Techno Electric & Engineering

Investors with a high-risk appetite can consider buying the stock of Techno Electric & Engineering – an engineering procurement and construction (EPC) contractor mainly serving the power sector.

Strong orders, diversified contracting profile and low leverage are key positives for this small-sized company.

At Rs 167, the stock trades at about 10 times its estimated per share earnings for FY-11. Given the volatility prevailing in the broad markets, investors can consider accumulating the stock on declines linked to broad markets.

Techno Electric is a contracting company that provides EPC services across the power spectrum – generation transmission and distribution.

Its clients include power equipment companies such as BHEL and Kalpataru Power Transmissions and ABB as well as State Electricity Boards.

Its projects include fuel oil storage and handling systems, piping systems, switchyard and substation execution, plant lighting and earthing systems and cabling. Given its diversified profile, it also does contracting work for the steel, petrochemicals, fertilisers and metals sectors.

The services of engineering companies such as Techno Electric are crucial for execution of power plants. Larger players, especially power equipment companies, typically tend to contract a part of the plant EPC works to such smaller players. Given the massive investment in power, players such as Techno Electric may emerge as major beneficiaries.

Companies such as BGR Energy Systems, which started off as an engineering services company, have upgraded their profile to power equipment players. While Techno Electric may not have a similar growth path, the company has in recent times acquired wind power assets.

It has, in the last few months, acquired wind power assets adding up to 95 MW in Tamil Nadu and Karnataka.

Given that these assets are already up and running and have power purchase agreements with State utilities, the revenue stream as well as tax benefits would be earnings accretive.

Techno Electric has for sometime been interested in entering non-conventional energy and has obtained licences to produce biomass power.

Plants with capacity of 22 MW are expected to be commissioned in 2010. While these initiatives may not be key revenue drivers, they would help the company build assets that generate regular streams of revenue, even as it derives its key business from the conventional energy space.

For the three years ended FY-09, Techno Electric's sales and net profits grew at a compounded annual rate of 24 per cent and 63 per cent to Rs 486 crore and Rs 64 crore respectively. Current order book of Rs 1,350 crore is about 2.7 times the previous year's revenues.

While operating profit margins have expanded over 100 basis points to 13.4 per cent in the September quarter, any hike in commodity prices would hurt costs and consequently profit margins sharply.

via BL