Elecon Engineering Limited

[basumallick]

Company Background

Elecon Engineering Limited (EEL) is one of Indiaâs largest manufacturer of Material Handling Equipments (MHE) and Industrial Gears and Power Transmission products. MHE systems primarily comprise of various conveyor systems. EEL is one of the largest manufacturers of industrial gears and was the first company in India to introduce modular design concept, case hardened and ground gear technology. EEL is the gear supplier of choice to core sectors like Sugar, Cement, Steel, Fertilizer, Plastic Extrusion and Rubber. They are the only manufacturers of Vertical Roller Mill Gear for the power and cement industry.

Investment Thesis

Turn around in capex cycle has meant that the order inflow has stabilized. 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. That means an additional debt burden of 105 cr. This acquisition provides EEL with access to European markets.

The order book is robust. The outstanding order book position on Jan 31, 2011 is 1690 crores. This includes 420 cr added in Q3 FY11. Out of this, MHE orders are 1350 cr and gears are 340 cr. EEL has also submitted bids worth 5000 cr and expects a hit ratio of 20-25%. With the existing order book, there is good revenue visibility for FY12.

Financials

	FY10	FY09	FY08	FY07	FY06
Sales	1109.36	1030.84	927.85	816.6	507.75
Other Income	18.72	-7.89	0.88	0.89	-0.32
Op Profit	168.45	180.72	154.75	123.75	73.45
EBDIT	187.17	172.83	155.63	124.64	73.13
PBT	94.68	92.05	107.57	87.76	45.48
PAT	66.18	57.45	67.2	54.9	27.88
EPS	7.13	6.19	7.24	17.75	48.85
Depreciation	33.12	22.15	14.2	12.22	9.43
Interest	58.71	58.23	33.86	24.66	18.22
Effective Interest Rate(%)	11.26%	9.83%	8.27%	8.69%	8.86%
Tax	24.14	30.65	31.47	29.5	13.09
Effective Tax rate (%)	25.50%	33.30%	29.26%	33.61%	28.78%

Assets	847.68	867.5	646	471.57	308.41
Networth	326.1	275.4	236.72	187.9	102.67
Debt	521.58	592.1	409.28	283.67	205.74
Net Block	344.34	282.91	177.15	122.27	84.55
Cap WIP	17.88	28.11	15.92	4.47	10.66
Debt/Equit Ratio	1.60	2.15	1.73	1.51	2.00
Book Value	35.12	29.66	25.49	60.76	179.87

Debt-Equity Ratio is likely to go up after the acquisition. Increased debt of 105cr would mean an additional interest outgo of around 10-12 cr.

Net Cash (Operations)	170.11	71.25	-20.22	-62.13	-40.51
Net Cash (Investment)	-60.21	-135.33	-79.32	-40.82	-41.73
Capex	84.32	140.1	80.53	43.75	104.64
Free Cash Flow	85.79	-68.85	-100.75	-105.88	-145.15
FCF/Sales(%)	7.73%	-6.68%	-10.86%	-12.97%	-28.59%

Interestingly, EEL has turned net free cash flow positive in 2010 and has turned positive operational cash flow from 2009 onwards.

Dupont Analysis
OPM(%)	15.18%	17.53%	16.68%	15.15%	14.47%
NPM(%) -- (A)	5.97%	5.57%	7.24%	6.72%	5.49%
Asset turnover(avg) -- (B)	1.31	1.19	1.44	1.73	1.65
RoA(%)	7.81%	6.62%	10.40%	11.64%	9.04%
Financial Leverage -- ( C)	2.60	3.15	2.73	2.51	3.00
RoE(%) -- (=A*B*C)	20.29%	20.86%	28.39%	29.22%	27.15%

Quarterly Results

	Q1	Q2	Q3
Sales	247.17	280.91	302.39
Other Income	0.01	0.4	20.55
Op Profit	37.91	39.96	49.65
EBDIT	37.92	40.36	70.2
PBT	19.16	19.95	48.03
PAT	13.32	14.21	36.82
EPS	1.43	1.53	3.97
Depreciation	8.92	9.75	9.83
Interest	9.85	10.66	12.34
Tax	5.84	5.74	11.21
Effective Tax rate (%)	30.48%	28.77%	23.34%

Risks

Political instability may reduce the pace of infrastructure development and may harm the growth for the company.

Input cost of steel is important for margins and any sudden and large increase in prices may impact margins.

Valuation

Stock is currently at 68.95 (NSE closing price) and PE of 19.34 (based on FY2010 EPS) and 7 (based on TTM EPS of 9.85). So, it cannot be termed as expensive. Expected FY12 EPS is around 11-12, with an estimated PE range of 10-12, the expected price range is Rs 110 â Rs 144.

I would not be surprised if I see atleast a 50% price appreciation in one year. The downside risk seems to be limited to 10%-15%

http://valueinvstr.blogspot.com/2011/03/elecon-engineering-limited-good-stock.html

[hemantbhatia]

Rep by P B Patel, CMD & Ravin Shah, CFO.Takeaways of con call by Capital mkt; The Order backlog as end of Jun 30, 2014 stood at Rs 286 crore compared to Rs 266 crore as end of Jun 2013. Order inflow in Q1FY15 was Rs 118 crore for gear business. Order backlog of Elecon EPC Projects (EPL) and Benzler-Radicon Group as end of Jun 2014 stood at Rs 1080 crore and Rs 79 crore respectively. Order flows for small-medium gears are yet to pick up but the company is getting orders for tailor/custom made gears. The orders flow mix has now changed for 60% of tailor made and 40% for standard gears compared to earlier levels of about 65% in favour of standards and 35% in favour of custom made. Elecon Engineering, the standalone company expects order intake of atleast Rs 400-500 crore for balance 9 months of current fiscal. EPL for the same period expects an order intake of Rs 500-600 crore.Expects standalone revenue of Rs 600 crore for current fiscal, translating into a growth of 20%. Debt at standalone level as end of June 2014 was Rs 242 crore and EPL books it's was Rs 203 crore. The interest cost is about 12.1%. During the first quarter the company paid term loan of Rs 40 crore and working capital loan reduced by about Rs 50 crore. Consolidated receivables was about Rs 979 crore of which about Rs 676 crore at EPL and about Rs 303 crore is in case of standalone. The company thinks that about 80-90% of the outstanding receivables of Rs 90-95 crore supplied through Tecpro Systems are recoverable with clients directly in touch with the company. As of now the company has not provided for outstanding receivables and if the company ascertains any of it as bad it will provide for the same. Benzler-Radicon Group has registered a revenue growth of 20% in Q1FY15 but at bottom-line it was a loss albeit negligible level as the company chased top line growth and market penetration at the cost of margin. However the company will end with a revenue growth of 25-30% for current fiscal with bottom-line in black. The company has made substantial investment during boom time. During the recession period it has cut cost massively including rationalization of manpower. Currently the company operates at about 35-40% of the desirable capacity levels. Once the market picks up and turnover increases the margin will expand substantially. Elecon Engineering has not yet got the Rs 130 crore on account of slump sales of EPC business as part of demerger approved as the EPL itself is hard pressed for liquidity. Standalone sales for Q1FY15 was down by 8% to Rs 102 crore and the EBITDA was up by 3% to Rs 23.45 crore with EBITDA margin expand by 280 bps to 24.7%. However the PAT stood lower by 62% to Rs 1.25 crore hurt largely by higher depreciation on account of change in depreciation calculation as per new Companies Act. Sales of EPL in Q1FY15 were Rs 104 crore (vs. Rs 88.2 crore in Q1FY14) and the EBITDA was Rs 9.45 crore (vs. Rs 9.17 crore in Q1FY14). At PBT level it was a loss of Rs 1.48 crore (vs. a loss of Rs 1.65 crore in Q1FY14)Consolidated sales in Q1FY15 stood at Rs 292 crore (vs. Rs 272 crore in Q1FY14) and the EBITDA was at Rs 31 crore (vs. Rs 33 crore in Q1FY14).

[basumallick]

Actual performance will pick up once the upstream sectors where their gears are used actually pick up - sectors like sugar, cement. Till then the stock will languish. Need to keep an eye out for the company as they will benefit from the revival in the infra spending.

[hemantbhatia]

Call addr by Mr. Prayasvin Patel CMD & Mr. Rajat Jain CFO. Highlights-Capital Mkt
Company bagged orders worth Rs 140 crore in June’15 quarter in Gears division domestically, and total order book position as on June’15 stood at Rs 260 crore as compared to Rs 285 crore in June’14.As per the management, while there are lots of enquiries going on, yet the conversion of those enquiries into concrete orders is taking time. Further, there are delays and deferments happening in existing orders. As per the management while it will take another around 6 months time for things to improve, concrete action needs to be taken by the Government and management is hopeful of the same.
Of the total consolidated revenue of around Rs 257 crore, about Rs 97 crore is from Indian Gear business, Rs 89 crore from Material Handling Business (MHE), about Rs 71 crore from International Gear business. At Ebidta level, Indian Gear business reported around Rs 22 crore of Ebidta, International gear around Rs 7 crore, while there was a loss at MHE division.MHE division sales were lower by about 14% to Rs 89 crore YoY and the segment reported a loss of about Rs 8.5 crore at PAT level. Lower execution is predominant reason of losses. Going forward management expects things to improve in next couple of quarters; however it’s difficult to give any timeline for the segment.
As per the management, there are not much tenders floating around for mining activities. Both public and private sector are taking time and delays are seen. There is no concrete action happening at the ground level at the current juncture for mining sector.MHE has an order book of around Rs 1100 crore as on June’15. The company expects another Rs 1000 crore of orders to come in, provided some tendering and business activity starts.As per the management, already activities have started at underground mining activity, where Eimco Elecon is present. Some orders for Tunneling, which is a pre requisite for mining activity, especially from private players who had won the coal auctions, is already received by Eimco Elecon. Gradually orders for conveyors, components, gear boxes etc should start in next 6 months if the mining activity picks up.
The international gear business has turned around in June’15 quarter. The strategy of the management to transfer all the manufacturing process to India and then subsequently to export to these countries and to use the subsidiary more from marketing and after sales and service business, has started yielding results for the company. Management expects the subsidiary to continue to do well. It has an order book of around Rs 150 crore as on June’15.The consolidated debt as on June’15 is around Rs 500 crore.For FY’16 management expects consolidated net sales to grow by around 10%. However all depends upon how the dispatch and delivery and execution of orders happen during the year.

[hemantbhatia]

Call addr by Mr. Prayasvin Patel CMD & Mr. Rajat Jain CFO.Highlights-Capital Mkt
Co bagged orders worth Rs 112 crore in Sep’15 quarter in Gears division domestically as compared to Rs 107 crore of orders in Sep’14 quarter, and total order book position as on Sep’15 stood at Rs 258 crore as compared to Rs 275 crore in Sep’14.The company continues to remain cautious on order intake and was very selective. Given the order backlog, outlook remains robust for execution in coming quarters.Management continues to remain optimistic for orders and its execution in H2 FY’16. As per the management, the open cast mining would see more inflow of orders in next 9 months time frame. Upsurge will happen in order inflow in H2 FY’16.Defense, sugar and fertilizer sector are showing good traction and good orders are expected in H2 FY’16.Ebdita margins at consolidated level was around 13% in Sep’15 quarter largely due to improvement in international gear business and domestic gear business and increase in sales of spare parts together with tight costs control initiatives.
Elecon EPC or the MHE business sales stood at around Rs 101 crore in Sep’15 quarter with a loss of about Rs 12 crore and international gear business reported sales of Rs 74 crore for Sep’15 quarter with PAT of Rs 1 crore.Elecon EPC business has an order book of around Rs 1000 crore and international gear business has orders of around Rs 60 crore as on Sep’15.
Overseas entity Ebidta is expected to remain around 7% going forward for rest of FY’16.
Overall, management expects around 10% growth in consolidated net sales and Ebidta margins of around 12-13% for FY’16.Debt at consolidated level as on Sep’16 stood at around Rs 632 crore.The company is operating at 45% of capacity for gear business and there are not much capex planned for next 12 months.As per the management, so far not much benefit of lower steel prices was visible to the company as the company always booked the raw material on back to back basis.Around Rs 275 crore is the retention money lying with customers for more than 1 year now. Management expects Rs 60 crore of recovery before Mar’16.

[crazymama]

CONFERENCE CALL

Elecon Engineering Company

Segments that will drive revenues for FY 2017 would be defence and marine business

Elecon Engineering Company held its conference call after it declared its results for the quarter ended December 2015.
Prayasvin B Patel, Chairman & Managing Director and CFO Rajat Jain addressed the call.

Highlights of the call:

Quarter was challenging from margins stand point.

At the standalone level the company had a challenging quarter from a margin standpoint. Its EBITDA levels came down on account of unfavorable revenue mix involving bulk of the shipments of low margins.

`Its end customers continue to grapple with execution challenges and the environment remains challenging in the medium to short term.

From an order book perspective, the company booked Rs 121 crore worth of orders, however it continues to see lackluster demand from the key sectors such as Cement & Steel.

At the PAT level, profits were boosted by gains from sale of surplus land.

Its consolidated topline grew 17% quarter on quarter essentially on account of performance in EPC and overseas business.

The EPC business, however, remains sluggish owing to macro factors which the management believes would be taken care of by the government’s ongoing measures across sectors.

The company is seeing traction in some sectors especially defense.

The management hopes that its business would sooner than later reap the benefits of economic upturn.

The management is upbeat on the long term business outlook of the company.

Given the current global economic scenario, the management understands that the government has a very hard task at hand.

Order booked amounted to Rs 121 crore during the December 2015 quarter against Rs 140 y-o-y and Rs 112 q-o-q.

Order pending amounted to Rs 252 crore during the December 2015 quarter against Rs 261 y-o-y and Rs 258 q-o-q.

The company designs and manufactures worm gear; parallel shaft and right angle shaft; helical and spiral level helical gear; fluid geared and flexible couplings, as well as planetary gear boxes.

The company, through its subsidiary Elecon EPC, also manufacturers, material handling equipment, mining equipment, casting processes amongst other.

After sales business in overall sales fell in quarter thus the company had to take hit on margins.

Segments that will drive revenues for FY 2017 would be defence and marine business. This is where the company expects more orders in the future. Also the sugar sector and partially cement sector is promising.

In sugar business exports would be driving sales in FY 2017. Cement industry per se is not doing good but there are requirement coming for modification and minor enhancements which will drive growth as this is coming frequently for different plants.

In material handling business the company is focusing on those orders which have good margins.

In material Handling business in FY 2017 toplins growth will be 8-10% in and in FY 2016 this year it will be 5-8%

EPC will see topline growth in this year and next year too but can not quantify.

Consolidated gross debt is Rs 600 crore.

Cost of debt is 12-12.25%.

In fourth quarter after sales should recover and the company expects it to contribute to 25% of total sales in FY 2017 from 20% last year.

Consolidated receivables were Rs 775 crore.

The key for growth, however, would be the uptick of demand in key industries like power, mining, sugar and other infrastructure sectors that directly have a bearing on the company’s growth prospects.

All the necessary capital expenditure required for expansion has been done and hence it sees no need for additional capex in the foreseeable future other than the maintenance capex which is not substantial.

Going forward EPC business will go down and product business will increase.

Land sold was surplus land which Elecon owned. It was under long term lease by Madhuban resort. Total realization was Rs 25 crore out of which 21.6 crore was capital gains. This land / resort was of no use to the company.

Loss of the EPC business during the current quarter was Rs 19.5 crore.

In FY 2016 EPC will not be able to make profit but the management will try to get it at breakeven levels.

Q4 will be definitely be profitable quarter. For this business the higher the turn over the better the profits.

[crazymama]

CONFERENCE CALL - from Capital Markets

Focus will be on products business

Elecon Engineering held a conference call on April 29, 2016. In the conference call the company was represented by Prayasvin Patel, Chairman and Managing Director and Prashant Amin, ED of the company.

Key takeaways of the call

• The merger of Elecon EPC (60.49% subsidiary of the company) into Elecon Engineering was necessitated as some of the advantages that the company envisaged in the earlier demerger did not percolate down to both the divisions. While the transmission business did see some momentum, the material handling business was bogged down by tough industry and macroeconomic conditions. In these circumstances the management believes the merger of the EPC business back into the parent would deliver economies of scale and financial benefits that would benefit both the Company and the shareholders.

• India’s EPC Industry is facing a slow down due to various reasons including delay in governmental clearances, environmental approvals and land acquisitions etc. The Company’s strategy on moving away from EPC projects and focusing solely on the equipment’s business would further cement the consolidation with Elecon which is being envisaged.

• Gear business continues its good traction. The company’s product offering in gears ranges from standard catalogue products to engineered products (lead of upwards of 6 months) as well as to large marine gears.

• Order book of the gear division stood at Rs 700 crore and this will add momentum to the business. It bagged 2 very large scale orders in naval defence.

• Defence orders worth Rs 530 crore and the execution will commence by FY19 crore and the order execution will be completed by 2022.

• The gear division of the company developed new products such as ‘Cooling tower gear boxes’ for domestic power sector and international markets. For sugar industry it has developed ‘planetary gear boxes’ range.

• The company is increasingly sourcing the demand for international market from India and Thailand. The company expects the exports to growth to 15-20% from current about 7-10% in near future.

• The company is also restructuring its overseas operations. Under the new structure the Swedish subsidiary will become 100% owned subsidiary of Radicon UK. Radicon USA will also be brought under the Radicon UK.

• The company provides end to end solutions in Material Handling. Though orders are coming in for MH business, the execution is a concern area. Going forward the MH business will be more of a product business rather than EPC. Currently EPC accounts for about 25-30% of the top-line and balance 70-75% is from products and going-forward the share of EPC will go down further.

• Order book of MH division is Rs 840 crore.

• Sales of Elecon EPC in FY16 was Rs 480 crore and at EBITDA it is a profit of Rs 15 crore and at PAT level –is a loss of Rs 14.8 crore. If the products orders are executed as scheduled the company will turn in PAT positive otherwise it will register a nominal loss at PAT level.

• Capacity Utilisation is about 40% in MH business division.

• Receivables of the EPC division stood at Rs 650 crore and of which about Rs 270-300 crore is retention money. The company hopes to complete all the EPC projects on hand by FY19.

• The company expects some losses in EPC project business in FY17 but not beyond that period.

• Industry opportunity for MH comes from power, port, mining, cement and steel with the latter two having marginal share of the business.

• Steel and cement continues to be sluggish. While cement shows some signs of activity steel will take some more time to come back to ordering.

• Once mines allocated got into production and return of cement to capex mode will facilitate growth for the material handling sector. In next 2-5 years all the user industries of MH are expected to see heavy investment and that will percolate to the MH division.

• Revenue outlook for 2016-19: The gear business revenue is expected to increase from Rs 518 crore to Rs 650 crore by 2019. The MH Division revenue is expected to about Rs 600 crore by 2019. Overseas subsidiaries together are expected to increase their revenue to Rs 400 crore by 2019. With improved capacity utilization the margin to growth substantially.

• Slow moving projects out the total order book of the company are about Rs 300 crore

[Mehnazfatima]

Elecon engineering - a fundamentally good company with a very bullish technical setup…there is a turnaround on monthly and weekly charts and it is poised for a volatility breakout on daily charts…can give very good returns in short and medium terms…

Discl: i am not invested in this stock as of now.

[ankitkhemka7]

Hi Mehnazfatima ji,
Any further views on the technicals of Elecon?

rgds
Ankit

[Mehnazfatima]

Very well placed for the rally to begin…meanwhile HDFC mutual funds has invreased its holding in elecon from 5% to 7%

[ankitkhemka7]

Hi Mehnazfatima ji,

Looks like the initial move of elecon has begun… Could you share the chart with your indicators please?

Rgds
Ankit

[Mehnazfatima]

[Mehnazfatima]

[Mehnazfatima]

My impression is that this is just the begining…once the rally gathers momentum, the stock can keep going up and up for quite sime time…a slow and steady kind of upmove.

Since there appears to be a turnaround on monthly charts too…and a pickup in demand for equipment makers…Elecon can be held as a long term investment …for next 1-2 years…or maybe even longer.

And incase the rally fizzles out, one can always sell it if it closes the day below 67.50…and again repurchase when there is another breakout…and once the stock breaks out of the next resistance of 84 -85, at that point another incremental purchase can be made.

Ofcourse a value investor like Buffett would laugh at any system which recommends purchasing a stock @85 rather than @55…but thats how portfolio is scaled up in momentum play

[ankitkhemka7]

Hi Mehnazfatima,

Any views on Elecon now? Seems like a decent breakout has happened…What does your analysis say?

Regards
Ankit

[Mehnazfatima]

Yes…it’s a breakout…and hope it sustains

[rahil_sayta]

Just went throught the concall for Elecon putting some key takeaways .

Management seems to be working on debt reduction by 35 Cr this year.
Also focus is more on gear buisness which is profitable and at 50-55 pcnt capacity.
20% revenue from export focus is to increase export revenue as margins are better.
Management seems confident of buisness over a medium term horizon.

New to writing post.

Disclosure : Recently invested.

[Rah20]

Company making barrel reclaimer for steel industry which is the largest in the country and top 3 in the world.

[Rah20]

Promoters buying from open market.

[SreenadhV]

Company is at interesting juncture at this point of time with multiple initiatives taken by company and also capex cycle which is expected to start…

1. Company is exiting from loss making material handling division → Blended margins will improve.

2. Debt repayment and refinancing of high interest loans. Interest cost is expected to go down by 20-25cr → Increase in PAT by 15-20Cr

3. Gear division capacity utilization is only at 50%. Significant operating leverage with increase in capacity utilization. (Capex cycle →Capex in cement, steel, power, chemical industries expected to go up)

4. High receivables : Receivables will go down further as significant portion is held as retention money which is maintained with material handling division customers. With the exit of material handling division, company guided for 100cr of receivables recovery in 12-18 months (key monitorable)

5. High contingent liabilities: CL mainly on account of corporate guarantees of 350cr to overseas subsidiaries. Since subsidiaries are profitable and outstanding debt is only 100cr, company is in talks and expect significant reduction in contingent liabilities.