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Elecon Eng.: Lower interest costs boost profits - Views on News from Equitymaster

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Elecon Eng.: Lower interest costs boost profits
Oct 29, 2010

Elecon Engineering has announced its 2QFY11 results. The company has reported 10% YoY and 32% YoY growth in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Net sales grow by 10% YoY in 2QFY11. Growth during the quarter aided by traction in the companyís transmission equipment segment which grew by a robust 33% YoY during the quarter.
  • Operating margins contract by 0.2% YoY during the quarter. This is on account of higher staff costs as also higher other expenses (as percentage of sales).
  • Net profits grow by 32% YoY in 2QFY11, helped a 20% YoY fall in interest expenses.


Performance snapshot
(Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
Sales 2,551 2,795 9.6% 4,674 5,255 12.4%
Expenditure 2,194 2,409 9.8% 3,991 4,502 12.8%
Operating profit (EBDITA) 357 385 8.1% 683 753 10.4%
Operating profit margin (%) 14.0% 13.8%   14.6% 14.3%  
Other income 18 18 -0.1% 40 29 -26.4%
Interest 134 107 -20.4% 278 205 -26.3%
Depreciation 78 98 25.0% 153 187 22.1%
Profit before tax 163 200 22.5% 292 391 34.2%
Extraordinary income/(expense) -†† -††   -†† -††  
Tax 55 57 4.1% 99 116 17.2%
Profit after tax/(loss) 108 142 32.0% 193 275 42.9%
Net profit margin (%) 4.2% 5.1%   4.1% 5.2%  
No. of shares       92.9 92.9  
Diluted earnings per share (Rs)*         8.0  
P/E ratio (x)*         11.9  
* On a trailing 12 months basis

What has driven performance in 2QFY11?
  • Eleconís revenues grew by 10% YoY during 2QFY11. The company was able to manage this growth largely due to growth in its transmission equipment (TE) business (which recorded a 33% YoY growth during the quarter). On the other hand, its material handling equipment (MHE) business saw a fall of 3% YoY in its revenues during the period. As such, the transmission equipment business increased its share in the companyís total revenue to nearly 44% from 36% last year, while the MHE business contributed to the balance 56% during the quarter (64% in 2QFY10).

    Segment-wise performance
    (Rs m) 2QFY10 2QFY11 Change 1HFY10 1HFY11 Change
    Material Handling Equipment (MHE)
    Revenue 1,659 1,610 -3.0% 2,950 3,108 5.3%
    % share 64% 56%   61% 58%  
    PBIT margin 11.4% 12.7%   11.8% 12.7%  
    Transmission Equipment (TE)
    Revenue 943 1,251 32.7% 1,849 2,261 22.3%
    % share 36% 44%   39% 42%  
    PBIT margin 16.7% 14.5%   16.4% 14.8%  
    Total
    Revenue* 2,602 2,860 9.9% 4,799 5,369 11.9%
    PBIT margin 13.3% 13.5%   13.5% 13.6%  
    * Excluding inter-segment adjustments

  • Eleconís operating margins contracted by 0.2% during 2QFY11. The reason behind this was higher staff costs as well as a spike in other expenditure (as percentage of sales).

  • During the quarter, the companyís net profits grew by 32% YoY. One of the reasons for this robust increase was a 20% YoY fall in interest expenses during the quarter. Thus despite a 25% YoY increase in depreciation charges, the company was able to turn in a good performance on the net profits front.

  • The company through its SPVs (special purpose vehicles) has decided to acquire the Benzler-Radicon group of businesses from David Brown Gear Systems Group. This includes a 100% shareholding in David Brown Systems Sweden AB, the applied products division of David Brown Gear Systems, UK, and certain assets of the gear motor business of Cone Drive Inc, USA. The gross value of 100% stake of these businesses as a going concern on a debt free and cash free basis is GBP 18.4 m. This acquisition will give a boost to the companyís presence in Europe and other geographies around the world where the acquired businesses are present.

What to expect?
At the current price of Rs 95, the stock is trading at a multiple of 11.6 times our FY13 earnings estimates. At this level, we hold a cautious view and would advise against taking fresh positions in the stock (Research Pro subscriber kindly click here).

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