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Elecon Engineering: Poor showing continues - Views on News from Equitymaster
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Elecon Engineering: Poor showing continues
Aug 11, 2014

Elecon Engineering has announced first quarter results of financial year 2014-2015 (1QFY15). The company has reported a 9% YoY decline in sales while net profits have declined by 62% YoY during the quarter. Here is our analysis of the results.

Performance summary
  • Net sales for the quarter decline 9% YoY.
  • Operating profits post a marginal growth of 2% YoY. Operating margins expand by 180 basis points (1.8%) compared to the previous year's quarter.
  • Net profits decline by 62% YoY despite operating margin expansion.

Standalone performance snapshot
(Rs m) 1QFY14 1QFY15 Change
Net Sales 1,040 948 -8.8%
Expenditure 878 783 -10.8%
Operating profit (EBDITA) 162 165 1.7%
Operating profit margin (%) 15.6% 17.4%  
Other income 66 70 5.7%
Interest 65 76 17.3%
Depreciation 114 140 23.0%
Profit before tax 49 18 -62.6%
Tax 17 6 -64.3%
Profit after tax/(loss) 33 12 -61.7%
Net profit margin (%) 3.1% 1.3%  
No. of shares   108.9  
Basic earnings per share (Rs)   2.33  
P/E ratio (x)*   21.4  
* On a trailing 12 months basis

What has driven performance in 1QFY15?
  • The operating margins expanded during the quarter due to a fall in raw material costs as well as employee costs.

  • Despite the expansion in operating margins during the quarter, the 17% YoY growth in interest costs, along with the 23% YoY increase in depreciation charges during 1QFY15 spoiled the show on the bottomline front leading to the substantial decline in net profits. Part of the reason for the higher increase in depreciation charges is due to change in a computation of depreciation costs as per the new Companies Act, 2013.

  • The order backlog as of June 2014 stood at Rs 2.87 bn, an increase of 17% compared to the same period in June 2013. During the quarter, order inflows for the company stood at Rs 1.18 bn, which was a fall of 36% compared to the order inflows the company saw in 1QFY14.
What to expect?
The management is hopeful of achieving a 20% YoY topline growth for the full year FY15, on the back of a healthy backlog of large sized (customized gear boxes) orders. However business in small to medium sized gears is still very slow in the domestic market. In fact, the management has indicated that things have gotten even more sluggish post the election. However, it expects the market to pickup post Diwali.

At the current price of Rs 50, the stock is trading at a multiple of 12.5 times our estimated FY17 earnings for the company. Considering the expensive valuations, we re-iterate our sell rating on the stock at current levels.

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