Technofab Engineering

Stock Opportunities
21

Prima facie Technofab looks great.

Some positives:

1). Strong growth over the past few years without stretching balance sheet.

2). Net cash plus company.

3). Good order book

4). Promoters seem to be steadily accumulating shares from market by creeping acquisition.

5). Good return ratios and margins.

NEGATIVES:

1). Biggest negative seems to be the EPC and infra sector itself.

2). Poor dividend track record. For small caps to have downside protection a good dividend yield is a must.

3). Geographical diversification as mentioned by donald carries its own risk. Many companies have in the past burnt their fingers while venturing into foreign countries.

4). Company seems to be sitting on a lot of cash – they should come out with some guidelines or plan as to what they intend to do with all this cash.

Looking at the bigger picture for the company and all the angles, it looks like an investment worthy company. Till now it does not seem to be on the market radar but once some kind of fancy builds up there could be significant upsides.

22

Pragmatic Traders Pvt LtdandEquipment Management Company (India) Ltd

both are gammonIndialtd company so total holding by gammonIndia is nearly7.18+9.77+3.34.1.33 = 21.62 which is 1% more than last Q

Regards, Vishal

23

All negative list/concerns:

  1. Political/geopolitical risk (includes currency risk)

  2. Poor strike rate (in terms of securing orders)- Its around 10-12% as indicated by management themselves

3)Outlook for EPC players in India- given the lower margins on which much larger peers operate, will Technofab be able to sustain its “sound margins” profile.

  1. Passive outlook- as earlier stated , managed is not keen to show a rosy (higher) topline at the cost of lower margins. On the other hand it also mentioned in their Feb interaction about smaller/lesser known/unlisted peers who have started under-cutting to secure orders. Will the company be in a position to handle this cut-throat competitive scenario?

  2. My interaction with the management made me seem like that management is definitely a bit conservative. This was emphasised in the CRISIL report which stated the lack of regular disclosures by the management whenever they have secured orders.

  3. Sluggish/Slow moving order book to the tune of 10-15%.

  4. The recent bulk deals in the counter where “Karuna Rajan” (associated to Gammon India promoters, please correct me if I’m wrong) is the seller and cos like “Pragmatic Traders” and “Equiptment Mgt Company” are acquiring these shares. Can anyone confirm if all these entities are associated with Gammon group? Is the Gammon group reducing its stake in the company?

  5. Since my Feb interaction, peers like Mcnally, Techno-electric, Tecpro, KEC have all been securing orders. Await some order announcemen from Technofab too.

  6. Poor dividend payout- Although management has indicated that they are likely to increase it this year. (If Im not mistaken, they have received the same query from Birla Sunlife who owns around 5% of their stock).

One _NEGATIVE _highlighted by the CRISIL report as also by Donald is something which the management broadly denied- the cost escalation point. They say that at the time of execution/commencement of the order there is an escalation clause in all orders, and adequate measures are taken to mitigate the same.

24

Some negative thoughts with respect to IPO.

Technofab had raised 138 crores in an IPO at 230 per share.

This is the reason for cash on the balance sheet. Though Debt/Equity has reduced, it is agian becasue of increase in equity, not decrease in debt, debt has increased.

The price around 230 also could see a lot of selling by those stuck after the IPO.

The great performance in last few years again could be something as a preparation for the IPO. 2011 has seen a drop in performance as compared to 2010.

25

**The IPO size was 71.66 crores, out of which 51.16 crores is the utilized amount as of 31st Dec 2011. **The balance 20.5 crores is parked in debt-related instruments (FMP’s & bank FD’s).

Source:http://www.bseindia.com/xml-data/corpfiling/AttachHis/Technofab_Engineering_Ltd_310112_Rst.pdf

26

Some food for thought…as received form a senior investor

Prima facie, this looks ok. I remember havingseen afavorablenote about this company onsome bloglast year.

For EPC/project exeution companies, ROE etc is a hollow number, things can change beyond recognition with just one project. This is not FMCG.

More thananalyst reports, I would like to know what the real management speak is, how they handle projects, mitigate risks etc. How do theyfund working capital - are they going to float subsidiaries for overseas execution orall ofit going to be billed in flagship company. Forex risks?What’s the debt plan for next 1-2 years?

Market will normally not assign higher multiplesto companies heavily depending on African nations.Market also knowswhat can happen to a Punjwhen Libya changed regime. NHPC landing in problems with projects in Burma is well known too. Even Bharti is findingthe goingtough in its zain piece…

What way Technofab is better placedto beat thepolitical climate in Ghana, Mozambique and the likes. One project of 100 crore gets stuck or incurs LD andone’s done for the year, what can you do with all the ratios and order book multiples.

Another issue is2nd line of management - generally such a company cannot hire and retain highly skilled or experienced people who can deliver. So competency and project execution is a real risk,far more than getting orders.

More info needed on above and management transparency since that’s important.

27

Hi guys,

Thanks Donald for nudging me to go through this. I find it hard to locate where all the action is happening on valuepickr.

Personally, I’m not a huge fan of the infra space as it tends to be a capital intensive industry with not much scope for price increases (due to heavy competition and tender bidding). Another major concern for me are the numbers i.e. how does the company account for its revenue and profit when project time periods are 18 - 24 months. It is very important to investigate the revenue recognition policy of the company (and its peers) as it is very easy to “massage” numbers by changing revenue policies.

The balance sheet looks bloated and there is a substantial increase in the debtor and the loans and advances balance from Sept-2010 and Sept-2011. Generally, if the company has anaggressiverevenue recognition policy then one can expect such significant increases in debtor balances.

The dividend policy of the Company is also not very attractive possibly because the company wants to conserve for future working capital. As projects becomes more complex and longer the company’s capital needs can only increase. So it is very likely that ROIC will decrease and the company will take on more debt.

Personally it doesn’t look super-interesting to me but I do see value in investing as the valuation is reasonable.

cheers,

Subbu

28

Here is what I think-

Order Book on Mar31, 2010 = 533 crs

Next 21 months Revenue= 533 crs

Margin= 8.9%

Current Order Book= 1088 crs

Next 24 months Revenue= 980 crs (90% of order book)

PAT= 87 crs for 2 years ( assuming margin of 8.9%)

Stock Price= 218 (at 5 PE)… that’s 23% CAGR for 2 years… Not too bad in my view.

Margin of Safety-

  1. Assumed no addition in order book.

  2. Assumed only 90% of order gets executed.

  3. Assumed 24 months average time against mgt guidance & past trend of 21 months.

  4. Assumed same margin… though margin tends to increase with increase in sales.

  5. Assumed no PE increase.

Though risks remains… project execution risk,new order risk etc etc.

However, this looks good on risk-rewardfront.

29

Thanks to all for some very fruitful discussions in quick time!

I think due attention has been paid to both negatives and positives for the stock. We have enough pointers to take the investigation to the next level - a Management Q&A session that will provide more insights - on how the company approaches/manages key concerns, their experience on the ground, management B/W and plans ahead, etc.

Meanwhile, Technofab Engineering makes an entry into ValuePickr Short Term portfolio - time horizon next 6-9 months. A sort of nibbling allocation at the moment, with the accent on undervaluation. Post Management Q&A things will be more clearer perhaps, and we can express views on whether to consolidate positions, or otherwise.

Management Q&A - proposingJune 1st/2nd week. This is a Delhi based company, we can club with updates from PI Industries, Poly medicure (some action seems to be there) and a fresh try at meeting Oriental Carbon Senior Management.

Really appreciate if someone can open doors at Oriental Carbon - Management has proved elusive so far, but there’s a happening story there in our reckoning!

Cheers

Donald

PS: off for vacation till 15th. Pls carry forward the good work

30

I looked at the story and did not come away with very compelling case for investing. Most of my concerns are similar to what Donald’s ‘senior investor’ and also Subbu has mentioned. As for the valuation, most if not all infra companies are available cheap these days. I don’t find any special reason to invest in this company due to that.

31

Dear Donald, u said technofab makes entry in valuepickr short term portfolio, but at scorecard i could not find entry for the same in the short term list…

32

Dear Kishore,

The scorecard is updated every 6 months or so - to bring some objectivity & accountability to our stock-picking exercise.

Technofab has made an entry - but will feature in the next update in Oct/Nov 2012 showing recco date as 4th May. initiation date will be Atul’s post date, and the performance in 6 months. There may be other infra stocks which are cheap - not as cheap as this one though - and almost all have either high debt queering the pitch and/or showing big time margin pressures with marginal/PAT de-growth. Whereas this one looks to grow at 30% with more or less intact margins -in FY12 and FY13.We feel considering everything there may not be much downsides in the next 6-9 months - as visibility in order-book/execution is high.

If we can follow up with Management Q&A, we may issue a fresh recco/otherwise, in June 2012.

33

Dear Donald, Thank you very much. I just had written one comment at scorecard post. Repeating here below for Administrator, senior members & your due consideration if found useful in general interest of all contributors & readers of valuePickrs… QUOTE Dear Admin & all valupickrs… Publishing scorecard is excellent efforts. May i request following… Can this long term & short term valuepicker portfolios can be made dynamic? i.e. new entry, current view, CMP etc could be added/changed as & when it happens or changes rather than updating them quarterly or so… Feel this may help all contributors & regular readers a lot… Request Administrator & senior members may find suitable solution for this. However,just as a suggestion, one option can be explored. To prepare online google spreadsheet which automatically fetches CMP from googlefinance & also updates calculated columns. Such spreadsheet can be owned by administrator OR designated member. New entry / current view can be edited by administrator OR designated member only for changes as & when they happens. And such spreadsheet can be shared with registered users of portal with view only rights… Unquote

34

Dear Kishor,

Portfolio objectives updated by Administrator in response to your post.

Rgds

Donald

35

Article dt. 26th May in Business Line:

http://www.thehindubusinessline.com/features/investment-world/stock-insight/article3459454.ece

The article raises some more queries and also has some notable pointers-

  1. Proportion of dollar-denominated trades- Since this is such a low m-cap co, how much does it hedge itself. (Issues of forex loss have hurt a lot of companies in recent past).

2)The big comfort is the credible agencies (E.g. Projects funded by World Bank and ADB- which most would agree are many times more credible and reliable compared to our state-owned PSUs).

  1. One think which would require constant monitoring is the proportion of domestic vis-a-vis international orders. (The last 1 yr has seen a drastic increase in proportion of international orders).

  2. The big worry/botheration remains MARGINS… which I suspect the co would need to compromise, in the course of larger tick size orders.

Lets await cues from the forthcoming qtrly results, and see if some more queries can be raised…

36

Technofab Q4 & FY12 results:

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Technofab_Engineering_Ltd_300512_Rst.pdf

Dividend payout is disappointing. As per the guidance given by the management in Feb, topline is 2-3% lower, however PAT is 5% higher.

Views invited

37

Technofab Results are good, on expected lines:

1). Operating margins are maintained in a difficult year at 14% - which to my mind is a plus. Net Margins also at 9% FY11 levels.

2). As of Q3FY12, Exports formed just over 50% of order book, we will know more in Conf call tomorrow - this augurs well for FY13

3). Rupee depreciation should be beneficial to the company

4). Working Capital requirements have surged on account of big jump in Sundry debtors -more than doubling. Some reduction in inventory days but Working Capital/Sales is up to over 40% from ~37% levels a year back

5). Larger Order sizes -will entail higher working capital, this is expected

6). Some discrepancy in restated data for FY11 (in Q4FY12 filing) as opposed to Q4FY11 filing. Restated data shows higher Debtors at 129 CR vs 78 Cr. Short Tem loans data - restated as 31 cr vs some 84 Cr. The net effect of the restatement is NIL - some loand and advances to Debtors!

Overall, I would say this is good performance in an environment where most EPC BOP players have struggled on Growth or Profit. Can someone do a quick check on peer results??

Order book position and composition will be good to monitor…as well as some colour from Management on Political risks in Export orders in the near term!

38

Technofab Concall

31st May, 2012, 16.30 hours

+91 22 30650378/66290532

39

Key Highlights of Mgtcon call:

FY13 guidance: Tgting Turnover of 450 crores (18-20% topline growth), targeting to maintain current margins.

Order book: 950 crores with Power contributing 38.6%, followed by water at 28.4%

Order book: In current fiscal, secured 1 order of 15 cr in electrical T&D segment. Co is L1 in order worth 210 cr. (2 domestic & 2 international orders)

W.r.t. Bangladesh project- revenues not yet booked, project about to start in a month

Caution statements from management- Jobs taking longer to come, land acquisition problems, coal linkage issues, funding problems.

Indian mkts- concerns regarding closing fresh orders, non-availability of funds.

Pace is slower in domestic compared to international mkts. Globally competition coming from Chinese mkts.

Fresh orders secured in last fiscal- 753 crores. Current yr tgt 1200 cr.

Positives- Mgt intention to maintain margins. Worry- Will they get orders if they donât resort to undercutting in forthcoming (challenging) times, only time will tell.

Mgt says co. receivables strong. Sharp increase in debtors â includes retention money from projects of around 55 crores.

Regarding low dividend payout- Mgt mentioned about the broader liquidity crunch situation and their view to take a longer term situation and have adequate liquidity in such times.

Sharp increase in Employee Benefit exp (annually up over 40%)- Historically the company has paid engineers poorly, more a means to retain and ensure lower employee turnover.

Increase in âOther L/Term Liab from 7.5 to 14 cr)- Security provided against vehicles at various sites.

Increase in other income- from currency conversion (i.e. weakening rupee).

To sum up- while mgt sounded cautious, the (only) biggest +ve I find is they are still maintaining their margins in such a gloomy environment. Another good thing is that management is cautious and prepared for testing times.

Will times get tougher and margins collapse- we need to wait and watch. As of the current unexecuted order book, it doesnât seem like margins should be much of a problem. Unless, of course there is some order execution and cancellation problem.

40

Just noticed some recent insider trading activity (as per BSE disclosures):

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Technofab_Engineering_Ltd_110512_SAST.pdf

http://www.bseindia.com/xml-data/corpfiling/AttachHis/Technofab_Engineering_Ltd_070612_SAST.pdf