Its IPO, opening tomorrow, values the company lower than its competitors

Technofab Engineering Ltd (TEL) hits the capital market on 29 June 2010. TEL offers engineering, procurement and construction (EPC) services for various balance of plant (BoP) packages—for sectors like conventional power, nuclear power, oil & gas, water & waste-water treatment, infrastructure, electrical distribution and rural electrification. Fitch Ratings has assigned an ‘IPO Grade 3’ to the issue indicating ‘average fundamentals’.

TEL’s competitors like Hindustan Dorr Oliver Ltd, Shriram EPC Ltd, Sunil Hitech Engineers Ltd and McNally Bharat Engineering Company Ltd carry P/Es between 12.9-34.8. TEL’s EPS is Rs25, which is the highest among its competitors. Based on this EPS, TEL’s P/E at the lower band of Rs230 stands at 9.2.

The IPO will be used to meet working capital requirements of Rs30 crore, to purchase construction equipment and storage facilities for Rs20.3 crore, and to set up a training centre for employees for Rs5.4 crore. The company had a strong order book of Rs533 crore as on 31 March 2010. In FY07, TEL divested 9% by entering into a strategic tie-up with Gammon India Limited (GIL) and divested 6.7% holding to Associated Transrail Structures Ltd (ATSL, now merged in GIL). The move has helped TEL to bid for projects for which it was not eligible due to net worth criteria.

TEL had a net profit of Rs19.09 crore on a total income of Rs200.48 crore as on 31 March 2010. It operates in an industry with high working capital needs. It has a limited track record as it has turned around mainly in FY08, FY09, and FY10 by posting 32%, 84.34% and 34.20% year-on-year growth. The top five customers contributed to around 75% of its FY09 revenue and 47% of its current order book. In fact, TEL posted a negative cash flow of Rs13.42 crore for the year ended 31 March 2010, which underlines the need for funds. There are 19 litigations filed against the company pertaining to civil, criminal and tax proceedings involving Rs8.95 crore. It claims to be carrying out projects in Ethiopia, Fiji and Kenya and says it is bidding for projects in several other African countries.

Collin Stewart Inga Pvt Ltd is the sole book running manager to the issue. The company has 29.90 lakh shares on offer and plans to raise Rs68.77 crore at the lower end of the price band. It has set the price band at Rs230-Rs240 per share. — Ravi Samalad