Query Corner:Gruh Finance, Elecon Engineering, Voltas, RPower, Kalindee Rail:: Business Line

Elecon Engineering Reducing visibility, Retain Hold :Emkay

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Elecon Engineering Leverage risk persists; Retain Hold ::Emkay

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Elecon Engineering

Leverage risk persists; Retain Hold

HOLD

CMP: Rs69                                        Target Price: Rs61

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n     Meets expectations – (1) Revenue up 20% yoy to Rs3.4 bn led by TE div. (+22%); MHE div. (+19%) (2) EBITDA mgn up 50 bps, TE EBIT mgn fall 70 bps (3) APAT up 10% to Rs156 mn

n     Order inflows at Rs2.6 bn (down 47% qoq) – YTD secured 52% of FY12E target. Order book healthy at Rs14.4 bn

n     Debt remains high at 1.3X. EEL in high capex mode despite strained cash flow position – plans to spend Rs1-1.2 bn in FY12E (equal to past 2 years capex spends)

n     We maintain our earnings estimates with H2FY12E asking rate undemanding at 14% yoy, but risks to earnings remain. Retain HOLD rating with price target of Rs61 per share

Buy ELECON ENGINEERING:: Pinc

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Elecon Engineering (EECL) registered 3.4% YoY growth in
revenue to Rs2.5bn (PINCe - Rs2.7bn) which was below our
expectations. OPM improved by 267bps YoY to 17.7% due to
decline in RM cost as a % of sales. Adjusted profit grew by
12% to Rs149mn (PINCe - Rs153mn) which was inline with
our estimates. Order inflows witnessed de-growth of 20% in
Q1FY12 (YoY Basis).
Transmission Equipments (TRE) continues to perform well
Revenues in the MHE division declined by 5% to Rs1.4bn but
margins improved by 80bps. TRE witnessed a healthy growth of
20% to Rs1.2bn and margins remained stagnant at 15.2%. We
believe better product mix and efficient cost management have
resulted in decline in RM cost as % of sales by 600bps to 62.7%.
Consequently, margins improved by 267bps to 17.7% at operating
level. Higher interest cost (up by 35%) impacted the bottom line
adversely and net profit registered a growth of 12% to Rs149mn.
Healthy Order Book but inflows on a lower side
Order inflows were down by 20% YoY (up by 8% QoQ) to Rs4.8bn
(Rs3.3bn from MHE division and Rs1.5bn from TRE division). Order
inflow in the first 4 months stood at Rs5.2bn. Management indicated
live enquiries worth Rs40bn. The current order book at end of Q1FY12
stands at Rs16bn (Rs12.3bn for MHE and Rs3.8bn for TRE division)
excluding the order from Brahmani Steel (worth Rs3.2bn). The order
book was up by 27% YoY and 16% QoQ.
VALUATIONS AND RECOMMENDATION
The current order book at Rs16bn provides good revenue visibility.
The improvement in margins reflects management’s focus on
sustainability of margins rather than growth. Company maintains
its sales guidance of 25% growth in FY12. We maintain our
estimates and expect sales CAGR of 21% (FY11-13E). At CMP
the stock is attractively valued at 7xFY13E given healthy order
book, increasing focus on project business, robust order pipeline
and sustainable margins. We roll forward our target valuation to
FY13 and maintain our ‘BUY’ recommendation with an increased
target price of Rs100 (9xFY13E).

Elecon Engineering - Momentum to continue, Retain BUY ::Emkay

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Elecon Engineering

Momentum to continue, Retain BUY

BUY

CMP: Rs77                                        Target Price: Rs101

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n     Meets expectations – (1) Revenue up 4% yoy to Rs2.6bn led by TE div. (+20%); MHE div. down 5% (2) EBITDA margins expand 240 bps yoy to 17.5% (3) APAT up 12% to RS149 mn

n     Secures orders worth Rs3.2 bn – MHE div. Rs1.4 bn and TE div. Rs1.8 bn. Order backlog grows 4% qoq to Rs15.4 bn. L1 in orders worth Rs2.5 bn

n     EEL shares optimistic outlook for FY12E (1) Revenue growth at 25% (2) Stable EBITDA margins (3) Benzler Radicon – Rev. Rs2.4 bn, PAT margin of 5% (4) Order inflows of Rs15-17 bn

n     Earnings momentum to continue - 19% CAGR in FY11-13E period. Revise FY13E earnings down by 9% on change in order inflow mix. Reiterate BUY with target of Rs101/Share

Elecon Engineering-- target of Rs. 101 ::Anand Rathi

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Elecon Engineering                                                                                         CMP  80                                                         Target 101 

Investment Arguments

~ Strong Order Book 
 ~Acquisition Opened the New Avenues for EECL 
~Strongest Player in MHE & TE Segment 
~Planning to Enter into New Ventures & CAPEX 
~Quoting at tantalizing valuation

 Company Description

Elecon Engineering Co Ltd (EECL), incorporated in 1951,  started with designing and building elevators and conveyors.   EECL is manufacturer of material handling equipments. The  Company is also engaged in manufacturing of industrial gears   and power transmission products in India. The Company   operates in two segments: Material Handling Equipment (MHE)   and Transmission Equipment (TE). The Company’s product   range includes design, engineering, manufacture, supply,   erection and commission of wagon tipplers, bucket wheel  stacker/reclaimers, barrel-type blender reclaimers, fertilizer   reclaiming scrapers, limestone pre-homegenizing and blending   plants, single and twin bucket wheel bridge-type reclaimers,  crawler-mounted rippers, stationary and shiftable conveying   systems for open cast lignite mines, integrated coal handling   plants for power stations, underground mining conveyors, opencast   conveying systems, and ferrous and non-ferrous foundry   products. The gear division manufactures helical and bevelhelical gear boxes, worm gear boxes and elevator tractor machines.

  

 Valuation

Over the last five years, EECL has traded at an average one-year  forward P/E of 8X-10x. At the current price of Rs. 80, the stock   discounts its earnings by 6.4x FY12E and 5.8x FY13E earnings.Considering 1) positive sector outlook 2) Improving revenue   visibility on strong order flows 3) faster execution cycle 4)  Improvement in EBIDTA margins and 5) strengthening of return   ratios, We see the 12 months price target of Rs. 101.

Elecon Engineering: Buy:: Business Line

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Even as the index for industrial production continues to oscillate, the pick-up in performance of six core industries bodes well for companies such as Elecon Engineering. Deriving its business from core sectors such as power, steel, cement and mining, material handling equipment and industrial gears maker Elecon has seen a steady pick-up in order flows in recent times. Together with its newly acquired British gear systems and gearbox player, Elecon's earnings growth prospects appear bright.

Investors with a two-year perspective can consider buying the stock of Elecon. At the current market price of Rs 76, the stock trades at 8.6 times its expected per share earnings for FY-12 (including earnings from the new acquisition). This is at a marginal discount to its slightly larger peer McNally Bharat Engineering.

ORDER PICK-UP

Elecon is among the top few players in the material handling equipment space and is the largest domestic player (25 per cent market share) in the industrial gear box business. Being dependent on some of the core sectors for growth, the company took a hit in profits during the slowdown although it managed to expand revenues. Tepid order inflows, post-downturn, kept the stock price depressed. Inflows, though, picked up pace from the first half of FY-11 and have since improved. Currently the Rs 1,513 crore of order book lends visibility for well over a year. Inflows have gained traction from the beginning of this fiscal, with the company announcing at least three orders in the power, cement and iron ore sectors.

KEY DRIVER

Material handling systems account for close to 80 per cent of the current order book, driven by orders from the power and steel sector as also cement. The prospect for this segment remains high on account of the following: one, the management has indicated live enquiries of about Rs 5,000 crore from the core sectors discussed above, which suggests that capex plans of industries are reviving. Even if 20-25 per cent of this converts into orders for the company — a feat not too difficult given that it is among the larger players — order flows are bound to see a healthy surge.

Two, there appears to be a visible improvement in the company's pricing strategy, given that EBITDA margins have seen a marked improvement. For the December quarter EBITDA margin at 16.5 per cent is 2 percentage points higher than the September quarter. Pricing policy that includes in-built escalation clauses in orders from government agencies and public sector players such as NTPC may well help cushion raw material hikes. Nevertheless, sharp commodity hikes may hurt non-government orders with a lead time of over one year; such time often taken in the material handling division.

GEARING UP

Elecon's industrial gears and gear box systems (called the transmission systems segment) division is known to be less prone to cyclical downturns as it caters to various industries. However, the segment did see a dip in profits during the downturn, given that capex activity across industries was put on hold. This segment has shown improvement, albeit slowly, with order inflows for the nine months ending December higher by 11 per cent over a year ago. The company's acquisition (through a subsidiary) of gear supplier, UK-based Radicon Benzlers in October 2010 could fast-track the growth of this division.

With presence in the UK, Sweden and Thailand as well as network in the US, the acquired company would not only add muscle (about Rs 175 crore sales per annum) to the group's revenues but also provide channels for distributing Elecon's products. Elecon plans to commence exports to Europe from this fiscal through the foreign subsidiary's distribution channels. Windmill gear box for 1-2 MW capacity is also another area that may provide some volumes, given the increasing interest in the renewable energy space. The company is said to have tied up with a couple of wind energy players for the same.

Elecon's revenue for FY-10 was Rs 1,067 crore while net profits stood at Rs 66 crore. Current debt equity ratio of 1.5 times provides sufficient room for capex plans of Rs 75-100 crore in FY-12

Elecon Engineering -Sustained momentum; Retain BUY ::Emkay

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Elecon Engineering

Sustained momentum; Retain BUY

BUY

CMP: Rs 65                                        Target Price: Rs 89

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n     We retain our positive bias on EEL post meeting management – Reiterate that tide has turned and EEL is poised to witness sharp recovery in earnings in FY10-12E period

n     MHE division – expected to grow at 15-20% in FY12E with sustained order inflow momentum. Current order book of Rs13.5 bn lends full revenue visibility for FY12E

n     TE division to witness sustained growth momentum – expect to grow at 17-18% in FY12E. Progress on recently acquired David Brown Gear Systems on track

n     Retain FY11E earnings estimates of Rs6.9 and fine tune FY12E estimates by -5% to Rs8.9. Maintain our Buy rating with revised price target of Rs89

ELECON ENGINEERING - Strong quarter : Edelweiss

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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.

Elecon bags orders worth `82cr: Angel Broking,

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Elecon bags orders worth `82cr
Elecon Engineering (EEC) has bagged orders worth `82cr from Tecpro System (`64.45cr)
and Adani Murmugao Port Terminal Pvt. Ltd. (`17.57cr). Tecpro’s order consists of supplying
stacker reclaimer, wagon tippler, side arm charger, apron feeder, wobbler feeder, crusher
and other spares for coal handling plant in Koradi (Lanco Project). While Adani’s order
pertains to the supply of bucket wheel stacker cum reclaimer in Goa. At `61, the stock is
available at 6.2x FY2012E earnings and 4.6x FY2012E EV/EBITDA. We maintain our Neutral
view on the stock.

Elecon Engineering – 2QFY2011 Result Update Angel Broking

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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.

Elecon Engineering Strong performance; BUY :: Emkay

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Elecon Engineering

Strong performance; Retain BUY

BUY

CMP: Rs 95                                       Target Price: Rs 121

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n     EEL performance ahead of estimates – revenue growth 10% yoy to Rs2.8 bn, EBITDA up 8% yoy to Rs400 mn and APAT growth of 32% yoy to Rs142 mn

n     Order book declined marginally to Rs15.0 bn – led by lower order inflows at Rs2.1 bn (MHE – Rs0.7 bn and TE – RS1.3 bn)

n     Acquired standardized gears & gearboxes business of David Brown Gear System for Rs1.3bn–earnings neutral in near-term

n     Trading at attractive valuations of 13.8X FY11E and 10.1X FY12E earnings. Maintain our Buy rating

Research Views from Emkay; 28 October, 2010

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n        Research Views

Bank of Baroda Q2FY11 result estimates

Net interest income likely to be strong, led by robust advance growth. However higher employee expense on account of gratuity, pension liabilities and investment depreciation will result in moderate growth at the operating level. Behaviour of restructured asset- key thing to watch out.

Punjab National Bank Q2FY11 result estimates

We expect PNB’s NII to grow by 27.5%yoy driven by a healthy growth in advances albeit NIM’s to contract by 15bps sequentially on account of higher cost of funds. Key thing to watch out will be behaviour of the restructured asset which was on higher side for PNB amongst PSBs. Strong growth in income to help provide higher for NPAs too.

Andhra Bank Q2FY11 result estimates

Andhra bank is expected to report strong growth in NII led by healthy advance growth and stable NIM’s, however lower trading gains as compare to last year will moderate Net income growth. The bank could see significant recoveries and upgradations during the quarter.

Elecon Engineering Q2FY11 Results – First Cut Analysis

Marginally above estimates

Elecon Engineering reported good all-round performance in Q2FY11 – marginally above estimates.

n    Revenues grew 10.1% yoy to Rs2809 mn, marginally ahead estimates – led by strong growth in Transmission Equipment (TE) division. TE division grew by 32.7% yoy to Rs1251 mn (ahead estimates) while MHE division decreased 3% yoy to Rs1610 mn (in line with estimates).

n    EBITDA growth was healthy at 8.4% yoy to Rs400 mn and EBITDA margins declined marginally by 20 bps yoy to 14.2% - in line with estimates.

n    Led by good operational performance as well as 20% decline in interest costs, adjusted net profits increased by 31.9% yoy to Rs142 mn – marginally above estimates.

n    Order inflows during the quarter were Rs2.1 bn – down 65% qoq and up 7% yoy. Order Book declined marginally sequentially to Rs15.0 bn (including Rs3.23 bn order from Bramhani Steel – currently on hold)

At CMP, the stock is trading at 14.2X FY11E and 10.4X FY12E earnings of Rs6.9 and Rs9.4 per share respectively. We have a BUY rating on the stock.

Thermax Standalone Q2FY11 Results – First Cut Analysis

Stellar performance yet again – above estimates

Led by uptick in industrial activity, Thermax posted yet another quarter of strong performance.

n    Revenues grew by a robust 60.4% yoy to Rs10.9 bn, above estimates - led by strong growth in both segments. Environment segment continued to witness strong traction in revenues – up 50.6% yoy to Rs2.5 bn, above estimates. Led by a growing order backlog, Energy segment grew by 70.9% yoy to Rs8.9 bn, above our estimates.

n    Led by strong revenues and stable EBITDA margins at 11.8%, EBITDA growth was robust at 62.3% yoy to Rs1286 mn – above estimates. Energy segment EBIT margins declined 160 bps yoy to 10.2% while Environment EBIT margins dropped by 40 bps yoy to 12.4%.

n    Led by strong operational performance, net profits increased by 65.4% yoy to Rs895 mn, above estimates.

n    At the consolidated level, revenues increased 61% yoy to Rs11.65 bn and net profits grew by 57% yoy to Rs914 mn, above estimates. The subsidiaries posted a profit of Rs19 mn – below estimates.

We have a positive bias on Thermax in view of uptick in industrial capex, robust order backlog and inflows, earnings visibility for next 2 years. Currently, we have earnings of Rs31.8 and Rs39.5 per share for FY11E and FY12E respectively. We have a BUY rating.

Bharat Bijlee Q2FY11 Results First Cut

Improvement accelerates, higher than expectations

n    PAT grow by 22% yoy and 160% qoq to Rs151mn (our expectations – Rs129mn); significant improvement driven by improvement in EBITDA margins to 13.8% (up 140bps yoy) due to low base. 

n    Revenue growth at 8%, below expectations of 13% growth 

n    Earnings for the quarter stood at Rs26.8/Share.

n    H1FY11 EPS stands at Rs37.1/Share (up 27% yoy)

n    Likely to maintain earnings of Rs96.1 and Rs116.4 in Fy11E and FY12E with upward bias going into Q3FY11. H2FY11 implied number stand at Rs59/share (growth of 35% yoy).

n    At CMP of Rs1087, the Stock is trading at 7.2xFY12E earnings & 1.6xFY12E Book Value (ex Siemens investment at 50% discount to CMP). The valuations are at 20% discount to peers at 9x. We currently have an accumulate rating on the stock with a target of Rs1350/Share. We will come out with a detailed update post discussion with mgmt….

n        Research Update Included

Patni Computers Q3CY10 Result Update; In line quarter, Disappointing Guidance for Q4CY10; Not Rated

n    Rev at US$ 178.8 mn, marginally ahead of est. Mgns at 18.9%, were down by ~130 bps QoQ  impacted by strong hiring (net adds of 1,663, +11% QoQ), impact of consolidation of CHCS

n    Profits at Rs 1.3 bn ahead of est. driven by higher than expected forex gains. See margin pangs continuing driven by supply side pressures( attrition at near peak levels)

n    Despite strong hiring, co’s Dec’10 rev guidance is muted. Patni’s rev growth continues to be anemic with strong margin defence until now getting threatened as expected by us

n    Tweak CY11E EPS down by ~5.7% to Rs 35.3 driven primarily by lower margin assumptions (partly on a/c of higher currency reset). At Rs 465, Patni trades at 13.1x/11.7x CY11E/12E EPS

United Phosphorus Q2FY11 Result Update; Results below estimates; Buy; Target: Rs 230

n    Q2FY11 results were marginally lower than estimates due to weak margins with RPAT of Rs 1.15 bn, +12%yoy

n    Implied H2FY11 revenue and EBITDA growth of 33% and 52% on higher side – may risk FY11 management guidance

n    We have adjusted downward our FY11 revenue, EBITDA and APAT estimates by 5.8%, 2.9% and 1.5%, respectively

n    Maintain BUY recommendation with target price of Rs 230 based on 12x FY12 estimates. Growing profit contribution from India is likely to drive valuations going forward

Ultratech Cement Q2FY11 Result Update; Numbers Disappoint. Maintain REDUCE; Target: Rs1040

n    PAT at Rs1.16 bn (-79.2% qoq) – below estimates led by lower realizations & higher P&F & staff costs. Revenues decline 19.4% qoq-volumes down 12.4%, realisations down 8%

n    Lower realizations and cost pressure dragged EBIDTA down by 59% qoq. EBITDA/t at Rs448 down 53.4% qoq. Downgrade FY11 earnings by 16.2% (EPS Rs54.8)

n    With recent cement prices hikes, expect the worst phase of profitability to be over for UTCL

n    Upgrade target to Rs1040 (valuing UTCL at EV/EBIDTA of 8X EV/Ton of USD130. However rich valuations at PER of 16.6X & EV/ton of USD135 leaves little upside. Maintain REDUCE

NTPC Q2FY11 Result Update; MAT grossing to hit ROE by 4%; Downgrade to Hold; Target Price: Rs 190

n    Results disappoint (APAT down 2%) due to (1) grossing up ROE at MAT, (2) Kahalgaon/Farakka continue to report lower PAF (70%) on fuel constraints & (3) lower interest income

n    Changed the grossing up to MAT rate frm earlier full tax rate; to hit profits by Rs10bn or 4% of core ROE from 28% to 24%

n    Reduce earnings by 11-13% in FY11E/12E

n    Valuations at 2.3xFY12E Book value, not attractive on core ROE of 24% (Earlier 28%); Lower target price to Rs190/Share; Downgrade to ‘Hold’

DB Corp Q2FY11 Result Update; Results miss est., Cut rating to HOLD; Target: Rs284

n    Q2FY11 PAT grew by 20.8% yoy to Rs550mn, below our estimate of Rs770mn impacted by sharp rise in opex towards new launches

n    Advertisement revenues grew by 16% yoy to Rs3bn equally led by volume and price growth

n    Cut EPS estimate by 10% /2% to Rs13.6 /14.6 for FY11E/12E due to higher than expected opex on new launches

n    Downgrade rating from ACCUMULATE to HOLD with target price Rs284

Union Bank of India Q2FY11 Result Update; Provisioning hits bottom-line; downgrade to HOLD; Target: Rs400

n    UBI’s Q2FY11 net profit at Rs3.0bn (-40%yoy), significantly below expectation led by higher provisioning and opex

n    The NII at 15.4bn inline with expectation, led by 30bps expansion in NIMs, albeit advances remaining flat qoq

n    The slippages during the quarter were higher at Rs11.3bn (3.6% annualised) including Rs4.2bn from agriculture NPAs, Rs760mn from restructured pool & Rs2.2bn from one big a/c 

n    Valuations expensive at 1.7x FY12E looking at sharp slippages and provision requirements. Downgrade to HOLD rating with TP of Rs400

Asian Paints Q2FY11 Result Update; Volume Allude, Maintain HOLD; Target Price: Rs 2,510

n    Asian Paints (APL) reported mixed performance – revenue growth at 5% yoy missed expectation and APAT growth at 4.4% yoy meets expectation

n    Volume growth alluded in the quarter- on back of high volume growth in Q1FY11 leading to pipeline filling and higher dealer inventory

n    Maintain earnings for FY11E (Rs92.2/Share) and FY12E  (Rs104.6/Share) – Maintain ‘HOLD’ rating with target price of Rs2510/Share

Marico Q2FY11 Result Update; Price Hike Initiated, Maintain HOLD; Target: Rs 128

n    Marico’s Q2FY11 performance meets expectation - revenue growth of 12.5% yoy to Rs7.8 bn and APAT growth of 14.8% yoy to Rs715 mn

n    Implemented price hike to offset material price inflation - 13% in ‘Parachute’ and ‘10%’ in ‘Saffola’ rice bran oil

n    Satisfactory volume growth at 15% yoy - ‘Parachute’ grew by 10%, ‘Saffola’ grew by 18% and ‘Hair oil’ grew by 27%

n    Maintain earnings estimates of Rs4.9/Share and Rs5.8/Share for FY11E and FY12E – Maintain ‘HOLD’ rating with price target of Rs128/Share

Voltas Q2FY11 Result Update; H2FY11 Promise; Retain BUY; Target Price: Rs 275

n    Results marginally below estimates with (1) 3% yoy decline in revenues to Rs10.7 bn (2) 140 bps yoy drop in EBITDA margins and (3) 17% yoy decline in PAT to Rs746 mn

n    EMP division performance negatively impacted due to slower execution on international orders & one-off expenditure

n    Order inflows up 76% yoy to Rs8.5 bn – YTD secured 44% of FY11E target order flows. Order book at Rs49.7 bn – equivalent to 1.4X standalone FY10 revenues

n    Maintain earnings estimates and Maintain ‘BUY’ with target price of Rs275/Share

TRF Q2FY11 Result Update; Negative Surprise Galore, Downgrade to Accumulate; Target Price: Rs 754

n    Q2FY11 results is loaded with negative surprise due to (1) one-offs provision of Rs0.3 bn and (2) dismal revenue booking in Projects division

n    Fires another salvo – revised Ebidta margins guidance from 10% to 7% - for reasons less understood and unexplainable

n    Downgrade in earning estimates for FY11E (down 43% to Rs36.1/Share) and FY12E (down 34% to Rs58.4/Share)

n    20% drop in market capitalization partly discounts earnings revision -  Downgrade from ‘BUY’ to ‘ACCUMULATE’ with revised target price of Rs754/Share