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Elecon Engineering: MHE remains a laggard - Views on News from Equitymaster
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Elecon Engineering: MHE remains a laggard
Aug 9, 2011

Elecon Engineering has announced first quarter results of financial year 2011-2012 (1QFY12). The company has reported 3.7% YoY and 11.9% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 3.7% YoY in 1QFY12.
  • Operating profits grew by 14.1% YoY during the quarter on account of relatively lower increase in expenditure when compared to the growth in sales.
  • Despite increase in interest and depreciation expenses, net profits increased 11.9% YoY due to increase in other income.
  • As of 30 June 2011, the unexecuted order backlog of the company stood at Rs 15.4 bn. Order inflow during the quarter was in the region of Rs 5.1 bn.
  • The company intends to incur a capex of Rs 1.0 to 1.25 bn in FY12

Standalone performance snapshot
(Rs m) 1QFY11 1QFY12 Change
Sales 2,452 2,543 3.7%
Expenditure 2,084 2,123 1.9%
Operating profit (EBDITA) 368 420 14.1%
Operating profit margin (%) 15.0% 16.5%  
Other income 11 30 162.3%
Interest 98 133 34.8%
Depreciation 89 98 10.3%
Profit before tax 192 218 14.0%
Tax 58 69 18.9%
Profit after tax/(loss) 133 149 11.9%
Net profit margin (%) 5.4% 5.9%  
No. of shares   92.9  
Basic earnings per share (Rs)*   9.7  
P/E ratio (x)*   7.5  
* On a trailing 12 months basis

What has driven performance in 1QFY12?
  • Elecon's sales grew by 3.7% YoY during 1QFY12. The growth was mainly led by a 20.3% YoY growth in the transmission equipment (TE) business. However, the material handling equipment (MHE) business registered a decline of 4.7% YoY during the quarter. Consequent to this decline, the TE business increased its share in the company's total revenue to nearly 45.9% from 40.2% in 1QFY11, while the MHE business contributed to the balance 54.1% during the quarter (59.8% in 1QFY11).

    Segment-wise performance
    (Rs m) 1QFY11 1QFY12 Change
    Material Handling Equipment (MHE)
    Revenue 1,495 1,424 -4.7%
    % share 59.8% 54.1%  
    PBIT margin 12.8% 13.6%  
    Transmission Equipment (TE)
    Revenue 1,004 1,209 20.3%
    % share 40.2% 45.9%  
    PBIT margin 15.2% 15.2%  
    Revenue* 2,499 2,633 5.3%
    PBIT margin 13.8% 14.3%  
    * Excluding inter-segment adjustments
  • Operating margins expanded 150 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 71.4% in 1QFY11 to 68.4% in 1QFY12. However, other expenditure (as a percentage of sales) increased during the quarter partly impacting the margin growth.

  • Net profits increased by 11.9% YoY on account of rise in other income and strong performance reported at the operating level.

    What to expect?
    At the current price of Rs 72, the stock is trading at a multiple of 4.8 times our FY14 earnings estimates. During the current fiscal, management expects revenues and net profits to grow by 25% YoY and 12% YoY respectively. Even margins are expected to remain in the historical range despite material price inflation due to prudent cost control measures. In light of strong growth guidance and attractive valuations, we maintain our hold view on the stock.

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