Technofab Engineering – Long Term Bet

The company is fundamentally sound and can be considered for the long term, but it may not give listing gains

The Faridabad-based Technofab Engineering (TEL) is tapping the capital market with its IPO of 29.90 lakh equity shares. The company, which is following the book building process, is yet to finalise the price band for the issue. However, the company is expected to raise a total of around Rs 70-75 crore from the market. Thus, on a conservath ‘.iS, even if we consider that TEL raises Rs 70 crore from the IPO, then with a total issue of 29.90 lakh equity shares, we feel that the price band for this IPO could be in the range of Rs 234-250.

The funds so raised from the IPO would be utilised towards financing the procurement of construction equipment, meeting long-term working capital requirements, setting up of maintenance and storage facility for construction equipment, setting up of training centre for employees and
general corporate purposes.

Technofab Engineering (TEL) is basically engaged in the business of providing engineering procurement and construction (EPC) services and executes a wide range of Balance-of- Plant (BoP) and electromechanical projects on a turnkey basis. Through these services, the company caters to a host of industries, which includes power (conventional and nuclear), oil & gas, water and waste water infrastructure, which contribute 52 per cent, 20 per cent and 19 per cent, respectively, to revenues with balance coming from industrial & infrastructure sector (i.e. steel, mining, sugar, cement, ports and fertiliser companies) and electrical distribution & rural electrification. It should be noted that power sector is the main growth driver and the management daims its contribution would remain higher going forward. As on March 2010, the company s order book stood at Rs 533.7 crore of which 26 per cent is made up of power, 14 per cent from water & waste water infrastructure, 53 per cent from industrial & infrastructure sector and balance 7 per cent from electrical distribution & rural electrification. At Rs 533.7 crore, the order book is 2.66x its FY10 revenues and is expected to be executed over the next 18 months. It should also be noted that the company also undertakes turnkey projects in overseas markets such as Ethiopia, Kenya and Fiji and the contribution of these projects is still less than 20 per cent to total revenues.

For FY10, the company’s revenues stood at Rs 200 crore, while profits stood at Rs 19.15 crore and has been growing at three year CAGR of 48 per cçnt and 190 per cent respectively. On the valuation front, at an estimated price of Rs 234-250 the scrip is available at Ph of 12.75-13.62x. In fact, on
the EV/EBDITA basis as well, the scrip is available at 7.44-7.93x. Though this might look a bit steep, we feel that the valuations are fair when compared to its peers such as Sunil Hi-Tech and Techno Electric & Engineering, which are available at PE of lix and 1 6x and EV/EBDITA of 4x and 12.75x. However, we dont expect TEL to give listing gains, although it can be considered from a long term perspective.

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