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Elecon Engineering: Disappointing quarter - Views on News from Equitymaster
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Elecon Engineering: Disappointing quarter
Jul 1, 2014

Elecon Engineering has announced fourth quarter results of financial year 2013-2014 (4QFY14). The company has reported a 10% YoY decrease in sales while net profits have declined by 2%. Here is our analysis of the results.

Performance summary
  • Total income declined by 10% YoY in 4QFY14. It may be noted that under a scheme of arrangement, Elecon Engineering has sold 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 last year's quarterly and annual financial results have been regrouped to reflect only Transmission Equipments (TE) business.
  • Operating profits increased by 35% YoY during the quarter. The margins have increased substantially from 13.6% in the last quarter to 20.5% in 4QFY14. This was on account of sharp drop in proportionate cost of raw material to sales.
  • Net profits decreased by 2% YoY on account of increase in interest rate as well as tax.
  • The order backlog as of March 2014 stood at Rs 2.66 bn. This reflects backlog of the TE segment only as MHE segment has been transferred to the subsidiary. During the year, the order inflow in the TE segment was approximately Rs 611 m.

Standalone Performance snapshot
(Rs m) 4QFY13 4QFY14 Change FY13 FY14 Change
Total income  1,814 1,630 -10% 5,952 5,012 -16%
Expenditure 1,568 1,297 -17% 4,925 4,012 -19%
Operating profit (EBDITA) 246 334 35% 1,027 1,001 -3%
Operating profit margin (%) 13.6% 20.5%   17.3% 20.0%  
Other income 23 30 32% 111 176 58%
Interest 59 94 58% 301 332 11%
Depreciation 121 112 -7% 420 454 8%
Exceptional items       (267)    
Profit before tax 89 158 77% 151 390 159%
Tax (23) 49 NA 65 115 76%
Profit after tax/(loss) 112 109 -2% 85 274 222%
Net profit margin (%) 6.2% 6.7%   1.4% 5.5%  
No. of shares         108.9  
Basic  earnings per share (Rs)         2.5  
P/E ratio (x)*         25.68  
* On a trailing 12 months basis

What has driven performance in 4QFY14 and FY14?
  • Elecon's total income declined by 10% YoY during 4QFY14 following fall in product sales in the TE segment.

  • Operating profits increased 35% YoY despite fall in topline as the total expenditure of the company declined at a faster pace of 17% YoY. Within total expenditure, raw material expenses on absolute basis as well as a proportion of total sales decreased which led to 6.9% increase in margins.

  • Despite strong growth in operating profits as well as other income, net profits remained flat. This is because interest increased sharply by 58% YoY and taxes also increased.

  • For FY14, sales were disappointing with 16% YoY decline in sales. Operating profit fell by 3% on account of increase in expenditure despite drop in sales. Net profit increased more than double. However, the increase was on account of rise in other income, exceptional loss (arising due to loss in slump sale of MHE business segment) as well as tax concessions in the last year. The adjusted net profit, therefore, has dropped by 22% YoY.
What to expect?
Elecon has had a disappointing performance on the topline front. The increase in the bottomline is also a result of rise in other income and exceptional loss in the previous year. At the current price of Rs 65, the stock is trading at a multiple of 25.7 times based on its trailing twelve month earnings. At this valuation the stock seems expensive. The recent rally in the stock is a result of improvement in investor sentiments on the hopes of revival of infrastructure sector with the formation of a stable government. Since FY14 is over, we shall revisit our estimates and view on Elecon. We shall soon update investors with a revised view and target price based on FY17 earnings. Till then we recommend the investors to Hold on to the stock.

However, 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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