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Elecon Engineering: Forex impact

Feb 20, 2009

Performance summary
  • Topline grows by 33% YoY in 3QFY09, 34% YoY in 9mFY09. Growth aided by traction in both segments – material handling and transmission equipment.
  • Operating margins contract by 0.6% YoY during the quarter. However margins for the 9mFY09 period remain flat at 17.3%.
  • Including extraordinary adjustments, net profits decline by 25% YoY in 3QFY09, and 9% YoY in 9mFY09. However, on excluding the same, profits for the quarter and 9mFY09 increase by 31% YoY and 28% YoY respectively.
  • Order backlog at the end of the quarter stands at Rs 18 bn (nearly 2.2 times its FY08 net sales).

Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 1,852 2,457 32.6% 4,986 6,665 33.7%
Expenditure 1,504 2,010 33.7% 4,121 5,509 33.7%
Operating profit (EBDITA) 349 447 28.1% 864 1,156 33.7%
Operating profit margin (%) 18.8% 18.2%   17.3% 17.3%  
Other income 6 10 56.9% 40 45 13.1%
Interest 88 142 61.1% 189 325 72.1%
Depreciation 36 56 55.7% 106 152 43.2%
Profit before tax 231 259 12.0% 610 725 18.8%
Extraordinary gains/ (losses) 12 (77)   36 (116)  
Tax 77 57 -26.4% 204 204 0.3%
Profit after tax/(loss) 166 125 -24.6% 442 405 -8.5%
Net profit margin (%) 9.0% 5.1%   8.9% 6.1%  
No. of shares (m)         92.9  
Diluted earnings per share (Rs)*         7.7  
P/E ratio (x)*         4.0  
* On a trailing 12-month basis; adjusted for extraordinary items

What has driven performance in 3QFY09?
  • Elecon’s revenues increased by 33% YoY during 3QFY09. Growth was aided by its material handling equipment (MHE) business (which grew 36% YoY) and its transmission equipment (TE) business (34% YoY). As for the nine-month period, growth in topline was led by the MHE business, which recorded a sales growth of 45% YoY. On the other hand, the TE business grew by 19% YoY.

    Segment wise performance
    (Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
    Material Handling Equipment (MHE)
    Revenue 1,059 1,437 35.7% 2,681 3,885 44.9%
    % share 57.1% 57.3%   51.8% 56.7%  
    PBIT margin 14.6% 11.3%   13.7% 11.7%  
    Transmission Equipment (TE)
    Revenue 797 1,071 34.4% 2,495 2,968 18.9%
    % share 42.9% 42.7%   48.2% 43.3%  
    PBIT margin 22.5% 17.5%   20.4% 18.2%  
    Revenue* 1,855 2,508 35.2% 5,176 6,852 32.4%
    PBIT Margin 18.0% 13.9%   16.9% 14.5%  
    * Excluding inter-segment adjustments

  • Elecon’s operating margins contracted by 0.6% YoY during 3QFY09. This was on account of higher other expenditure (as a percentage of sales). Further, the company’s net profits declined by 25% YoY. This was mainly on account of forex losses to the tune of Rs 77 m. However, during 3QFY08, the company had earned Rs 12 m on account of forex gains. On excluding these items, net profits are higher by 31% YoY during the quarter. In addition, depreciation and interest charges also witnessed an increase as compared to 3QFY08. As a percentage of sales, depreciation charges increased to 2.3% in 3QFY09 as compared to 1.9% in 3QFY08, while interest costs increased to 5.8% as against to 4.8% in 3QFY08.

What to expect?
At the current price of Rs 31, the stock is trading at a multiple of 4 times its trailing 12 months earnings. From its order backlog of Rs 18 bn, nearly 86% forms part the MHE business, while the balance is shared by its TE business. The company’s management is bullish on the MHE business. The rationale behind the same is that it is expecting large number of tenders from power projects. It may be noted that nearly 85% of the MHE business’ orders are from the power sector. As for the TE business, the management’s view is mixed. While the demand for gearboxes has decreased, the demand for other equipment remains stable.

The management believes that the next few quarters will be tough keeping in mind the increased competition and general slowdown in economic activity. As such, it expects the company’s margins to be under pressure on account of competitive pricing for projects.

Presently, the company has a debt of nearly Rs 5.1 bn, of which Rs 3.8 are working capital loans, while the balances are term loans. This puts the company in a tight spot considering that its debt to equity ratio stands at an approximate 2.2 times. Also the fact that delayed customer payments and increasing receivable days are impacting engineering companies, the same holds true for Elecon as well. We shall soon update our research report on the company, factoring the 9mFY09 numbers.

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