Technofab Engineering: Buy

Investors with a one-two year perspective can take limited exposure to the stock of Technofab Engineering. Strong order-book, ability to diversify into new markets and low leverage buttress our recommendation. At the current market price of Rs 127, the stock trades at 3.5 times its expected per share earnings for FY-13. With close to 50 per cent of its order book from export markets, the company may benefit from the rupee's depreciation against the dollar too.

Technofab is a small-cap stock and will be subject to market gyrations. Investors should, therefore, temper their exposure to the stock.

Diversification helps

Since its IPO in June 2010, Technofab has managed to keep its revenue ticking in high double-digits. Net sales expanded 47 per cent annually over the last four years to Rs 290 crore in FY-11. This is in contrast to the performance of many engineering procurement construction (EPC) and balance of plant (BoP) players which struggled to expand revenues as a result of slower investment activity. Technofab's growth was made possible by managing steady order inflows at a time when local players saw a steep dip in fresh orders.

Its increased focus on overseas markets helped.

The company bagged orders in African and Asian markets such as Mozambique, Zambia, Bangladesh and Fiji. While this does subject its business to possible political risks, it is noteworthy that much of these projects are funded by international agencies. It is, therefore, subject to lesser risks of non-payment. As much as 85 per cent of the export orders are dollar denominated. The receivables are also insured.

As of December 2011, 50 per cent of the order book of Rs 1020 crore came from overseas projects.

Another strategy that has helped Technofab is its conscious effort to reduce exposure to the power sector. From holding an order book with 60 per cent exposure to this space in FY-08, Technofab's December 2011 order book had less than 45 per cent of projects in power. The company managed this by expanding into industrial infrastructure, water management, oil and gas and electrical works.

In the domestic market, Technofab is not without competition. Players such as Sunil Hitech or McNally Bharat Engineering compete with the company in various business segments.

But the company has received repeat orders from clients such as NTPC and Nuclear Power Corporation. These orders act as a strong reference point for its future projects with new clients.

Financials

Technofab's net profits jumped more than five times in the last three years to Rs 28 crore in FY-11. This pace may not continue as the low base effect vanishes. While managing healthy growth, the company did have to shed its profit margins.

Operating profit margins, for instance, fell from 14 per cent in FY-09 to 12 per cent for the nine-months ending December 2011. But this may be a small price to pay to keep orders ticking.

Given its small size, Technofab may have to look at joint ventures to bid for larger projects. This too may cut into margins. That said, a double-digit operating margin for a small player could still be called above average.

Investors can expect a return on equity of 18-20 per cent from the company. With low debt-equity ratio of 0.2 times, the company can also leverage its way to growth.

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