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Elecon Engineering – 2QFY2011 Result Update
Angel Broking recommends a Neutral on Elecon Engineering.
Elecon Engineering (EEC) posted top-line growth of 9.3% to `281cr for
2QFY2011. OPM came in at 14.2%. Lower interest cost and tax rate led to strong
32% yoy growth in bottom-line to `14cr. We have revised downwards our
earnings estimate to factor in the recent acquisition as we do not expect it to be
EPS accretive. Hence, we recommend Neutral view on the stock.
Strong order book offers revenue visibility: EEC's order backlog has been
declining post hitting the peak of `1,812cr in 3QFY2009. At the end of
2QFY2011, the order backlog stood at `1,501cr, a decline from `1,582cr at the
end of 1QFY2011. However, for 1HFY2011 order inflow stood at `8.3bn as
against `7.5bn in 1HFY2010, indicating revival in the capex cycle. We believe
that EEC's current order book of `1,501cr or 1.4x FY2010 revenues, offers good
revenue visibility.
Acquisition: EEC has acquired the Benzler-Radicon business from the David
Brown Gear Systems Group for a consideration of ~`132cr. The company
proposes to fund 80% of the acquisition through debt.
Outlook and Valuation: We believe that EEC is well placed to seize the upcoming
opportunities in the power sector due its strong order book, which renders high
revenue visibility. We have revised downwards our earnings estimate to factor in
the acquisition. We estimate EEC sales to register a CAGR of 25% to `1,624cr
over FY2010-12. Given that the acquisition is funded through debt and is not
expected to be EPS accretive, bottom-line CAGR is expected to be restricted to
17% over the period. At current levels, the stock is trading at fair valuations of
9.6x FY2012E earnings. We recommend Neutral on the stock.
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