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Elecon Engineering: Material handling business suffers - Views on News from Equitymaster

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  • May 26, 2011 - Elecon Engineering: Material handling business suffers

Elecon Engineering: Material handling business suffers

May 26, 2011

Elecon Engineering has announced fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported 6.6% YoY growth in sales. However, net profits have declined 12.9% YoY. Here is our analysis of the results.

Performance summary
  • Net sales grow by 6.6% YoY in 4QFY11, 12.5% YoY during FY11.
  • Operating profits grow by 21.2% YoY during the quarter on account of relatively lower increase in expenditure when compared to the growth in sales. The expenditure seems to be well managed despite the prevailing macro-economic headwinds.
  • Fall in other income in addition to the increase in tax expenses impacts the bottom line. Net profits are down by 12.9% during the quarter.
  • The company declared a dividend of Rs 1.8 per share.

(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 3,291 3,507 6.6% 10,464 11,772 12.5%
Expenditure 2,854 2,978 4.3% 8,968 10,007 11.6%
Operating profit (EBDITA) 437 530 21.2% 1,496 1,765 18.0%
Operating profit margin (%) 13.3% 15.1%   14.3% 15.0%  
Other income 117 35 -70.2% 248 284 14.8%
Interest 117 130 10.6% 509 458 -9.9%
Depreciation 95 99 4.1% 331 384 16.0%
Profit before tax 341 336 -1.6% 903 1,207 33.6%
Tax 70 100 41.8% 241 328 35.7%
Profit after tax/(loss) 271 236 -12.9% 662 879 32.9%
Net profit margin (%) 8.2% 6.7%   6.3% 7.5%  
No. of shares         92.9  
Basic & Diluted earnings per share (Rs)*         9.5  
P/E ratio (x)*         7.3  
* On a trailing 12 months basis

What has driven performance in 4QFY11?
  • Elecon's sales grew by 6.6% YoY during 4QFY11. The growth was mainly led by a 15.1% YoY growth in the transmission equipment (TE) business. However, the material handling equipment (MHE) business registered a decline of 4.9% YoY during the quarter. Consequent to this decline, the TE business increased its share in the company's total revenue to nearly 43.9% from 39.3% in 4QFY10, while the MHE business contributed to the balance 56.1% during the quarter (60.7% in 4QFY10).

    Segment-wise performance
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    Material Handling Equipment (MHE)
    Revenue 2,100 1,998 -4.9% 6,549 6,746 3.0%
    % share 60.7% 56.1%   60.6% 56.3%  
    PBIT margin 12.9% 13.8%   12.7% 13.2%  
    Transmission Equipment (TE)
    Revenue 1,358 1,563 15.1% 4,259 5,246 23.2%
    % share 39.3% 43.9%   39.4% 43.7%  
    PBIT margin 15.8% 16.2%   16.1% 16.0%  
    Total
    Revenue* 3,458 3,562 3.0% 10,808 11,992 11.0%
    PBIT margin 14.1% 14.9%   14.0% 14.4%  
    * Excluding inter-segment adjustments

  • Operating margins expanded 180 bps YoY mainly due to fall in raw material expenses as a percentage of sales. The raw material expenses (as a percentage of sales) declined from 68.5% in 4QFY10 to 63.1% in 4QFY11. However, other expenditure (as a percentage of sales) increased during the quarter arresting margin expansion. Other expenditure increased due to a foreign exchange loss of Rs 12 m incurred during the quarter compared to a gain of Rs 4.2 m in 4QFY10. (It may be noted that forex losses are clubbed in other expenditure). Increase in bad debts also led to a rise in other expenditure.

  • Net profits declined by 12.9% YoY on account of fall in other income and rise in tax expenses. Other income declined due to lower profits on sale of investments of Rs 1.5 m in 4QFY11 compared to Rs 82.2 m in 4QFY10.

What to expect?
At the current price of Rs 67, the stock is trading at a multiple of 6.9 times our FY13 earnings estimates. The current order backlog stands at Rs 16.9 bn and management expects order inflow of Rs 6 bn over the next 6 months. Amidst healthy order inflow, top line for FY12 is expected to be in the range of Rs 14.5-15 bn. Even margins are expected to remain in the historical range despite material price inflation due to prudent cost control measures. It may be noted that the company has in-house manufacturing capability for certain products which presents margin leverage. At current levels, we maintain our view on the stock.

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