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Elecon Engg: Slowing down? - Views on News from Equitymaster

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Elecon Engg: Slowing down?

Feb 2, 2008

Performance summary
  • Topline grows 10% YoY in 3QFY08, 14% YoY in 9mFY08. Quarterly growth largely aided by the material handling business, while transmission equipment business leads performance for the nine-month period.
  • Operating margins expand by 1.3% during the quarter owing to stock related adjustments, as raw material costs increase (as percentage of sales).

  • Net profits grow 13% YoY in 3QFY08, 22% YoY in 9mFY08. Quarterly growth in bottomline aided by the extraordinary impact of 3QFY07.

Performance snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Sales 1,682 1,852 10.1% 4,383 4,986 13.8%
Expenditure 1,388 1,504 8.3% 3,661 4,121 12.6%
Operating profit (EBDITA) 294 349 18.6% 722 864 19.8%
Operating profit margin (%) 17.5% 18.8%   16.5% 17.3%  
Other income 17 19 7.9% 49 76 56.6%
Interest 54 88 64.3% 136 189 39.1%
Depreciation 33 36 9.7% 88 106 19.6%
Profit before tax 225 243 8.2% 546 646 18.3%
Extraordinary income/(expense) (6) -   (17) -  
Tax 72 77 7.1% 165 204 23.1%
Profit after tax/(loss) 147 166 13.0% 363 442 21.7%
Net profit margin (%) 8.7% 9.0%   8.3% 8.9%  
No. of shares         92.8  
Diluted earnings per share (Rs)*         6.8  
P/E ratio (x)*         29.6  
* On a trailing 12 months basis

What has driven performance in 3QFY08?
  • Elecon grew its sales by 10% YoY during 3QFY08. This growth was largely aided by the company’s material handling equipment (MHE) business, which grew sales by 6% YoY. On the other hand, the transmission equipment business recorded a marginal 1% YoY increase in sales. As for the nine-month period, growth in topline was led by the second division, which raked in a sales growth of 23% YoY, led by continued upsurge in industrial capex, with strong expansion activity in cement and steel industries.

    Segment-wise performance
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Material Handling Equipment (MHE)            
    Revenue 999 1,059 5.9% 2,572 2,681 4.3%
    % share 55.9% 57.1%   55.9% 51.8%  
    PBIT margin 13.0% 14.6%   12.7% 13.0%  
    Transmission Equipment (TE)            
    Revenue 790 797 0.9% 2,031 2,495 22.9%
    % share 44.1% 42.9%   44.1% 48.2%  
    PBIT margin 21.1% 22.5%   20.5% 21.2%  
    Revenue* 1,789 1,855 3.7% 4,603 5,176 12.5%
    PBIT margin 16.6% 18.0%   16.2% 16.9%  
    * Excluding inter-segment adjustments

  • Elecon’s operating margins expanded by 1.3% YoY during 3QFY08. This was a result of stock related adjustments. However, the gains in operating margins were pared on account of increase in raw material costs. These costs increased from 72.3% of sales in 3QFY07 to 77.8% in 3QFY08. Based on segments, both MHE and TE recorded improvement in PBIT margins.

  • Elecon’s net profits grew by 13% YoY during 3QFY08. This was largely a result of an extraordinary expense that the company had booked in 3QFY07 and that was not incurred during 3QFY08. Adjusting for this one-off expense, the net profit growth for 3QFY08 stands reduced to 9% YoY.

What to expect?
At the current price of Rs 200, the stock is trading at a multiple of 11.7 times our estimated FY10 earnings. Considering the size of investments planned in the power sector over the next few years, while the opportunity for Elecon seems huge, the lacklustre performance during the third quarter and nine months seems an oddity. We had recommended a ‘Hold’ on the stock at Rs 141 (adjusted for 2:1 bonus) with a target of Rs 197, which has already been breached. We shall update our report and view on the company post a research meeting with the management.

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Mar 22, 2019 11:19 AM


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