Technofab Eng

Technofab Engineering is entering the capital market on 29^th June 2010 with a fresh issue of 29.9 lakh equity shares of Rs.10 each, in a price band of Rs.230 to Rs.240 per share, to raise approximately Rs. 70 crores. The 100% book built issue, closing on 2^nd July 2010, constitutes 28.50% of the post issue equity capital of the company.

The company provides Engineering Procurement and Construction (EPC) services for Balance-of-Plant (BoP) packages for power, oil and gas, water and waste water treatment and other industrial and infrastructure projects. With over 38 years of turnkey engineering and construction experience, it has presence in both domestic and overseas markets.

Overseas business, mainly in Ethiopia, Kenya and Fiji, accounted for 10% of FY10 revenues. In the domestic market, it has prestigious clients such as Nuclear Power Corporation, NTPC, Lanco, Reliance Energy, Tata Power, BHEL, State Electricity Boards, GAIL, IOC, NALCO, SAIL and NMDC.

Promoters hold 51% stake in the company, which will reduce to 36.5% post-issue. Gammon India holds 15.7% stake, since FY07.

The issue proceeds will be used to fund company's future growth and expansion:

• Rs. 30 crores for long-term working capital needs
• Rs. 16 crores for purchase of construction equipment
• Rs. 5 crores each for establishing storage facility for construction equipment and training centre for employees

A dividend paying company, for FY10, it reported sales of Rs. 201 crores, EBITDA of Rs. 34 crores and net profit of Rs. 19 crores. In the last four years, from FY07 to FY10, sales have grown at a CAGR (compounded annual growth rate) of 49% and net profit at a CAGR of 193%. The EBITDA margin rose to 16.8% in FY10 from 5.1% in FY07, whereas net profit margin improved to 9.5% in FY10 from 1.2% in FY07.

Having achieved critical mass, the company, for FY10, reported an EPS of Rs. 25.5 on equity base of Rs. 7.5 crores. Its networth, as on 31^st March 2010, was Rs.50 crores and book value per share was Rs. 66.9. The company is low on leverage with net debt of about Rs. 8 crores, as on 31^st March 2010.

It presently has 41 ongoing projects, of which 4 are overseas. The order book, as on 31^st March, 2010 stood at Rs. 534 crores, which is 2.7 times its FY10 sales. Its dependence on few clients has been on a decline, with top five customers, who accounted for 95% of sales in FY08, constituted only 62.5% of FY10 sales. Moreover, top 5 clients represented only about 35% of order book as at 31^st March 2010.

The company is offering shares in single digit PE multiples of 9 and 9.4 times, at the lower and upper end of the price band, respectively. The price to book ratio (P/B) is 3.4 and 3.6 times respectively. Listed EPC players, bigger in size but having lower net profit margins, are presently ruling at PE multiples of 12 and above.

The company though small in size, looks like a good EPC player, which can grow well over the next few years. The issue looks reasonably priced and can be subscribed even at the upper end of the price band, of Rs. 240 per share.