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Elecon Engineering: On a steady growth trajectory - Views on News from Equitymaster

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Elecon Engineering: On a steady growth trajectory

Nov 16, 2011

Elecon Engineering has announced second quarter results of financial year 2011-2012 (2QFY12). The company has reported 20.4% YoY and 9.6% YoY growth in total income and net profits respectively. Here is our analysis of the results.

Performance summary
  • Total income grows by 20.4% YoY in 2QFY12.
  • Operating profits grew by 24.0% YoY during the quarter due to healthy growth in top-line.
  • Net profits grew at a relatively slower pace of 9.6% YoY due to increase in interest, depreciation and tax expenses.
  • As of 31 October 2011, the unexecuted order backlog of the company stood at Rs 14.9 bn. Order inflow during the quarter was in the region of Rs 2.4 bn.
  • The company intends to incur a capex of Rs 1.0 to 1.1 bn in FY12.

Standalone performance snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Total income 2,798 3,368 20.4% 5,261 5,941 12.9%
Expenditure 2,398 2,872 19.8% 4,482 4,996 11.5%
Operating profit (EBDITA) 400 496 24.0% 779 945 21.4%
Operating profit margin (%) 14.3% 14.7%   14.8% 15.9%  
Other income 4 4 1.3% 4 4 0.0%
Interest 107 143 34.2% 205 276 34.5%
Depreciation 98 108 11.1% 187 207 10.7%
Profit before tax 200 248 24.5% 391 467 19.4%
Tax 57 93 61.4% 116 162 40.0%
Profit after tax/(loss) 142 156 9.6% 275 305 10.7%
Net profit margin (%) 5.1% 4.6%   5.2% 5.1%  
No. of shares         92.9  
Basic earnings per share (Rs)*         3.3  
P/E ratio (x)*         6.4  
* On a trailing 12 months basis

What has driven performance in 2QFY12?
  • Elecon's total income grew by 20.4% YoY during 2QFY12. Growth was led by a strong performance from both material handling equipment (MHE) and transmission equipment (TE) businesses. Revenues from the MHE and TE segment increased 19.6% YoY and 22.4% YoY respectively during the quarter.


  • Segmental performance
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Material Handling Equipment (MHE)
    Revenue 1,607 1,922 19.6% 3,102 3,347 7.9%
    % share 56.4% 55.8%   58.0% 55.1%  
    PBIT margin 12.7% 13.3%   12.8% 13.4%  
    Transmission Equipment (TE)
    Revenue 1,242 1,521 22.4% 2,247 2,729 21.5%
    % share 43.6% 44.2%   42.0% 44.9%  
    PBIT margin 14.6% 13.8%   14.9% 14.4%  
    Total
    Revenue* 2,849 3,443 20.9% 5,348 6,076 13.6%
    PBIT margin 13.5% 13.5%   13.6% 13.9%  
    * Excluding inter-segment adjustments

  • Operating margins expanded 40 bps YoY mainly due to fall in raw material expenses (after stock adjustments) as a percentage of sales. The raw material expenses (as a percentage of sales) declined from 67.0% in 2QFY11 to 64.9% in 2QFY12. However, other expenditure (as a percentage of sales) increased during the quarter partly impacting the margin growth.

  • Net profits increased by 9.6% YoY. However, growth at the bottom line level was impacted by interest, depreciation and tax expenses which increased by 34.2% YoY, 11.1% YoY and 61.4% YoY respectively.

What to expect?
At the current price of Rs 63, the stock is trading at a multiple of 4.3 times our FY14 earnings estimates. During the current fiscal, management expects revenues to grow by 20-25% YoY. 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 view on the stock.

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