Technocraft Industries

Investment Memo
9th March 2015

This report deals with fundamental analysis of Technocraft Industries and our independent view on
its suitability as an investment opportunity with respect to its return potential and risk involved

9th March 2015

Technocraft Industries Investment Memo

About Technocraft Industries:

Technocraft was established in 1972 by two brothers S.K. Saraf and S.M. Saraf both of whom
are alumni of IIT Bombay.
Technocraft started its business as a manufacturer of drum closures. Drum closures are used
in sealing the top opening of metallic drums. These drums are used for storing chemicals, oil
etc. Most of the drum closures are exported to Middle East, USA and Europe.
From 1972 to 1994, Technocraft continued developing and increasing the production of
drum closures until it became the second largest manufacturer globally.
Due to limited market size of the drum closure industry, the company could not re-deploy
excess cash from operations into the same industry. Subsequently in 1994, Technocraft
acquired Maharashtra Steel Tubes which manufactured steel pipes and began exporting
them to Europe.
Gradually, the company did forward integration of the steel pipes division and started
manufacturing steel scaffolding tubes which were exported to US and Europe. Scaffolding,
also called staging, is a temporary structure used to support people and material in the
construction or repair of buildings and other structures. Although scaffolding can be custom
made from wood and bamboo (frequently used in Southeast Asia), yet globally scaffoldings
are primarily made from metal pipes or tubes. Scaffolding is used in a wide variety of
purposes like construction of buildings, bridges, and erection of boilers in power plants and
petrochemicals.
In 1997, Technocraft further diversified into manufacturing of cotton yarn and set up a
100% export oriented (EOU) yarn unit. In 2003, cotton yarn division was forward integrated
to manufacture garments.
The company also has a small presence in Engineering IT services space which was started as
a separated division called Technocraft Engineering (TE) in 1999. TE provides engineering
design services to automobile, mining equipment, general machinery and other
manufacturing and engineering companies.
Technocraft runs a captive coal based power generation plant of 15MW to cater to its
power requirements, resulting into less dependence on state electricity board and ensuring
continuous supply to all its divisions.
The company's manufacturing facilities are located at Murbad (Thane), which is 50 kms
from JNPT port, which makes the operations efficient as over 90% of the company's revenue
is generated from overseas markets.
Technocraft has a market cap of INR ~750 crores and it reported revenue of ~1,045 crores
and profit after tax of ~89.6 crores in FY14.
Page 1 of 22

9th March 2015

Technocraft Industries Investment Memo

Key Financial Metrics & Trend

Operating Revenue

1,200

YoY Revenue Growth

26.0%

1,000
800
600

24.1%

484

652

574

30%
25%
15%

1,045

-5.9%

35%

20%

455

200

29.2%

13.6%

10.4%

400

YoY
Growth

Revenue Trend (CAGR 2009-14 - 16.6%)

(INR Crores)

809

10%
5%
0%
-5%

-10%
2009

2010

2011

2012

2013

2014

Revenue Split By Segment

Drum Closure
23.1%

16.7%

26.6%

33.5%

27.3%

18.9%

23.0%
2009

Scaffolding

Textile

Others

22.2%

22.5%

26.1%

35.3%

31.1%

25.1%

15.3%

20.6%

23.4%

30.9%

27.2%

25.9%

25.5%

21.7%

2010

2011

2012

2013

2014

EBITDA

34.7%
21.4%
22.2%

EBITDA Margin

(INR Crores)
12.9%

140
120

15.1%

13.1%

160

12.9%

100

10%

7.8%

80

122

60
20

48

14%
12%

9.8%

40

16%

59

135

8%
6%
4%

74

51

2%

0%
2009

2010

2011

2012

Page 2 of 22

2013

2014

9th March 2015

Technocraft Industries Investment Memo

PAT

PAT Margin

(INR Crores)
100.0
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

12%

9.6%
9.2%

10%

8.6%

8%
5.5%
3.9%
43.8

31.3

18.6
2009

74.3

2.3%

2010

4%
2%

15.3

2011

EPS

0%

2012

2013

2014

YoY Growth EPS

30

28.4

386%

450%
400%
350%
300%
250%
200%
150%
100%
50%
0%
-50%
-100%

25
23.6

20
13.9

15

9.9

10

6.5

113%

4.8

5
-40%

2009

2010

6%

89.6

21%

-29%

-51%

2011

2012

Pre-Tax Return on Capital Employed

2013

2014

Pre-Tax Return On Equity

21.3%
18.4%

22.7%
19.7%

15.6%
11.3%
8.3%

8.3%

5.8%

7.7%

6.2%
3.6%

2009

2010

2011

Page 3 of 22

2012

2013

2014

9th March 2015

Technocraft Industries Investment Memo

Key Observations

Revenue growth has been positive (in double digits) in each of the last 5 years except for
2010 when revenue de-grew by ~6%.
o Key Questions: Which segments are driving topline growth?
o What is the sustainable rate of revenue growth going forward?

Operating margins (EBITDA margins) have been volatile and have fluctuated from a low
of 7.8% in FY12 to a high of 15.1% in FY13.
o Key Questions: Why are the operating margins so volatile?
o Are the current margins sustainable?

The bottom line viz. PAT and EPS have exhibited extreme gyrations. PAT and EPS
bottomed out in FY12 and have re-bounded sharply in FY13. The uptrend has continued
in FY14.
o Key Question: What is the sustainable earning power of the business?
o Are we entering at the top of the cycle?

The company has mediocre return ratios historically. Pre-tax return on capital was less
than 10% in four of the last six years. Return on capital has improved to ~ 19-20% in the
last two years.
o Key Questions: How profitable are the different segments of Technocraft?
o What has been the driver of improved profitability of Technocraft in last two years?
o Is the improved profitability sustainable and is it expected to improve further?

De-coding Business Performance By Segment

Drum Closure Segment
Technocraft is the second largest player globally (ex-China) in drum closures commanding
36% market share of the industry which has an estimated size of ~INR 700 cr. Greif is the
largest player commanding over 50% market share. The top two players together command
over 86% of the Global (ex-China) market share thus making the industry a duopoly.
Technocraft caters to all leading steel drum manufacturing companies of the world.
Globally, production of the Steel drums is estimated at about 150 million sets per annum
(Excluding China). Each steel drum requires one set of closure, a precision engineering
product so as to ensure that the liquid inside does not spill out.
Through its patented technology, Technocraft substantially reduced manufacturing costs,
and improved quality of drum closures which has helped it in becoming the second largest
global manufacturer of steel drum closures. Technocraft has 3-global patent products for
manufacturing of GRT Flanges, Octagonal Clinched and Drum Top.
Page 4 of 22

9th March 2015

Technocraft Industries Investment Memo

Illustrative Images of Select Steel Drum Closure Components:

Flange

Plug

Final Assembled Drum

Closure

Competitive Advantage in Drum Closure Industry

The small market size of steel drum closure industry acts as a deterrent to entry of large
global engineering companies as the small profit pool doesnt justify the time and efforts
required to enter the business.

Although manufacturing of steel drum closures is no rocket science, it is a very critical

component of the drum as any leakage or spillage of hazardous chemicals or oil stored
inside the drum due to improper closure can lead to significant liabilities or losses.

Further, the cost of a set of drum closure (~INR 30) is just 3% of the cost of a steel drum
(INR ~900). The combination of low cost and high criticality of the drum closures results
in two distinct competitive advantages.
o Steel drum manufacturers dont switch to cheaper drum closure suppliers as the cost
of drum closure is pretty insignificant but the potential risks and liabilities arising out
of improper drum closures can be very high.
o The stickiness of the customer enables existing suppliers like Technocraft to easily
pass on any cost pressures to the steel drum manufacturers for whom the cost of
closures is insignificant.

The unique competitive advantages in the drum closures business is reflected in the
strong financials of drum closure segment of Technocraft which boasts of EBITDA
margins of ~30% and pre-tax return on capital of ~50-60%

Drum closures business has been a cash cow for Technocraft and we expect it to retain
its wonderful economics going forward due to the inherent competitive advantages.

It remains the best asset by a wide margin among all the businesses of Technocraft.

Page 5 of 22

9th March 2015

Technocraft Industries Investment Memo

Key Financials of Drum Closures Segment

Drum Closures Revenue (INR Crores)

125.0

140.8

2009

2010

171.1

2011

2012

EBITDA

(INR Crores)
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0

165.5

30.0%
28.5%

27.3%

42.2

45.2

2009

2010

2011

56.7

2012

Pre-Tax Return on Capital Employed

70.0%

28.0%

29.8%

26.7%

60.0%

227.8

2013

2014

EBITDA Margin %

33.1%

35.6

208.9

31.2%

65.2

2013

34.9%

79.4

2014

EBIT Margin
32.5%
28.6%

25%

40.0%
30.0%

35%
30%

24.1%

50.0%

40%
35%
30%
25%
20%
15%
10%
5%
0%

20%
61.6%
44.8%

20.0%

42.0%

53.2%

57.2%

62.2%

15%
10%

10.0%

5%

0.0%

0%
2009

2010

2011

Page 6 of 22

2012

2013

2014

9th March 2015

Technocraft Industries Investment Memo

Key Observations

The segment has exhibited a steady revenue growth of ~13%.

o Revenue growth led by strong realization growth of 10% CAGR and volume growth of
3% CAGR exhibiting pricing power of Technocraft.
EBITDA margins have been in the range of ~27%-35%. Margins are a function of the steel
prices which is the key raw material.
FY14 EBITDA margins are the highest reported in the last 6 years as steel prices have
been at record lows due to global overcapacity and fall in demand especially from China
leading to excess supply scenario.
Margins have also been aided by INR depreciation as more than 95% of revenues come
from exports.

Future Plan and Outlook

Steel drum closure industry expected to grow at 8-10% over next five years backed by
growing demand from Oil & Gas, Chemical, Pharma and Food & Beverage industries.
Technocraft expects China which is one of the top-three markets for steel drums to be a
key growth driver for steel drum closures in future.
In order to cater to demand from China, Technocraft plans to increase its drum closure
capacity in China by 20%, from 6mn to 7.2mn sets in FY15, with capex of ~INR 60m.
o Technocraft operates its drum closure and scaffolding business in China through its
subsidiary, Anhui Reliable.
o It is important to note that Technocraft has not been able to make significant inroads
into China in spite of being present in the market since 2007 due to detrimental duty
structure which is aimed at encouraging domestic Chinese manufacturers.
o Technocraft has managed to grab only a ~6% market share in Chinese drum closures
in spite of being in the market for ~7-8 years.
In order to de-risk its steel drum closure business and cater to rising demand for plastics,
Technocraft has also ventured into manufacturing of plastic closures for small metal and
plastic containers majorly used in the Oil & Gas industry.
Technocraft is also looking at inorganic expansion to establish a significant presence in
plastic closures segment.
The company expects to generate ~40 crores of revenues form plastic closures by FY16.
Technocraft is also eyeing acquisitions in the packaging sector to vertically integrate the
drum closures business by entering into manufacturing of drums.

Page 7 of 22

9th March 2015

Technocraft Industries Investment Memo

Scaffolding Segment
Scaffolding is a temporary structure used to support people and material in the construction
or repair of buildings and other large structures. It is usually a modular system of metal
pipes or tubes, although it can be made from other materials also.
Technocraft is the largest scaffolding exporter from India. It manufactures scaffoldings as
per the certifications/standards set by countries like US, Germany and UK where there is a
huge demand for scaffoldings. Scaffolding segment is growing mainly on the back of the
strong demand from the international infrastructure markets.
Technocrafts Scaffolding segment also comprises of Formwork and Tower business.
Formwork refers to a mould made up of steel or aluminium into which concrete or similar
materials are poured to give them the the desired shape for final use. Technocraft has
started manufacturing sophisticated engineered formwork systems for building,
construction and infrastructure projects in India.
Illustrative Images of Engineered Formworks Used in Flyover Construction

The tower business was started in 2010 to manufacture and supply towers for
telecommunications, wind-turbines, power transmission & distribution, and other
industries.
Currently, North American market contributes 60% of total scaffolding revenues, South
American market contributes 20%, and Australian market contributes 15%. Technocraft
plans to increase its market share in South American market by expanding aggressively in
relatively larger Latin American markets of Brazil, Argentina, Venezuela etc.
Scaffolding segment has been a key driver of consolidated topline and bottom line growth
of Technocraft. Scaffolding revenues have grown at a CAGR of ~36% in the last three years
and EBIT has increased at a CAGR of ~82% in the same period.

Page 8 of 22

9th March 2015

Technocraft Industries Investment Memo

Key Financials of Scaffolding Segment

Scaffolding Revenue (INR Crores)
250

46.3%

YoY Growth %

41.1%

200

21.6%
7.8%

150
86.1

100
148.6
50

-42.0%

191.7

233.2

135.9
92.9

0
2009

2010

2011

EBITDA

2012

2013

13.7%
10.1%

25.0

8.8%

20.0
15.0

2014

EBITDA Margin %

35.0
30.0

5.8%

32.0

8.7

8.2

2009

2010

2011

13.8

14.2

2012

2013

8%
6%
4%
2%

0.0

0%

Pre-Tax Return on Capital Employed

18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%

14%
10%

7.4%

8.7

16%
12%

10.1%

10.0
5.0

60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
-40%
-50%

2014

EBIT Margin

12.2%

14%
12%

5.7%

5.1%

4.2%

9.9%
5.3%
2009

6.3%
2010

10%

7.5%

5.6%

8%
15.7%

4%

8.0%

2%

3.5%
2011

Page 9 of 22

6%

0%
2012

2013

2014

9th March 2015

Technocraft Industries Investment Memo

Key Observations:

Scaffolding segment has shown strong growth in the last three years. Subsequently,
consolidated revenues of Technocraft have also exhibited similar trend.
The margins are volatile as they are a function of underlying steel prices.
It is important to note that Technocraft doesnt possess the same pricing power in
scaffolding business as enjoyed in drum closures leading to volatile margins.
The utilization level of scaffolding division has increased steadily from ~50% in FY11 to
~80% in FY14
EBITDA margins have expanded from 8.8% in FY11 to 13.7% in FY14 due to a
combination of improving utilization, depreciating rupee and record low steel prices.
We feel that there is a limited opportunity of further margin expansion in scaffolding
business as the rupee has pretty much stabilized at ~60-61 levels and steel prices are
trading close to 5 year-lows.

Global Hot Rolled Coil (HRC) Steel Prices Prices close to 5 year lows

We believe there is a higher probability of downside risk to scaffolding margins. The

current margins may be nearer to peak.

Scaffolding business is much more competitive than drum closures with a number of
organized as well as unorganized players. The same is vindicated by mediocre pre-tax
return on capital employed which has been consistently below 10% except in FY14.

Page 10 of 22

9th March 2015

Technocraft Industries Investment Memo

Future Plan and Outlook

Technocraft expects the scaffolding segment to grow at ~25% for the next three years.
o Growth to be driven by expansion in the Latin America scaffolding market.
o Focus on domestic engineering formwork segment to leverage on the revival of
infrastructure and construction projects in India.
Become a complete scaffolding solutions company in the next 3 years.

Textile Segment
Technocraft is involved in manufacturing of cotton yarn as well as garments. ~90% of cotton
yarn is exported. Key export markets include Europe, Asia and Latin America. Garments are
mostly sold in the domestic market and only 20% were exported in FY14.
Key Financials of Textile Segment
Textile Revenue (INR Crores)

144.8

152.5

2009

2010

214.5

205.3

205.6

224.5

2011

2012

2013

2014

Revenue Split By Segment

Cotton Yarn

Garments

13.9%

10.8%

16.1%

15.5%

11.2%

9.4%

86.1%

89.2%

83.9%

84.5%

88.8%

90.6%

2009

2010

2011

2012

2013

2014

Page 11 of 22

9th March 2015

Technocraft Industries Investment Memo

Textile EBITDA (INR Crores)

30.0

10.6%

Textile EBITDA Margin

13.2%

14%

25.0

12%

9.6%

20.0

10%

7.1%

15.0

8%

28.3

10.0

2.6%

5.0

16.2
-1.2%

2%
0%

-5.0
2009

4%

14.5

3.8

0.0

6%

21.6

2010

2011

-2.4
2012

-2%
2013

2014

EBIT Margin

7.3%

6.4%
2.8%

2.2%
-1.4%
-6.8%

2009

2010

2011

2012

2013

2014

Pre-Tax Return on Capital Employed

2.0%
-1.5%

2009

10.9%

8.6%

4.5%
-11.1%

2010

2011

2012

Page 12 of 22

2013

2014

9th March 2015

Technocraft Industries Investment Memo

Key Observations:

Revenue has pretty much been flat between FY11 and FY14.
The fortunes of the textile business are dependent on the cotton prices which is the key
raw material. Expectedly, the operating margins have been extremely volatile.
Technocraft plays in more commoditized segment of cotton yarn as indicated by
significantly lower EBITDA margins compared to peers.
EBITDA Margins vs. Peers
35%

Vardhman Textiles

Trident

Ambika Cotton

Technocraft

30%
25%
20%
15%
10%
5%
0%
-5%

FY11

FY12

FY13

FY14

Combination of low margins and high capital intensity of textile business has resulted in
mediocre return ratios for the textile segment.
Overall, the textile business has been a drag on Technocraft business in terms of
margins, return ratios and also valuations

Valuation of Technocraft vs. Peers: Textile business dragging valuations down

LTM EV / EBITDA

Steel Tubes & Pipes Players

10.5x

Textile Players

13.3x
7.4x

7.0x

5.4x

Page 13 of 22

5.0x

7.8x
3.9x

5.4x

9th March 2015

Technocraft Industries Investment Memo

Technocraft trades at 5.4x EV/EBITDA which is at a significant discount to steel pipes and
tubes players who trade at ~7-10x EV / EBITDA
We believe that textile business of Technocraft and diversified business operations with
varying economics is the key reason for the discount given to Technocraft by the market.
We believe that the discount will persist and Technocraft will trade closer to its textile
peers rather than steel tubes and pipes manufacturing unless it decides to hive off its
textile business.
De-merger of the textile business can lead to re-rating. The company had put up the
textile business for sale in July-2011 but could not find buyer at a suitable price.
As of now management has not shown any intention to exit the business. Moreover, the
management has recently stated its plan to modernize the facility for garments which
indicates that they may not be thinking of exiting the business any time soon

Current margins may not be sustainable: Cotton prices at 3 year lows

Cotton prices have been subdued for the past two years due to excess supply and a
cotton policy change by China wherein it has decided to fulfill its cotton requirements
domestically without relying on imports. China is one of the largest importer of cotton
worldwide.
Soft cotton prices have resulted in comparatively better EBITDA margins for Technocraft
as seen in FY13 and FY14.
According to India Ratings, cotton prices are expected to remain weak in FY16 also due
to weak global demand especially from China.
Although, cotton prices may fall further, we believe that it is not prudent to bet on the
same considering that cotton prices are at 3 year lows currently.

Global Cotton Prices - Cotlook Index (US Cents per lb.)

Domestic Cotton Prices - S-6 Lint Prices ( INR Per Kg)

250
200
150
100
50
0
Aug-08

May-09

Jan-10

Sep-10

Jun-11

Feb-12

Page 14 of 22

Oct-12

Jul-13

Mar-14

Nov-14

9th March 2015

Technocraft Industries Investment Memo

Other Segments:
Other segment reflects the financials of all the subsidiaries and JVs of Technocraft domestic as well as overseas irrespective of the segment in which they operate. Therefore,
looking at overall financials doesnt make much sense.
Subsidiaries and JV's

Status

Country

Description

Technosoft Engineering Projects

Technocraft Tabla Formwork
Shreyan Infra & Power LLP
Technocraft Trading Poland
Technocraft International Ltd.UK
Technocraft Australia Pty Limited
Anhui Reliable Steel Tech. China
Impact Engineering Solutions Inc.
Swift Engineering Inc.
Swift Projects Inc.

Subsidiary
JV
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Step Down Subsidiary
Step Down Subsidiary
Step Down Subsidiary

India
India
India
Poland
United Kingdom
Australia
China
U.S.A.
Canada
U.S.A.

Engg / IT services
Scaffolding / Formwork
Power
Marketing Office
Marketing Office
Marketing Office
Drum Closures and Scaffolding
Engg / IT services
Engg / IT services
Engg / IT services

% Ownership
(As of Mar-14)
90.3%
65.0%
90.0%
100.0%
100.0%
100.0%
100.0%
100.0%
59.0%
100.0%

Engineering / IT Services Division

Technosoft Engineering Projects (TE) provides engineering design services to various
engineering / manufacturing companies. It offers engineering services in 5 business lines viz.
Engineering, Consulting, Innovation, Resources and Content. It has a strong team of over
250 engineers and designers located worldwide.
During the financial year 2013-14, TE acquired a controlling stake in Swift Engineering Inc., a
Company headquartered in Calgary, Canada, which is in the business of providing
Engineering, Procurement and Construction Management services (EPCM) services,
specializing in oil & gas sector, process studies, piping, mechanical, electrical, civil/ structural
designing and procurement support.
Swift Engineerings operations are synergistic to the activities of Technosoft Engineering,
which provides engineering design services to automotive, mining equipment, general
machinery, oil & gas, structural engineering and other sectors. TEs primary engineering
designing center is in Mumbai and it has subsidiaries in Milwaukee, USA and Manchester,
UK. The acquisition of Swift Engineering has made the services of TE more broad based and
cover a larger international geographical area. According to the management Oil and Gas
segment in Canada and US is likely to show a strong growth over next 3 to 5 years due to oil
and gas finds in Alberta, Canada and in southern US belt.

The Engineering / IT services division clocked revenues of ~73 crores in FY14 (7% of
consolidated revenues)
PBT was 6.6 crores (~5% of consolidated PBT) and PAT was 4.9 crores (~4% of
consolidated PAT)
Management has expressed its intention to look at synergistic acquisitions in
engineering services space to expand its portfolio of services.

Page 15 of 22

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Technocraft Industries Investment Memo

Year Ending March; INR Lacs
Subsidiary Financials
Technosoft Engineering Projects Limited
Capital
Reserve
Total Assets
Total Liabilities
Investment included in Total Assets
Turnover
PBT
Tax
PAT
Revenue as % Total Consolidated Revenue
PBT Margin
Asset Turnover
Leverage
Pre-Tax ROE

Year Ending March; INR Lacs

Swift Engineering Inc
Capital
Reserve
Total Assets
Total Liabilities
Investment included in Total Assets
Turnover
PBT
Tax
PAT
Revenue as % Total Consolidated Revenue
PBT Margin
Asset Turnover
Leverage
Pre-Tax ROE

2011

2012

55.3
1,613.2
2,079.3
410.8
822.0
1,390.6
248.5
69.3
177.7
2.4%
17.9%
0.7x
1.2x
14.9%

2011

55.3
1,811.3
2,450.0
2,450.0
789.8
1,331.1
260.3
62.1
198.1
2.0%
19.6%
0.5x
1.3x
13.9%

2012

2013

55.3
1,998.6
2,464.9
2,464.9
789.8
1,836.8
251.7
64.7
187.0
2.3%
13.7%
0.7x
1.2x
12.3%

2013

2014

55.3
2,408.1
3,816.1
1,352.8
0.0
4,934.0
605.2
169.8
435.4
4.7%
12.3%
1.3x
1.5x
24.6%

2014
0.1
544.0
824.1
280.0
0.0
2,376.1
55.0
0.0
55.0
2.3%
2.3%
2.9x
1.5x
10.1%

Total Engineering Services / IT Financials (Technosoft Engg + Swift)

Capital
Reserve
Total Assets
Total Liabilities
Investment included in Total Assets
Turnover
PBT
Tax
PAT
Revenue as % Total Consolidated Revenue
PBT Margin
Asset Turnover
Leverage
Pre-Tax ROE

Page 16 of 22

FY14
55.4
2,952.1
4,640.2
1,632.8
0.0
7,310.1
660.2
169.8
490.4
7.0%
9.0%
1.6x
1.5x
22.0%

9th March 2015

Technocraft Industries Investment Memo

Summary of Opportunity

Technocraft is a diversified engineering company operating in four different categories

of businesses viz. drum closures, scaffolding, textile and engineering / IT services.
Drum closures segment is by far the best asset with EBITDA margins of ~30% and pretax return on capital of ~60%. Although, drum closures is the most profitable segment, it
suffers from limited growth opportunities.
Scaffolding business is the growth engine but has below average economics and return
on capital.
Textile division suffers from low margins and inadequate return on capital. It is a drag
on the companys valuations.
Engineering services business is still in a nascent stage Current scale wont move the
needle, management planning to grow the segment inorganically through acquisitions as
it has done in the past.

Key Risks

Increase in steel prices: Steel is the key raw material used in manufacturing of drum
closures and scaffoldings. Although, Technocraft has the ability to pass on the rise in
input costs in drum closures, the same is not true for the more competitive scaffolding
business. As seen previously, margins of scaffoldings business have been very volatile in
the past and can fall if there is any rise in steel prices. The current steel prices are at 5
year lows and there is a higher probability of steel prices going up rather than down in
the next few years.

Increase in cotton prices: The company's textile (yarn) business operates in a highly
competitive environment and any increase in cotton prices could impact profitability.
The textile division's profitability has witnessed significant volatility in the past based on
the movement in cotton & yarn prices. The cotton prices are currently trading at 3 year
lows.

Lack of sound capital allocation strategy: Technocrafts success in drum closure

business prompted the management to utilize excess cash flows to expand in new
businesses. The Company subsequently ventured into steel tubes (now scaffoldings),
textiles and Engineering services. While it has achieved reasonable success in
scaffoldings and IT, its performance in the textiles division has been disappointing. The
company has cash & equivalents of INR 180 crores as of Mar-14 which is close to 21% of
total assets. Further, as cash flows from drum closure division continue to pour in, the
cash position of the company will continue to increase. The management is planning to
utilize its cash by venturing into new businesses or by acquiring a company. Any new
venture or acquisition in an unrelated field having poor business economics is a risk.

Page 17 of 22

9th March 2015

Technocraft Industries Investment Memo

Dependence on global demand: Technocraft has an export oriented business model

with sales outside of India accounting for over 90%. Thus the company's growth depends
upon the demand in International markets specially that in US and Europe. Any
slowdown in these developed economies could have a bearing on the scaffolding, IT and
textile divisions of the company.

Forex Risk: Any appreciation in INR will hurt the margins of Technocraft as most of its
revenues come from exports.

Valuation & Recommendation

At the current price of INR 237 per share, Technocraft trades at ~5.4x LTM EBITDAx and
10.1x LTM PE.
Current valuations are at a discount to the pure play steel tubes and pipes players
(closest peers to Technocrafts drum closure and scaffolding business) who trade at a
median LTM EBITDAx of 8.9x and median LTM PE of 15.3x.
The textile business of Technocraft is a drag on its valuations. Technocrafts valuation
reflect those of textile companies rather than speciality pipe companies.
We dont think Technocraft will get re-rated unless it divests its textile business. In 2011
they had initiated the process to sell the textile business but could not find a buyer at
the right price. The management has shown no intention to divest the same off late.
Although current valuations of Technocraft are not expensive, we believe the big
question is to understand how future margins and thus profitability will look like.
Considering the fact that rupee has stabilized after depreciating sharply in the last 2
years, steel and cotton prices are at recent year lows makes us uncomfortable in taking a
position in the company.
We believe there is a higher probability of margin contraction as opposed to expansion.
All the other businesses except drum closures are very sensitive to raw material prices
and dont possess any pricing power leading to poor economics as seen in historical
financials.
Overall, we would avoid taking a position in the stock due to a lack of conviction in any
of the businesses of Technocraft except drum closures.

Page 18 of 22

9th March 2015

Technocraft Industries Investment Memo

Appendix
Year Ending March; ` Crores
Balance Sheet
Shareholder's Equity
Share Capital
Reserves & Surplus
Minority Interest
Shareholder's Equity
Non-Current Liabilities
Long Term Borrowings
Deferred Tax Liabilities
Long Term Provisions
Total Non Current Liabilities
Current Liabilities
Short Term Borrowings
Current Maturity of LT Debt
Trade Payables
Other Current Liabilities
Short Term Provisions
Total Current Liabilities
Total Liabilities
Total Equity & Liabilities
Non-Current Assets
Tangible Assets
Capital Work In Progress
Intangible Assets
Goodwill on Consolidation
Non Current Investments
Deferred Tax Assets
Long Term Loans and Advances
Other Non Current Assets
Total Non-Current Assets
Current Assets
Current Investment
Inventories
Trade Receivables
Cash and Cash Equivalents
Short Term Loans and Advances
Other Current Assets
Miscellaneous Expenditure
Total Current Assets
Total Assets

2009

2010

2011

2012

2013

2014

31.5
320.8
2.0
354.3

31.5
355.1
2.1
388.8

31.5
390.6
2.1
424.2

31.5
405.8
2.0
439.3

31.5
468.4
2.2
502.1

31.5
536.9
4.8
573.2

37.5
0.3
0.0
37.8

27.3
0.0
0.0
27.3

19.0
0.0
0.9
19.9

8.3
0.4
1.0
9.7

6.1
0.4
1.8
8.2

5.6
0.5
5.5
11.6

70.6
16.6
28.2
16.0
80.6
211.9
249.7

113.5
14.6
35.8
20.1
88.9
272.8
300.1

148.1
3.3
46.5
33.3
5.0
236.2
256.1

93.4
12.3
38.8
44.2
7.3
196.1
205.8

121.1
3.7
51.9
43.0
12.0
231.7
239.9

150.9
3.8
69.2
43.8
24.0
291.7
303.3

604.0

688.9

680.4

645.1

742.0

876.5

129.2
45.9
0.0
0.0
74.0
1.0
0.0
0.0
250.1

135.8
54.5
0.0
0.0
62.0
2.6
0.0
0.0
254.9

168.9
6.6
4.3
0.0
70.6
3.7
2.5
10.0
266.6

162.0
1.7
5.2
0.0
47.6
6.2
1.7
12.3
236.7

146.4
0.4
3.3
0.0
64.1
7.5
4.6
3.6
229.8

141.7
0.3
3.2
5.2
67.9
8.5
5.7
7.8
240.3

0.0
94.7
85.9
34.7
0.0
138.6
0.0
354.0

0.0
106.0
119.2
61.5
0.0
146.8
0.5
434.0

0.0
169.3
134.5
61.0
1.2
47.8
0.0
413.8

0.0
118.6
151.2
22.3
77.6
38.8
0.0
408.4

58.3
169.9
217.6
19.4
3.2
43.8
0.0
512.2

78.0
179.4
279.2
42.7
1.7
55.2
0.0
636.2

604.0

688.9

680.4

645.1

742.0

876.5

Page 19 of 22

9th March 2015

Technocraft Industries Investment Memo

Year Ending March; ` Crores
Income Statement
Total Operating Revenue
Cost of Raw Materials & Components
Purchase Of Traded Goods
(Increase) / Decrease in Inventories
Cost of Goods Sold
Gross Profit
Employee Benefit Expense
Other Expenses
EBITDA
Depreciation & Amortisation
EBIT
Interest Expense
Interest Income
Other Non-Operating Income
Exceptional Items
Profit Before Tax
Total Tax Expense
Effective Tax Rate
Profit After Tax Before Minority
Minority Interest
Profit After Tax After Minority
Shares Outstanding (Cr)
Earnings Per Share

2009

2010

2011

2012

2013

2014

9M 2015

484.2
244.1
32.7
5.1
282.0
202.3
36.3
118.3
47.7
25.9
21.8
14.7
0.0
22.1
0.1
29.3
8.8

455.5
203.2
40.2
8.5
251.9
203.6
33.5
110.6
59.5
24.0
35.5
7.0
0.0
32.1
0.2
60.8
14.9

574.0
284.6
77.3
(32.0)
329.9
244.1
40.5
129.4
74.2
38.2
36.0
8.7
5.3
15.6
(0.1)
48.1
14.8

651.9
323.1
61.7
20.7
405.6
246.4
47.8
148.0
50.6
32.7
17.9
11.4
5.8
15.3
(0.3)
27.2
12.0

808.8 1,044.9
345.6
427.2
119.0
196.1
(6.5)
(2.4)
458.2 621.0
350.6 423.9
53.0
74.1
175.2
214.7
122.4 135.1
30.9
27.1
91.5 108.0
8.1
4.6
2.9
3.8
20.6
23.1
0.0
0.0
107.0 130.3
32.7
40.6

29.9%

24.6%

30.7%

43.9%

30.6%

31.2%

0.4

0.3

20.5
1.9
18.6
3.15
6.5

45.9
2.0
43.8
3.15
13.9

33.3
2.0
31.3
3.15
9.9

15.3
0.0
15.3
3.15
4.8

74.3
0.0
74.3
3.15
23.6

89.6
0.0
89.6
3.15
28.4

57.3
0.0
57.3
3.2
18.2

65.4
0.0
65.4
3.2
20.7

9M 2015

577.2
284.5
67.9
(30.6)
321.7
255.6
32.9
120.7
102.1
15.7
86.4
4.4
0.0
8.3
(1.6)
88.6
31.4

9M 2014

516.7
255.5
28.3
(8.2)
275.7
241.0
29.4
115.4
96.2
17.0
79.2
3.1
0.0
18.8
1.2
96.2
30.8

Year Ending March

2009

2010

2011

2012

2013

2014

Margin Analysis
Gross Margin
EBITDA
EBIT
Profit Before Tax
Profit After Tax After Minority

41.8%
9.8%
4.5%
6.1%
3.9%

44.7%
13.1%
7.8%
13.3%
9.6%

42.5%
12.9%
6.3%
8.4%
5.5%

37.8%
7.8%
2.7%
4.2%
2.3%

43.3%
15.1%
11.3%
13.2%
9.2%

40.6%
12.9%
10.3%
12.5%
8.6%

44.3%
17.7%
15.0%
15.4%
9.9%

46.6%
18.6%
15.3%
18.6%
12.7%

Cost Analysis as % Revenue

Cost of Goods Sold
Employee Benefit Expense
Other Expenses
Depreciation & Amortisation
Interest Expense
Other Non-Operating Income
Total Tax Expense

58.2%
7.5%
24.4%
5.3%
3.0%
4.6%
1.8%

55.3%
7.4%
24.3%
5.3%
1.5%
7.0%
3.3%

57.5%
7.1%
22.5%
6.6%
1.5%
2.7%
2.6%

62.2%
7.3%
22.7%
5.0%
1.8%
2.4%
1.8%

56.7%
6.5%
21.7%
3.8%
1.0%
2.6%
4.0%

59.4%
7.1%
20.6%
2.6%
0.4%
2.2%
3.9%

55.7%
5.7%
20.9%
2.7%
0.8%
1.4%
5.4%

53.4%
5.7%
22.3%
3.3%
0.6%
3.6%
6.0%

Year Ending March

2009

2010

2011

2012

2013

9M 2014

2014

Du Pont Analysis
PBT Margin
PAT Margin
Asset Turnover
Leverage
Pre-Tax Return On Equity
Post-Tax Return On Equity

6.1%
3.9%
0.80x
1.70x
8.3%
5.3%

13.3%
9.6%
0.66x
1.77x
15.6%
11.3%

8.4%
5.5%
0.84x
1.60x
11.3%
7.4%

4.2%
2.3%
1.01x
1.47x
6.2%
3.5%

13.2%
9.2%
1.09x
1.48x
21.3%
14.8%

12.5%
8.6%
1.19x
1.53x
22.7%
15.6%

EBIT Margin
Capital Employed Turnover
Pre-Tax Return on Capital Employed

4.5%
1.3x
5.8%

7.8%
1.1x
8.3%

6.3%
1.2x
7.7%

2.7%
1.3x
3.6%

11.3%
1.6x
18.4%

10.3%
1.9x
19.7%

Page 20 of 22

9th March 2015

Technocraft Industries Investment Memo

Year Ending March; ` Crores

2009

Cash Flow Statement

Cash Flow From Operating Activities
Profit Before Tax
Adjustment For Depreciation & Amortization
Adjustment For Provision (Written Back) / Created
Adjustment For Non Operating (Income) / Expense
Pre-Tax Cash Flow From Operations
Adustment For Working Capital Changes
Direct Taxes Paid
Gain on Exchange (Net)
Net Cash Flow From Operations

2010

2011

2012

2013

2014

29.3
25.9
0.0
(4.8)
50.4
43.4
(5.5)
3.2
91.5

60.8
24.0
0.0
(10.3)
74.5
(53.0)
(2.6)
(1.2)
17.8

48.1
38.1
0.0
(7.6)
78.7
(47.8)
(16.4)
1.9
16.4

27.2
32.7
0.0
(7.4)
52.6
(22.9)
(7.8)
6.0
27.9

107.0
30.9
0.0
(2.9)
135.0
(53.0)
(27.9)
(1.6)
52.4

130.3
27.1
0.0
(22.2)
135.2
(59.0)
(46.4)
4.8
34.5

Cash Flow From Investing Activities

Capex
Divestment of Assets
Net (Investment) / Divestment In Financial Assets
Income From Financial Assets
Net Cash Flow From Investing

(56.2)
0.1
14.6
3.1
(38.4)

(39.7)
1.6
14.1
7.0
(17.0)

(24.8)
0.9
(7.0)
8.5
(22.4)

(24.7)
3.0
25.5
8.5
12.3

(12.4)
0.3
(70.6)
6.3
(76.3)

(22.9)
3.5
(14.1)
7.2
(26.2)

Cash Flow From Financing Activities

Total Borrowings Net of Repayment
Interest Paid
Dividend Paid Including Distribution Tax
Other Items
Net Cash Flow From Financing

(24.5)
(10.2)
(3.7)
0.0
(38.4)

32.6
(4.3)
(1.8)
(0.5)
25.9

28.1
(7.1)
(5.5)
0.0
15.5

(65.4)
(9.6)
(3.7)
0.0
(78.7)

25.5
(6.2)
(7.3)
0.0
12.0

29.3
(2.9)
(7.4)
0.0
19.1

14.6
20.1
(0.0)
34.7

26.8
34.7
0.0
61.5

9.6
61.5
0.0
71.0

(38.5)
71.0
0.0
32.6

(11.9)
32.6
0.0
20.7

27.4
20.7
0.0
48.1

Change In Cash & Equivalents

Net Increase In Cash & Cash Equivalents
Cash and Cash Equivalents at the beginning of the year
Effect of Foreign Exchange rate change
Cash & Cash Equivalents At End Of The Year

Year Ending March

2009

Key Cash Flow Metrics

Cash Flow From Operations (` Crores)
Capital Expenditure (` Crores)
Free Cash Flow (` Crores)
CFO as % Operating Revenue
CFO as % EBITDA
FCF As % Operating Revenue
FCF As % EBITDA

91.5
(56.2)
35.3
18.9%
192.0%
7.3%
74.0%

Page 21 of 22

2010

17.8
(39.7)
(21.9)
3.9%
30.0%
(4.8%)
(36.8%)

2011

16.4
(24.8)
(8.4)
2.9%
22.1%
(1.5%)
(11.3%)

2012

27.9
(24.7)
3.2
4.3%
55.2%
0.5%
6.4%

2013

52.4
(12.4)
40.0
6.5%
42.8%
4.9%
32.7%

2014

34.5
(22.9)
11.6
3.3%
25.6%
1.1%
8.6%

9th March 2015

Technocraft Industries Investment Memo

Year Ending March
Working Capital Efficiency
Inventory Turnover
Recievables Turnover
Payables Turnover
Inventory Days
Receivables Days
Payable Days
Cash Conversion Cycle (Days)

Working Capital Trend

Inventory
COGS
Sales
Receivables
Payables
Recievables as % Revenue
Payables as % COGS
Inventory as % Revenues

2009

2010

2011

2012

2013

2014

3.0x
5.6x
10.0x
122.6
64.7
36.5
150.8

2.4x
3.8x
7.0x
153.5
95.5
51.8
197.2

1.9x
4.3x
7.1x
187.3
85.5
51.5
221.4

3.4x
4.3x
10.4x
106.7
84.7
35.0
156.4

2.7x
3.7x
8.8x
135.4
98.2
41.3
192.3

3.5x
3.7x
9.0x
105.4
97.5
40.7
162.3

94.7
282.0
484.2
85.9
28.2
17.7%
10.0%
19.6%

106.0
251.9
455.5
119.2
35.8
26.2%
14.2%
23.3%

169.3
329.9
574.0
134.5
46.5
23.4%
14.1%
29.5%

118.6
405.6
651.9
151.2
38.8
23.2%
9.6%
18.2%

169.9
458.2
808.8
217.6
51.9
26.9%
11.3%
21.0%

179.4
621.0
1,044.9
279.2
69.2
26.7%
11.1%
17.2%

Page 22 of 22