Techno Electric & Engineering Limited

Engineering & Capital Goods Event Update Techno Electric & Engineering Limited Buy Wind business spin off will lead to value unlocking. Institutional Research CMP (`) 404 Target (`) 504 Nifty: 8,224 Sensex: 27,206 Key Stock Data BSE Code 533281 NSE Code Bloomberg Code TECHNO TEEC IN Shares o/s mn (FV `2) 57.1 Market Cap (` bn) 23.7 52-Week High / Low 455 / 184 3-M Daily Avg. Vol. 43,401 Relative Performance (%) 1m 3m 12m TEEC 5.0 (3.4) 119.3 NIFTY (5.6) (6.2) 15.9 SENSEX (5.1) (6.0) 14.2 Shareholding Pattern (%) Mar-15 Dec-14 Sep-14 Promoter 58.0 58.0 58.0 FII 5.1 5.6 5.5 DII 15.1 13.5 7.2 Others 21.8 22.9 29.3 Amber Singhania amber.singhania@amsec.in +91 22 4343 5296 Techno Electric & Engineering Company (TEEC) has announced the sale of its 44.45MW of wind power asset in Tamilnadu for a total cash consideration of `2.15bn. These were the assets acquired from Suzlon five years back. Post the sale TEEC continues to own 162.9MW of wind power assets as a consolidated entity. The company has received the entire deal consideration as on date. We have incorporated the current sale of 44.45 MW in our numbers assuming the company is keeping the cash in its books as the current debt belongs to the wind assets which continues to be owned by the company. Keeping all the other assumptions unchanged, we incorporated the impact of the asset sale and revised down our FY16E EPS to Rs24.6 and FY17E EPS to Rs30.1. With the changing profile of the company, improving balance sheet situation, net debt free status by FY16end, healthy revenue and profit visibility in EPC segment and improving return ratios we have revised our rating to BUY from HOLD with a revised PT of Rs504. We value TEEC on SOTP basis valuing EPC at 15x FY17E earnings, remaining wind business at DCF and the transmission BOT assets on the basis of BV. Key highlights of concluded deal: 1) Sold 44.45MW assets owned via 97% subsidiary SWPL for a total consideration of `2.15bn. The average realization /MW work out to `48.4mn/MW. The entire sale consideration has been received by the company and is lying in the bank accounts. 2) As per our estimates, TEEC has realized ~1.24x its book value registering a profit from the sale of ~Rs416mn. We estimate the net block of 44.45 MW at Rs1.73 bn. 3) We estimate the revised adjusted EPS at RS24.6 for FY16E and `30.1 for FY17E. However the balance sheet suggests a significant improvement post the deal. 4) With the sale proceeds and internal accrual, we estimate TEEC to be net debt free company in FY16E. The Core return ratios (Ex cash & Equivalent) would also improve significantly to ROaE of 27.0% and ROaCE of 16.4% in FY17E. We have also worked out a probable scenario where TEEC exits its wind business entirely assuming the sale value per MW same as the recently concluded deal. We believe the company would be able to realize similar or better deal value for future asset sale as the remaining assets include relatively newer turbines. TEEC management has already indicated their intent to sell entire wind assets. We believe once the entire wind asset sale takes place the stock may further rerate on the back of strong return ratios and sound balance sheet and cash positions. Exhibit 1: Key Financials (Consolidated) Exhibit 2: Key Ratios Y/E Mar (Rs mn) FY13 FY14 FY15E FY16E FY17E Y/E Mar FY13 FY14 FY15E FY16E FY17E Sales 7,001 7,085 7,793 9,396 11,047 EBITDAM (%) 33.5 27.2 26.0 25.0 24.3 yoy (%) (14.6) 1.2 10.0 20.6 17.6 NPM (%) 17.0 12.3 11.2 14.2 15.0 EBITDA 2,346 1,925 2,023 2,349 2,688 PER (x) 18.8 26.0 25.8 16.5 13.4 yoy (%) 6.8 (17.9) 5.1 16.1 14.4 P/BV (x) 3.0 2.8 2.6 2.2 1.9 Adjusted PAT 1,225 887 893 1,402 1,720 EV/Sales (x) 4.1 3.8 3.3 2.4 1.9 yoy (%) 0.7 (27.6) 0.7 94.2 (0.9) EV/ EBITDA (x) 12.1 13.9 12.7 9.5 7.7 Equity 114 114 114 114 114 Core RoACE (%) 11.8 9.5 8.9 12.2 16.4 EPS 21.4 15.5 15.6 24.6 30.1 Core RoANW (%) 16.9 12.5 11.9 18.7 27.0 Refer Disclosures & Disclaimer at the end of the report. Our reports are available on Bloomberg ASNM <GO>, ThomsonReuters, Factset and Capital IQ May 15, 2015

Exhibit 3: Segment wise profit & Loss statement Revenue Model (EPC) FY12 FY13 FY14 FY15E FY16E FY17E Order intake 2540 5659 8205 11488 13785 16542 Closing orderbook 9500 10000 12500 17427 23011 29712 Sales 7040 5159 5705 6561 8201 9841 EBITDA margin % 16.0 11.1 10.6 12.8 14.7 15.6 Other Income 224 206 120 200 450 450 PBT ( EPC) 1332 759 702 976 1587 1915 Adjusted PAT 1124 714 673 781 1269 1532 Revenue Model (Wind) FY12 FY13 FY14 FY15E FY16E FY17E PLF% 23% 24% 19% 17% 20% 20% Avg Tariff/unit 3.93 4.21 3.96 3.99 4.19 4.22 Revenue booked 1158 1842 1380 1232 1195 1205 EBITDA 1112 1749 1288 1183 1147 1157 PAT 137 512 215 113 132 188 Exhibit 4: Change in estimates resulting from sale of assets Consolidated (Rs mn) Old Estimates Revised Estimates % Change FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E Revenue 7,793 9,806 11,458 7,793 9,396 11,047 - (4.2) (3.6) EBITDA 2,023 2,743 3,083 2,023 2,349 2,688 - (14.3) (12.8) Adj. PAT 893 1,556 1,875 893 1,402 1,720 - (9.9) (8.3) EPS (Rs) 15.6 27.3 32.8 15.6 24.6 30.1 - (9.9) (8.3) Core ROaE (%) 11.9 16.1 16.9 11.9 18.7 27.0 Core ROaCE (%) 8.9 15.2 17.8 8.9 12.2 16.4 Source: AMSEC Research Exhibit 5: SOTP Valuation post the sale of 44.45MW of wind power asset Valuation Amount Per Share Business segment methodology (Rs mn) (Rs) EPC 15x FY17E P/E 22,975 402 Wind power DCF 4,444 78 Transmission business Jhajjar KT Transco 2x book value 760 13 Patran Power 1x book value 600 11 Total equity value 28,779 504 CMP 404 Upside (%) 25% Source: AMSEC Research May 15, 2015 2

Scenario of exit from wind business: Key Assumptions and Highlights: 1) We assume TEEC sells its entire wind power assets of 207MW for a total consideration of `10.0bn (@48.4mn/MW) 2) We assume it will repay the entire debt on the books from the sale proceeds and the balance will stand as current investments earning other income. 3) With the above assumptions, we estimate the FY16E EPS of `21.3 and for FY17E EPS of `27.4. 4) The return ratios (ex cash) to improve significantly with core ROaE of 66.8% in FY17E and Core ROaCE of 42.5% in FY17E. 5) TEEC to have a net cash balance of `7.9 bn in FY16E and `8.9 bn at the end of FY17E. 6) In the above scenario being a pure EPC company, healthy orderbook and revenue visibility, Debt free balance sheet net cash of over `9 bn in FY17E and Excellent return ratios of ROaE of 67% and ROaCE of 43%; the stock would pose itself as a strong rerating contender for further rerating. 7) In the event of complete exit from wind power segment, TEEC would have significant cash in its books. In the lack of newer opportunities to utilize significant portion of this cash pile; management might consider a onetime dividend utilizing part of its cash balance. This could be an attractive dividend yield at the current stock price. Exhibit 6: Key Financials (Consolidated) Y/E Mar (Rs mn) FY13 FY14 FY15E FY16E FY17E Sales 7,001 7,085 7,793 8,201 9,841 yoy (%) (14.6) 1.2 10.0 5.2 20.0 EBITDA 2,346 1,925 2,023 1,202 1,531 yoy (%) 6.8 (17.9) 5.1 (40.6) 27.4 Adjusted PAT 1,225 887 893 1,217 1,565 yoy (%) 0.7 (27.6) 0.7 82.2 (3.8) Equity 114 114 114 114 114 EPS 21.4 15.5 15.6 21.3 27.4 Exhibit 7: Key Ratios Y/E Mar FY13 FY14 FY15E FY16E FY17E EBITDAM (%) 33.5 27.2 26.0 14.7 15.6 NPM (%) 17.0 12.3 11.2 14.0 14.7 PER (x) 18.8 26.0 25.8 19.0 14.7 P/BV (x) 3.0 2.8 2.6 2.2 2.0 EV/Sales (x) 4.1 3.8 3.3 1.8 1.4 EV/ EBITDA (x) 12.1 13.9 12.7 12.3 9.0 Core ROaCE (%) 11.8 9.5 8.9 12.3 42.5 Core ROaE (%) 16.9 12.5 11.9 21.7 66.8 May 15, 2015 3

Profit & Loss Account Cash Flow Statement Particulars FY13 FY14 FY15E FY16E FY17E Particulars FY13 FY14 FY15E FY16E FY17E Net sales 7,001 7,085 7,793 9,396 11,047 PBT 1,375 924 1,116 2,168 2,150 Consumption of materials 3,747 4,260 4,208 5,074 5,965 Non-cash adjustments 655 667 675 676 677 Staff Expenses 324 290 374 479 585 Changes in working capital (1,284) 600 (159) (266) (260) Other operating expenses 584 609 1,188 1,494 1,808 Interest Paid 522 454 432 372 312 Total Expenditure 4,655 5,160 5,770 7,047 8,358 Tax Paid & Other Adj (187) (79) (223) (434) (430) EBITDA 2,346 1,925 2,023 2,349 2,688 Cashflow from operations 1,081 2,566 1,841 2,516 2,449 Depreciation 655 667 675 676 677 Capital exp. & Advances (183) (359) (150) 1,584 (150) Operating profit 1,691 1,259 1,348 1,674 2,011 Change in investments (112) (1,224) (500) (3,000) (1,000) Other income 206 120 200 450 450 Other investing cashflow - - - - - EBIT 1,897 1,379 1,548 2,124 2,461 Cashflow from investing (294) (1,583) (650) (1,416) (1,150) Interest 522 454 432 372 312 Issue of equity - (0) - - - Exceptional items - - - 416 - Issue/repay debt 445 (600) (600) (600) (600) Profit before tax 1,375 924 1,116 2,168 2,150 Interest Paid (522) (454) (432) (372) (312) Tax 151 38 223 434 430 Dividends paid (167) (167) (223) (278) (278) Reported net profit 1,225 887 893 1,735 1,720 Cashflow from financing (243) (1,221) (1,254) (1,250) (1,190) Adjusted net profit 1,225 887 893 1,402 1,720 Change in cash & cash eq 543 (238) (63) (150) 109 Share O/s mn 57 57 57 57 57 Opening cash & cash eq 176 718 481 417 268 EPS Rs (adjusted) 21.4 15.5 15.6 24.6 30.1 Closing cash & cash eq 719 481 417 268 377 Balance Sheet Particulars FY13 FY14 FY15E FY16E FY17E Ratios Free cash flow to firm 898 2,207 1,691 4,100 2,299 SOURCES OF FUNDS : Particulars FY13 FY14 FY15E FY16E FY17E Share Capital 114 114 114 114 114 PER SHARE Reserves 7,585 8,257 8,927 10,384 11,826 EPS Rs (adjusted) 21.4 15.5 15.6 24.6 30.1 Minority Interest 188 193 193 193 193 CEPS Rs 32.9 27.2 27.5 42.2 42.0 Total Shareholders Funds 7,887 8,564 9,235 10,691 12,133 Book Value Rs 134.9 146.6 158.4 183.9 209.1 Non-Current Liabilities 6,683 6,086 5,486 4,886 4,286 VALUATION Total borrowings 6,676 6,077 5,477 4,877 4,277 EV / Net Sales 4.1 3.8 3.3 2.4 1.9 Deferred tax liability 7 9 9 9 9 EV / EBITDA 12.1 13.9 12.7 9.5 7.7 Current Liabilities 2,364 1,848 2,114 2,639 3,178 P / E Ratio 18.8 26.0 25.8 16.5 13.4 Trade payables 2,123 1,787 2,028 2,523 3,026 P / BV Ratio 3.0 2.8 2.6 2.2 1.9 Short term provisions 240 62 85 116 151 GROWTH YOY% Total Equity & Liabilities 16,934 16,498 16,834 18,216 19,597 Sales Growth (14.6) 1.2 10.0 20.6 17.6 APPLICATION OF FUNDS : EBITDA Growth 6.8 (17.9) 5.1 16.1 14.4 Non Current Assets 11,420 11,113 10,588 8,329 7,802 Net Profit Growth 0.7 (27.6) 0.7 94.2 (0.9) Goodwill 157 157 157 157 157 PROFITABILITY (%) Gross block (Total) 12,917 13,247 13,397 10,880 11,030 EBITDA / Net Sales 33.5 27.2 26.0 25.0 24.3 Less : accumulated depreciation (Total) 2,045 2,711 3,386 3,128 3,805 EBIT / Net sales 27.1 19.5 19.9 22.6 22.3 Net block (Total) 10,872 10,536 10,011 7,752 7,225 NPM / Total income 17.0 12.3 11.2 14.2 15.0 Capital work in progress 7 36 36 36 36 Raw Material/Net Sales 53.5 60.1 54.0 54.0 54.0 Noncurrent investment 384 384 384 384 384 Int/PBIT 27.5 33.0 27.9 17.5 12.7 Deferred tax assets Core ROaNW 16.9 12.5 11.9 18.7 27.0 Current Assets 5,514 5,385 6,246 9,887 11,795 Core ROaCE 11.8 9.5 8.9 12.2 16.4 Current investment 262 1,486 1,986 4,986 5,986 Tax / PBT 11.0 4.1 20.0 20.0 20.0 Inventories 17 118 107 129 136 TURNOVER Sundry debtors 3,060 2,060 2,349 2,832 3,329 Net Woking Cycle (Days) 113 81 81 78 75 Cash and bank 718 481 417 268 377 Debtors Velocity (Days) 160 106 110 110 110 Short loans and advances 1,256 949 1,068 1,287 1,513 Inventory (Days) 1 6 5 5 5 Others current assets 201 291 320 386 454 Creditors Velocity (Days) 111 92 95 98 100 Total Assets 16,934 16,498 16,834 18,216 19,597 LIQUIDITY Net Working Capital* 2,170 1,570 1,729 1,995 2,255 Gross Asset Ratio 0.5 0.5 0.6 0.8 1.0 Total Gross Debt** 6,676 6,077 5,477 4,877 4,277 Total Asset Ratio 0.4 0.4 0.5 0.5 0.6 Total Net Debt 5,696 4,110 3,073 (377) (2,086) Net Debt-Equity Ratio 0.7 0.5 0.3 (0.0) (0.2) Capital Employed*** 14,564 14,641 14,711 15,568 16,410 Interest Coverage (x) 3.6 3.0 3.6 5.7 7.9 * WC = CA-CL (Excl short term & Curr. Mat. Long term debt) PAYOUT ** Total Debt = Long Term + short Term + Curr. Mat. Of Long Term Debt Payout % 13.6 18.8 24.9 16.0 16.2 *** Capital Employed = NW + Total Debt Yield % 0.7 0.7 1.0 1.2 1.2 May 15, 2015 4

Recommendation Rationale Sector Rating Buy: Potential upside of Accumulate: +6 to +15% Reduce: +5 to -5% Sell: > -5% Not Rated (NR): >+15% (absolute returns) No investment opinion on the stock Overweight: Underweight: Neutral: The sector is expected to outperform relative to the Sensex. The sector is expected to underperform relative to the Sensex. The sector is expected to perform in line with the Sensex. Disclosure of Interest Analyst Certification: I, Amber Singhania, the research analyst and author of this report, hereby certify that the views expressed in this research report accurately reflects our personal views about the subject securities, issuers, products, sectors or industries. It is also certified that no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research report receive compensation based on overall revenues of the company (Asian Markets Securities Private Limited), hereinafter referred to as AMSEC and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. AMSEC, its associates, directors and employees maybe owning the stock discussed herein and to that extent may have vested interest in the price performance of the stock. 1. Name of the analyst: Amber Singhania 2. Qualifications of the analyst: MBA (Finance) 3. Analysts ownership of any stock related to the information contained: None 4. AMSEC ownership of any stock related to the information contained: None 5. Broking relationship with company covered: None 6. Investment Banking relationship with company covered: None May 15, 2015 5

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