Elecon Engineering Result Update June 07 Edel

India Equity Research | Engineering and Capital Goods Elecon Enginerring

Result Update

ELECON ENGINEERING

INR 493

Expanding growth opportunities

BUY

Elecon Engineering’s (Elecon’s) Q4FY07 results were in line with our expectations in terms of the topline. They were however marginally below our expectations on the operating

June 18, 2007

margin front due to higher share of bought out components in the MHE division. Sales for the quarter grew 52% Y-o-Y to INR 2848 mn on the back of 61% and 40% growth in MHE and transmission divisions respectively. EBITDA and PAT grew 54% and 45% Y-o-Y to

Harish Sharma +91-22-2286 4307 [email protected]

INR 384 mn and INR 185 mn respectively; EBITDA margins, at 13.5%, grew 20bps Y-o-Y. For the full year though, the margins increased 150bps to 15.1%, and we expect this trend to continue going forward.

Bhargav Buddhadev +91-22-4009 4360 [email protected]

Full year highlights The key highlight for FY07 was the strong sales growth of 77% and EBIT margin improvement of 400bps in the MHE division. We expect this division to grow at a CAGR of 32% over FY07-09E on the back of strong demand from the thermal-based power plants, steel, and cement sectors. Performance of the transmission division has been steady with sales growing 42% Y-o-Y to INR 3135 mn and EBIT margins remaining constant at 20%. The capital employed during this quarter has increased by INR 650 mn to INR 2950 mn, representing investment on the wind mill gear manufacturing front. Elecon is on the verge of entering into collaboration with an European company for manufacturing wind mill gear boxes. Order book Elecon’s order book, as of now, is INR 8360 mn with INR 6150 mn in MHE and INR 2150 mn in transmission divisions. The execution period for MHE and transmission divisions is

Reuters

:

ELCN.BO

Bloomberg

:

ELCN IN

528 / 156

close to 12-15 months and 3-5 months respectively. This however does not include the Market Data

INR 1000 mn sales expected from the wind mill division.

52-week range (INR)

:

We continue to maintain our ‘BUY’ recommendation on the stock on the back of robust

Share in issue (mn)

:

30.9

outlook on the user industries namely coal-based thermal power plants, steel, and cement.

M cap (INR bn/USD mn)

:

15.2 / 372.6

We envisage a demand of ~INR 30 bn for material handling equipment on an annual basis

Avg. Daily Vol. BSE (‘000)

:

89.6

for the next five years. Elecon is on the verge of entering into a collaboration for manufacturing wind mill gear boxes, an INR 20 bn market in India. At the outset, Elecon is looking at manufacturing 650 KV of wind mill transmissions and then scale up to 1.5 to 2.5

Share Holding Pattern (%)

MW. If this comes through, then the company will have another feather in its cap, which

Promoters

:

42.2

could lead to its potential re-rating. At INR 493, the stock trades at a P/E of 18.8x and

MFs, FIs & Banks

:

20.7

FIIs

:

5.0

Others

:

32.2

13.1x FY08E and FY09E earnings of INR 26.3 and INR 37.6 respectively. We maintain our ‘BUY’ recommendation on the stock.

Financials Year to March Revenue (INR mn)

Q4FY07 Q4FY06 Y-o-Y% 2,848

1,874

EBITDA (INR mn)

384

250

Net profit (INR mn)

185

127

EPS (INR)

5.9

4.5

52 54 45 32.7

Q3FY07 Q-o-Q% 1,682 296

FY06

FY07

FY08E

4,425

7,231

9,727

597

1,094

1,625

279

548

822

8.9

17.5

26.3

P/E (x)

57.2

29.1

19.4

EV/EBITDA (x)

26.7

16.2

11.4

ROE (%)

31.7

38.7

39.0

1

152

69 30 21 242.4

1.7

Edelweiss Research is also available on Bloomberg EDEL , Thomson First Call, Reuters and Factset.

Elecon Enginerring

Result Highlights

Š

Sales for the quarter grew 52% Y-o-Y to INR 2848 mn and for the full year by 58% to INR 7232 mn.

Š

MHE division and transmission division accounted for 67% and 33% of sales, respectively, on a quarterly basis. Annually, the contribution was 62% and 38% from the MHE and transmission divisions respectively.

Š

On a segmental basis, sales in the MHE division grew 61% Y-o-Y, whereas growth in the transmission division was 41%. On a full year basis, the Y-o-Y growth in MHE and transmission divisions was 98% and 35% respectively.

Š

EBITDA for the quarter grew 54% Y-o-Y to INR 384 mn. EBITDA margin improved by 20bps from 13.3% in Q4FY06 to 13.5% in Q4FY07. However, on a sequential basis, there was a decline 400bps, primarily because of the following reasons:

Š

The proportion of bought out components in the MHE division was higher at INR 520 mn in Q4FY07 as against INR 330 mn in Q3FY07. We however do not expect this trend to continue, going forward, as it is a one off aberration and an inconsistent phenomenon.

Š

Other expenses, as a percentage of sales, stood at 14% of sales as against 12.2% in Q3FY07, which was abnormal considering the full year trend of 14%. As a result, there was a direct hit of 200bps on the operating margin front.

Š

For the full year, EBITDA grew 83% to INR 1094 mn. EBITDA margins increased 150bps to 15% on the back of 310bps improvement in the EBIT margins of the MHE and stable margins for transmission division. We expect this trend to continue going forward on the back of improved demand scenario from the user industries and operating leverage kicking in.

Š

Other income for the quarter increased 18% Y-o-Y to INR 23 mn in Q4FY07. For the full year though there was a decline of 21% Y-o-Y to INR 66 mn.

Š

PAT for the quarter grew 45% Y-o-Y to INR 185 mn in Q4FY07. For the full year, the same grew 96% to INR 548 mn. Net profit margin for the quarter declined marginally by 30bps to 6.5% in Q4FY07. For the full year though, margins improved 130bps to 7.6%.

Other details Venture into manufacturing of large-size windmill gear boxes Elecon is venturing into the manufacture of large-size windmill gear boxes (between 1 and 2 MW). It will also be selling entire windmills on a turnkey basis for turbine sizes of up to 600 KW and has recently signed an agreement with Centre for Wind Energy Technology for certification of 600 KW windmills. For higher turbine sizes, it is looking at tying up with global windmill companies for their gear box sourcing requirements. It is setting up a separate plant for this purpose, entailing a capital expenditure of INR 800 mn. Though Elecon is targeting revenues of ~INR 1 bn in FY09E, we have factored in sales of INR 500 mn in FY09E from this segment. We have adopted a conservative approach because we would prefer waiting for the company to get a few orders, given the complexity of this business and presence of established players in the turnkey market.

2

Elecon Enginerring

Capex plan of INR 1500 mn over the next two years We estimate a capex of INR 1.5 bn for Elecon over FY08-09E. The break-up of the same is as follows: Table 1: Expansion plan Particulars Wind mill transmission Wind mill MHE Transmission Total

Amount (INR mn) 800 100 300 300 1,500

Source: Company, Edelweiss research

The company is likely to finance 30% of this capex through internal accruals and balance by way of term loans. We expect Elecon’s strong earnings to keep its debt-to-equity ratio at the current levels, going forward. Bonus and dividend Elecon declared bonus of 2 shares for every one held and a dividend of 75%. Post the record date we shall be incorporating the impact of bonus shares in our model.

(INR mn)

Financials snapshot Year to March Net sales

Q4FY07

Q4FY06

Y-o-Y % 52.0

Q3FY07

2,848

1,874

Raw materials

1,984

1,299

1,113

Raw material consumed

1,750

1,151

1,214

234

148

82

50

398

276

2,464

1,624

1,386

384

250

23

13

Stock adjustment Employee expenses Other expenditure Total expenditure EBITDA Other income

1,682

Q-o-Q % 69.3

FY06

FY07

FY08E

4,425

7,231

9,727

3,086

4,872

6,880

67

191

271

325

206

552

993

897

3,828

6,137

8,102

597

1,094

1,625

83

66

23

(101)

53.6

296

77.7 29.7

15

Depreciation

34

25

33

94

122

169

Interest

58

35

54

140

194

251

315

203

130

76

185

127

Tax rate (%)

41

37

Equity capital (FV INR 10)

63

No. of shares (mn)

PBT Provision for taxation - current PAT

Adj EPS (INR)

55.1

225

40.1

410

843

1,227

131

295

405

279

548

822

32

32

35

33

57

63

57

63

63

31

29

31

29

31

31

6

4

5

9

18

26

57

29

19

69.7

67.4

70.7

4.3

3.8

3.3

12.5

13.7

9.2

13.5

15.1

16.7

6.3

7.6

8.5

72

45.3

152

21.3

P/E (x) Margins (%) R.M. (% of sales)

3

66.2

13.3

0.5 8.8 (5.0) 1.1

17.6

5.3 (27.8) 14.1 (23.4)

6.8

87.1

9.1

30.8

69.7

69.3

Emp exp (% of sales)

2.9

2.6

Other exp (% of sales)

14.0

14.7

OPM (%)

13.5

NPM (%)

6.5

4.0 12.2

Elecon Enginerring

Y-o-Y% 52.1 61.2 40.9 73.6

Q3FY07

64.7 73.5 56.9

297

Q-o-Q% 69.3 91.4 39.8 57.7

Q4FY07

Q4FY06

Segment revenue (INR mn)

2,849

1,874

Material handling equipment (INR mn)

1,913

1,187

Transmission equipment (INR mn)

1,104

784

Less: Intersegment (INR mn)

168

97

PBIT (INR mn)

451

274

Material handling equipment (INR mn)

223

129

Transmission equipment (INR mn)

228

145

Profitability (%)

15.8

14.6

Material handling equipment (%)

11.7

10.8

13.0

12.3

Transmission equipment (%)

20.7

18.5

21.1

20.6

4

1,682 999 790 107

130 166 17.6

52.1 71.1 37.2

FY07 7,232 4,485 3,135 388 1,196 551 645 16.5

Elecon Enginerring

Company Description Elecon Engineering (Elecon) was incorporated in 1951 and has supplied equipment to major core sectors such as steel, fertilizers, cement, coal, lignite and iron ore mines, power stations, and port mechanisation in India and abroad. It used to be a two-product company (elevators and conveyors), but now it operates in two broad business segments- MHE and industrial transmission equipment

Investment Theme With 42, 625 MW of capacity addition expected over FY07-12, we expect a total capital expenditure of Rs.112.5 bn on the material handling equipment front over the period of six years. Elecon being one of the bulk material handling equipment players is expected to benefit from the same. Elecon is the largest manufacturer of transmission equipment in India. Order book for the transmission division is driven by the corporate capex plans that have increased from a low of 23% of GDP to 26% in 2004. With average capacity utilisations running at higher levels currently, India is on buoyant corporate capex cycle for the next three years, which will provide growth for the transmission business.

Key Risk Any slowdown in the capex plans of the user industries, namely coal-based power plants, steel, and cement, could be a major threat to the company’s expansion plans.

5

Elecon Enginerring

Financial Statements Income statement

(INR mn)

Year to March

FY05

FY06

FY07E

FY08E

FY09E

Income from operations

2,728

4,425

7,230

9,727

12,614

Direct costs

8,927

1,915

3,086

4,872

6,880

Employee costs

157

191

271

325

407

Other expenses

337

552

993

897

1,032

2,409

3,828

6,136

8,102

10,365

319

597

1,094

1,625

2,249

82

94

123

169

196

237

502

971

1,455

2,053

Interest expenses

93

140

194

251

318

Other income

31

83

66

23

20

175

445

843

1,227

1,755

74

131

295

405

579

-

-

Total operating expenses EBITDA Depreciation and amortisation EBIT

Profit before tax Provision for tax Extraordinary items

-

36

Reported profit

101

279

548

822

1,176

-

Adjusted net profit

101

279

548

822

1,176

Shares outstanding

28

29

31

31

31

Dividend per share

0.6

1.1

1.5

6.6

9.4

Dividend payout (%)

15.9

11.0

8.6

25.0

25.0

FY05

FY06

FY07E

FY08E

FY09E

88.3

86.5

84.9

83.3

Depreciation

3.0

2.1

1.7

1.7

1.6

Interest expenditure

3.4

3.2

2.7

2.6

2.5

11.7

13.5

15.1

16.7

17.8

3.7

6.3

7.6

8.5

9.3

Year to March

FY05

FY06

FY07E

FY08E

Revenues

71.2

62.2

63.4

34.5

29.7

EBITDA

138.3

87.0

83.4

48.5

38.4

Common size metrics- as % of net revenues Year to March Operating expenses

EBITDA margins Net profit margins

82.2

Growth metrics (%)

PBT

731.0

155.0

89.2

45.7

43.0

Net profit

375.2

176.3

96.4

50.2

43.0

EPS

375.2

176.3

96.4

50.2

43.0

Cash flow statement Year to March Net profit

(INR mn) FY05

FY06

FY07E

FY08E

FY09E

101

314

548

822

1,176

Add: Depreciation

82

94

123

169

196

Add: Misc expenses written off

32

27

23

-

-

Add: Deferred tax

24

(2)

239

434

Gross cash flow Less: Dividends Less: Changes in W. C. Operating cash flow Less: Change in investments

6

FY09E

-

-

694

992

1,372

16

31

47

206

294

188

914

657

887

819

34

(511)

(10)

(101)

260

(1)

13

-

-

-

Less: Capex

229

401

700

700

1,000

Free cash flow

(193)

(926)

(710)

(801)

(740)

Elecon Enginerring

Balance sheet As on 31st March

(INR mn) FY05

FY06

FY07E

FY08E

57

57

63

63

63

Reserves & surplus

677

970

1,738

2,354

3,236

Shareholders funds

733

1,027

1,800

2,417

3,299

Secured loans

670

1,506

1,706

2,206

2,706

Unsecured loans

292

551

589

789

989

Borrowings

962

2,057

2,295

2,995

3,695

Sources of funds

1,695

3,084

4,095

5,412

6,994

Gross block

1,725

2,027

2,727

3,427

4,427

Depreciation

1,112

1,182

1,305

1,474

1,670

613

846

1,423

1,953

2,757

7

107

107

107

107

621

952

1,529

2,060

2,864

50

63

63

63

63

Inventories

1,200

1,639

3,010

3,663

4,754

Sundry debtors

5,011

Equity capital

Net block Capital work in progress Total fixed assets Investments

FY09E

1,140

2,142

2,975

4,002

Cash and equivalents

92

247

48

(53)

(94)

Loans and advances

251

306

383

478

560

Total current assets

2,682

4,334

6,415

8,090

10,231

Sundry creditors and others

1,539

2,122

3,502

4,268

5,454

Provisions

45

45

289

412

588

Total CL & provisions

1,584

2,167

3,790

4,680

6,042

Net current assets

1,097

2,167

2,624

3,410

4,189

(123)

(121)

(121)

(121)

(121)

50

23

0

0

0

1,695

3,084

4,095

5,412

6,994

26

36

58

77

106

FY09E

Net deferred tax Others Uses of funds Book value per share (BV) (INR) Ratios Year to March

FY05

FY06

FY07E

FY08E

ROE (%)

14.6

31.7

38.7

39.0

41.1

ROCE (%)

17.6

23.0

28.9

31.1

33.4

Current ratio

1.7

2.0

1.7

1.7

1.7

Debtors (days)

152

177

150

150

145

Fixed assets t/o (x)

5.1

5.6

5.8

5.4

5.1

Debt/Equity

1.3

2.0

1.3

1.2

1.1

FY09E

Valuations parameters Year to March EPS (INR)

Y-o-Y growth (%) CEPS (INR)

FY06

FY07E

FY08E

3.2

8.9

17.5

26.3

37.6

375.2

176.3

96.4

50.2

43.0

32.4

65.4

107.3

158.6

219.5

153.0

55.4

28.2

18.8

13.1

Price/BV(x)

19.0

13.7

8.6

6.4

4.7

EV/Sales (x)

5.4

3.6

2.4

1.9

1.5

46.5

26.7

16.2

11.4

8.6

P/E (x)

EV/EBITDA (x)

7

FY05

Elecon Enginerring Edelweiss Securities th

14 Floor, Express Towers, Nariman Point, Mumbai – 400 021 Board: (91-22) 2286 4400 Email: [email protected] Naresh Kothari – 2286 4246

Co-Head, Institutional Equities

Vikas Khemani – 2286 4206

Co-Head, Institutional Equities

INDIA RESEARCH

SECTOR

INSTITUTIONAL SALES

Shriram Iyer

-

2286 4256

Head – Research

Nischal Maheshwari

-

2286 4205

Gautam Roy

-

2286 4305

Airlines, Textile

Rajesh Makharia

-

2286 4202

Ashutosh Goel

-

2286 4287

Automobiles, Auto Components

Vikrant Oak

-

4019 4712

Abhijit Chakraborty

-

4019 4823

Vishal Goyal, CFA

-

2286 4370

Banking & Finance Balakumar V

-

(044) 4263 8283

Revathi Myneni

-

2286 4413

Cement Ashish Agrawal

-

2286 4301

Nikhil Garg

-

2286 4282

Harish Sharma

-

2286 4307

Infrastructure, Auto Components, Mid Caps

Priyanko Panja

-

2286 4300

Infrastructure, Engineering, Telecom

Swati Khemani

-

2286 4266

Parul Inamdar

-

2286 4355

Information Technology

Neha Shahra

-

2286 4276

Priyank Singhal

-

2286 4302

Media, Retail, FMCG

Priya Ramchandran

-

2286 4389

Anubhav Kanodia

-

2286 4361

Prakash Kapadia

-

4097 9843

Mid Caps Tushar Mahajan

-

2286 4439

Niraj Mansingka

-

2286 4304

Oil & Gas, Petrochemicals Harsh Biyani

-

2286 4419

Manika Premsingh

-

4019 4847

Economist

Nirmal Ajmera

-

2286 4258

Sunil Jain

-

2286 4308

Alternative & Quantitative

Ankit Doshi

-

2286 4671

Yogesh Radke

-

2286 4328

Alternative & Quantitative

Dipesh Shah

-

2286 4434

Email addresses: [email protected]

e.g. [email protected]

unless otherwise specified

RATING INTERPRETATION Buy

Expected to appreciate more than 20% over a 12-month period

Reduce

Expected to depreciate up to 10% over a 12-month period

Accumulate

Expected to appreciate up to 20% over a 12-month period

Sell

Expected to depreciate more than 10% over a 12-month period

Trading Buy Expected to appreciate more than 10% over a 45-day period

Trading Sell Expected to depreciate more than 10% over a 45-day period

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8

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