Buy Techno Electric; target of Rs 445: Centrum

Centrum's research report on Techno Electric

We retain Buy rating on Techno Electric (TEEC) and our TP of Rs445. EBITDA earnings bounced YoY owing to higher EPC execution and PBIT margin of 15.2% coupled with higher PLF from wind segment. The outlook appears robust, with a Rs 26 bn order book, having +Rs10 bn of order bid pipeline and margin guidance slightly ahead of estimates. The wind business performance was weak in FY16, but a sharp pick-up in PLF in 1HFY17 so far, favourable HC verdict and an average tariff increase of 15-20% will lead to strong performance in FY17. The guidance to monetise the balance wind asset entailing an EV of about Rs7.9bn is intact and has the potential to unfold shareholder value in the long term. Additionally, our inference of average RoE of 35% on EPC segment and average RoCE of 86% for the forecast period, debt-free EPC business, FCF yield of 5% in FY18E, and low D:E of 0.4x in FY18E make it a compelling investment bet.

Our TP of Rs 445 is based on SoTP of Mar’18E, derived by assigning PE(x) of 22.5x its EPC earnings, P/B(x) to wind asset, cash and investments and DCFE-based valuation to BOOT/BOOM projects. TEEC’s superior earnings, lower PEG(x) and FCF yield of 4% cap the downside. Key downside risks are (1) slowdown in EPC order book and (2) lower PLF and earnings in wind assets.