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Elecon Engineering: Strong sequential performance - Views on News from Equitymaster
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Elecon Engineering: Strong sequential performance
Nov 29, 2013

Elecon Engineering has announced second quarter results of financial year 2013-2014 (2QFY14). The company has reported a 14.5% QoQ growth in sales while net profits grew by 171.2% sequentially. Here is our analysis of the results.

Performance summary
  • Total income increased by 14.5% QoQ in 2QFY14. It may be noted that under a scheme of arrangement, Elecon Engineering had decided to sell its material handling equipments (MHE) business by the way of slump sale to Elecon EPC Projects Ltd, a subsidiary of the company. The scheme of arrangement was effective from 01 April 2013. As such, the current quarter financial results reflect the operations of Transmission Equipments (TE) business only. Hence, YoY performance is not comparable since 2QFY13 results include the performance of MHE business. Thus, we have analyzed the 2QFY14 performance on QoQ basis. Also, half yearly comparison does not depict the right picture since 1HFY13 figures contain the performance of MHE business also.
  • Operating profits increase by 39.4% QoQ during the quarter due to 7.2% QoQ decline in cost of raw materials and a flattish growth (0.8% QoQ) in staff expenses.
  • Net profits increase by 171.2% QoQ due to 52.2% QoQ increase in other income. Higher dividend income from subsidiaries led to a growth in other income.
  • The order backlog as of 3oth September 2013 stood at Rs 2.66 bn. This reflects backlog of the TE segment only as MHE segment has been transferred to the subsidiary. During the period until Sep 20103, the company received orders worth Rs 3.21 bn pertaining to the TE segment.
  • The D/E ratio stood at 0.51x for the quarter.

Standalone performance snapshot
(Rs m) 1QFY14 2QFY14 Change
Total income  1,053 1,206 14.5%
Expenditure 878 961 9.5%
Operating profit (EBDITA) 176 245 39.4%
Operating profit margin (%) 16.7% 20.3%  
Other income 52 79 52.2%
Interest 65 88 35.6%
Depreciation 114 114 -0.2%
Profit before tax 49 123 149.5%
Tax 17 35 107.4%
Profit after tax/(loss) 33 88 171.2%
Net profit margin (%) 3.1% 7.3%  
No. of shares   108.9  
Basic  earnings per share (Rs)   0.81  
P/E ratio (x)*   NM  
* On a trailing 12-months basis

What has driven performance in 2QFY14?
  • Elecon's total income increased by 14.5% QoQ during 2QFY14 on a standalone basis due to strong growth from the TE business. Since the MHE business was transferred to a subsidiary of the company its quarterly performance is not shown in the standalone table below.

    Segment-wise performance
    (Rs m) 1QFY14 2QFY14 Change
    Material Handling Equipment (MHE)
    Revenue - -  
    % share NA NA  
    PBIT margin NA NA  
    Transmission Equipment (TE)
    Revenue 1,053 1,206 14.5%
    % share 100.0% 100.0%  
    PBIT margin 10.8% 17.5%  
    Total
    Revenue* 1,053 1,206 14.5%
    PBIT margin 10.8% 17.5%  
    * Excluding inter-segment adjustments

  • Operating profits increased 39.4% QoQ due to strong performance at the topline level and fall in raw material expenses (-7.2% QoQ). As a result, operating margins increased to 20.3% during the quarter from 16.7% that prevailed in 1QFY14.

  • In line with the rise in operating profits, net profits increased by 171.2% QoQ. Growth in the bottom line was fueled by 52.2% QoQ growth in other income. Higher dividend income (Rs 55.3 m) from subsidiaries boosted other income for the quarter.
What to expect?
At the current price of Rs 30, the stock is trading at a multiple of 3.8 times our estimated FY16 EPS estimates. Since the MHE business is now sold off to a subsidiary its performance is not reflected in the standalone financials. However, the like to like comparison for the quarter after excluding the MHE business was encouraging. Also, the back log in the TE business has been increasing over the last 2-3 quarters. This is predominantly because the company was able to bag some large size orders from Pipavav Defence (Rs 372 m) and L&T (Rs 222.4 m) in 1HFY14. Considering the revival in order back log and strong sequential performance reported during the quarter we maintain our HOLD view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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