Tecpro Systems: Buy

Tecpro Systems has differentiated itself from its peers in the material handling systems segment by moving further up in the value chain, offering Balance of Plant (BoP) works for power projects. Forging partnerships to be able to scale itself higher, the company has kept up the order momentum and held on to its execution record at a time when some of its peers are struggling on these counts.

Investors with a two-year perspective can consider taking limited exposure to the stock of Tecpro Systems. At the current market price of Rs 262, the stock trades at seven times its expected per share earnings for FY-13. However, as the company moves to larger projects, higher margins notwithstanding, we expect short-term concerns in the form of stretched working capital and higher debt — an inevitable phase for a company making a leap to larger/value-add businesses. Investors may have to wait out this phase for the next three-four quarters. This could be a reason for the drag in its stock price since IPO.

Tapping opportunities

Tecpro Systems is stated to be the market leader in coal handling plant projects and third largest player in ash-handling, based on orders placed in the Eleventh Plan. Leveraging on its leadership position and capabilities, the company has successfully entered BoP contracts in the thermal power generation space forging ties for specific projects with established players such as VA Tech Wabag and Gammon India.

As coal and ash handling typically account for about 40 per cent of the BoP order, Tecpro's strategy of bagging it in entirety by forming consortiums for the rest of the package such as water systems and cooling towers appears a sound one. This entry has resulted in a close to 100 per cent surge in order flows in FY-11, with order book closing at Rs 4,400 crore or three times revenue of the latest ended fiscal.

Tecpro has also been active in identifying the right opportunities in various sectors. The company, for instance, has bagged a couple of projects from cement players such as Grasim Industries and Shree Cement for waste heat recovery systems (for generating power). For this purpose, it has tied-up with a Chinese company for importing the boiler and turbine; balance of plant works being done by Tecpro itself. Cement, which is a power-intensive industry, has been nagged by power shortages and high cost of coal for captive power generation. With reports stating that one million tonne of cement production capacity will generate heat sufficient to generate 3.5-5 MW of power, the heat recovery market appears to hold high potential for Tecpro.

Tecpro has also not lost focus of its bread-and-butter business of material handling systems. It has recently tied with a US company for overland conveyor systems. The company can be expected to offer advanced solutions under its material handling division, with this tie-up.

Financials

Tecpro ended the 2011 fiscal with a 35 per cent growth in sales to Rs 1,455 crore, while net profits expanded at a lesser 24 per cent to Rs 136 crore. While the shift to larger projects bumped up EBITDA margins by over 1.5 percentage points to 15.2 per cent, it did not help much as interest costs ate a third of the EBITDA.

Costs incurred in expanding its credit limit and resultant higher finance charges are all just beginning to show in the company's numbers. The debt-to-equity at 1.1 times, though not alarming, certainly means a stretch on cash flows for some time by way of servicing debt.

Long-gestation projects (as long as 30 months) could also mean higher debtor days. The management has indicated that its borrowing costs though has dropped to 11 per cent from 12.5 per cent a few months ago. The risk of higher financing costs denting profits in the current rising interest rate scenario nevertheless remains.