Tecpro Systems IPO - Apply or Not ?

An established track record of project execution, quality order book and technical collaboration with international players, besides high trajectory of earnings growth strengthen the prospects of material-handling player Tecpro Systems. Investors with a two-year perspective can consider investing in the initial public offer of Tecpro. The offer price of Rs 340-355 discounts the company's consolidated per share earnings estimated for FY-11 by 12-13 times. The valuation is at a good discount to peers such as McNally Bharat Engineering and TRF.



The company and offer

Tecpro Systems provides turnkey solutions in material and ash handling, balance of plant (BoP) and engineering procurement and construction (EPC) contracts. The company has an in-house manufacturing facility in Rajasthan and Haryana to make material- and ash-handling equipment such as stackers, re-claimers and crushers.

Proceeds from the offer would be utilised for working capital requirements.

Forward integration

Of the orders placed for coal handling solutions in the Eleventh Plan, Tecpro is stated to have a 19 per cent market-share in coal-handling systems and a 15 per cent share in ash-handling. It competes with players such as Larsen & Toubro, ThyssenKrupp Industries and Elecon Engineering in the coal-handling space.

In-house manufacturing facility, besides a number of collaborations with international players, may have possibly helped the company bag projects from large companies such as Reliance Energy, Lanco Infratech and SAIL.

As a natural extension of its material-handling services, especially for power plants, Tecpro bid and won a balance of plant work from the Chhattisgarh State Power Generation Company valued at Rs 993 crore. The company has already started execution of this project. That this BoP has added to the overall profitability is also evident from the company's operating profit margins (OPM). From an 11-13 per cent OPM range in previous years, this margin shot up to 15 per cent in FY-10 after the BoP execution started. We expect this contract to act as a good reference point for future projects.

Tecpro's edge in the BoP space also lies in its well-entrenched presence in coal and ash handling projects; these form a significant portion of a BoP package, besides civil work and water treatment plant.

To draw from the expertise of other companies, Tecpro bid for its first BoP project in consortium with infrastructure player Gammon India (for cooling towers) and water treatment company, VA Tech Wabag.

Going forward, the company intends to manufacture and commission cooling towers as well as water treatment plants in-house besides supply and commissioning of coal washeries. With this, the company may be well-placed to consolidate its operations in the power infrastructure sector.

Companies such as BGR Energy Systems, which started off as a service provider to the energy sector moving to BoP and later EPC have been considerably re-rated in the stock market.

Power dominates

While the BoP segment is fast catching up as a key driver of revenues, Tecpro's material handling systems continues to account for a good chunk of its order book. Of the Rs 2,310 core of order backlog (1.5 times FY-10 sales), bulk handling forms a good 45 per cent, BoP and EPC about 30 per cent and the rest from ash handling projects. The order backlog is dominated by projects from the power sector, which account for 80 per cent of the orders.

According to the Central Electricity Authority estimates (as of June 2010), about 148 orders for coal and ash handling each need to be placed under the Twelfth Plan. There were only eight key players offering coal handling works and nine vendors in ash handling as of August 2009. Tecpro's focus on the power segment therefore appears well-timed.

Financials

Tecpro's revenues for FY-10 stood at Rs 1,455 crore, growing 84 per cent compounded annually over the last three years, albeit from a small base. Net profits grew 75 per cent to Rs 109 crore. The company's debt-equity would reduce to less than one post-issue. However, working capital turnover does appear low. Almost a fourth of the receivables were pending for over six months (as of March 2010) and average debtor days was as high as 165. An increase in BoP works may push the company to negative operational cash flows.

Tecpro's BoP project in Chhatissgarh is under litigation as another bidder has challenged the State Power Corporation. While this was dismissed in the High Court of Chhattisgarh, the same is pending before the Supreme Court. Any adverse ruling can impact future revenues. However, the company would not have to reverse revenue booked.

via BL