Avinash Gupta isn’t really a risk taker. He’s conservative and cautious. But back in the 1950s, he took the first of two, life-changing bold decisions — on graduation, the young Gupta opted out of joining his family’s air-conditioning services business in Ludhiana and instead, moved to Bombay to work for infra major Gannon Dunkerley. “I was clear I wanted to work for a few years in a company before starting my own business,” recalls Gupta, now a sprightly 72 years.
More than a decade later, in 1971, Gupta took his second bold decision — he quit, borrowed ₹20,000 from his father-in-law and started Technofab Engineering, operating out of his father-in-law’s home in south Delhi. “I don’t remember if I ever returned the money,” he laughs. If he had offered a stake in the company in lieu of the loan, Gupta’s father-in-law would have been a happy man, indeed. In the past five years, Technofab has grown at an average 36%, from ₹81 crore in FY08 to ₹377 crore in FY12 (and ₹287 crore in the first nine months of FY13). Profits, too, have grown more than six times in the same period, from ₹5.3 crore in FY08 to ₹34 crore in FY12 and ₹19 crore in April-December 2012. All of which has led Technofab to become one of the fastest-growing companies in India.
When Gupta set up Technofab, he was very clear (thanks to his experience with Gannon) what his field of specialisation would be: mechanical construction, which involves building systems and machines at industrial plants. “Those were heady days of public sector and Planning Commission-driven projects. Many new industrial projects were coming up, requiring both civil and mechanical contractors,” he says. There weren’t too many of the latter around and, as a result, Technofab was a profitable company from the start.
But given the field, the company ended up only doing the hard labour part of any job — most material for construction was imported and customers wanted contractors to merely supply labour. By 1979, Technofab switched from being a labour contractor to an engineering, procurement and construction (EPC) contractor, serving the power, industrial and infrastructure sectors by taking up turnkey contracts.
The earliest clients were state electricity boards (SEBs)and National Thermal Power Corporation (NTPC), India’s largest state-owned electric utilities company. To these, Technofab started offering electro-mechanical solutions in the balance of plant (BOP) space — boilers and turbines make up 50% of a power plant project, while the rest is referred to as BOP. It was usual practice for NTPC to break up the mechanical BOP work into several discrete projects (such as water treatment plants, low pressure piping, fire protection systems etc.), which made them small enough to be managed by a small company such as Technofab. “We have been a part of almost every NTPC project even if it involved laying just one pipe,” says Gupta proudly.
Through the 1980s, Technofab grew steadily but lost its momentum, soon after. “As a small company, we had growth constraints such as management bandwidth and access to capital,” Gupta says, explaining the stagnancy of the 1990s and early 2000s. It didn’t help that most business came from NTPC and SEBs, and receivables from the latter kept adding up. So, Technofab did what most companies in its position would do — it hunkered down and prepared for better times ahead.
Those weren’t too far away. In 2005, Gupta’s sons, Arjun and Nakul, joined the company’s board, having worked their way through the ranks over the previous seven-eight years. The infusion of fresh blood worked to the company’s advantage — the new directors pointed out that the skill sets Technofab had developed through its work in the thermal power sector could be easily and profitably extended to other sectors. The company started looking out for newer business areas such as nuclear power, water, electrical distribution and rural electrification, as well as newer geographies.
Opening new vistas
The diversification has helped Technofab reduce its dependence on the power sector, which traditionally contributed a staggering 90% of its revenues. “When we examine our revenue break-up in the past six years or so, we see that except for the thermal power sector, which has consistently contributed 30% to revenue, the rest have been continuously churning,” says Gupta. In fact now, water projects are the largest contributor (40%) to the company’s topline. They also account for the largest share of the company’s order book.
The company currently has an order-book of around ₹1,050 crore. Water projects make up 42% of this, followed by thermal power, electrical distribution, oil and gas, industrial and infrastructure and nuclear power (see: Casting the net wide). During the Q3FY13 results conference call with analysts, Gupta mentioned that the company has not got any new business from the power sector in the past one year. “I don’t see us securing business from the power sector for another year,” he added.
There’s been another significant change in the past few years — now Technofab accepts comprehensive BOP work instead of just small, niche projects. “We have moved up the value chain,” confirms Gupta. Crisil analyst Chetan Majithia says this strategy will increase the average ticket size of projects. “Traditionally, Technofab has been executing smaller projects with an average ticket size of ₹8-9 crore in the BOP space, which requires relatively lower technical skills,” Majithia explains. “With the company now offering a comprehensive BOP package, which involves much larger and more complex projects, the average ticket size of its projects has increased significantly to as much as ₹45 crore,” he states.
Technofab’s segment diversification was accompanied by geographical expansion. It wasn’t a new strategy, though: in the 1990s, the company had taken on projects in Kenya and Zambia but had put its international ambitions on the backburner, given its problems at home. “That was the time receivables from SEBs were piling up, so we were busy sorting that out,” says Gupta. In 2006, though, the company began pursuing overseas projects with renewed vigour, focusing on Africa, in particular, identifying and going after projects funded by the World Bank and other multilateral agencies.
In 2007, Technofab bagged a contract each in Ghana and Ethiopia; at around ₹50-70 crore each, these were significantly larger than its average domestic order size of ₹10 crore. Subsequently, it also ventured into Fiji, Bangladesh, Kenya and Tanzania. Interestingly, Gupta says it’s easier to do business abroad. “Admittedly, there are huge logistics problems but there are no unpleasant surprises as there are in India,” says Gupta. As a case in point, he cites two virtually identical contracts the company won in 2007, one in West Bengal and one in Ghana.
The projects were of the same value, had the same schedules and began almost at the same time. But where the Ghana project was completed ahead of time, the project in West Bengal got stuck because of a “right of way” issue. “It took our client two years to resolve the problem. Though this is an extreme example, such surprises keep coming up in India,” he adds.
Next on the international agenda is venturing into CIS countries and, possibly, Iraq, Iran and South Asia. West Asia, though, isn’t on the list, a deliberate omission. “Projects in the Gulf are high-magnitude ones of $500 million or more. We are not comfortable with any single project of over $100 million,” says Gupta. So much so that the company backed out of a possible joint venture in Saudi Arabia. This cautious approach hasn’t hampered Technofab, so far. Today, overseas projects still account for 55% of the overall order-book.
A Nagaraju, an analyst with brokerage firm Firstcall Research, says the company has been able to maintain growth despite a domestic slowdown because of its presence in overseas markets and diversification into new segments (see: Beyond the shores). “In the December-ended quarter of FY13, 60% of the company’s revenues came from the overseas market and if you look at the order-book, much of it is now from the water segment,” he points out. “This has helped Technofab counter the
However, Crisil’s Majithia feels that while overseas business shields the company from a domestic slowdown, it does pose some risks. “Risks of timely execution and receivables cannot be ruled out as most of the countries where the company is currently involved have witnessed political instability in the past; any similar event now could impact revenues or receivables,” he says. Still, much of the credit risk is mitigated by the fact that most projects are backed by international agencies; moreover, the company has insured its overseas receivables with the Export Credit Guarantee Corporation.
In the past 42 years, Technofab has executed 140 projects and received repeat orders from marquee clients such as NTPC, Bharat Heavy Electricals, Nuclear Power Corporation, Steel Authority of India, Hindalco, and others. However, John Perinchery, senior analyst (equity research), Asian Markets Securities, points out that about half of the current order-book comprises fixed-price contracts. “Hence, the company is exposed to sharp spikes in commodity prices. Any unexpected spike in commodity prices would adversely impact Technofab’s margins.”
However, Gupta says a quarter of the company’s orders have provided for revision on account of cost escalation. “Technofab’s philosophy is simple. We estimate all our costs and on top of that, depending upon the competitive position and our appetite, we add our margins, and we usually achieve our margins.” So far, the company has managed to keep its profit after tax (PAT) margins healthy, from 7.82% in FY09 to a little over 9% by FY12.
The next few years, however, will be the real test. Gupta admits that the growth seen in the past five years won’t be possible again in the near term. “Our internal target is to have a plus 20% growth every year but we don’t think we have enough business to sustain the growth rates.” Indeed, Firstcall expects the company to show 12-14% growth in topline in FY14 while Perinchery of Asian Markets Securities says the existing order book is likely to be exhausted in the next 12-15 months. “The company needs to report ₹200-250 crore of order inflows every quarter over the next two to three quarters if it is to maintain the current turnover and profitability. Also in the water segment, which anyway is a low-margin (5%) business, it will have to compete with several other players.”
For a company that has a market cap of ₹120 crore, Technofab has a significant cash pile (including investments in MFs) of ₹100 crore. Analysts point out that the company is not leveraging on this to acquire suitable smaller companies. “If they are unable to find a suitable target, the company should go for a high divided payout ratio. Currently, that is a paltry 7-10%, which needs to be increased to over 40-50%,” says Perinchery.
Technofab is determinedly sticking to its conservative approach. The aborted JV in West Asia is a case in point; similarly, the company is also staying away from BOT projects fearing it will be out of its depth. “We were worried we would end up in losses. Whenever you learn something new, you pay a price for it. And that price could have been more than we could handle,” explains Gupta. Being prudent has helped in other ways, too: the company has just ₹51 crore debt on its books.
But challenges remain. Net working capital days has gone up from 80 in March 2012 to 90 as of December 2012. Then, receivables of around ₹66 crore are a concern, especially as in some cases, the overdue is more than 12 months — Lanco Infratech, for instance, is yet to pay the company ₹4.5 crore.
That, combined with the company’s conservative approach, is reflecting on the stock. Analysts say the company could have been trading at seven or eight times its current valuation (4X TTM) had it shown more aggression in the marketplace. Gupta, however, doesn’t seem too worried. “We have a very modest fire in the belly,” he says. “We are a company that is not looking for topline growth. We are interested only in profitable growth and if we don’t get that we don’t mind not growing.”