivalents 11,959 109
Target Price 461
Source: I-Sec research

Table 2: Changes in estimates (EPC segment)

(Rs mn)
FY23E FY24E
Rs mn Earlier Revised Change (%) Earlier Revised Change (%)
Revenue 11,985 11,098 (7.4) 15,007 14,524 (3.2)
EBIDTA 1,894 1,753 (7.4) 2,596 2,513 (3.2)
PAT 1,282 1,184 (7.7) 1,770 1,711 (3.3)
Source: I-Sec research

Table 3: Changes in estimates (consolidated)

(Rs mn)
FY23E FY24E
Rs mn Earlier Revised Change (%) Earlier Revised Change (%)
Revenue 13,010 12,008 (7.7) 16,031 15,434 (3.7)
EBIDTA 2,736 2,550 (6.8) 3,461 3,332 (3.7)
PAT 2,385 2,245 (5.8) 2,975 2,878 (3.3)
Source: I-Sec research

Table 4: Financial highlights (consolidated)

(Rs mn)
Q2FY23 Q2FY22 YoY(%) Q1FY23 QoQ(%) FY22 FY21 YoY(%)
Total Revenues 2,280 2,735 (16.6) 1,730 31.8 10,739 8,892 20.8
EBITDA 710 854 (16.8) 477 48.8 2,222 2,161 2.8
Margin 31.2 31.2 -8bps 27.6 356bps 20.7 24.3 -360bps
Depreciation 103 102 1.1 103 0.0 413 412 0.3
Finance Cost 13 13 3.9 14 (9.1) 56 78 (28.3)
Other Income 190 103 84.8 130 46.1 1,508 669 125.5
PBT 784 843 (6.9) 490 60.1 3,261 2,339 39.4
Tax 196 209 (5.9) 134 46.0 658 503 30.9
Tax rate 25.0 24.8 26bps 27.4 -242bps 20.2 21.5 -130bps
Profit from JV/associates - 15 (100.0) - - 36 (18) -
PAT 588 648 (9.3) 356 65.4 2,639 1,818 45.2
Adjusted PAT 588 648 (9.3) 356 65.4 2,639 1,818 45.2
Margin (%) 25.8 23.7 208bps 20.6 523bps 24.6 20.4 410bps
EPS (Rs) 5.2 5.8 3.2 16.5 16.3
Source: Company, I-Sec research

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 Techno Electric & Engineering, November 16, 2022 ICICI Securities
Table 5: Segmental performance (consolidated)
(Rs mn)
Q2FY23 Q2FY22 YoY(%) Q1FY23 QoQ(%) FY22 FY21 YoY(%)
Revenues
Corporate 190 103 84.8 103 84.7 1,500 643 133.4
Energy (Power) 474 481 (1.3) 309 53.6 856 1,000 (14.4)
EPC (Construction) 1,806 2,255 (19.9) 1,448 24.7 9,884 7,917 24.9

EBIT
Corporate 189 102 85.6 101 86.3 1,500 643 133.4
Energy (Power) 332 341 2.8 166 99.3 291 326 (10.8)
EPC (Construction) 277 412 (32.8) 236 17.0 1,526 1,449 5.3

EBIT Margin (%)

Corporate 99.5 99.0 40bps 98.6 90bps 100.0 100.0 0bps
Energy (Power) 69.9 71.0 -110bps 53.9 1600bps 34.0 32.6 140bps
EPC (Construction) 15.3 18.3 -300bps 16.3 -100bps 15.4 18.3 -290bps
Source: Company, I-Sec research

Table 6: Annual segmental financial trends and assumptions

(Rs mn)
FY17 FY18 FY19 FY20 FY21 FY22 FY23E FY24E
Sales 12,720 13,313 10,590 9,227 9,586 12,248 13,914 17,026
EPC 12,049 11,734 8,792 7,843 7,917 9,884 11,985 15,007
Energy 254 1,210 1,095 918 1,000 856 1,024 1,024
Corporate 417 370 704 465 669 1,508 905 995

EBIT 2,308 2,887 2,776 2,212 2,418 3,317 3,208 4,001

EPC 1,773 1,808 1,517 1,387 1,449 1,526 1,894 2,596
Energy 351 710 557 360 326 291 410 410
Corporate 183 370 702 465 643 1,500 905 995

EBIT Margin % 18.1 21.7 26.2 24.0 25.2 27.1 23.1 23.5
EPC 14.7 15.4 17.3 17.7 18.3 15.4 15.8 17.3
Energy 138.2 58.7 50.9 39.2 32.6 34.0 40.0 40.0
Corporate 44.0 100.0 99.8 100.0 96.1 99.5 100.0 100.0
Source: Company, I-Sec research

Concall highlights
 Order intake for Q2FY23 was at Rs4bn. Key order wins include: Tripura
transmission order for Rs2.3bn, and PGCIL transmission order for Rs1.67bn.
 Orderbook as of Sep’22 stands at Rs36bn. Management maintained its FY23
order inflow guidance of Rs45bn.
 Company is L1 in orders worth Rs5bn: Goa transmission order from Sterlite Power
for Rs1.3bn and J&K smart metering order for Rs3.38bn.
 For FY23 and FY24, management guided for ~Rs12.5bn and Rs15bn in revenues,
respectively. As of Sep’22, current investments including cash stand at Rs12bn.
 EBITDA margin guidance for EPC segment was ~13% for FY23 factoring-in
elevated commodity costs, but is expected to improve to ~15% in FY24.
 Company is currently undergoing a share buy-back and any balance amount post
completion of the buy-back might be distributed as dividend.
 Company is aiming at developing three data centres across the country, starting
with Chennai, then Kolkata and possibly Mumbai. And each will be in the range of
25-30MW of IT load and facility load of ~36-42MW.

3
Techno Electric & Engineering, November 16, 2022 ICICI Securities
 TEEC aims to develop ~250MW capacity by FY30, spread across 5-6 data
centres. These centres will be powered by a renewable energy source and so, it
will be energy-neutral and will help clients achieve their ESG goals.
 Capex would be Rs450mn/MW of IT load and company will be adding capacity in
phases of 6MW of IT load. Phase-1 is expected to complete by Q3FY24. As of
Sep’22, company has spent Rs5.5bn towards the civil works apart from land
acquisition.
 Company is in discussions to tie up with a JV partner as a data centre operator
based out of US or Singapore to create a separate SPV.
 TEEC has decided to sell a part of its wind assets apart from what is required for
data centres. This would help remove the volatility in the business revenue and
help reduce the receivables.
 Currently, TEEC has wind assets of 129MW across 3 geographies (60.5MW in
Tirunelveli, 51MW in Coimbatore balance 18MW in Karnataka). It would be selling
~40MW of its capacity to a third party for ~Rs45mn/MW, possibly by FY23-end. It
would sell the balance capacity to a separate power SPV.
 Focus on FGD segment will continue as 80GW of FGD order is yet to be tendered,
with an expected investment of ~Rs800bn. Management expects FGD orders to
continue for another 4-5 years and if the timeline to implement FGD is extended to
Dec’26.
 Growth in this segment is likely to come from strong power sector reforms towards
improving the efficiency, reliability, and financial health of discoms. Government’s
objective of installing 500GW of renewable power and additional 25-30GW of
energy storage solutions at grid level over the next 5 years is expected to drive
growth in the transmission segment.

Price chart

400
350
300
(Rs)

250
200
150
May-21

May-22
May-20

Feb-21

Feb-22
Feb-20

Nov-20

Nov-21
Nov-19

Aug-20

Aug-21

Aug-22

Nov-22

Source: Bloomberg

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Techno Electric & Engineering, November 16, 2022 ICICI Securities

Financial summary (consolidated)

Table 7: Profit and Loss statement Table 9: Cashflow statement
(Rs mn, year ending March 31) (Rs mn, year ending March 31)
FY21 FY22 FY23E FY24E FY21 FY22 FY23E FY24E
Total Income 8,892 10,739 12,008 15,434 Operating Cashflow 1,254 2,585 1,323 727
Operating Expenses 6,731 8,517 9,458 12,102 Working Capital Changes (591) 1,005 (487) (1,654)
EBITDA 2,161 2,222 2,550 3,332 Capital Commitments (1) (337) (1,000) (1,200)
% margins 24.3 20.7 21.2 21.6 Free Cashflow 662 3,253 (163) (2,128)
Depreciation & Amortisation 412 413 432 455 Cashflow from Investing (542) (1,902) (145) (255)
EBIT 1,749 1,809 2,118 2,877 Activities
Gross Interest 78 56 62 68 Issue of Share Capital - - - -
Other Income 669 1,508 905 995 Buyback of shares - - - -
PBT before exceptionals 2,339 3,261 2,960 3,804 Inc (Dec) in Borrowings 400 (77) - -
Add: - - - - Interest paid (78) (56) (62) (68)
Extraordinaries/Exceptionals Dividend paid (660) (495) (220) (330)
Add: Share in associates Extraordinary 591 (1,005) 1,512 2,879
PBT 2,321 3,297 2,960 3,804 Items/Others
Less: Taxes 503 658 740 951 Chg. in Cash & Bank 373 (283) 921 99
Less: Minority Interests 18 (36) (25) (25) balance
Net Income (Reported) 1,818 2,639 2,245 2,878 Source: Company data, I-Sec research
Adjusted Net Income 1,818 1,814 2,245 2,878
Source: Company data, I-Sec research
Table 10: Key ratios
Table 8: Balance sheet (Year ending March 31)
FY21 FY22 FY23E FY24E
(Rs mn, year ending March 31) Per Share Data (in Rs)
FY21 FY22 FY23E FY24E Diluted adjusted EPS 16.5 16.5 20.4 26.2
Assets Recurring Cash EPS 20.3 27.7 24.3 30.3
Total Current Assets 15,197 20,365 22,368 25,545 Dividend per share (DPS) 6.0 4.5 2.0 3.0
of which cash & cash eqv. 7,212 10,952 11,873 11,971 Book Value per share (BV) 146.9 167.0 185.4 208.5
Total Current Liabilities & 4,313 5,572 6,167 7,591
Provisions Growth Ratios (%)
Net Current Assets 3,673 3,842 16,201 17,954 Operating Income 1.5 20.8 11.8 28.5
Investments 734 5 5 5 EBITDA (0.0) 2.8 14.7 30.7
Other Non-Current Assets 1,429 199 249 299 Recurring Net Income 1.5 45.2 (14.9) 28.2
Net Fixed Assets 4,657 4,581 5,149 5,894 Diluted adjusted EPS 1.5 (0.2) 23.8 28.2
Goodwill 10 10 10 10 Diluted Recurring CEPS 1.0 36.9 (12.3) 24.5
Total Assets 17,713 19,588 21,613 24,161
Valuation Ratios
Liabilities P/E 17.0 17.0 13.8 10.7
Borrowings 400 - - - P/CEPS 13.9 10.1 11.5 9.3
Deferred Tax Liability 1,151 1,221 1,221 1,221 P/BV 1.9 1.7 1.5 1.3
Minority Interest 0 0 0 0 EV / EBITDA 11.2 9.0 7.5 5.7
Equity Share Capital 220 220 220 220 EV / Operating Income 2.7 1.9 1.6 1.2
Face Value per share (Rs) 2.00 2.00 2.00 2.00 EV / Operating FCF (pre-capex) 19.2 7.7 14.4 26.1
Reserves & Surplus 15,942 18,147 20,173 22,720
Net Worth 16,162 18,367 20,393 22,940 Operating Ratios
Total Liabilities 17,713 19,588 21,613 24,161 Raw Material/Sales (%) 64.0 69.5 70.2 70.9
Source: Company data, I-Sec research SG&A/Sales (%) 7.9 6.6 5.4 4.9
Other Income / PBT (%) 28.6 46.2 30.6 26.2
Effective Tax Rate (%) 21.5 20.2 25.0 25.0
NWC / Total Assets (%) 22.5 20.4 20.4 23.2
Inventory Turnover (days) 3 9 10 10
Receivables (days) 218 199 196 195
Payables (days) 150 142 143 143
Net D/E Ratio (x) (0.4) (0.6) (0.6) (0.5)

Return/Profitability Ratios (%)

Recurring Net Income Margins 20.4 24.6 18.7 18.6
RoCE 8.3 10.5 8.1 9.1
RoNW 11.7 15.3 11.6 13.3
Dividend Payout Ratio 36.3 27.3 9.8 11.5
Dividend Yield (%) 2.1 1.6 0.7 1.1
EBITDA Margins 24.3 20.7 21.2 21.6
Source: Company data, I-Sec research

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 Techno Electric & Engineering, November 16, 2022 ICICI Securities
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New I-Sec investment ratings (all ratings based on absolute return; All ratings and target price refers to 12-month performance horizon, unless mentioned otherwise)
BUY: >15% return; ADD: 5% to 15% return; HOLD: Negative 5% to Positive 5% return; REDUCE: Negative 5% to Negative 15% return; SELL: < negative 15% return

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