Technofab Engineering IPO Analysis

Focused on balance of plant packages

Undertakes projects in the power, oil & gas, water & wastewater treatment and other industrial & infrastructure sectors

Technofab Engineering (TFEL) is engaged in the business of providing engineering, procurement and construction (EPC) services on turnkey basis. The company undertakes execution of a wide range of balance-of-plant (BoP) and electro-mechanical projects in the power, oil & gas, water & wastewater treatment and other industrial & infrastructure sectors in both India as well as international markets. The company currently executes projects in 15 states in India as well as Kenya, Ethiopia and Fiji.



Incorporated in 1971, the company has evolved from a piping, valves and pressure vessels fabricator to an EPC company undertaking turnkey packages relating to low pressure piping systems, fuel oil handling systems and fire protection systems, and eventually executing comprehensive electromechanical packages involving all engineering disciplines: mechanical, electrical, control and instrumentation, environmental and civil. Even within turnkey services, the company has gradually expanded its coverage.

The company, which had largely targeted individual BoP packages required by customers in the steel, metallurgical and power sectors in the initial years, has gradually evolved to undertake comprehensive turnkey projects in liquid waste and effluent treatment, raw and seawater intake systems and pumping stations, rural electrification works comprising transmission mains and distribution lines, rehabilitation and up gradation of city water & sewage treatment plants in the latter years.

The company forayed into rural electrification by acquiring 100% stake of Rivu Infrastructure Developers (RIDPL), a company engaged in undertaking electrical works including lighting and erection of substations on contractual basis on February 6, 2010 for Rs 5 lakh. RIDPL clocked a net profit of Rs 7 lakh on a sale of Rs 1.70 crore for FY 2010.

The company has strong relationship and worked with leading engineering consultants such as Development Consultants (DCPL), Desein, FITCHNER Consulting Engineers (India), Mecon, Tata Consulting Engineers, Engineers India, M.N. Dastur, L&T, Sargent & Lundy, Uhde India.

Issue proceeds are to fund 1) long-term working capital requirements; 2) to finance the procurement of construction equipment; 3) to set up maintenance and storage facility for construction equipment; 4) to set up of training centre for employees; and 5) general corporate purposes.

Strengths

Unexecuted order book end March 2010 was Rs 533.74 crore, about 2.7 times its FY 2009-10 revenue providing strong revenue visibility.

Thirty-eight years of experience in the EPC business. Has good track record in projects execution as well as ability to move up the value chain. The confidence of the user industry in the company's ability to handle large project has been vindicated with quite few large orders coming as well as steady growth in rise of order ticket size for the company. The average order ticket size, which was about Rs10 crore in FY 2006, rose to Rs 20 crore in FY 2010 with large number of orders in the ticket size of Rs 40-50 crore.

Gammon India holds about 15.7% of the pre IPO paid-up equity of the company and it will get diluted to 11% post issue. . Gammon India accounts for 20% of current order backlog of the company including one large road construction contract worth Rs 103.32 crore, which is the largest ticket size contract for the company. Gammon India (GIL), which forayed into the power equipment business with acquisition in boilers, turbines and balance of plant equipments might see synergic fit for electro mechanical EPC for water and fuel oil systems. The company may not only get subcontracts from Gammon India, but may also qualify for large ticket orders in association with Gammon India.

Weaknesses

The company is still small and has limited expertise in the BoP segment. Even within the water segment, it does not have technical capability to pre-qualify for desalination project in the utility/power sector. Manufacture of demineralization and water treatment plants is dominated by large players such as Thermax, Driplex Water, Doshi Ion Exchange, and Ion Exchange. Similarly, large players like Techno Electric and BGR Energy dominate the fuel oil (FO) systems of the power sector.

As the BoP package for power plant contracts are bundled into a single EPC package for the whole power plant including the main plant package or a single BOP package for a power plant, the company's success largely relies on the ability of a company to forge partnership or relationship with large EPC players such as BHEL or a consortium of BoP players as it does not have presence in entire spectrum of BoP.

In the power sector BoP space, which accounts for 25% of the current order book, the share of the company in the 11th five year plan projects is not significant even within the water segment as well as FO systems.

The company has limited experience in rural electrification and roads, and is yet to prove its mettle. Given the low margin nature of this businesses, the company's ability to profitably execute largely hinges on timely completion and control on material cost.

The company had an operating negative cash flow of Rs 9.37 crore in FY 2010.

Valuation

Standalone sale for FY 2010 was higher by 34% to Rs 200.37 crore and net profit was higher by 63% to Rs 19.09 crore. The company's OPM in FY 2010 was 16.8%, which is high compared to other players in the industry who enjoy OPM of around 10-12%. The standalone EPS for FY 2010 works out to Rs 18.2. The offer price band of Rs 230-240 discounts the FY 2010 EPS by 12.6-13.2 times.

In comparison other comparable BoP EPC players such as Techo Electric quotes at a PE of 13.5 times its FY 2010 consolidated EPS and Sunil Hitech trades at P/E of around 11 times FY 2010 standalone EPS.