Buy Techno Electric; target of Rs 790 :Edelweiss

Techno Electric & Engineering’s (TEEC) Q1FY17 revenue jumped 35% led by 30% spurt in EPC business and 70% growth in wind business. EPC business margin catapulted 150bps to 14.5%. Our conviction on TEEC’s growth prospects are boosted by strong traction in T&D EPC space, particularly in niche areas, rising government funding support, increased states’ spending, TBCB and reforms like UDAY. Moreover, improved regulatory framework and higher wind tariffs could boost PLFs to 20% in FY17E from 16% in FY16 doubling the wind business’ PAT. Maintain ‘BUY’ with revised SOTP‐based target price of INR790 and maintain it as our top pick in T&D EPC space.

 

Selective approach to orders, efficient working capital (WC) management and significant potential uptick in T&D spending reinforce our conviction on TEEC. We raise our target P/E of EPC business to 19x from 16x factoring in increasing revenue visibility (3x), the margin and WC matrix remains intact—a rare phenomenon in T&D EPC companies—owing to prudent WC management. We also increase our EPS by 8% each for FY17/18 building in increased revenues from EPC biz and better profitability from wind business. We estimate EPS CAGR of 35% over FY16‐18E, mainly led by EPC business. Maintain ‘BUY/SO’ with revised TP of INR 790 (INR 620 earlier).