Technocraft - Great Future Ahead

Technocraft Industries (India)                                                  CMP  - 175

Company Background & Management

Technocraft is a diversified business company with a wide range of products was established in 1972 by two brothers Mr. S.K. Saraf and Mr. S.M. Saraf. The brothers, who are IIT Mumbai Graduates & Technologists,  had  started with the aim of manufacturing high precision and sophisticated products, mainly for discerning world markets. Technocraft has four business verticals—drum closures, engineering services, scaffolding and textiles. Technocraft has emerged as a niche player, with efficient operation  and second largest global market leader in drum closures and scaffolding business. It has sizable operations in textile and engineering services. Several value added products  have been  recently added in different verticals like  higher-margin lacquered products for drum closures, computer software and information technology in engineering service business . As a group, it has been dominant in precision engineering, and forward integrated its tube division by producing a high precision Scaffolding system and Formwork for infrastructure-construction sector. The cotton-yarn division has also forward integrated operations, producing and exporting garments. The Company has a coal based captive power generation plant of 15MW to cater to its power requirements, resulting into less dependence on state electricity board and surety of continuous power supply to all its divisions. It has six manufacturing plants in India (at five places near Mumbai) and one in China, with exports to more than 80 countries. Technocraft has been constantly upgrading its capacity & improving its standards to meet the ever increasing expectations of its customers. The strategy adopted by the company comprises of growth through constant innovation, enter new categories, and focus both on domestic as well as foreign markets.

Drum Closures Division 

Technocraft is the world second-largest manufacturer of drum closures with an enviable 40% market share (Grief Inc. USA at top with 50% world market share). With such dominance in the existing markets and efforts to penetrate newer markets, it reports steady and consistent growth in this high-margin cash-rich business. To cater to increasing demand for drum closures in China, it has expansion through its subsidiary " Anhui Reliable" in China. The China market is one of the top-three markets for steel drums, with great growth potential. The quality of some large producers in China such as Nanjing Guli has not been approved internationally. The globally-accepted technology utilized by Technocraft helps it capture market share very easily.  Technocraft has three globally patented products  GRT flanges, octagonal clinches and drum tops.  Its patented technology and state of-the-art manufacturing, coupled with low labour costs, would help it gain market share and give cost-competitive advantage over its local competitors. Its sound technical expertise and infrastructure would enable it to tap the lucrative China market more efficiently. This would show in future revenue. I believe the company’s China operations will drive growth in drum closures and help it expand Chinese market share from 6% to 20% in 2016. Company has started manufacturing fast-growing plastic drum closures for small metal and plastic containers mostly used in oil, gas, chemical and pharma industries. This would help it de-risk its steel drum-closure business. Technocraft's drum closure division commands EBITDA margins of 30% along with an ROCE of over 70% thereby generating robust free cash flows.

Scaffolding Division 

Technocraft has taken significant strides in the global scaffolding market. Technocraft is the largest scaffolding exporter from India and top three in the world. It manufactures scaffoldings as per the certifications/standards set by countries like US, Germany and UK where there is a huge demand for scaffoldings. Technocraft provides end-to-end solutions with all components and an entire system and market leader with 40-45% market share in North America and 50% in Australia. This is a quality-driven business requiring certifications in different countries i.e. in Germany DIN issued by SIGMA, in Australia work cover certificate, in the USA a certificate from a welding society, etc. Such certificates reassure customers in all countries and add value to products. Most clients in developed countries prefer producers with such certificates. As Technocraft possesses all such certifications, it is easy to capture any opportunities in the market. Earlier company was focused on 100% export driven external demand of scaffolding.  Now with mounting demand in the domestic market especially in infrastructure and construction field, the company is focusing on capturing opportunities in India. Looking at the Indian government’s focus on rapid infrastructural development across the country through constructing railways, roads, bridges, dams, airports, power plants and many more, construction is now growing rapidly. Keeping pace, contractors have started adopting newer technologies, better systems, advanced concrete and better management tools. The major advantage it has is that it helps speed up construction and lower costs. The Indian market for scaffolding is estimated at Rs 15bn, with global production and consumption of steel scaffolding rising rapidly every year. Infrastructure is expected to register a robust growth during FY15-17, which would act as a catalyst in boosting revenue in this segment. Recent acquisition of AA International Trading LLC in USA has given edge  to increase its market share in USA, South America by expanding in the larger Latin American markets of Brazil, Argentina, Venezuela and China. The above factors are expected to drive scaffolding revenue at a 35% CAGR over FY15-17. 

 Engineered Formwork and Tower

 The company has ventured into manufacturing sophisticated engineered formwork systems for building, construction and infrastructure projects in India to capture the great growth potential in this market. Engineered formwork systems are built of prefabricated modules with a metal frame usually steel or aluminum and covered on the application (concrete) side with material having the required surface structure (steel, aluminum, plastic, timber, etc). Growth in Indian railways, roads, bridges, dams, airports, metro-rail projects, power plants will drive growth as they are key users. Company has several major infra development clients like L&T, J. Kumar, NCC etc. The tower division was started in 2010 to manufacture and supply towers for telecommunications, wind-turbines, power transmission & distribution, and other industries. With strong technological support and state-of-the art manufacturing plants and a workforce of engineers and designs validated by the Structural Engineering Research Centre, the Indian Institute of Technology, Chennai, and the Central Power Research Institute, this division is on the growth path. The company’s focus is on raising capacity utilization and gaining momentum.

Yarn and Garments Division 

In 1997, Technocraft entered textiles, setting up a 100% export-oriented cotton yarn spinning mill (15,000 spindles). At present, the plant has 61,100 spindles and capacity of 1,000 kg/hr. Products comprise 100% cotton ring spun yarn, super-carded and super-combed for knitting and weaving.  At present, Technocraft exports 70% of its products to Europe and Asia, with the rest going to LATAM countries.  The company has completed modernization of its spindles recently, which will result in reduced labour cost and downtime. The altered machines would make value-added yarn, resulting in higher realisation per kg. With an in-house spinning mill to control the quality of yarn from the beginning, Technocraft offers high quality fabric to customers. Technocraft manufactures premium active-wear garments. Products are custom knit, dyed, finished, cut, sewn, decorated, packaged and distributed. The company has access to the latest trends in European markets, thus offering quality products and the latest fashions at Indian prices with shortest delivery time. Increasing retail penetration, a growing service class and an increasing share of designer wear are key growth drivers in this segment. Indian government is focusing on revival of textile sector, company management has already disclosed about sign of recovery in this division. This division hopefully will perform better than expected to register revenue growth at 15 % CAGR over FY15-17.

Engineering Services

Technosoft Engineering provides engineering-design services to engineering and manufacturing verticals, and engineering, procurement and construction management (EPCM) services to automotive, packaging, medical, aeronautics, heavy machinery, oil and gas industry etc. It was established in 2000 to leverage the company’s engineering expertise into a services organization, supporting clients worldwide. Today, TE has sizable operations in North America (the USA, Canada) and in Europe, serving clients in general engineering, heavy equipment manufacturing, specialty machines and oil & gas. To increase its reach and for synergies, TE acquired a controlling stake in Swift Engineering. Headquartered in Calgary, Canada, Swift provides EPCM services to the oil & gas sector, process studies, piping, mechanical, electrical, civil/structural designing, and procurement support. The Swift acquisition has broadened TE’s services to the larger international arena. The Canadian and US oil and gas industry is likely to grow well in the next 3-5 years because of oil and gas discovered in Alberta, Canada, and the southern US belt. TE operates in North America through its subsidiaries, Impact Engineering Solutions. Technocraft’s engineering services business is expected to register revenue growth at 25% CAGR over FY15-17. 

NTTF 

As part of CSR, Technocraft has promoted NTTF under trust. It is near to its manufacturing plant in Murbad Maharashtra. It offers various courses under the programs in Mechanical, Electrical, Information Technology and Tool n die Engineering. NTTF offers Technical Training programs at Certificate, Diploma, Post diploma & Postgraduate levels. It enable the company  to train the students under ' LEARN AND EARN ' model.

Conclusion

Techocraft has huge growth potential in its all businesses. Investor friendly company and paying good dividend from inception. Well proven track record of ability and credibility of the promoters who has raised the small workshop into world class drum closures company. They bought small sick companies (steel and yarn) and converted into huge high profitable business of scaffolding and garments. 

Recent market correction has given wonderful opportunity for small investors to enter the stock below 200. Few month back legend investor Radhakishan Damani, Kotak Mahindra Investments and Reliance Capital Trust has bought the stock near 250 by seeing growth and hidden intrinsic value (ref. annual report 15 pg 32)

Strong balance sheet with reserves of Rs 554 Cr, healthy key ratios NPM, ROCE, D/E and 75% promoters holding. Investors can buy and hold the stock for multiple gain. Even though lot information given above, further more details are available on company and its subsidiaries' websites.