Technofab Engineering Limited is tapping the capital markets with an IPO to raise Rs 68.8 crs at the lower price band of Rs 230 and Rs 71.8 crs at the higher price band of Rs 240. The issue opens on Tuesday the 29th of June and closes on Friday the 2nd of July.

Business
The company commenced business way back in 1971 and over the last four decades has been in the business of providing Engineering Procurement and Construction (EPC) services, executing a wide range of Balance-of –plant (BOP) and electro mechanical projects on a complete turnkey basis. The company provides its services to domestic and overseas markets across a number of industrial and infrastructure sectors which includes power, oil and gas, waste and waste water treatment and other industrial and infrastructure sectors.

The broad segments in which the company is present include conventional power, Nuclear power, oil and gas, water and waste water treatment, industrial and industrial infrastructure sectors and electrical distribution and rural electrification. The company has grown its revenues significantly in the last two to three years and this growth momentum is likely to continue considering the present order book of Rs 533.74 crs as on 31st March 2010. It is estimated that this book would be executed in the next 18-24 months. The company has bid for 41 projects amounting to approximately Rs 2200 crs and as per information in the RHP, Technofab is the lowest bidder in five project totalling Rs 400 crs.

The growth in Infrastructure within the country and overseas and looking at our GDP growth of over 8%, business is there for the asking. There is plenty for all and the only key is execution. Technofab is now in the midst of capturing this phenomenal growth that India is witnessing.

The promoter is Mr Avinash Gupta and has with him his two sons who help him in the running and management of his business. The band width required to execute different projects simultaneously in different geographies is there with Technofab Engineering.

The company is offering a discount of Rs 20 per share to its employees.

Objects of the Issue

The objects of the issue are to make the company ready to take it to the next level as it moves from a 200 cr turnover to Rs 500 and then to Rs 1000 crs in the next few years.

Financials
The company has seen a huge growth in revenues with total turnover rising from Rs 61.61 crs in March 2007 to Rs 81.63 crs in March 2008, Rs 149.57 crs in March 2009 and Rs 200.48 crs in March 2010. The profit after tax for the corresponding periods has been Rs 78.64 lakhs, Rs 5.31 crs, Rs 11.69 crs and in March 2010 the net profit was Rs 19.09 crs. Th margins have been improving steadily and in 2008-09 the net margins were 7.81% which have improved to 9.52%. The growth in turnover from 81.63 crs in March 2008 to Rs 200.48 crs in March 2010 is a CAGR compounded annual growth rate of 48% while net profits in the same period have grown at a CAGR of 189%.

As mentioned earlier the company has a very healthy order book and a steady pipeline as well. This should see the company targeting sales in excess of Rs 800-1000 crs in the next 4 to 5 years.

Valuations
The equity capital of the company is Rs 7.5 crs and based on the earnings for the year ended March 2008, March 2009 and March 2010 the EPS is Rs 7.08, Rs 15.58 and Rs 25.45 respectively. This is a good earning that the company has achieved and based on March 2009 earnings the present issue is at a very reasonable pre-money earnings multiple of 9.04 at the lower band and 9.43 at the upper band.   

The present dilution would increase the equity from 75 lakh shares to 104.9 lakh shares and on historical earnings the EPS would fall to Rs 18.20. The company with an order book of over Rs 350 crs is expected to grow significantly in the coming years as well. To compare the growth that has been witnessed at a CAGR level of 48% we would see a turnover of Rs 300 crs and a net profit assuming similar margins at roughly Rs 28.5 crs. This on a fully diluted basis would mean an EPS of Rs 27 to Rs 27.20 or a price earnings multiple of just about 8.5 to 8.88, in fact cheaper than the multiple at which the share is being offered today.

Clearly valuations look attractive and there is something on the table for investors to look forward to.

Risks and opportunities
There could be delays in clearances from regulatory authorities and subsequent cost over runs is a key area of concern. The relatively small size of the company and small ticket orders so far could be a hurdle as the company moves into bigger ticket size orders. High working capital requirements and the working capital cycle could act as hurdles in the growth. 

The recent association of Gammon India with the company will help Technofab in a big manner in entering into key contracts leveraging the size and expertise of Gammon India. The huge business opportunity and its successful implementation and execution of large number of projects will help the company in growing in the future. 

Comparison
Technofab has compared itself with entities like Hindustan Dorr Oliver, Shriram EPC, Sunil Hitech Engineers and Mcnally Bharat Engineering Company Limited. It compares very favourably with all of them on price earnings multiple and return on net worth (RONW) etc.  It looks like an interesting company and investors with a medium term approach should be rewarded.

Conclusion
Investors with a medium term outlook should subscribe to the issue and should under normal circumstances be amply rewarded for their investment. A 15-25% appreciation on the initial investment in the first year or earlier looks likely.

SEBI disclaimer: – I intend to subscribe to the above issue