Kolkata-based Techno Electric & Engineering does stand out for a couple of reasons. For one there aren’t too many debt-free engineering procurement construction (EPC) companies that focus more on margins, profitability and cash flow rather than going after projects to beef up their order book. Techno Electric has been quite careful about choosing complex projects that come with higher profitability and cash flow. Techno Electric provides services to all the three segments within the power sector industry — generation, transmission and distribution. Apart from the power sector it also caters to the needs of steel, fertiliser, metals and petrochemicals sectors. The company ventured into renewable energy through acquisitions of wind assets in 2009. It currently has a total installed capacity of 130MW. As on FY17, EPC accounted for 89% of the company’s revenue and wind power brought in the balance 11%.
In FY17, the company’s revenues grew by 23% to 1,356 crore in FY17. In the last quarter alone, the company booked orders worth 500 crore. With a healthy order book position of 2,600 crore, the company is poised to sustain its growth momentum in the next couple of years.
The company’s discipline in both execution and choosing projects has held it in good stead. Even during FY10-14 — a period marked by heightened competitive intensity — Techno Electric showed restraint in choosing its projects while peers raced ahead. The company revenue remained flat at an average growth of 0.22% during that period. Techno consciously let go of many Power Grid Corporation of India (Power Grid) and State Electricity Board (SEB) orders. As PP Gupta, managing director at Techno Electric & Engineering, puts it, “We believe more in closing the contract than bagging the contract. We are not a top-line driven company. We focus on executing complex and profitable projects in time-bound manner.”
Techno Electric first forayed into the EPC business in 1978, when NTPC set up its first power plant of 1,000 MW in Singrauli in Eastern UP. Techno Electric got the job of installing the fuel oil handling system for them. In 1990, when Power Grid took over the transmission assets from NTPC, Techno Electric began its long-standing relationship with them. Today, Power Grid is its largest client in the Transmission & Distribution (T&D) space. Power Grid plans to spend 150,000 crore over the next five years, which will only means more orders for the company.
As a policy Techno Electric does not have more than 20 open sites at any point of time since a high order backlog and too many open sites, would lead to poor resource management and long execution cycles, affecting the focus and project execution timelines. Avoiding delays and cost overruns help Techno Electric have one of the highest EBITDA margins of 15% among its peers in the EPC business (See: Best in business). “When it comes to substations, Techno Electric is best at executing them. The company commands better margins due to its ability to get things done within time,” says Amber Singhania, analyst at Asian Market Securities.
Given its long-term experience of working with Power Grid and SEBs, Techno Electric cherry-picks projects with better profitability. “We work with PSUs who have good discipline and take up mostly the projects which are multilaterally or bilaterally funded,” Gupta says. The funding from agencies like World Bank, Rural Electrification Corporation (REC) or Power Finance Corporation (PFC) reduces risk of payment delays for Techno Electric. The company has an average receivable period of 70 days — one of the lowest in the industry.
And their discipline has paid off in more ways than one. During 2010-12, several infrastructure companies entered the transmission EPC space. After seeing execution delays, Power Grid had declined awarding incremental contracts to these new players until they executed their existing transmission projects. This led to many new entrants like Jyoti Structures, Ashoka Buildcon and other regional players exiting the transmission EPC business with high debt and losses. However, this augurs well for established players like Techno Electric. The company expects an order inflow of 1,500-2,000 crore in FY18.
Gupta says that going ahead he expects orders from states to gather momentum. “With India becoming power surplus, the states have more choice now. They have the choice to buy power at the cheapest cost. Until now, they were taking power that was being allotted to them. In days to come, we will see more of medium-term contracts than long-term PPAs and this will drive demand in T&D.” If PPAs are of shorter duration, there would be more buyers and sellers in the market, which would require more connectivity.
Besides this, with Government’s focus on bringing down the aggregate technical and commercial (AT&C) losses and thrust on renewables, T&D spending should gravitate towards more substations. Analysts reckon all this put together can throw up a 2.6 lakh crore EPC opportunity over the next five years and Techno Electric is expected to corner a part of it. STATCOM, a regulating device, used for providing stability to the grid can open up another opportunity for Techno Electric. “When you feed so much power in a grid, it needs to be more stable. So, Power Grid would need to make investments in STATCOM and this can be good opportunity for Techno,” says Pawan Parakh, analyst at HDFC Securities. Techno has a first-mover advantage here as it has been first company to bag a STATCOM order in India. As per industry estimates, Power Grid plans to install approximately 50 STATCOMs (investment of about 8,000 crore) over the next three to four years.
Apart from the EPC business, Techno Electric is also to ramp its presence in Build Own Operate Transfer/Maintain (BOOT/BOOM) projects as more states are expected to opt for this model. Under this model transmission lines are privately owned, including substations that are awarded by the Government on a competitive bidding basis. These private players sign contracts for 35-40 years where they invest in the line, maintain it and Government pays them an annuity. “BOOT projects are largely awarded at an interstate level, but states may also start opting for these models independantly like Rajasthan has done in some projects and more may happen in Jharkhand also,” Gupta says. In 2010, Techno Electric made its foray into BOOT projects through the JV with Kalpataru. It bagged a 440 crore transmission project in Jhajjar in Haryana for a period of 25 years which is extendable by another ten years. It won another project worth 200 crore in Patran in Punjab in 2013. With both projects progressing well, the company wants to build a portfolio of four to five projects by 2020. It recently won its third BOOT project along with Kalpataru Power in Nagaland worth 1,100-1,200 crore, where Techno Electric will own 26% stake and will execute EPC orders worth 350 crore.
Techno Electric has two objectives behind investing in T&D BOOT projects. Unlike EPC, BOOT projects come with an asset ownership model. According to analysts at Emkay Global Financial Services, these projects offer the company an avenue to deploy its excess cash resources to generate stable and secure returns of 10-11%. It also helps it bag the substation EPC business and operation and maintenance contracts from these BOOT projects. The EPC business generates a cash surplus of around 150 crore in FY17.
Mayuresh Joshi, fund manager (PMS) at Angel Broking, who has taken exposure to the stock, is enthusiastic about Techno’s BOOT projects. “If they divest from their BOOT portfolio even at a 15-20% markup to their invested capital over the next two years, there are still returns to be made on the stock.” Market observers reckon Techno’s operational efficiencies give it a competitive edge. “People can go wrong in project execution and cost estimation in the BOOT model, these are strengths of Techno and that mitigates its risks,” says Vikas Khemani, president and CEO, Edelweiss Securities.
Show me the money
Over the last three to four years, Techno had been struggling over its wind power portfolio on account of back-downs and delayed payments. Nearly 70% of Techno’s capital employed (as on FY17) was towards wind projects which gave only 12% returns as against the 90% returns generated by the EPC segment. While over the last seven to eight months, these problems have eased following payment of dues from Tamil Nadu Electricity Board and improvement in wind flow and grid availability, Techno has taken a policy decision to sell its wind power assets. It plans to allocate the cash surplus from the sale of assets towards BOOT projects. In FY16, the company sold 44.5MW and in FY17, the company sold 33MW. The balance 130MW would be sold over the next 12-24 months.
Investments in T&D networks have traditionally lagged behind generation capacities. While Power Grid has been investing heavily in building an inter-state transmission system for the last three to four years, analysts expect investments in intra-state to pick up pace as state transmission utilities upgrade and ramp up investments in T&D capacities leading to an increased order flow for Techno Electric.
They expect Techno Electric’s consolidated revenue to grow by a little over 19% and earnings to grow at around 25% on an average every year over FY16-19. At current market price, the stock is trading 21.7x one-year forward earnings. Given the company’s strong execution track record and consistent cash flow generated by the EPC business and potential sale of wind power assets, the stock seems to have all the voltage to light up your portfolio.