Tecpro Systems IPO Analysis

Tecpro Systems is an established material handling company in India, engaged in providing turnkey solutions in material handling, ash handling and total Balance of Plant projects. Of late, the company is also taking up small power plant EPC contracts.



The company's promoters Ajay Kumar Bishnoi and Amul Gabrani are first generation entrepreneurs with more than 25 years in the material-handling industry. Incorporated in 1990 the company started operations (material handling business) in 2001 and up to March 31, 2010, executed 1,042 material handling orders. Currently about 269 material handling orders are under execution.

The company, which started as a material handling solution provider, has subsequently backwardly integrated to manufacturing of material handling equipments. Over the years it has also developed in-house capabilities for providing comprehensive solutions in material handling and ash handling systems. Currently it is in designing, engineering, manufacturing, selling, commissioning and servicing a range of material handling systems and equipment for the core infrastructure related sectors like power, steel, cement and other industries. Its entry into ash handling systems came by way of amalgamation of Tecpro Ashtech (formerly Mahindra Ashtech) with the company effective from April 1, 2009. Tecpro Ashtech was taken over by the group in June 21, 2008. Mahindra Ashtech has 40 years of experience in the business of ash handling systems. Likewise the company has also amalgamated Tecpro Power Systems, a subsidiary company providing power plant EPC, with itself on April 2008.

Tecpro Trema, one of the company's subsidiaries, supplies of air pollution control equipment business, which adds strength to the company's BoP business. Two of the company's other subsidiaries, Ajmer Waste Processing Company and Bikaner Waste Processing Company, are into the waste processing business and provide turnkey solutions for management and processing of municipal solid waste that can be used as either land fill or for generation of fuel used as an alternative fuel for burning in kilns in the cement industry or in boilers. Furthermore, Tecpro Energy, another subsidiary, provides comprehensive turnkey solutions for setting up and operating biomass based power plants.

The company's manufacturing plants are at Bhiwadi, Rajasthan and Bawal, Haryana. While the Bawal unit manufacture crushers, screeners, and feeders, the Bhiwadi unit manufacturers idler, pullies, tech structure, and scrappers.

The company in relation to its material handling, ash handling and other operations has entered into collaboration and license agreements with 12 companies such as Siebtechnik GmbH (for vibrating screens), Maschinenfabrick Liezen (for crushers); GEA EGI Contracting/Engineering Company (for high concentration slurry disposal systems), etc. However, some of the collaborators/licensees are under review. Maschinenfabrik Liezen Und Giesserei GmbH has terminated the license agreement pursuant to a letter dated August 19, 2010, with effect from February 19, 2011. Similarly, the company is currently in the process of renewing its MoU with Xiamen Longking Bulk Materials Science and Engineering Company Ltd and co-operation agreement with Greenbank Terotech.

The company has formed subsidiaries, Tecpro Systems (Singapore) Pte. and Tecpro International FZE, for operating in Singapore and Dubai, respectively, and intend to expand into emerging markets such as Africa and South East Asia. Moreover it recently entered into a contract with Vietnam Machinery Installation Corporation for supply of ash handling systems.

The company plans to use the proceeds from the current fresh issue to fund its working capital requirements of Rs 200 crore and balance for general corporate purposes.

Strengths

An established player in the material/coal-handling and ash-handling segments, the company has received highest number of orders (or 19% market share) for coal handling plants among the orders placed for the eleventh five-year plan power projects. Similarly for ash handling it has about 15% market share out of the orders finalized for the eleventh five-year plan projects, according to the data provided by Central Electricity Authority.

Strong order backlog end of July 31, 2010, at Rs 2311.30 crore translates into 1.6 times of its trailing (i.e., FY 2010) sales, thereby giving descent revenue visibility. Moreover about 79.4% of the total order backlog is from the power sector, with the share of steel and cement being 9.8%nd 2.9%, respectively.

Leveraging its expertise in coal handling and ash handling segments, which form a significant part of a BoP contract, the company has moved up the value chain to take up turnkey balance of plant projects. It bagged a large turnkey BoP project for 1X500 MW Korba West TPS worth Rs 993 crore from Chhatisgarh State Power Generation Company (CSPGCL) as a leading partner of the consortium in 2009. Similarly the company has also taken up turnkey execution of power plant EPC including BTG package and BoP. Currently it has two orders to set up a power plant, with an installed capacity of 30 MW and 32 MW each, for Indian Metals & Ferro Alloys and Star Metallics & Power, respectively. Currently about 31% of the total order book is for turnkey BoP/ EPC projects with the share of ash handling and material handling being 24% and 45%, respectively.

Weaknesses

Currently executing two small power plant EPC orders, and the company's ability to scale up for higher rating/MW power plants such as 135MW/ 500 MW/ 600 MW/660MW has to bee seen. The company is yet to finish the first two orders it has bagged in complete power EPC space and not yet bagged any new projects in the last two years.

On the back of continued demand supply imbalance of power in the country, the power generation addition in the country is on high focus with the country planning to add about 62,000 MW (revised) in the 11th five-year plan period and about 1,00,000 MW in the 12th five-year plan period. This expands the pie for power plant BoP and EPC. But competition has intensified with new players getting into these segments and players in BoP products such as coal handling or ash handling expanding to other segments and eyeing for complete BoP package. This might impact the profitability in the long run.

The company has incurred negative cash flow from operating activities of Rs 185.99 crore in FY 2009-10 following the merger of Tecpro Ashtech and Tecpro Power Systems with itself and increase in sundry debtors and inventories.

CSPGCL's award of Rs 993 crore Korba order to the company has been contested by Indure, one of the other bidders to the tender, alleging that its bid was arbitrarily and discriminatorily rejected by CSPGCL. Its writ petition was dismissed by the High Court of Chhattisgarh in December 10, 2009, but Indure has filed a special leave petition in the Supreme Court. The CSPGCL' Korba order accounts 42% of the order backlog of the company. As of March 31, 2010, the company had recognized revenue of Rs 185.79 crore and incurred a cost of Rs 148.64 crore. Of this, it has received paltry Rs 11.11 crore. Hence, any adverse decision against the company may result in the company incurring a loss to the extent of expenses incurred but not recovered from CSPGCL apart from substantial reduction in the order book and revenue visibility.

About 4.17% of the post-issue paid-up equity, or 7.9% of the promoter stake numbering about 2103033 equity shares, was pledged with the State Bank of India. Any sale of equity shares by State Bank of India in case of a default under the financing documents will dilute the shareholding of the promoters and adversely affect the stock price of the company.

As at July 31, 2010, the company's debts to banks stood at Rs 1764.87 crore. On a consolidated basis, the debtor turnover ratio has surged from 118 days in FY 2006 to 199 in FY 2009, which has further surged to 230 days in FY 2010. This was funded by raising debt, which has led to four-fold rise (397% y-o-y spike) in interest costs to Rs 71.44 crore in FY 2010.

Valuation

Consolidated sales of the company for the fiscal ended March 31, 2010, were higher by 82% to Rs 1454.92 crore and net profit doubled to Rs 108.71 crore. The EPS on post-issue equity of Rs 50.47 crore was Rs 21.5. And at the offer price band of Rs 340-355 the PE works out to 15.8-16.5 times of its FY 2010 consolidated earnings. In contrast, McNally Bharat Engineering quotes at a PE of 15.5 times and TRF at 19.8 times its FY 2010 consolidated earnings. On the other hand BGR Energy Systems, powered by two of its 600 MW power plant EPC contracts, gets higher valuation with a PE of 28 times of its FY 2010 consolidated earnings.