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Elecon Engineering: Profits halve sequentially

Mar 10, 2014 | Updated on Oct 30, 2019

Elecon Engineering has announced third quarter results of financial year 2013-2014 (3QFY14). The company has reported a 7.0% QoQ decline in sales while net profits have declined by 49.8% sequentially. Here is our analysis of the results.

Performance summary
  • Total income declined by 7.0% QoQ in 3QFY14. It may be noted that under a scheme of arrangement, Elecon Engineering had decided to sell its material handling equipments (MHE) business by the way of slump sale to Elecon EPC Projects Ltd, a subsidiary of the company. The scheme of arrangement was effective from 01 April 2013. As such, the current quarter financial results reflect the operations of Transmission Equipments (TE) business only. Hence, YoY performance is not comparable since 3QFY13 results include the performance of MHE business. Thus, we have analyzed the 3QFY14 performance on QoQ basis. Also, nine month comparison does not depict the right picture since 9MFY13 figures contain the performance of MHE business.
  • Operating profits increase by 0.5% QoQ during the quarter due to 25.6% QoQ decline in other expenses and a 16.5% QoQ decline in staff expenses.
  • Net profits decline by 49.8% QoQ despite flattish performance at the operating level due to 82.7% QoQ fall in other income.
  • The order backlog as of 31st January 2014 stood at Rs 2.77 bn. This reflects backlog of the TE segment only as MHE segment has been transferred to the subsidiary. During the period until 31st Jan 2014 the company received orders worth Rs 4.96 bn pertaining to the TE segment. Currently, overall order book of the company is in the region of Rs 17.1 bn.
  • Recently, the company bagged an order worth Rs 2.46 bn from NTPC. Management expects margins to be in the range of 5-7% on this new order.

Standalone performance snapshot
(Rs m) 2QFY14 3QFY14 Change
Total income  1,206 1,122 -7.0%
Expenditure 961 876 -8.9%
Operating profit (EBDITA) 245 246 0.5%
Operating profit margin (%) 20.3% 21.9%  
Other income 79 14 -82.7%
Interest 88 86 -2.3%
Depreciation 114 115 1.2%
Profit before tax 123 59 -51.9%
Tax 35 15 -57.3%
Profit after tax/(loss) 88 44 -49.8%
Net profit margin (%) 7.3% 4.0%  
No. of shares   108.9  
Basic  earnings per share (Rs)   0.41  
P/E ratio (x)*   NM  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • Elecon's total income declined by 7.0% QoQ during 3QFY14 on a standalone basis due to poor performance from the TE business. Since the MHE business was transferred to a subsidiary of the company, its quarterly performance is not shown in the standalone results.

  • Operating profits increased 0.5% QoQ despite fall in topline as the total expenditure of the company declined at a faster pace of 8.9% YoY. Within total expenditure, other expenses and staff expenses fell by 25.6% QoQ and 16.5% QoQ respectively. As a result, operating margins increased to 21.9% during the quarter from 20.3% that prevailed in 2QFY14.

  • Despite flattish growth in operating profits, net profits declined by 49.8% QoQ due to 82.7% QoQ fall in other income.
What to expect?
At the current price of Rs 28, the stock is trading at a multiple of 3.5 times our estimated FY16 EPS estimates. Since the MHE business is now sold off to a subsidiary, its performance is not reflected in the standalone financials. However, the like to like comparison for the quarter after excluding the MHE business was not encouraging.

The back log in the TE business has been increasing over the last 3 quarters. The overall company back log is also healthy at Rs 17.1 bn. This is predominantly because Elecon was able to bag some large size orders from Pipavav Defence (Rs 372 m) and L&T (Rs 222.4 m) during 9MFY14. Further, the company recently won an order worth Rs 2.46 bn from NTPC as well. Considering the revival in order back log we maintain our HOLD view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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