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

Strong performance – Net profit growth at 32% yoy

Elecon Engineering (EEL) reported strong performance in Q2FY11 with 32% yoy growth

in net profits – above estimates. Strong performance was led by traction in high-margin

transmission segment and decline in interest costs. Key highlights are (1) 10.1% yoy

growth in revenues – led by Transmission Equipment (TE) division (up 33% yoy to

Rs1.3 bn) whereas Material Handling Equipment (MHE) division declined marginally by

3% yoy to Rs1.6 bn (due to low order-book cover) (2) Stable EBITDA margins at 14.2%

with EBITDA growth at 8.4% yoy to Rs400 mn and (3) Sharp decline in interest costs by

20.4% yoy to Rs107 mn.

Order book at Rs15.0 bn, Order inflows subdued at Rs2.1 bn

After a strong Q1FY11, EEL witnessed lower order inflows at Rs2.1 bn in Q2FY11. This

was due to delays and postponements in finalization of orders leading to lower orders in

the MHE division - merely Rs0.7 bn (Vs Rs4.1 bn in Q1FY11). Order inflows in the TE

division were healthy at Rs1.3 bn. Consequently, order book declined marginally on qoq

basis to Rs15.0 bn (including Rs3.2 bn Bramhani Steel order – on hold).

Acquires standard gears & gearboxes business of David Brown

EEL acquired the standardized gears and gearboxes business in Sweden (with

manufacturing facility), USA and UK of David Brown Gear Systems in Oct’10 – the

foreclosure of acquisition is expected in Nov’10. EEL has made the acquisitions through

its 100% subsidiary (step-down) Elecon USA Transmission Ltd. for a total value of

Rs1.3 bn (GBP 18.4 mn) – to be financed through internal accruals (20-22%) and debt

(78-80%). The acquired business has revenues of Rs1.6-1.8 bn in FY09 and PAT

margins of 6-8%. The acquisition provides geographical diversification, access to new

customer base, complementary products and outsourcing opportunities. Based on backof-

envelope calculation, acquisition would be earnings neutral in near-term.

Attractive valuations; Maintain ‘BUY’ rating

We believe that the tide has turned for EEL and expect EEL to witness sharp recovery

in earnings in FY10-12E period after witnessing earnings decline during FY08-10

period. We believe that EEL will benefit from expected revival in industrial capex in

ensuing quarters and record strong earnings growth. We maintain earnings forecasts of

Rs6.9/Share and Rs9.4/Share for FY11E and FY12E. We maintain our Buy rating.