Technofab Engineering IPO Review

Those with a high risk appetite can consider investing in the initial public offer of small-sized Engineering, Procurement and Construction (EPC) services player, Technofab Engineering, with a two-year perspective. Strong growth in revenues and earnings over the last couple of years, low gearing, presence in lucrative segments such as nuclear power and water management are the key positives for this company. The offer price band of Rs 230-240 discounts the likely per share earnings for FY-11 by 7.6-8 times. The valuation is at a discount to comparable peers such as Hindustan Dorr Oliver and BGR Energy Systems.



The company and offer

Technofab started off as a piping, valves and pressure vessels fabricator catering to power, steel and other metallurgical sectors. The company later expanded its scope of work and undertook comprehensive turnkey projects in power transmission and distribution as well as water and waste management. Its sales for the year ending March 2010 was Rs 200 crore; profits stood at Rs 19 crore. The company plans to raise about Rs 70 crore to meet long-term working-capital requirements and fund procurement of equipment. At the higher end of the offer price band, the company would have a market capitalisation of Rs 250 crore on listing, making it a small-cap stock.

Fast track

Technofab has managed to ramp up its revenues at a compounded annual rate of 48 per cent over the last three years, while profits leaped by 189 per cent annually, albeit on a low base.

Thanks to the increased opportunities in conventional and nuclear power as well as increase in water and sewerage management programmes over the last few years, Technofab has managed to receive orders from public and private companies.

Projects from Nuclear Power Corporation of India and NTPC serve as good reference points for future orders, as pre-qualification is a key criteria in public sector bids.

The company has also made inroads in West Asia and Africa. Close to a third of its current order-book (together with L1 orders) are international projects. Water-related projects in countries such as Kenya and Ethiopia can be expected to deliver higher returns.

Technofab's steady sales growth, combined with rapid profit growth and spike in profit margins, suggest that the company has focused on profitability rather than topline. Its operating profit margins also reflect this strategy. OPM at close to 17 per cent is far ahead of the industry average.

However, the company may miss out on the volume-driven opportunities domestically, especially in the power transmission and industrial space. Technofab's current order book at Rs 533 crore (plus over Rs 400 crore of orders where it is the lowest bidder) is tilted towards conventional power and nuclear projects, which is likely to ensure that that the current profitability is sustained.

While about 25-35 per cent of the orders may be protected by price escalation clauses, the rest may be exposed to commodity price hikes.

However, given the average execution cycle (12-20 months) and that its OPMs steadily increased over 2008-2010 (when commodity prices peaked and later crashed) suggests that the company has managed its raw material costs well.

Challenges

However, foreign exchange management may be a cause for concern. While only 10 per cent of revenues were derived from overseas in FY-10, this proportion was 40 per cent in FY-09. The current order book has a chunk of international projects. While the company may protect itself partly through natural hedge — by procuring in similar currency, it may still be subject to risks of currency volatility.

Another key area of challenge for Technofab would be to scale up its size to bid for larger projects. Gammon India, a strategic investor in the company may, however, provide support in terms of financial qualification. Together, the two companies may complement each other with their respective financial and technical resources.

via BL