CRISIL retains Technofab Engineering`s fair value to Rs 168

CRISIL Research's report on Technofab Engineering

Technofab Engineering (Technofab) is a Delhi-based EPC player focusing on balance of plant (BoP) works in the power and industrial infrastructure segment and EPC work in the oil & gas and water segments. Owing to issues in the power sector and slowdown in the economy, order inflows in the domestic market have taken a hit. In FY13, the company received orders worth Rs 4.8 bn (compared to Rs 7.5 bn in FY12), mostly from overseas markets. Its current order book of Rs 11.2 bn (2.7x TTM sales) provides revenue visibility for the next two years. However, with 23 percent of the orders moving at a slow pace, their execution is a key monitorable. Technofab’s better working capital management and low leverage compared to peers are positives. We retain our fundamental grade of 3/5 on Technofab, indicating that its fundamentals are good relative to other listed securities in India. International orders offset slowdown in domestic market
With the domestic power sector hampered by various issues, Technofab has diversified to other segments in India and to overseas markets. In FY13, Technofab received orders worth Rs 4.8 bn compared to Rs 7.5 bn in FY12. Of the order inflows, 65 percent is from overseas markets; the company has entered into new geographies such as Liberia, Tanzania and Zimbabwe. Order book provides good revenue visibility, 23 percent of the orders are slow moving
Technofab’s current order book of Rs 11.2 bn (2.7x TTM sales) provides revenue visibility for the next 24 months. In addition, the company is the lowest bidder (L1) in projects worth Rs 3.5 bn. Projects worth Rs 2.6 bn (23 percent of the current order book) are either not moving or moving slowly. All these projects are delayed due to external factors and are stuck at the clients’ end either due to lack of environmental clearance or funding constraints. We have factored in delays on these projects in our revenue estimates. Working capital to increase in next two years, gearing one of the lowest in the industry
Despite operating in a working capital-intensive industry, Technofab has been able to maintain its working capital cycle at 90 days as of December 2012. We expect working capital days to increase to 115 days and 120 days in FY14 and FY15, respectively, once execution of the large orders in hand begins. Its gearing is low at 0.1x compared to peers’ average of 1.8x. The liquidity position is good with Rs 547 mn in cash as of December 2012. Revenues to increase at three-year CAGR of 11 percent; return ratios to decline
We expect revenues - at a muted three-year CAGR of 11 percent - to increase to Rs 5.1 bn by FY15. This is mainly due to lower order intake and execution hurdles in a few projects. EBITDA margin is expected to decline to 11.5 percent in FY15 from 13.5 percent in FY12 due to increasing competition in the domestic and overseas segments. PAT is expected to remain stable at Rs 352 mn in FY15 from Rs 340 mn in FY12. RoCE is expected to decline to 18.8 percent in FY15 from 26 percent in FY12 and RoE to decline to 14.4 percent from 21.7 percent during the same period. Valuations: Current market price has strong upside
We continue to use price-to-earnings (P/E) method to value Technofab and retain our fair value of Rs 168 per share. At the current market price of Rs 111, our valuation grade is 5/5. Disclaimer: This report (Report) has been commissioned by the Company/Investor/Exchange and prepared by CRISIL. The report is based on data publicly available or from sources considered reliable by CRISIL (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. Opinions expressed herein are CRISIL's opinions as on the date of this Report.  The Data / Report are subject to change without any prior notice. Nothing in this Report constitutes investment, legal, accounting or tax advice or any solicitation, whatsoever. The Report is not a recommendation to buy / sell or hold any securities of the Company. CRISIL especially states that it has no financial liability, whatsoever, to the subscribers / users of this Report. This Report is for the personal information of the authorized recipient only. This Report should not be reproduced or redistributed or communicated directly or indirectly in any form to any other person or published or copied in whole or in part especially outside India, for any purpose. © CRISIL Limited . All Rights Reserved. Published under permission from CRISIL"

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