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�� Strong results; margin improves
Elecon Engineering (Elecon) reported strong Q3FY11 results, ahead of our
estimates. Revenue was up 20.4% Y-o-Y, at INR 3.0 bn, led by 35% growth in the
gear division (46% of revenue). The material handling equipment (MHE) division
(54% of revenue), however, grew lower at 9% during the quarter. EBITDA, at INR
497 mn, jumped 27.5% Y-o-Y. Lower raw material cost (down 122bps Y-o-Y, to
67.0% of sales) and employee cost (down 44bps Y-o-Y, to 4.8% of sales) helped
expand EBITDA margin by 92bps Y-o-Y, to 16.4% in Q3FY11. PAT, adjusted for
profits from sale of investment, rose 34.5% to INR 163 mn, driven by lower
interest cost and tax rate as debt levels continued to decline.
�� Order book provides visibility; revise up estimate
Elecon reported strong order inflow in MHE at INR 2,870 mn in Q3FY11 against
INR 810 mn during Q3FY10, primarily from the power and steel sectors. Similarly,
the gear division’s order inflow grew a strong INR 1,360 mn against INR 1,120 mn
during Q3FY10. For 9mFY11, the total order inflow in MHE and gear divisions
stood at INR 7,970 mn and 4,570 mn, respectively. MHE contributed INR 13.5 bn
(up 27.5% Y-o-Y) to order book, products accounted for ~65% and the balanced
comprised projects. Order book of the gear division stood at INR 3.4 bn, up 30%
Y-o-Y. Ex-Brahmani order, MHE order book stood at INR 10.3 bn. The company’s
order backlog stood at INR 16.9 bn, up 28% Y-o-Y, with execution period for
projects and products at 23-36 months and 12 months, respectively. With strong
order inflow during 9mFY11 and improving visibility, we revise up our FY12
revenue and earnings by 3.6% and 7.1%, respectively.
�� Outlook and valuations: Better visibility; maintain ‘HOLD’
At CMP of INR 67, the stock is trading at 9.3x and 7.8x our FY11E and FY12E EPS
of INR 7.2 and INR 8.6, respectively. With strong order inflows during the quarter,
visibility on the company has improved. While we expect order inflow to remain
healthy in the coming quarters with some signs of revival in capex across industry
verticals, we believe execution is yet to pick up meaningfully. Accordingly, we
maintain our ‘HOLD’ recommendation on the stock.
�� Company Description
Incorporated in 1951, Elecon is primarily engaged in manufacture of material handling
equipment (MHE) and industrial gears. MHE primarily enables transfer or carrying of raw
materials/ finished goods from the place of origin to destination. These equipment are
also used for loading and unloading heavy raw materials and shipping goods, and are
largely used in sectors like power, coal mining/ excavation, steel and ports. Currently,
the company has an unexecuted order book of INR 16.9 bn and has bid for projects on
the core infrastructure sectors that could get finalized over the next few quarters. It also
offers industrial gears and gear boxes from its power transmission division in which it
commands 26% market share. The company markets its product through its strong
network spread across geographies i.e. India, Singapore, Australia, South Africa, China
and Dubai.
�� Investment Theme
Infrastructure remains the key focus area for GoI. Huge capacities are expected to be
build in power, steel, port, mining etc in the next five years. Growth in Elecon’s business
bulk material handling equipment (BMH) and power transmission are linked with the
investments to be made in these infrastructure and manufacturing facilities. Presence in
industrial gears and gear boxes transmission, which are used across industries, provides
a natural hedge to the company’s operations from adverse business cycle.
However, the company has significant lagged in new order intake and margin
improvement.
�� Key Risks
Leveraged balance sheet
Debt-equity ratio is likely to be 1.7 x for FY11E, which implies high interest cost.
High working capital cycle
Working capital cycle over the past few years has increased from 86 days to ~135 days.
It is expected to remain at current levels over the next two years.
Promoter group companies
Elecon’s promoters have holding in 21 companies, some of which are in a similar line of
business. Its transactions with these companies have accounted for ~15% of direct costs
(primarily raw material, finished goods, job work) over the past few years. The company
has indicated that it will be looking at consolidating some of these entities in the near
future.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
�� Strong results; margin improves
Elecon Engineering (Elecon) reported strong Q3FY11 results, ahead of our
estimates. Revenue was up 20.4% Y-o-Y, at INR 3.0 bn, led by 35% growth in the
gear division (46% of revenue). The material handling equipment (MHE) division
(54% of revenue), however, grew lower at 9% during the quarter. EBITDA, at INR
497 mn, jumped 27.5% Y-o-Y. Lower raw material cost (down 122bps Y-o-Y, to
67.0% of sales) and employee cost (down 44bps Y-o-Y, to 4.8% of sales) helped
expand EBITDA margin by 92bps Y-o-Y, to 16.4% in Q3FY11. PAT, adjusted for
profits from sale of investment, rose 34.5% to INR 163 mn, driven by lower
interest cost and tax rate as debt levels continued to decline.
�� Order book provides visibility; revise up estimate
Elecon reported strong order inflow in MHE at INR 2,870 mn in Q3FY11 against
INR 810 mn during Q3FY10, primarily from the power and steel sectors. Similarly,
the gear division’s order inflow grew a strong INR 1,360 mn against INR 1,120 mn
during Q3FY10. For 9mFY11, the total order inflow in MHE and gear divisions
stood at INR 7,970 mn and 4,570 mn, respectively. MHE contributed INR 13.5 bn
(up 27.5% Y-o-Y) to order book, products accounted for ~65% and the balanced
comprised projects. Order book of the gear division stood at INR 3.4 bn, up 30%
Y-o-Y. Ex-Brahmani order, MHE order book stood at INR 10.3 bn. The company’s
order backlog stood at INR 16.9 bn, up 28% Y-o-Y, with execution period for
projects and products at 23-36 months and 12 months, respectively. With strong
order inflow during 9mFY11 and improving visibility, we revise up our FY12
revenue and earnings by 3.6% and 7.1%, respectively.
�� Outlook and valuations: Better visibility; maintain ‘HOLD’
At CMP of INR 67, the stock is trading at 9.3x and 7.8x our FY11E and FY12E EPS
of INR 7.2 and INR 8.6, respectively. With strong order inflows during the quarter,
visibility on the company has improved. While we expect order inflow to remain
healthy in the coming quarters with some signs of revival in capex across industry
verticals, we believe execution is yet to pick up meaningfully. Accordingly, we
maintain our ‘HOLD’ recommendation on the stock.
�� Company Description
Incorporated in 1951, Elecon is primarily engaged in manufacture of material handling
equipment (MHE) and industrial gears. MHE primarily enables transfer or carrying of raw
materials/ finished goods from the place of origin to destination. These equipment are
also used for loading and unloading heavy raw materials and shipping goods, and are
largely used in sectors like power, coal mining/ excavation, steel and ports. Currently,
the company has an unexecuted order book of INR 16.9 bn and has bid for projects on
the core infrastructure sectors that could get finalized over the next few quarters. It also
offers industrial gears and gear boxes from its power transmission division in which it
commands 26% market share. The company markets its product through its strong
network spread across geographies i.e. India, Singapore, Australia, South Africa, China
and Dubai.
�� Investment Theme
Infrastructure remains the key focus area for GoI. Huge capacities are expected to be
build in power, steel, port, mining etc in the next five years. Growth in Elecon’s business
bulk material handling equipment (BMH) and power transmission are linked with the
investments to be made in these infrastructure and manufacturing facilities. Presence in
industrial gears and gear boxes transmission, which are used across industries, provides
a natural hedge to the company’s operations from adverse business cycle.
However, the company has significant lagged in new order intake and margin
improvement.
�� Key Risks
Leveraged balance sheet
Debt-equity ratio is likely to be 1.7 x for FY11E, which implies high interest cost.
High working capital cycle
Working capital cycle over the past few years has increased from 86 days to ~135 days.
It is expected to remain at current levels over the next two years.
Promoter group companies
Elecon’s promoters have holding in 21 companies, some of which are in a similar line of
business. Its transactions with these companies have accounted for ~15% of direct costs
(primarily raw material, finished goods, job work) over the past few years. The company
has indicated that it will be looking at consolidating some of these entities in the near
future.
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