EPIC Energy Detailed Analysis

As we all know how important Energy is to our everyday activities and to the nation as whole. When we get back to home from work to find our fans or A/C don’t have power or when the TV doesn’t work before a crucial cricket match or when we urgently need to access internet and there is no power, we are reminded that POWER has become a crucial factor for our everyday living. It is not that India has not been working to solve the problem. We have been witnessing huge capacity additions over the past several years to an extent that we have not seen such levels of additions before.

The solution to Power for all mandates and the theme of this report is Energy conservation – One unit of Energy saved is equivalent to 2 units of Energy produced.  Helping the above theme are the companies which form a sub sector of the power segment which is at a very nascent stage and unknown to many – the Energy Services Companies or the ESCOs.

We have made a notice of this segment and are proud to present you this multibagger.

Epic Energy Limited

Focused, efficient and professionally managed ESCO with a commitment towards Energy Conservation. This ISO 9001:2000 company is one among 37 ESCOs shortlisted by Bureau of Energy Efficiency (BEE) & rated at CRISIL-BEE Grade 3 (indicates: Good).

The equity markets have witnessed many waves from various sub segments – Power generation, Power transmission, Power distribution, Power utilities, Power leakage solution providers. The time could soon set in for the Energy conservation companies as well.

ESCO industry in India:
The ESCO industry in India is still at a very nascent stage and it has a long way to go to achieve some tangible amount of potential. In a country like India, where Energy safety is still a distant dream, the ESCO industry will continue to be here and establish itself over the next decade.

The ESCO industry in India posted total revenues of just 17.7 million USD in 2007 compared to about 280 million USD in Brazil(2007) and 3.6 billion USD in US (2006). The ESCOs in India are classified into the following 3 types and Epic Energy Ltd. falls in the second category.

#1. General ESCO – An ESCO not owned or operated by an equipment manufacturer or an energy supplier.
#2. Vendor driven ESCO – An ESCO affiliated with or owned by an equipment or control manufacturer.
#3. Consultant ESCO - An ESCO offering recommendations to a client based on knowledge or specialization in a particular aspect of energy efficiency.

The majority of ESCO’s energy efficiency projects have payback periods of less than 2 years and ESCOs save clients an average of 20 to 25% of baseline energy costs. The rage of energy savings is between 15% and 35%.

ESCO Industry Growth Rates:
>From 2003 to 2007, the revenues grew by a compounded annual growth rate of 95.6% from a low base of just 5 Crore. The industry is expected to clock high growth rates going forward and it is only in the coming years that the impact of ESCOs on the energy landscape of India can be seen.

There are new players coming in which includes various MNC s as well and this is seen as one of the growth drivers. However, the most important growth drivers would continue to be the increase of awareness towards energy conservation and the implementation of various policy initiatives that the government had initiated in the
last 5 years.

In the last 2 financial years the growth rates for the industry is estimated to be around 70%.

EPIC Energy Limited

EEL is an ISO 9001:2000 company listed on the BSE completely dedicated to the cause of Energy conservation and making renewable
energy devices.

Epic has manufacturing plants in Vadodara and Navi Mumbai. The company currently operates in states including Maharashtra, Tamil Nadu, Andhra Pradesh, Karnataka, Uttarkhand, Chattisgarh, Arunachal Pradesh and Rajasthan.

Epic operates in the space of Energy Conservation through services and products and in Power retail. EPIC has its own manufacturing facilities for producing Energy Saving Devices and also has tie-ups with various suppliers of renewable energy devices, both Indian and International.

Epic is a slim, efficient and professionally managed ESCO with a commitment towards Energy conservation. It is one of the 37 ESCOs empanelled by the Bureau of Energy Efficiency (BEE) through an accreditation process carried out by CRISIL and ICRA.

Epic energy is into energy conservation through it’s various power saving products and services. Epic is also into Non renewable energy space and has it’s own kitty containing various Solar powered and Wind powered projects.

Organic Growth Strategy:
The following are the acquisitions that the company made in the last 2 financial years.

• Early 2007 – The company had acquired several small energy devices manufacturers in Por, Gujarat.
• Q4 FY 07 – Epic acquired Bangalore based Hydragen infrastructure, an energy conservation company for 1.25 Crore. At the time of acquisition, Hydragen had a installation base of 3000 KVA and had projects with Navi Mumbai Municipality.
• Q1 FY 08 – Epic acquired Coimbatore based SRS Engineers, a power electronics and energy conservation firm. The acquisition transferred projects worth 1.75 Crore to Epic. SRS Engineers was a leading manufacturer of street light controllers, power saving switches and had extensively implemented projects in various districts of Tamil Nadu.
• Q2 FY 08 – Epic acquired TN based Sathian Sun power systems, a leading supplier of solar solutions in Tamil Nadu. Sathian had installed Solar street lights, Solar studs and solar hoarding lights for various government bodies.
• Q1 FY 09 – Epic acquired Kerala based MM associates, an electrical designing and contracting firm. MMA was a company with 5 Crore annual revenues.

List of clients:
Following are some of the key clients for which epic has already worked / is currently working on orders.

• Navi Mumbai and Thane Municipal corporation
• Madurai and Coimbatore Municipal corporation
• Konkan Railway Corporation Ltd
• Government of Arunachal Pradesh
• BEST, Mumbai
• Ennore Port Trust Ltd
• J W Mariott Mumbai and Chennai
• JSW Limited
• Central Power research institute
• Thirupathi Thirumala Devasthanam
• Karnataka PWD
• Lonavala Municipal corporation
• Government bodies of various states
• Various hotels and resorts
• Various trade centers and commercial complexes

Recent orders won/executed:

• Mar 2009 - EPIC Energy received an order for 100 kVA from Konkan Railway Corporation Ltd for its Power Savers. This order marks the entry of Epic in the Railways segment.
• Nov 2008 - EPIC Energy Ltd has successfully implemented a 400 KVA Electrical Infrastructure Project and a 250 KVA DG Set project for Land World Center.
• Nov 2008 - EPIC Energy was awarded a contract to conduct Investment Grade Energy Audit for ten Government Buildings in Arunachal Pradesh from the Arunachal Pradesh Energy Development Agency.
• Oct 2008 - EPIC Energy Ltd successfully commissioned a 325 kVA Energy Saving Project for Hometel Group of Hotels at its Hyderabad Hotel property.
• Sep 2008 - EPIC Energy Ltd has informed BSE that the Company has successfully commissioned a 500 KVA Energy Saving Project for Aditya Trade centre at its Hyderabad property.
• Sep 2008 - EPIC Energy Ltd has informed BSE that the Company has successfully commissioned a 140 kVA Energy Saving Project for the BEST at one of its transport terminals in Mumbai.
• Aug 2008 - EPIC Energy Ltd has informed BSE that the Company has successfully commissioned a 102.5 kVA Energy Saving Project for the Ennore Port Trust Ltd (EPTL) at Chennai.
• Aug 2008 - EPIC Energy Ltd has announce that its Energy Conservation project in Chhattisgarh was inaugurated by the Hon. Chief Minister of Chhattisgarh Dr. Raman Singh. Implementation of the project commenced on August 18, 2008.

Income Statement:

• The revenues have grown by around 15 times in the last 3 years from just 3.5 crore in FY 07 to about 54 crore in FY09. In organic growth contributed to most of this growth.
• Cost of revenues has increased from 36% to around 73% in FY09. This can be attributed to the wide range of products and services that came into the company’s kitty in a short span of time. We feel that the cost of revenues could go down and consolidate at lower levels over a period of time, with the consolidation in various businesses acquired by the company.
• SG and A expense is in line with the Sales growth implying that the company has not been made in pushing up sales by increasing the selling expenses.
• The company does not have any significant debt as such. This will work out well for the company for its future expansion plans.
• OPM has reduced from 48% in FY 07 to about 14% in FY09. It is only now that the company is making some realistic and tangible sales numbers and the previous margins should not be used to draw any conclusion. The NPM stands at around 10.5% for FY 09 and there is ample scope of margin increase.
• The net profits and the EPS have grown by around 3.6 times in the last 3 years. The company has managed to pull this growth without taking any debt and without diluting equity.

Balance Sheet:

• The balance sheet is almost debt free and is light on the liability part.
• The growth in accounts receivable is in line with the sales growth. Also, there is no pile up of inventory as such.
• The company seems to be light on the PP and E costs as the costs have not moved much in comparison with the Sales growth. This is a very good sign since the scaling up of business may be easier.
• The company carries a goodwill amount of around 90 lacs for both FY 07 and FY 08. This is attributed to the 3 initial acquisitions that the company made during the concerned period.
• There are no short terms debt and a very less long term debt.
• The company commands a ROCE of more than 40% which is impressive.
  

Shareholding pattern:

• The promoters have 25% stake in the company with no pledged shares and the promoter holding has not changed in the last one year. One need not really worry about the low promoter holdings because it was not due to selling shares or equity dilution.
• Though the direct promoter stake holding is less, we believe that it could actually be higher through indirect holdings or holdings of strategic interest. The corporate bodies holding an 18.73% and two non promoter entities holding around 15% each supports this view. The two non promoter entities are believed to be part of the company, which could take the total management stake to at least 55%.
• Few domestic investment institutions like Narayan Securities private ltd, Search Finvest private ltd have stakes in the company. Reputed financial services company JM financial has 1.05% stake in the company. JM financial had stakes in Asian electronics as well, which it exited in June 2008 quarter.
  

Best buying price: Between Rs. 30 and Rs.35

• Current price of Epic Energy which is a pure play leading company in an unexplored sector (ESCO) is very attractive and available for bargain hunters. Just 20Cr company with 1000 times bigger scale of opportunity. One MUST average down the price while buying because consolidation for 1-2 months is the likely move for Epic Energy.

Challenges/Risk involved:

The following are some of the risks involved in this investment and these risks could derail the growth story for the company.

• Lack of Awareness – Though Government has taken many initiatives to improve awareness on energy conservation, it has not caught up to an extent that will establish ESCOs as a major industry. Though there has been constant increase in awareness, the pace of increase will determine the growth of the company. Energy savings has not really caught the attention of various industries and the potential customers.
• Implementation of Government’s initiatives – This is the key to the industry’s growth and for Epic energy as well. It is appreciable that Government has taken up Energy conservation as a major issue and has come out with various initiatives. But, how far these initiatives will be effectively implemented remains a matter of concern.
• Funding issues – The ESCO industry is still at a very nascent stage and it suffers from lack of proper funding mechanism. Though BEE is entitled to make proper funding arrangements for the growth of energy conservation in India, these initiatives are moving at a slower pace. The banks do not recognize the ESCO as an industry and are stringent in lending their projects. They do not show the interests that they show to an infra or a power project. Also, high levels of collaterals are being required. Any new industry faces these issues and ESCO is not an exception.
• Deviation in business interests – There have been unconfirmed reports that Epic is looking at a foray into Bio diesel division. Though the reports surfaced more than a year ago, no such developments are visible so far. But, any such foray could harm the interests and the focus in the current business.