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30 June 2011
BUY
Company Description
Tecpro Systems Ltd. (TSL) is an established material handling company with presence in the coal handling (19% market share) and ash handling (15% market share) for power, steel, cement and other sectors. TSL has recently forayed into BoP segment and has secured two orders worth INR 29.7bn (68% of its current order-book). We believe TSL would be key beneficiary, given its leadership position in material / ash handling business and strong growth in underlying industry. With revenue and profit expected to grow at CAGR of 25% and 18% respectively over FY13, recommend Buy on the stock for price target of INR 300 (+25%).
INR mn
Key Financials Net Sales EBITDA EBITDA (%) Adj Net Profit Net Profit (%) Adj. EPS
FY10 FY11E FY12E FY13E 14,549 19,734 25,829 30,994 2,262 15.5 1101 7.6 24.9 3,007 15.2 1362 6.9 27.0 3,435 13.3 1643 6.4 32.5 3,719 12.0 1901 6.1 37.7
Investment Rationale
Strong positive outlook for core infrastructure industry, directly linked, augurs well for the business prospects of TSL Established player (executed highest orders for coal handling during eleventh five year plan) in ash and material handling segment and foray into BoP segment (synchronization and diversification) would lead to growth with diversification
Having secured orders in Waste heat recovery (WHR) from Cement Industry, order intake momentum in this segment is likely continue Strong technical expertise (in-house and through collaborations) enables TSL to offer its product and services on turnkey basis within a stipulated time at competitive rates
Clientele with strong base mitigates risk of project deferment or cancellation Revenue visibility over FY13e on the back of strong order-book of INR 43.7bn (2.2x FY11 sales)
TSL
NSE Nifty
Concerns
Non availability of long term project funding with higher debt cost could slow down growth in core sector which would have direct impact on the business and growth prospects of TSL Rise in working capital would lead to stress on cash flow and higher interest cost
Analyst:
Falgesh Sanghvi | fsanghvi@unicon.in
Tecpro Systems Ltd. (TSL) is an established company in infrastructure space which undertakes turnkey projects of material handling systems and provide comprehensive material handling solutions in power, cement, steel and other metallurgical plants, ports, coal storage & reclaiming plants and aggregate process plant for mineral processes. These projects involve design, engineering, manufacturing, supply, erection and commissioning of material handling systems, associated structural and civil work, electrical and instrumentation work and auxiliaries like dust control, suppression systems, ventilation systems and fire fighting system. TSL now also offers balance of plant (BoP) and engineering, procurement and commissioning (EPC) contracts for vast range of projects in the infrastructure sector. Manufacturing Locations
TSL has four manufacturing facilities out of which three TSL manufactures stackers, reclaimers, crushers, screens, feeders and fabricated facilities are located at Bhiwadi, Rajasthan and one at structures at its factory in Bawal, Haryana. TSL's plant at Bhiwadi, Rajasthan Bawal, Haryana
manufactures pulleys, idler & rollers, structures, feeders, screens, conveyor systems, conveyor components, crushers and screen parts. TSL also has a casting unit in Bhiwadi for both material handling and ash handling equipments. The third unit at Bhiwadi, Rajasthan only manufactures ash handling equipments.
TSL offers complete turnkey system for coal / lignite handling systems for captive and thermal power plants. These include a) tripper conveyor system for bunker feeding, b) pollution control systems including dust extraction system, dust suppression systems etc., c) complete electrical and instrumentation system, lighting etc., and d) maintenance of equipment like hoists etc.
An aggregate process plants includes a combination of Jaw Crusher, Cone Crusher (CC) and Vertical Shaft Impactor (VSI) along with various types screening and conveying equipments. The CC and VSI are imported from its collaborator, M/s. Wonduck Industrial Machinery Co. Ltd., Korea. TSL undertakes complete turnkey execution including mechanical, electrical and structural fabrication, supply and erection and commissioning of the plants.
Investment Rationale
Positive outlook for core infrastructure industry augurs well for the business prospects of TSL Growth would come from expansions (green field / brown The growth prospects of the material and ash handling industry are directly field) in power, steel and cement sectors coupled with linked with the growth in core industries such as power, steel, cement, fertilizers, other sectors like coal mining, sugar, cogeneration and mining, ports, power and petrochemicals which are likely to see huge investment paper from both the public and private sectors in coming years. TSL stands to gain over medium to long term as there would be higher demand for its product and services to these sectors. Given the thrust of GoI to accelerate pace of infrastructure development to keep country growing at or above 8.5% p.a., the outlook for underlying industry remains positive in general and for TSL in particular.
India needs to increase its primary energy supply to Power Sector is likely to remain a key market for TSL's material handling and ~800,000 MW by 2031-32 and 76,500 MW in the Twelfth ash handling segment. This is due to a) India's per capita power demand at five year plan 612kWH is low against a global average of 3,000 kWH and b) current peak
supply deficit is -13% and c) coal has proven to be India's most important energy source which is likely to continue, going forward.
Following favorable Government policies and huge do- Steel Sector offers good opportunity to material handling industry as well. mestic potential, several domestic and foreign firms have This is so because, a) India is fifth largest producer of crude steel in the world shown a great deal of interest for setting up steel ca- and is expected to become the second largest producer by FY16, b) present perpacities in the country.
capita consumption of steel, based on FY08 data, in the country is at ~47/kg against the world average of ~190/kg and that of 400/kg in the developed economies.
Cement Sector equally offers opportunity as the Industry has grown @ CAGR of 10%+ over the last three years and with the GoI giving boost to various infrastructure projects, housing facilities and road networks, the cement consumption in India is expected to continue growing in the coming years. TSL is geared to capitalize on these growth opportunities, given the TSLs expertise in the coal handling and the ash handling solutions which form a substantial part of the BoP projects in the power sector. Wealth Research, Unicon Financial Intermediaries Pvt Ltd. Email: wealthresearch@unicon.in 3
Ltd., Gammon India Ltd. and erstwhile Tecpro Ashtech Ltd. TSL is aiming to get more BoP orders, going forward. Further to have the benefit of operational synergies, Tecpro Ashtech Ltd (TAL) and Tecpro Power Systems Ltd (TPSL) TSL aims to undertake a consortium bidding approach were amalgamated with the Company. With this amalgamation, TSL would be for large projects in the BoP and EPC segment able to provide ash handling services and EPC services for captive power plants in addition to coal handling to its clients and expand its business. TSL's focus will be on availing the opportunities available in material and ash handling solutions, as well as actively pursuing EPC and BoP contracts in the power sector.
No consideration is payable to NTK, China as equip- Waste Heat Recovery (WHR), next growth driver - with recent technical tie up ments are sourced from them with Nanjing Triumph Kaineng Environment and Energy Company Ltd (NTK,
China) TSL has won orders (worth INR 2.24bn) from GRASIM and Shree Cement. TSL aims to gain more ground in this segment by securing more orders from Cement Industry. WHR is a new concept and is gaining momentum in the Indian cement industry. This module of alternative energy for cement plants can generate, depending on the capacity of the cement plant, ~ 2 to 15-18MW of power in cement plant In WHR, power is being generated by using waste gas emitted from kiln and there is no real cost of raw material. NTK will also supply critical equipments like boiler, turbine and generator and the balance of plant will be done by TSL.
Strong R&D team of 300+ engineers, sound network and 8 marketing teams at key area in several states across the country provides greater flexibility and efficiency
Strong technical expertise (in-house and through collaborations) enables TSL to offer its product and services on turnkey basis within a stipulated time at competitive rates. TSL's technological alliances with world leaders through 8 collaborations for various material handling equipment & technologies, 3 collaborations for ash handling operations and a joint venture for manufacture of critical equipment of air and gas pollution control systems. This enables TSL reduce it R&D cost and time to market for new technologies. To name few, TSL has technical tie up with Pneuplan Oy of Finland which is for dense phase pneumatics conveying and one with NTK which is for waste heat recovery power project.
order book is diversified across PSU and private sector Strong customer base mitigates the risk of project deferment or cancellation clients and dominated mainly by power sector which con- TSL's rich clientele includes NTPC, BHEL, Steel Authority, Reliance Energy, tributes ~89.7% of the total backlog Mecon, Lanco, Punj Lloyd, JSW Energy, Tata Power, Hindalco, and Shree Cement.
Thermal Power Project and for the Kakatiya Thermal Power Project) win from APGENCO valued ~INR 19,780Mn, TSL has consolidated its position as one of the prominent players in the BoP space. We have factored in order-book growth of 25% and 20% for FY12e and FY13e respectively due to higher interest rate regime (which could lead to delay in project award) against management guidance of 30%+ over same period
Concerns
The key catalyst to the stock would be continued pace in order intake, as income during 9MFY12e is expected to remain subdued due to lumpy order addition during FY11.
Capacity constraints in terms of physical infrastructure and human resources and financial resources can inhibit TSLs ability to successfully grow its operations Non availability of long term project funding at lower rates could also slow down growth in core sector which would have direct impact on the business and growth prospects of TSL Risk associated with project delays and cost overruns could have material impact on TSLs performance. As BoP works has direct link with the work progress on BTG, any delay at client end to secure and put BTG in time would also have cascading effect on BoP project implementation Stiff competition from Indian and international engineering companies and change in technical and technological developments in the engineering and material handling industry Rise in working capital would lead to stress on cash flow
Financials
For Q4FY11, TSLs revenue was INR 9.6bn (+30% YoY) as compared to INR 7.4bn during same quarter last year. EBITDA for the quarter was INR 2bn (+32% YoY) compared to INR 1.5bn during corresponding quarter last year. PAT increased by 21% to INR 1.1bn. For full year FY11, TSLs revenues grew by 35% YoY to INR 19.7bn. Operating profit at INR 3.01bn was higher by 52% with operating profit margin of 15%. Over FY13e, we expect companys revenue and net profit after tax to grow at a CAGR of 25% and 18% respectively.
Peer Valuation
TSL, though not exactly comparable due to its versatile product range and service offering, BGR Energy, Elecon, Mcnally Bharat comes close to its business model. Normally, stocks in material handling segment trades over 8-10x its forward earnings. Given TSLs leadership position in coal and ash handling with diversification into BoP segment, we believe, TSL will command premium over its peers over medium to long term.
Peer Comparison
Company Name TSL Elecon ^ Mcnally Bharat TRF BGR Energy
Source: Unicon,
^
Market PE(x) EPS12e EPS13e Cap FY12e 12,104 32.5 37.7 7.4 6,073 9.6 28.0 41.2 48.7 10.9 35.3 48.4 59.0 6.8 5.0 9.0 9.0 4,406 4,147 33,125
EV/EBITDA RoE (FY13e) (FY13e) 3.3 22.1 4.4 3.0 6.5 6.0 19.1 22.3 24.4 28.3
Bloomberg
Income Statement Income from Operations Sales Growth (%) Operating Expenses EBITDA EBITDA Margin (%) Depn. & Amtsed Exp. EBIT Interest Expenses Other Income PBT Tax Provision PAT PAT (%)
FY09 7,070 47 6,180 890 13 31 859 131 91 819 312.0 509 7.2
FY10 14,549 106 12,287 2262 16 73 2,189 714 209 1684 587.0 1101 7.6
FY11E 19,734 36 16,728 3007 15 103 2,904 926 122 2100 738.0 1362 6.9
FY12E 25,829 31 22,393 3435 13 126 3,309 1041 258 2527 884.0 1643 6.4
FY13E 30,994 20 27,275 3719 12 129 3,590 821 155 2924 1024.0 1901 6.1
INR mn
Balance Sheet Net Assets Investments CA & Loans & Adv. Inventories Sundry Debtors Cash & Bank Loans and Advc. & O Asst Total assets Equity Fund Total Debt CL., Provns. & Othrs Equities & Liab.
FY09 852 101 6,159 793 3,902 955 509 7,112 1,513 1,025 4,574 7,112
FY10 1,246 94 14,796 1,061 9,176 1,820 2,739 16,137 3,450 4,868 7,819 16,137
FY11E 1,612 370 23,424 1,399 14,073 2,992 4,960 25,405 6,783 7,469 11,153 25,405
FY12E 1,736 370 25,317 1,885 15,568 4,092 3,771 27,422 7,933 5,542 13,947 27,422
FY13E 1,857 370 28,825 2,170 17,832 4,922 3,900 31,051 9,264 5,050 16,737 31,051
Key Ratios Basic & Diluted EPS Growth % BV / Share EBITDA (%) Pre-tax Margin (%) PAT (%) RoE (%) RoCE (%) Debt / Equity(x) Valuations P/E (x) Price/Book Value (x) EV/Sales (x) EV/EBITDA (x)
Source : Company, Unicon Research
FY09 18.4 54.6 12.6 11.6 7.1 40.1 49.5 0.7 13.6 4.6 1.0 7.9
FY10 24.9 35.5 78.0 15.5 11.6 7.4 44.2 44.2 1.4 10.0 3.2 1.0 6.2
FY11E 27.0 8.4 134.4 15.2 10.6 6.9 26.6 26.8 1.1 9.3 1.9 0.9 5.7
FY12E 32.5 20.6 157.2 13.3 9.8 6.3 22.3 25.7 0.7 7.7 1.6 0.5 4.1
FY13E 37.7 15.7 183.5 12.0 9.4 6.1 22.1 27.0 0.5 6.6 1.4 0.4 3.4
Cash flow Statement PBT Add: Depreciation Interest Exp Less: Direct Taxes Paid Chg. in Working Capital Other Miscellaneous CF from Operations (Pur) / Sale of FA (Pur.) / Sale of Invt. Other Miscellaneous CF from Investments Free Cash Flow Change in Networth Change in Loan Fund Less: Interest Paid Add: Interest Income Dividend Paid Other Miscellaneous CF from Financing Net Change in Cash
FY09 819 31 131 (312) (310) 5 364 (531) 55 38 (438) (74) 10 739 (131) 12 629 555
FY10 1,684 73 714 (587) (4,510) 786 (1,840) (489) 7 100 (383) (2,223) 165 3,843 (714) (206) 3,088 865
FY11E 2,100 103 926 (738) (4,108) (1,717) (481) (275) (757) (2,474) 2,380 2,601 (926) (409) 3,646 1,171
FY12E 2,527 126 1,041 (884) 2,002 4,811 (250) (250) 4,561 (1,927) (1,041) (493) (3,461) 1,101
FY13E 2,924 129 821 (1,024) 112 2,963 (250) (250) 2,713 (491) (821) (570) (1,882) 830
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