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Eimco Elecon India Limited (EEIL) is a Gujarat based company engaged in the manufacturing, marketing and servicing of loaders used
in underground mines. EEIL was the pioneer to introduce Side dump loaders; load haul dumpers and rock shovel loaders in India. The
company is a leading manufacturer of heavy material handling equipment primarily used for mining (underground as well as for open
cast) and construction activities. The company's key products include side dump loaders, load haul dumpers, Rocker-shovel loaders,
dump trucks, Air motors, Hydraulic cylinders, wheel loaders etc.
We had initiated coverage on the stock on 17th August 2010 at a CMP of Rs 277.9 and to be added on dips in the range of Rs 258-263
bands for sequential targets of Rs 322 and Rs 354. The stock achieved the first target of Rs 322 on September 13, 2010 and the
second target of Rs 354 was achieved on November 2, 2010. EEIL had announced its Q2 FY11 results.
Q2 FY11 Results Review:
The Q2 FY11 results were ahead of market expectations.
The net sales for the quarter rose by a meager 24.9% on a Y-o-Y basis to Rs 484.6 mn while the net sales were up 15.6% on a Q-o-
Q basis. Net sales for H1 FY11 were 36% to Rs 903 mn. The rise in net sales is attributable to a 37% volume based jump, which was
marginally offset by a 0.8% drop in realizations.
Other operational income increased by 137% Y-o-Y for H1 FY11 to Rs 17.3 mn. This is on account of an exceptional income
(insurance claim) of Rs 5.5 mn received by the company in Q1 FY11.
The operating margins for the quarter at 16.4% are up 360 bps on a Y-o-Y basis. The raw material cost (as a % of sales) dropping by
270 bps Y-o-Y for the quarter coupled with operating efficiencies kicking in has boosted the operating margins for the quarter. The
employee’s cost (as a % of sales) increased by 80 bps which was also offset by benefits kicking in from operational efficiencies.
The net profit at Rs 40 mn is up 86% on a Y-o-Y basis. This can be partly attributable to the dip in the interest cost (tight working
capital management and repayment of loans) and partly to the improvement in the overall demand situation boosting the top line. The
net profit margins for the quarter stood at 8.3% up from 5.6% in Q2FY10. On a sequential basis the net profit margins have declined
due to a higher tax provisioning done by the company in Q2FY11.
Key Developments:
Higher sales of equipment to continue to boost demand for spares:
Sales of spares are an integral part of the total revenue composition. EEIL provides warranty up to 18 months on the equipment it
manufactures. Post the completion of the warranty period the company starts earning revenues from the sale of spares. Since the
performance of the equipment has to be consistent, the buyer prefers to buy spares from EEIL. Following chart depicts the share of
spares in the total sales:
As is clear from the chart above, the sale of spares (as a % of revenues) has dropped in FY10 to 49% from 58% in FY09. This is so
because the sale of machines has increased to 51% in FY10 from 42% in FY09. In addition to the existing base of 2000+ machines
already sold, higher machine sales in FY10 could translate in to a higher spares sale in FY12. These are sold mainly through
distributors. Further spares yield higher margins as compared to machines. This augurs well for the company, as higher proportion of
spares sales would boost the operating margins for the company.
Strong order inflows coupled with ample headroom to ramp up production enhances revenue visibility for the company:
With the revival in the economic situation the demand for EEIL’s products has also increased substantially. The company has sold
around 151 machines (primarily loaders) in H1 FY11 as against 110 in H1 FY10. Also the company currently has orders for 100
machines and it expects the order inflow to strengthen up in H2 FY11. EEIL is currently operating at around 80% of its capacities and
this implies that the company has ample headroom to ramp up its production. Therefore strong order inflows coupled with ample
headroom to expand production enhance the revenue visibility for the company.
Entry of private players could result in diversification of the client base:
Currently Coal India Limited accounts for more than 90% of EEIL’s revenues. The balance revenues are derived from private players.
With the coal industry being de-regulated by the government the participation of private players is likely to increase in the sector. The
changing situation could lead to the share of revenues from the private players increasing for the company. This could be a positive
development for EEIL as it would reduce the dependence on Coal India Limited. Further the overall size of the pie would also
increase for the company. EEIL holds 90% market share in the underground coal mining equipment.
New model launches to aid the revenue growth going ahead:
EEIL has recently launched a continuous miner, which has been approved by Coal India Limited (the biggest customer for EEIL and
a leading global player in the mining space). The objective of introducing a continuous miner is to increase the productivity of the
coalmines. In addition to this the company has also launched a new model for the construction space, AL-120. The introduction of the
Al-120 in the construction space coupled with the acceptability of the continuous miner augurs well for EEIL as it could drive the top
line of the company in the near future.
The company historically has been registering a strong set of numbers for the last quarter of any fiscal year. This is so because most
of the customers place orders with EEIL in Q2 and Q3 so as to get deliveries of their machines before the financial year ends. This is
likely to drive the revenues and profits in 2H FY11.
Concerns:
Coal India has cut its production target by around 6% for FY12.
Coal India Limited, which is the largest customer of EEIL, has cut down its coal production estimates for FY12 from 521 MT to 486
MT and is also likely to miss out its FY11 production target of 460.5 MT by a 16 MT shortfall (9.3% growth in FY12). The downward
revision in FY12 production target is because Coal India is awaiting forest clearance for 17 of its projects with an estimated coal
reserve of 110 mn tons. The company had expected to commence mining activities in these areas, which have now been postponed,
consequently resulting in a drop in production levels for FY11 and FY12. EEIL is heavily dependant on Coal India for its revenues.
However, in our view a 6% production cut announced by Coal India for FY12 will still mean a 9.5% growth over FY11 and hence is
not likely to have any substantial impact on the performance of EEIL.
Conclusion:
EEIL is primarily engaged in the business of the manufacturing mining equipment. Based in Vallabh Vidya Nagar, Gujarat the company
manufactures side dump loaders, load haul dumpers, Rocker-shovel loaders, dump trucks, Air motors, Hydraulic cylinders, wheel
loaders etc. The company is a market leader in the mining equipment space with a dominant market share. Coal India Limited is a
major customer for the company, which accounts for majority of the revenues; hence the fortunes of EEIL are linked to the fortunes of
Coal India limited & mining industry in general. Furthermore with the demand for coal set to rise in the near future, the demand for
mining equipment is also likely to witness a spurt in demand. Therefore market leaders like EEIL are set to benefit from this in the form
of increased off-take for their products. Also the company is in the process of diversification, which could reduce its dependence on the
coal-mining sector.
EEIL announced Q2 FY11 results, which were above the market expectations. The net sales for 1H FY11 were up 36% Y-o-Y on the
back of a 37% Y-o-Y volume jump, which fully offset the marginal fall of 0.8% in the realizations. The operating margins improved to
17% for 1H FY11 as against 15.8% in 1H FY10 primarily due to operating efficiencies coming in, which are reflected in the lower other
expenses (as a % of sales). The net profit margins have improved by 170 bps Y-o-Y to 8.7% triggered by a drop in the interest charge
and a substantial rise in the revenues. Going ahead we maintain our FY11 revenue and operating profit estimates but have marginally
revised downwards our interest cost estimates. Consequently the revised EPS for FY11 stands at Rs 32.4 as against Rs 32.2 earlier.
Simultaneously we introduce FY12 estimates as well. We expect the revenues for FY12 to grow at a slower rate on the back of a
downward revision of production targets announced by Coal India. This could be off-set by increasing share of private players, which
could add up to the revenues. In addition to the above the company has also launched a continuous miner and a new backhoe loader
aimed at the construction sector. The continuous miner has been approved by Coal India and thus gives comfort on the future
prospects of the products. Also the company had recently launched a JCB Al-120 primarily for the construction industry. With the
construction activities in the country on the rise, the demand for the new equipment is also picking up. Going ahead we expect the
share of construction equipment segment in the total revenues of the company to be 2.4% as of FY12 from the current level of 1.2%.
The foreign collaborator of EEIL, i.e. Sandvik is also present in India in the open cast mining equipment space. We think that promoters’
restructuring (sell-off by either partners to the other) is likely due to conflict of interest and the large opportunity available in India.
However the timing of this is uncertain. Thus could however lead to an event based push to the stock price. At the CMP the stock is
trading at 7.7x FY12E EPS. Based on the above we feel that the stock can be bought at the current levels for sequential price target of
Rs 337 (9x FY12E EPS) and Rs.356 (9.5x FY12E EPS) over the next 1-2 quarters.
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