Shriram EPC is one of the leading providers of integrated design, engineering, procurement, construction and project management services for renewable energy projects, process plant, metallurgical plants and municipal services sector projects. Besides engineering, procurement and construction (EPC), it also manufactures and installs 250-KW wind turbine generator (WTG) and cooling towers.
The renewable energy business comprises EPC execution of biomass power plant, co-generation power plant projects and bio-ethanol plants. Bio-ethanol technology is sourced from a leading European player with project-specific arrangement. Similarly, EPC solutions for process and metallurgy plants including captive and non-captive thermal power plants are also undertaken. In the process and metallurgy space, bids are placed as part of larger project-specific consortium with international players such as Danielli of Italy for rolling-mill contracts, SSIT of China for coal-dust injection, Waterbury of Canada for stainless-steel mill for an integrated steel plant, Beltran of the US for wet electrostatic precipitators, and Envirotherm GmbH of Germany for coal gasification. In the water and wastewater space, EPC solution is given for treatment plants, water and sewerage infrastructure and pipe rehabilitation.
The WTG business is focused on developing, manufacturing, erecting and commissioning 250-KW WTGs. Currently, megawatt class WTGs are being developed through a subsidiary and associate company, which have formed a joint venture (JV) with Leitwind of the Netherlands. End December 2007, over 210 WTGs were supplied and installed and four wind farm projects developed for clients in India, particularly in Tamil Nadu. The first export order to supply 250-KW WTG to a client in Thailand in fiscal 2007 was executed recently. To move up to MW class of WTGs, one 1.35-MW WTG was installed in Tamilnadu in September 2007 and another is to be installed in Karnataka by February 2008.
The process and metallurgy business accounted for 62.7% of the EPC contract revenue and 39.1% of total consolidated revenue in the year ended March 2007(FY 2007). The biomass power-plant business generated about 26.8% of the EPC contract revenue and 16.7% of consolidated revenue. The municipal services business accounted for 106% of the EPC contract revenue and 6.6% of consolidated revenue. The WTG business generated 35.9% of consolidated revenue.
Shriram EPC has three associate companies manufacturing WTGs, renewable power generation, and metallurgical coke. Orient Green Power (OGPL) is the associate company in which Shriram EPC holds a 48.7% stake, focuses on developing renewable energy source based (biomass and hydel) power plants on build-own-operate (BOO) and build-own-operate-transfer (BOOT). To date, OGPL has identified four biomass power projects in Dindugal, Pattukottai, Vandavasi and Pollachi in Tamilnadu of 1x7.5 MW each, aggregating 30 MW ; one mini hydel power project (of 15 MW) in Orissa; and one poultry-based power project (of 6 MW) in Andhra Pradesh for development. The licence for these six projects to be executed are already in place with third parties. OGPL is expected to acquire a majority / entire stake in each of the special purpose vehicle (SPV). OGPL has also bid for licences for two biomass power plants in Punjab and one in Madhya Pradesh, with a capacity of 10 MW each. Ennore Coke is the listed company and the second associate. Leitner Shriram Manufacturing is the other associate company, where Shriram EPC owns 49%, with the balance 51% held by the Netherlands-based JV partner, Leitwing BV, manufacturing 1.35-MW class WTG machines. This JV is expected to commence operation from January 2008.
Hamon Shriram Cottrell (formerly Hamon Thermopack Engineers) and Shriram Leitwind are the two subsidiaries of Shriram EPC. While Hamon Shriram Cottrell manufactures and erects cooling towers and air pollution control units, Shriram Leitwind (Shriram EPC owns 51%) markets WTG of both 25 KW class and 1.35 MW class. Shriram EPC also plans to shift the manufacturing and marketing of the KW machine business to the newly formed JV companies. Shriram EPC acquired majority stake ( 50% + 2 shares) in erstwhile Hamon Thermopack Engineers from Hamon Group and also got exclusive licence to design, manufacture and sell certain air pollution products and systems from the stable of Hamon Research Cottrell Inc.
The issue proceeds will be used to capitalise the subsidiaries and associate companies to purchase of equipment for pipe-rehabilitation projects and fund expenditure for general corporate purpose.
Strengths
Presence in potentially strong growth sectors such as renewable energy including bio-ethanol plants, metallurgical EPC contracts and water and waste water infra projects. This sector presents strong potential with increasing capital expenditure. Operating in complementary projects such as cooling towers and air pollution control equipment, and coal gasification solutions will help to maximise the business share from both existing and future clients.
Consolidated order book stood at Rs 2279.18 crore end December 2007, translating into about 7.7 times FY 2007 revenue. The order book is also diverse by project mix with the share of process and metallurgical-plant projects including cooling towers and pollution control equipment about 57%, municipal services 9.2%, and biomass-power plant 9.3%. The WTG business accounted for about 7.7% of the total order book. Has also bagged a Euro 69-million contract to design and build a 280-kilo litre per day (KLPD) bio-ethanol plant in Czech Republic.
Successful project execution capability in time-bound and cost-effective manner backed by an able management team. Has executed large and complex projects on time or before the scheduled completion date. As lump-sum turnkey projects do not come with a price-escalation clause, timely completion and cost effectiveness is a big determinant of profitability.
Weakness
Though has a strong presence in 250 KW class, has entered into the MW class with a relatively new player as technology partner. Furthermore, the gearless technology of Leitwind is new, without a track record. This and competition in the global wind-power equipment market calls for strong marketing muscle, which is yet to be seen.
A single order (the EPC contract for setting up of a 1.5-tonne per day grassroot cement plant for Sree Jayajothi Cements in Andhra Pradesh) constituted about 25% of the total order book end December 2007. About 10 projects represented 72.6% of the order book end December 2007. Any delay or holdback of the project will affect the revenue flow.
GEI Industrial Systems has filed a petition before the Company Law Board against Compagnie Financiere Hamon and other praying for restraining Hamon/ or any subsidiary or group company from entering into any new JV and cancellation/ termination of existing JV. In the event of adverse decision against Hamon, the JV Hamon Shriram will be asked to terminate.
Has little experience in the successful execution of bio-ethanol plant. Its ability to scale up in this market by competing against established players is to be seen. Similarly, has also won order for the execution of a cement plant and a coal-gasification plant, where it lacks experience.
Valuations
Consolidated revenue in the fiscal ended March 2007 was higher by 105% to Rs 295.72 crore and the restated net profit up 117% to Rs 14.06 crore. The EPS for FY 2007 works out to Rs 3.3 on post-IPO equity. At the offer price band of Rs 290-Rs 330, the P/E works to 87.9-100 times the FY 2007 consolidated earning. However, the P/E based on consolidated half-yearly EPS (annualised) works out to 59.2 (on the lower price band of Rs 290) times to 67.4 times (on the upper price band of Rs 330). Given the diverse operational profile, there is no comparable player of its size. Nevertheless, peer players such as Thermax, BGR Energy, Praj and Suzlon Energy are quoting at a P/E of 42.3, 175.8, 38.1 and 58.7 times their FY 2007 consolidated earning