April 13,2015

Technocraft Industries (India) Ltd

Building blocks for Engineering Growth

Rating

BUY

CMP (Rs)
Target Price (Rs)
Upside %
CNX SMALLCAP

274
389
42%
6007

Key Data
Bloomberg Code
Reuter Code
NSE Code
Current Share o/s (mn)
Diluted Share o/s (mn)
Mkt Cap (Rs bn/USD mn)
52 WK H/L (Rs)
Daily Vol. (6M Avg NSE+BSE )
Face Value (Rs)
1 USD / Rs

Shareholding Pattern

Company Financials (Standalone)

Y/E
FY15E
FY16E
FY17E

Analysts:

@ - Consolidated Promoters

Revenue EBITDA EBITDA% Adj. PAT Adj. PAT @

(Rs mn) (Rs mn)
(Rs mn) (Rs mn)
8,577
9,250
10,012

1,422
1,686
1,855

16.6%
18.2%
18.5%

Vipul Shah
vipul.shah@networthdirect.com
Ph. No. 022 30641745

1,049
1,320
1,559
Associate:

1,137
1,423
1,681

EPS@
(Rs)

P/E@

36.1
45.2
53.4

7.6
6.1
5.1

EV/EBITDA
4.2
3.0
2.1

ROCE
(%)
19.8
19.7
18.0

FII
ROE DII
Others

(%)

TIIL IN
TEIN.BO
TIIL
31.5
31.5
8.64/138.4
281.0/86.2
57247
10
62.37
%
74.97%
2.34%
0.79%
21.90%

Price Performance (%)

18.2
19.9 TIIL
20.4 CNX SMALLCAP

1M 6M 12M
17.6 48.3 209.1
4.9 22.3 51.4

Jason Soans
jason.soans@networthdirect.com
Ph. No. 022 30641631

Technocraft Industries (India) Ltd

Technocraft Industries (India) Limited (TIIL) promoted by two IIT alumnus & first generation technocrats - is
a diversified company having interests in Engineering (+75% of Revenue) & Textile businesses. More than
85% of TIILs revenue comes from global markets.
In the Engineering segment, TIILs businesses can be further classified into Products (Drum Closures &
Scaffoldings) and Services (Multi-disciplinary Engineering Services to various engineering companies). TIIL
holds a leadership position in global steel drum closures & scaffoldings businesses while in Engineering
Services segment, TIIL has strengthened its presence through series of acquisitions to capture global
Engineering Services Outsourcing (ESO) market. In the Textile segment, TIIL produces cotton yarn and
manufacturers active wear garments and has recently forayed into fabric manufacturing also.
Key highlights of TIILs various businesses are:

Steel Drum Closures: Second largest global player, Oligopoly & Mature market, Precision engineering product, Strong
moats, High quality of earnings & FCF
Scaffoldings: Largest exporter from India, Complete solution provider, One of the leading suppliers in its key markets,
Growing segment having superior margins & ROCE
Engineering Services: Huge market opportunity, Putting together building blocks, Strong growth on a low base
Textiles: Value added yarn & cotton price corrections to improve yarn profitability, Addition of value added fabrics to its
garment portfolio to improve garment profitability , Huge land bank, Division not matching with TIILs Engineering
related businesses and hence may see its restructuring

Supported by growth of scaffoldings business on backdrop of lower growth of drum closures & textile
businesses, we expect TIILs standalone revenue to grow at a CAGR of 8.1% during FY15-17 period while
standalone EBITDA & PAT are expected to grow at a CAGR of 14.2% & 21.9% respectively during the same
period. We expect TIILs subsidiaries revenue (accounting for less than 25% of consolidated revenue ) to
grow at a CAGR of 15.2% during FY15-17 period on back of growth of ESO business (Indian & North
American Subsidiaries) & engineering products business (Chinese Subsidiary).

TIILs business segments

TIIL
Engineering

Products
Drum Closures
FY14
Revenue: Rs 2278 mn
Exports: ~ 97%
EBITDA margin: 37.2%
ROCE : 85.4%

Textiles

Services
Indian Subsidiary
FY14
Revenue: Rs 234 mn
EBITDA margin: 23.3%

Overseas subsidiaries
Scaffoldings
FY14
Revenue: Rs 2332 mn
Exports: ~79%
EBITDA margin: 15.2%
ROCE : 23.7%

FY14
Revenue: Rs 238 mn
PBT margin: 2.3%

Yarn
FY14
Revenue: Rs 2033 mn
Exports: ~87%
EBITDA margin: 13.1%
ROCE : 19.3%

Fabrics & Garments

FY14
Revenue: Rs 212 mn
EBITDA margin: (5.3%)
ROCE : (10.7%)

Chinese subsidiary
FY14
Revenue: Rs 748mn
PBT margin: 2.2%

Steel Drum Closures

FY10-14 Revenue CAGR :12.8%

FY10-14 EBITDA CAGR:16.1%
(Ex-subsidiaries)

Key Highlights: Second largest global player, Oligopoly & Mature market, Precision
engineering product, Strong moats, High quality of earnings & FCF

TIIL is the second largest manufacturer of steel drum closures (precision engineering product preventing
leakages of the product from the drum) in the world and has a market share of ~36% (ex-China) & ~6% in
China. The largest player Greif has over 50% market share (ex-China) and the top two players (Greif & TIIL)
together command over 86% of market share making the market structure an oligopoly.
Globally the production of steel drum is pegged at 150 mn pcs per annum ex-China and growing at very low
single digit rate. Global steel drum closure consumption is pegged at 130 mn sets per annum (ex-China)
valued at ~ Rs 7,000 mn while steel drum closure consumption is pegged at 100 mn sets per annum in China.
TIILs Key Strengths in this business are:

Decades of experience in manufacturing steel drum closures requiring a very high level of precision engineering
(Relatively small industry size makes it unattractive for large global engineering company to venture into this business)
Complete product portfolio & solutions - produces a wide variety of closures and related equipment ranging from fully
automatic flange insertion systems to cap-sealing tools.
Continuous innovation & process improvement TIIL has designed & developed next generation products & patented
technology for manufacturing drum closures resulting into higher realization & profitability per set, and has also
introduced nylon & PP based closures.
Global scale & reach - TIIL has manufacturing facilities in India (54 mn sets per annum) & China (6 mn sets per annum),
and has marketing & distribution setup spread across 80 countries. TIIL caters to all leading steel drum manufacturing
companies of the world with exports accounting for more than 95% of segment revenue

TIILs strong moats in steel drum closure business are reflected in quality of earnings of the segment (EBITDA
margin of over 30% and an ROCE of over 80%) and strong FCF generation.
Growth Plans Market share gains in the world market ex-China due to innovative products, Capacity ramp
4
up in China to capture higher market share, Foray into plastic closures and acquisitions

Scaffoldings

FY10-14 Revenue CAGR :25.4%

FY10-14 EBITDA CAGR:29.6%
(Ex-subsidiaries)

Key Highlights: Largest exporter from India, Complete solution provider, One of the leading
suppliers in its key markets, Growing segment having superior margins & ROCE

TIIL manufactures & supplies premium scaffoldings to global scaffolding contractors, and is the largest
exporter of scaffoldings from India. More than 85% of TIILs revenue from scaffoldings is accrued from
overseas markets.
TIILs key strengths in this business are: Quality manufacturing, Cost competitiveness, Ability to supply
complete solution, and widespread distribution across North America, South America and Australia.
TIILs scaffolding manufacturing facilities in India & China - producing under highest quality standards &
having captive steel tube production - have all approvals & certifications in place to supply in U.S. and
European markets. This is very important factor for developed market buyers because for them scaffolding is
not a mere construction material but a very important safety product. These facilities are easily scalable at
nominal capex through debottlenecking to meet future demand.
TIIL provides complete solution with all tooling requirement to scaffolding contractors instead of just being a
piecemeal supplier. TIIL is one of the leading supplier of complete scaffolding solutions in North American,
South American & Australian markets. TIILs ability to warehouse scaffoldings near to markets is also its added
advantage.
TIILs revenue from scaffolding has grown at a CAGR of 25.4% during FY10-14 period on back of strong
demands from the international construction and infrastructure markets while its segment EBITDA margin at
15.2% and segment ROCE at 23.7% in FY14 are also impressive.
Growth plans: Geographic expansion, Market share gains in the largest Latin American markets of Brazil,
Argentina & Venezuela, and Product expansion through foraying into engineering formwork systems & tower
manufacturing to improve capacity utilization & gain critical mass
5

Engineering Services

FY10-14 Revenue CAGR :21.7%

FY10-14 EBITDA CAGR:92.0%
(Ex-subsidiaries)

Subs. Revenue (CY14): ~ Rs 80 mn

Key Highlights: Huge market opportunity, Putting together building blocks, Strong growth on a
low base

TIIL provides multi-disciplinary engineering services to various engineering companies (In industries like
automotive, off-highway vehicles, heavy machinery, consumer equipment, medical devices, etc) through its
90.34% Indian subsidiary Technosoft Engineering Projects Limited (TE), and step down subsidiaries in North
America. TE has a strong team of over 250 engineers & designers located worldwide (projects are executed
on-site as well as off-shore) and caters to large corporates based in U.S., Canada, U.K. and Europe.
During FY14, TE acquired a controlling stake in Swift Engineering Inc. (SE), a Canadian company, which
provides engineering services, specializing in Oil & Gas sector. In the Oil & Gas industry, SE provides services
to midstream & downstream sector which is less exposed to downfall in oil prices. The acquisition of SE has
made the services of TE more broad based covering a larger international geographical area. TIIL is in talks
with ONGC & Cairn India to get some business from them based on expertise of SE.
Market sources estimate that global spend on engineering services was around $930 billion in 2012, and will
reach $1.4 trillion by 2020. Outsourceable spend on engineering services stood at around $325 billion in
2012, with offshored spend comprising approximately 10 percent of the total market. Total outsourcing
spend on engineering services is estimated to be growing 3-4 times the rate of total spend on engineering
services an indicator of growing propensity to outsource engineering services
Another key trend is a continued shift in the overall allocation of spending from the mature markets to
emerging markets. The United States, Europe, and Japan collectively account for over 85 percent of the total
spend today, but are likely to see their collective share drop by 5 percent by the end of decade, with the
emerging markets of Asia expected to gain the most from this market shift. Asia (excluding Japan) is expected
to account for approximately 11 percent of the total global engineering services spend by 2020. (Source:
Information Services Group, www.isg-one.com)
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Textiles

FY10-14 Revenue CAGR :9.2%

FY10-14 EBITDA CAGR:(2.6%)

Key Highlights: Value added yarn & cotton price corrections to improve yarn profitability,
Addition of value added fabrics to its garment portfolio to improve garment profitability , Huge
land bank, Division not matching with TIILs Engineering related businesses and hence may see
its restructuring

TIIL diversified into textiles business by setting up a cotton yarn spinning mill in the year 1997, and setting up
a garment (premium quality active wear) manufacturing unit in 2003. Current capacities: Cotton Yarn
61,000 spindles / 1,000 kg/hr; Garment 40,000 pieces / day. TIIL also has a 15 MW coal based captive
power plant to meet its power requirement. In cotton yarn, TIIL exports more than 90% of its products
70%+ exports to Europe & Asia and remaining to Latin American countries
In cotton yarn segment, with the help of modernization & alteration of machines, TIIL has added value added
yarn like slub yarn, compact yarn, etc having higher realization per kg.
TIIL has also modernized its garment unit with a capex of Rs 180 mn to produce value added fabrics like
cotton lycra fabric, viscose lycra fabric, polyester cotton fabric, etc., and added imported knitting machines &
stenters.
TIILs garment segment is not profitable (FY14 revenue at Rs 212 mn, & EBITDA margin at -5.3% ) and with
the addition of fabric unit, TIIL expect a significant turnaround in its garment segment.
TIILs cotton yarn division had a reasonable good performance in FY14 (Revenue : Rs 2033 mn, EBITDA
margin: 13.1% and segment ROCE:19.3%) due to good demand from export markets. However due to
reduced demand from China market and high priced cotton inventory TIILs cotton yarn performance in 9M
FY14 (Revenue: Rs 1,345and EBIT margin:0.2%) was dented. However, with introduction of value added yarn,
recent cotton price corrections & consumption of high cost inventory, TIIL expects its cotton yarn segment to
show improved performance.

Outlook & Valuations

We expect TIILs Drum Closures business (stand alone) to grow at a muted CAGR of 5% during FY15-17 period
on back of market share gains & higher value realization due to introduction of innovative products.
We expect TIILs Scaffoldings business (stand alone) to grow at a CAGR of 15% during FY15-17 period on back
of market share gain, growth of end user market, geographic expansion, market share gains in the largest
Latin American markets of Brazil, Argentina & Venezuela, and foray into engineering formwork systems &
tower manufacturing .
We expect TIILs Chinese subsidiary to clock a revenue CAGR of 25% during FY15-17 period due to market
share gains in Chinese drum closure s market and growth of scaffoldings business.
We expect TIILs textile businesss growth to be muted, however we expect textile businesss margin to
improve on back of introduction of value added yarn varieties and foray into fabric manufacturing.
We expect TIILs Engineering services business (subsidiaries) to grow at revenue CAGR of 19% during FY15-17
period on back of size of opportunities in ESO market and spending shifting from the mature markets to
emerging markets.
At CMP of Rs 274, TIILs is trading at a 7.6x FY15E, 6.1x FY16E and 5.1x FY17E consolidated EPS. We have
valued TIILs stock based on Sum-Of-The-Part (SOTP) valuation by valuing each business separately and
arrived at a price target of Rs 389 for the stock of TIIL. At our target price, TIILs stock will trade at 10.8x
FY15E, 8.6x FY16E and 7.3x FY17E consolidated EPS.

SOTP valuation
Valuation Method@

Multiple

Drum Closures

EV / EBIT multiple

4,237

Scaffoldings

EV / EBIT multiple

4,319

Textiles

EV / EBIT multiple

148

Engineering Products Overseas Operations

M Cap / Revenue

0.5

731

P/E

295

M Cap / Revenue

0.5

378

Cash & Cash Equivalents

FY17E

4,538

Less: Debt & Current Liabilities

FY17E

(2391)

Business Segment

Engineering Services Indian Operations

Engineering Service Overseas Operations

Market Capitalization
No. of Shares
Target Price, Rs / Share

EV, Rs mn

12,254
-

31.5 mn
389

@ - Based on FY17 Estimates

Key Risk & Concerns

Global Slowdown More than 85% of TIILs revenue comes from global markets . Any slowdown in economic
activities in global markets in general and U.S. market in particular may affect TIILs performance.
Foreign exchange - Being an export oriented company, TIILs competitiveness , revenue growth & margins
may be affected incase Indian Rupee appreciates significantly against major global currencies in long run. In
the short run, volatility in foreign exchange markets may affect TIILs profitability as it does not hedge its
export receivables.
Commodity prices - Increase in commodity prices like steel & cotton may affect TIILs performance in case it
unable to pass the rise in commodity prices to its customers.
Capital allocation TIILs certain businesses generate significant cash flows and TIILs cash & cash equivalents
were at Rs 1,722 mn as on 31-Mar-14. TIILs management has plans to invest this cash into various businesses
and keep looking for inorganic growth opportunities. Inorganic growth opportunities pursued in future may
or may not generate economic returns as desired due to various factors. However, management has
narrowed down focus to engineering area (considering managements background & expertise) while
pursuing inorganic growth opportunities and evaluating certain opportunities in specialized drum closures
segment and engineering services segment.

10

Key Managerial Personnel

Name

Designation

Details

Madhoprasad Saraf

Chairman

More than 60 years of experience in Finance, Accounting and

Taxation

Sharad K Saraf

Managing Director

Electronic Engineer from IIT, Mumbai

Promoted Technocraft group in 1972
Instrumental in strategic direction & handles all commercial
aspects of the company

Sudarshan K Saraf

Managing Director

Mechanical engineer from IIT, Mumbai

Handles all engineering operations of the group

Navneet Saraf

Chief Operating
Officer

Mechanical Engineer from the University of Manchester, UK

Founded Technosoft Engineering Projects Limited, groups
engineering services subsidiary
Handles overseas, commercial and IT operations of the group

Ashish K Saraf

Chief Financial Officer

Masters in Textile Technology from the University of Manchester

University, UK
Handles the Textile division of the group
11 years of experience in industrial and commercial area

Subhash Khandelwal

President - Marketing

Bachelor in Textile from T.I.T., Bhiwani & Diploma in ExportImport Management

With Technocraft Group Since 1988

Anil Gadodia

President Accounts &

Finance

Fellow member of The Institute of Chartered Accountants of India

+28 years of experience in Finance, Accounting and Taxation
11

Financials
Income Statement (Standalone)
(Rs mn)
(YE March 31st)

FY 14

FY 15E

FY 16E

FY 17E

Total Revenues

8,384

8,577

9,250

10,012

% growth

29.4%

2.3%

7.8%

8.2%

Total Expenditure

6,997

7,155

7,564

8,157

EBITDA

1,387

1,422

1,686

1,855

230

238

275

296

1,158

1,184

1,411

1,560

38

52

53

56

282

367

527

723

EO items (income/(expenses))

(194)

(16)

EBT

1,207

1,483

1,885

2,227

Tax

386

450

566

668

Reported PAT

822

1,033

1,320

1,559

Adj. PAT

1,015

1,049

1,320

1,559

% growth

56.9%

3.3%

25.8%

18.1%

Depreciation
EBIT
Interest
Other Income

12

Financials
Balance Sheet
(Rs mn)

(Standalone)

(As on March 31st)

FY 14

FY 15E

FY 16E

FY 17E

Cash & equivalents

342

1,034

1,932

3,082

Debtors

2,216

2,267

2,445

2,647

Inventory

1,235

1,264

1,363

1,475

853

872

941

1,018

Total Current Assets

4,646

5,437

6,681

8,222

Current Liabilities

1,972

1,995

2,152

2,329

Net Working Capital

2,675

3,442

4,529

5,892

Other Assets

74

74

74

74

Investments

1,656

1,656

1,656

1,656

Net Fixed Assets

1,040

1,052

877

683

Total Assets

5,445

6,224

7,136

8,305

58

61

61

61

315

315

315

315

Reserves

5,072

5,847

6,759

7,928

Total Networth

5,387

6,162

7,074

8,244

Total Liabilities

5,445

6,224

7,136

8,305

Others

Other Liabilities
Debt
Shareholder's Equity

13

Financials
Cash Flow Statement (Standalone)
(Rs mn)
(YE March 31st)
EBT
Depreciation
Tax paid
Change in Deferred Tax Liability
Net Working Capital
Other Operating activities
Operating Cash Flow

FY 14
1,207
230
(386)
(182)
(11)
858

FY 15E
1,483
238
(450)
(75)
1,196

FY 16E
1,885
275
(566)
(189)
1,405

FY 17E
2,227
296
(668)
(214)
1,641

Capital Expenditure
Investments

(153)
(278)

(250)
-

(100)
-

(101)
-

Investing Cash Flows

Change in Borrowings
Change in Equity
Dividend paid
Financing Cash Flow
Net Change in Cash
Closing Cash balance

(430)
(2)
(24)
(184)
(210)
218
342

(250)
4
(258)
(254)
692
1,034

(100)
(78)
(330)
(408)
898
1,932

(101)
(390)
(390)
1,150
3,082
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Financials
Ratio Analysis (%)
(YE March 31st)

FY 14

FY 15E

FY 16E

FY 17E

2.2

2.2

2.2

2.4

EBITDA Margin

16.5%

16.6%

18.2%

18.5%

Net Profit Margin

Average Return on Equity

12.1%
20.0%

12.2%
18.2%

14.3%
19.9%

15.6%
20.4%

Average ROCE

23.2%

19.8%

19.7%

18.0%

Inventory(days)

54

54

54

54

Payable(days)

86

85

85

85

Receivables(days)

96

96

96

96

Net Debt to Equity (%)

-0.4

-0.4

-0.5

-0.6

Diluted EPS (Rs)

32.2

33.3

41.9

49.5

P/E (x)

8.5

8.2

6.5

5.5

P/BV (x)

1.6

1.4

1.2

1.0

EV/EBITDA (x)

4.8

4.2

3.0

2.1

EV/Sales (x)

0.8

0.7

0.6

0.4

2.1%

3.2%

4.0%

4.8%

Fixed Assets Turnover Ratio

Dividend Yield (%)

15

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