1Technocraft Industries (India) LtdBuilding blocks for Engineering Growth

April 13,2015

Rating BUYCMP (Rs) 274

Target Price (Rs) 389

Upside % 42%

CNX SMALLCAP 6007

Key DataBloomberg Code TIIL IN

Reuter Code TEIN.BO

NSE Code TIIL

Current Share o/s (mn) 31.5

Diluted Share o/s (mn) 31.5

Mkt Cap (Rs bn/USD mn) 8.64/138.4

52 WK H/L (Rs) 281.0/86.2

Daily Vol. (6M Avg NSE+BSE ) 57247

Face Value (Rs) 10

1 USD / Rs 62.37

Shareholding Pattern %Promoters 74.97%

FII 2.34%

DII 0.79%

Others 21.90%

Price Performance (%)1M 6M 12M

TIIL 17.6 48.3 209.1

CNX SMALLCAP 4.9 22.3 51.4

Company Financials (Standalone) @ - Consolidated

Y/E Revenue EBITDA EBITDA% Adj. PAT Adj. PAT @ EPS@ P/E@ EV/EBITDA ROCE ROE

(Rs mn) (Rs mn) (Rs mn) (Rs mn) (Rs) (%) (%)

FY15E 8,577 1,422 16.6% 1,049 1,137 36.1 7.6 4.2 19.8 18.2

FY16E 9,250 1,686 18.2% 1,320 1,423 45.2 6.1 3.0 19.7 19.9

FY17E 10,012 1,855 18.5% 1,559 1,681 53.4 5.1 2.1 18.0 20.4

Analysts: Vipul Shah Associate: Jason Soans

vipul.shah@networthdirect.com jason.soans@networthdirect.com

Ph. No. 022 30641745 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). 2

TIILs business segments

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Fabrics & GarmentsFY14Revenue: Rs 212 mnEBITDA margin: (5.3%)ROCE : (10.7%)

TIIL

TextilesEngineering

Products Services

Drum ClosuresFY14Revenue: Rs 2278 mnExports: ~ 97%EBITDA margin: 37.2%ROCE : 85.4%

ScaffoldingsFY14Revenue: Rs 2332 mnExports: ~79%EBITDA margin: 15.2%ROCE : 23.7%

YarnFY14Revenue: Rs 2033 mnExports: ~87%EBITDA margin: 13.1%ROCE : 19.3%

Indian SubsidiaryFY14Revenue: Rs 234 mnEBITDA margin: 23.3%

Overseas subsidiaries FY14Revenue: Rs 238 mnPBT margin: 2.3%

Chinese subsidiary FY14Revenue: Rs 748mnPBT margin: 2.2%

Steel Drum ClosuresKey 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 up in China to capture higher market share, Foray into plastic closures and acquisitions 4

FY10-14 Revenue CAGR :12.8%FY10-14 EBITDA CAGR:16.1%(Ex-subsidiaries)

ScaffoldingsKey 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

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FY10-14 Revenue CAGR :25.4%FY10-14 EBITDA CAGR:29.6%(Ex-subsidiaries)

Engineering ServicesKey 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) 6

FY10-14 Revenue CAGR :21.7%FY10-14 EBITDA CAGR:92.0%(Ex-subsidiaries)

Subs. Revenue (CY14): ~ Rs 80 mn

TextilesKey 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.

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FY10-14 Revenue CAGR :9.2%FY10-14 EBITDA CAGR:(2.6%)

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.

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SOTP valuation

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Business Segment Valuation Method@ Multiple EV, Rs mn

Drum Closures EV / EBIT multiple 5 4,237

Scaffoldings EV / EBIT multiple 7 4,319

Textiles EV / EBIT multiple 2 148

Engineering Products Overseas Operations M Cap / Revenue 0.5 731

Engineering Services Indian Operations P/E 5 295

Engineering Service Overseas Operations M Cap / Revenue 0.5 378

Cash & Cash Equivalents FY17E - 4,538

Less: Debt & Current Liabilities FY17E - (2391)

Market Capitalization 12,254

No. of Shares - - 31.5 mn

Target Price, Rs / Share 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.

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Key Managerial Personnel

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

Sudarshan K Saraf Managing Director Mechanical engineer from IIT, MumbaiHandles all engineering operations of the group

Navneet Saraf Chief Operating Officer

Mechanical Engineer from the University of Manchester, UKFounded Technosoft Engineering Projects Limited, groups engineering services subsidiaryHandles overseas, commercial and IT operations of the group

Ashish K Saraf Chief Financial Officer Masters in Textile Technology from the University of Manchester University, UKHandles the Textile division of the group11 years of experience in industrial and commercial area

Subhash Khandelwal President - Marketing Bachelor in Textile from T.I.T., Bhiwani & Diploma in Export-Import ManagementWith 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

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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

Depreciation 230 238 275 296

EBIT 1,158 1,184 1,411 1,560

Interest 38 52 53 56

Other Income 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%

Financials

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Balance Sheet (Standalone) (Rs mn)

(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

Others 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

Other Liabilities - - - -

Debt 58 61 61 61

Shareholder's Equity 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

Financials

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Cash Flow Statement (Standalone)(Rs mn)

(YE March 31st) FY 14 FY 15E FY 16E FY 17E

EBT 1,207 1,483 1,885 2,227

Depreciation 230 238 275 296

Tax paid (386) (450) (566) (668)

Change in Deferred Tax Liability - - - -

Net Working Capital (182) (75) (189) (214)

Other Operating activities (11) - - -

Operating Cash Flow 858 1,196 1,405 1,641

Capital Expenditure (153) (250) (100) (101)

Investments (278) - - -

Investing Cash Flows (430) (250) (100) (101)

Change in Borrowings (2) 4 - -

Change in Equity (24) - (78) -

Dividend paid (184) (258) (330) (390)

Financing Cash Flow (210) (254) (408) (390)

Net Change in Cash 218 692 898 1,150

Closing Cash balance 342 1,034 1,932 3,082

Financials

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Ratio Analysis (%)

(YE March 31st) FY 14 FY 15E FY 16E FY 17E

Fixed Assets Turnover Ratio 2.2 2.2 2.2 2.4

EBITDA Margin 16.5% 16.6% 18.2% 18.5%

Net Profit Margin 12.1% 12.2% 14.3% 15.6%

Average Return on Equity 20.0% 18.2% 19.9% 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

Dividend Yield (%) 2.1% 3.2% 4.0% 4.8%

Financials

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