[T.S.R:18022] Shriram EPC; Sell With A Target Of Rs 90; Debt Woes Persist

SEPC reported revenue and PAT decline of 25% and 56%, respectively,

during the Sep11 quarter, led by weak execution and higher interest

costs. Working capital deteriorated further, from 275 days to 350 days

in Sep11 on account of a significant increase in the outstanding liability

of a large client. We believe execution delays, rising interest costs and

stretched balance sheet are likely to constrain the growth momentum.

We reduce our earning estimates by up to 35% and introduce FY14

forecasts, implying revenue and PAT CAGR of 9% and 3%, respectively,

over FY12‐FY14. We cut our Sep12 TP by c27% to INR97. With a

downside of 13%, we reduce our rating from Hold to Reduce. Early

settlement of dues may lead to re‐rating and is a risk to our forecasts.

PAT down 56%, reflecting weak execution and higher interest cost

Lower‐than‐anticipated billing and execution delays in new projects impacted

SEPC's Sep11 quarter revenues, which declined by 25% y‐o‐y to INR2.2bn. A

stretched working capital cycle and higher interest costs impacted PAT, which

was down 56% y‐o‐y to INR63mn. SEPC continues to maintain good order

traction, with order flow of INR6.2bn during the quarter. The adjusted order

backlog improved by 21% y‐o‐y to 3.3x TTM sales, against 2.1x during Sep10.

Concerns on stretched working capital and gearing

Working capital deteriorated further on account of a significant increase in the

outstanding liability of a large client. The outstanding liability has increased by

over INR2.1bn to INR5.3bn, owing to maturity of contingent liability which had

come on SEPC'S books. The working capital has stretched to over 350 days

during the quarter, from 275 days during Jun11. The company had to take on

additional debt to manage its working capital, leading to increased gearing. The

net debt to equity has increased from 1.7x during Mar11 to 2.5x in Sep11, thus

raising balance sheet concerns. In spite of repeated management attempts,

there have been inordinate delays in settling the outstanding payment issue.

This raises concerns on the possibility of some write‐offs in the future. We have

not assumed any write‐offs in our forecasts.

Reduce EPS estimates by 35%; cut to Reduce with a Sep12 TP of INR97

We believe execution delays, rising interest costs and a stretched balance sheet

are likely to constrain the growth momentum. We reduce our earning

estimates by up to 35% over FY12f‐FY14f, factoring in weak execution (EPC and

windmill segment) and rising interest costs. We also introduce FY14 forecasts,

implying a revenue and PAT CAGR of 9% and 3%, respectively, over FY12‐FY14.

We continue to value SEPC on the sum‐of‐the‐parts method, valuing the stake

in Orient Green Power (OGPL IN, NR) at INR26/share (based on OGPL's current

price of INR11/share) and the EPC business at INR71/share (based on 6x oneyear

forward P/E). We cut our Sep12 TP by c27% to INR97 on account of the

revised estimates. With a downside of 13%, we downgrade the rating on the

stock from Hold to Reduce. Early settlement of dues may lead to a re‐rating and

is a risk to our forecasts.

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