Data Center And Renewable Energy Projects Will Diversify Future Revenue Streams

Key Takeaways

• Expansion into data centers and Infrastructure-as-a-Service diversification could drive margins and revenue via high-margin digital services and long-term agreements.
  
• Strong EPC order book and anticipated revenue growth from renewable energy positioning could enhance profitability and future revenue.
  
• Delays and regulatory dependencies threaten Techno Electric & Engineering's project timelines and revenue, while supply chain challenges and market shifts may impact profitability.

Catalysts

Provides engineering, procurement, and construction (EPC) services to the power generation, transmission, and distribution sectors in India.

• The completion of Phase 1 of Techno Electric's 40-megawatt build load data center is expected by March '25, with leasing projected in Q1 of the following year, likely boosting future revenues and earnings as the data center becomes operational and begins generating revenue streams.
  
• The significant increase in order intake, with a robust order book of ₹9,700 crores and the expectation to close the year with an ₹10,000+ crores order backlog, suggests strong future revenue growth from the EPC business segment.
  
• The anticipated rise in monthly EPC revenue from ₹125 crores in FY24 to ₹200 crores in FY25 and a target of ₹300 crores per month in FY26 could significantly drive overall revenue and improve profitability through operational scaling and economies of scale.
  
• The shift towards renewable energy and increased governmental budget allocation for renewable projects, coupled with Techno Electric's positioning in the transmission segment for renewable power, has the potential to enhance revenue growth through increased project wins and execution.
  
• The expansion into data centers, including the development of edge data centers in partnership with RailTel and plans to offer Infrastructure-as-a-Service, is expected to diversify revenue streams and potentially increase margins through high-margin digital services offerings and long-term revenue-sharing agreements.

Techno Electric & Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Techno Electric & Engineering's revenue will grow by 40.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.0% today to 11.9% in 3 years time.
• Analysts expect earnings to reach ₹6.3 billion (and earnings per share of ₹53.01) by about March 2028, up from ₹3.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 47.4x on those 2028 earnings, up from 37.4x today. This future PE is greater than the current PE for the IN Construction industry at 19.2x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 15.39%, as per the Simply Wall St company report.

Techno Electric & Engineering Future Earnings Per Share Growth

Risks

• The data center project in Chennai has faced significant delays due to regulatory issues and supply chain disruptions, which might impact revenue projections and timelines.
  
• Revenue from the data center is not expected until the latter half of FY '26, and any further delays in leasing agreements or project completion could affect earnings.
  
• The dependence on regulatory approvals and land acquisition for projects in the transmission sector could delay project execution and reduce projected revenue growth.
  
• The adoption of disruptive technologies in the data center sector, such as those related to AI, may change market dynamics, potentially impacting future margins and revenue growth.
  
• Ongoing supply chain challenges and competition in the transmission bidding process may lead to increased costs or delays in project delivery, impacting net margins and profitability.

Valuation

• The analysts have a consensus price target of ₹1370.0 for Techno Electric & Engineering based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹52.8 billion, earnings will come to ₹6.3 billion, and it would be trading on a PE ratio of 47.4x, assuming you use a discount rate of 15.4%.
• Given the current share price of ₹1032.35, the analyst price target of ₹1370.0 is 24.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.