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Elecon Engineering: Restructuring to bear fruits

Aug 7, 2012

Elecon Engineering has announced first quarter results of financial year 2012-2013 (1QFY13). The company has reported a 7.3% YoY and 57.1% YoY decline in sales and net profits respectively during the quarter. Here is our analysis of the results.

Performance summary
  • Total income declined by 7.3% YoY in 1QFY13.
  • Operating profits decline by 25.7% YoY during the quarter due to muted performance at the topline level and a 21% YoY rise in the staff cost.
  • Net profits declined by 57.1% YoY, due to muted performance at the operating level and rise in interest and depreciation expenses.
  • As of 30 June 2012, the unexecuted order backlog of the company stood at Rs 16.2 bn. Order inflow during the quarter was in the region of Rs 6.67 bn.
  • As of 30th June 2012, the company had a total debt of Rs 5.66 bn, of which approximately Rs 4 bn pertained to the working capital requirements.

Standalone performance snapshot
(Rs m) 1QFY12 1QFY13 Change
Total income  2,543 2,358 -7.3%
Expenditure 2,119 2,042 -3.6%
Operating profit (EBDITA) 425 316 -25.7%
Operating profit margin (%) 16.7% 13.4%  
Other income 30 42 41.8%
Interest 135 149 10.4%
Depreciation 101 114 13.2%
Profit before tax 218 94 -56.9%
Tax 69 30 -56.4%
Profit after tax/(loss) 149 64 -57.1%
Net profit margin (%) 5.9% 2.7%  
No. of shares   92.9  
Basic  earnings per share (Rs)   0.7  
P/E ratio (x)*   7.2  
* On a trailing 12 months basis

What has driven performance in 1QFY13?
  • Elecon's total income declined by 7.3% YoY during 1QFY13. Revenues (excluding inter-segment adjustments) from material handling equipment (MHE) declined 15.0% YoY. Delivery deferments by the clients impacted the revenue growth from the MHE segment. It may be noted that equipments worth Rs 350-360 m are lying with the company as the deliveries are getting deferred by the clients. However, revenues the transmission equipment (TE) business increased marginally by 3.6% YoY.

    Segment-wise performance
    (Rs m) 1QFY12 1QFY13 Change
    Material Handling Equipment (MHE)
    Revenue 1,424 1,210 -15.0%
    % share 54.1% 49.1%  
    PBIT margin 13.6% 9.4%  
    Transmission Equipment (TE)
    Revenue 1,209 1,252 3.6%
    % share 45.9% 50.9%  
    PBIT margin 15.2% 13.9%  
    Revenue* 2,633 2,463 -6.5%
    PBIT margin 14.3% 11.7%  
    * Excluding inter-segment adjustments

  • Operating margins contracted to 13.4% during the quarter from 16.7% in 1QFY12. This was mainly due to increase in staff cost which increased 21% YoY. Slower revenue growth due to client deferment is also making absorption of fixed costs difficult, thereby impacting the margins.

  • Net profits declined by 57.1% YoY due to muted performance at the operating level and rise in interest and depreciation expenses.

What to expect?
At the current price of Rs 47, the stock is trading at a multiple of 7.2 times its trailing twelve month earnings. The overall performance in the current quarter was quite disappointing. Nonetheless, management has maintained its full year revenue target and expects to end the year with a top-line growth of about 7-8%. Better topline performance in the second half will also make absorption of fixed cost smoother. Thus, operating margins are expected to remain in the range of 14-15% for the full year. In terms of order inflow, management expects a growth of 20-30% of what was registered in the last year (FY12 order inflow was Rs 12.1 bn). Capex will remain toned down in the region of Rs 560-600 m.

The company also undertook a restructuring exercise in the current quarter whereby it aims to consolidate the group's MHE and TE businesses. This would entail creation of separate entities for both the businesses. It may be noted that the company currently has two wholly owned subsidiaries, namely Prayas Engineering and EMTICI Engineering which also have presence in MHE and PT segments. The basic idea of restructuring is to have all the sub-segments (MHE & PT) under one roof of any of the subsidiaries. This would entail better management as the business dynamics of MHE and PT segments are different. For instance, the capex requirement of PT business is double of that the MHE business. However, MHE business is more working capital intensive than the PT business. Thus, the said restructuring would help manage both the businesses in a better way. Although the transaction is expected to be EPS neutral for FY13, the synergy benefits are likely to accrue from FY14. The benefits are expected to be in the region of Rs 100 m pa. Based on these factors we maintain our buy view on the stock.

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