Multi Baggers

Technofab Engineering

Sales and earnings set to boom

Over the past five years, TEL has grown its revenues at a CAGR of 27.5% to Rs 290.4crore (FY2011). Over the next 3 years, we expect the company to maintain its robust revenue growth and achieve Rs 501.9 crore worth of revenues by FY2013 (CAGR of
31.5%). Earnings are also expected to grow handsomely to Rs 38.2 crore (CAGR of29.9%) over the forecast period.

High margins and healthy balance sheet to lead to superior return ratios

With more than a third of revenues coming from overseas orders, which have high realizations and its conscious decision to be focused on profitability while bidding for domestic projects has helped maintain higher margins (blended) than peers.

Despite the fact that the EPC business has an elongated working capital cycle, TEL’s focus on better execution, strong project management skills and its decision on not over leveraging itself has aided it maintain low debt levels, which has contributed to superior return ratios.

Further the Rs 87.4 crore cash (Rs 90.1 per share) in the form of Rs 42.5 crore of cash and Rs 44.9 crore of liquid investments as of Q2FY12 provides significant cushion to any downside movement. Further this cash can be used as currency to significantly leverage itself without having to resort to raising debt.

Financial performance (Standalone)

Aided by higher order execution, Technofab posted a revenue growth of 28.2% to Rs 93.8 crore in Q2FY12. Operating profit in the same period was higher by 15.4% and stood at Rs 11.9 crore. The comparatively slower growth in operating profit was largely attributable to increased RM, manpower and other operating cost. Meanwhile, PAT for the current quarter stood at Rs 7.6 crore, a jump of 16.6% on YoY basis.

Valuation

We initiate coverage on Technofab Engineering Ltd (TEL) as a BUY with a Price Objective of Rs 197 over a period of 18 months representing a potential upside of 66.6%. Its strong order book from overseas across a number of industrial and infrastructure sectors (power, oil & gas, water & waste water treatment and other industrial & infrastructure sectors) should go a long way in improving revenues and overall profitability. Accordingly we expect revenues and earnings to grow to Rs 501.9 crore (31.5% CAGR) and Rs 38.2 crore (29.9% CAGR) respectively over the period FY11-13. Further the liquid cash balance of Rs 87.4 crore cash (Rs 90.1 per share) as of Q2FY12 provides significant cushion thereby limiting the downside.

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