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Elecon Engineering: Disappointing quarter - Views on News from Equitymaster
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Elecon Engineering: Disappointing quarter
Feb 1, 2013

Elecon Engineering has announced third quarter results of financial year 2012-2013 (3QFY13). The company has reported a 32.8% YoY decline in sales while net profits have declined by 53.7% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Total income declined by 32.8% YoY in 3QFY13 as revenues from material handling equipments (MHE) and transmission equipments (TE) declined 41.9% YoY and 23.6% YoY respectively.
  • Operating profits decline by 34.4% YoY during the quarter due to a muted performance at the topline level.
  • Net profits decline by 53.7% YoY due to weak performance at the operating level and increase in depreciation expenses.
  • The order backlog as of 31st December 2012 stood at Rs 14.1 bn. The order book breakdown is as follows: MHE - Rs 11.6 bn and TE- Rs 2.6 bn. During the quarter the company received orders worth Rs 1.9 bn.

Standalone financial performance
(Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
Total income  3,000 2,017 -32.8% 8,897 7,672 -13.8%
Expenditure 2,516 1,700 -32.4% 7,509 6,444 -14.2%
Operating profit (EBDITA) 484 318 -34.4% 1,388 1,228 -11.5%
Operating profit margin (%) 16.1% 15.7%   15.6% 16.0%  
Other income 12 8 -29.8% 60 68 13.1%
Interest 151 124 -17.6% 429 428 -0.4%
Depreciation 107 120 12.8% 313 355 13.3%
Profit before tax 238 81 -66.0% 705 513 -27.3%
Tax 86 11 -87.7% 248 149 -40.1%
Profit after tax/(loss) 152 71 -53.7% 457.08 364 -20.3%
Net profit margin (%) 5.1% 3.5%   5.1% 4.7%  
No. of shares         92.9  
Basic earnings per share (Rs)         3.9  
P/E ratio (x)*         6.3  
* On a trailing 12 months basis

What has driven performance in 3QFY13?
  • Elecon's total income declined by 32.8% YoY during 3QFY13. Revenues (excluding inter-segment adjustments) from material handling equipment (MHE) and transmission equipment (TE) businesses declined 41.9% YoY and 23.6% YoY respectively.

    Segment-wise performance
    (Rs m) 3QFY12 3QFY13 Change 9MFY12 9MFY13 Change
    Material Handling Equipment (MHE)
    Revenue 1,644          956 -41.9% 4,991 4,075 -18.4%
    % share 52.8% 46.0%   54.3% 51.6%  
    PBIT margin 12.5% 10.4%   13.1% 12.4%  
    Transmission Equipment (TE)
    Revenue 1,468 1,122 -23.6% 4,198 3,818 -9.1%
    % share 47.2% 54.0%   45.7% 48.4%  
    PBIT margin 14.9% 12.1%   14.6% 15.0%  
    Total
    Revenue* 3,112 2,077 -33.3% 9,188 7,892 -14.1%
    PBIT margin 13.6% 11.3%   13.8% 13.7%  

  • Operating margins declined to 15.7% during the quarter from 16.1% in 3QFY12. This was mainly due to increase in staff cost as percentage of sales. The staff cost increased from 6.3% in 3QFY12 to 9.6% in 3QFY13. Other expenses also increased from 12.1% in 3QFY12 to 14.5% in 3QFY13.

  • In line with the fall in operating profits, net profits declined by 53.7% YoY. Net margins also fell from 5.1% in 3QFY12 to 3.5% in 3QFY13.

What to expect?
At the current price of Rs 41, the stock is trading at a multiple of 6.3 times its trailing twelve month (TTM) earnings. The overall performance in the current quarter was really disappointing. Muted results and slowdown in the industry has resulted in a correction of about 26% since our initial recommendation. Going forward, for FY13, management expects revenues in the region of Rs 12.5-13 bn. Considering the 9MFY13 performance, the company will have to report revenues of Rs 4.8 bn in the last quarter (first 3 quarter average is Rs 2.6 bn) to achieve the full year target. This appears to be a challenging task. Nonetheless, we feel that muted financial performance has more or less been priced in by the market. Considering the cheap valuations (6.3x times TTM earnings) we feel the stock would re-rate soon once the capex cycle recovers. As a result, we maintain our BUY view on the stock.

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