Techno E&E Co. (BUY): Time for the state orders?
Commentary by power T&D contractors indicates that visibility of orders from states is improving. In our recent reports, we highlighted that increasing investments at inter-state transmission (by PGCIL) and distribution (through IPDS/DDUGJY) would necessitate investments by state transcos. With the kickstart of tendering under IPDS/DDUGJY, state transmission investment may accelerate (up 21% in FY17E for select states). In the midst of a 5-6 year high investment cycle akin to FY04-09, Techno remains the best play on the segment given: (i) best-in-class execution; best working capital and cost management combined with bidding discipline; (ii) reversal of capital allocation errors; sale of wind assets; and now (iii) reasonable valuations of 15x FY18E core EPS. We marginally upgrade our EPS estimate by 2% and TP by 3%. TEEC is amongst our top picks in the E&C space. (Utsav Mehta, CFA, +91 22 3043 3209)
ANALYST NOTES
Light Electricals: Havells to benefit from demonetization
We spoke with channel participants to gauge impact of demonetisation on light electricals. The B2B segment, comprising cables & wires and switchgears (~60% of market), has been hit only marginally, with 8-10% decline in sales since the announcement. Also, distributors reported no weakness in demand from ongoing projects. Note that restocking recently picked up as distributors' margins increased after 10% increase in cables & wires retail prices. Meanwhile, B2C demand dipped 30-35% but should recover from 1QFY18 as new currency circulation increases. Havells/Finolex would be least affected given high B2B presence (~55% of revenues). Moreover, our checks indicate Havells could announce a special package (credit period + special incentives; akin to package during Lehman crisis) to support the channel and help it gain market share. We have factored in deceleration in revenue growth from 12% in 1HFY17 to 4%/11% in 2HFY17/FY18. Multiple of 29x FY18E P/E seems rich due to the interim disruption, but reasonable at 23x FY19E P/E; BUY on dips. (Bhargav Buddhadev, +91 22 3043 3252)
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