Elecon

1QFY2011 Result Update | Capital Goods
August 3, 2010

Elecon Engineering BUY
CMP Rs92
Performance Highlights Target Price Rs107
Parameters (Rs cr) 1QFY11 1QFY10 % chg. 4QFY10 % chg. Investment Period 12 Months
Sales 247 214 15.2 332 (25.6)
EBITDA 38 35 9.0 47 (19.4) Stock Info
EBITDA margin (%) 15.3 16.2 14.2 Sector Capital Goods
Adj. PAT 13 9 57.3 27 (50.6) Market Cap (Rs cr) 857
Source: Company, Angel Research Beta 1.1
Elecon Engineering (EEC) posted top-line growth of 15% to Rs247cr for 52 Week High / Low 111/70
1QFY2011. The OPM came in at 15.3%. Robust top-line growth and strong Avg. Daily Volume 283147
margins led to bottom-line growth of 57% to Rs13cr. We have revised our Face Value (Rs) 2
estimates upwards to factor in robust growth in 1QFY2011 and higher-than- BSE Sensex 18,115
estimated capex for FY2011. We maintain our Buy rating on the stock.
Nifty 5,440
Strong order book offers revenue visibility: EEC's order backlog has been Reuters Code ELCN.BO
declining since it touched the peak of Rs1,812cr in 3QFY2009. However, at the Bloomberg Code ELCN@IN
end of 1QFY2011, the order backlog stood at Rs1,582cr, improving from
Rs1,243cr at the end of 4QFY2010. We believe this indicates a revival in the
capex cycle, which we had discussed in our Initiating Coverage report. EEC's Shareholding Pattern (%)
current order book of Rs1,582cr or 1.5x FY2010 revenue offers huge revenue Promoters 45.7
visibility, further increasing our confidence in the company. MF / Banks / Indian Fls 13.0
Outlook and valuation: We believe EEC is well placed to seize the upcoming FII / NRIs / OCBs 3.3
opportunities in the power sector due its strong order book, which renders a high Indian Public / Others 38.0
revenue visibility for the company. We estimate EEC’s adjusted PAT to post a 22%
CAGR over FY2010–12E, driven by strong order inflow and a reduction in interest
outflow due to de-leveraging of the balance sheet because of better working Abs. (%) 3m 1yr 3yr
capital management. We expect the RoCE and RoE to improve from 13% and Sensex 4.2 13.8 19.7
22% in FY2010 to 19% and 23% in FY2012E, respectively. At Rs92, the stock is Elecon Engg. 17.1 16.3 (57.1)
available at attractive valuations of 8.6x FY2012E earnings and 5.7x FY2012E
EV/EBITDA. We maintain our Buy view on the stock with a revised Target Price of
Rs107 (Rs102).

Key financials (Consolidated)
Y/E March (Rs cr) FY2009 FY2010 FY2011E FY2012E
Net sales 955 1,046 1,255 1,431
% chg 15.6 9.6 19.9 14.0
Net profit 55.0 66.2 80.4 99.2
% chg (18.2) 20.4 21.4 23.4
EBITDA (%) 17.3 14.6 15.1 15.4
EPS (Rs) 5.9 7.1 8.7 10.7
P/E (x) 15.6 12.9 10.7 8.6
P/BV (x) 3.1 2.6 2.2 1.9
RoE (%) 21.5 22.0 22.6 23.6
RoCE (%) 18.0 13.2 17.5 19.7
EV/Sales (x) 1.4 1.3 1.0 0.9 Sageraj Bariya
EV/EBITDA (x) 8.5 8.8 6.4 5.7 40403800 extn 346
sageraj.bariya@angeltrade.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report 1

Elecon Engineering | 1QFY2011 Result Update

Exhibit 1: Quarterly performance
Y/E March (Rs cr) 1QFY2011 1QFY2010 % chg FY2010 FY2009 % chg
Total sales 246.0 212.3 1035.9 942.3
Other op. income 1.1 2.2 10.4 12.7
Net revenue 247.2 214.5 15.2 1046.4 955.1 9.6
Raw material cost 169.2 142.4 626.9 503.0
Gross profit 76.9 69.9 409.0 439.3
Gross margin 31.2 32.9 39.5 46.6
Employee expenses 12.0 8.9 43.5 43.8
As % of sales 4.8 4.2 4.2 4.6
Other expenditure 28.1 28.4 2168.9 2385.9
As % of sales 11.4 13.2 11.0 11.5
Total expenditure 209.3 179.7 895.1 792.5
Operating profit 37.9 34.8 9.0 151.2 162.6 (7.0)
OPM (%) 15.3 16.2 14.6 17.3
Depreciation 8.9 7.5 33.1 22.1
EBIT 29.0 27.3 6.2 118.1 140.4 (15.9)
EBIT (%) 11.7 12.7 11.4 14.9
Other income 0.1 0.0 24.8 9.6
Interest 9.8 14.4 52.6 61.9
PBT (excl of ext items) 19.2 12.9 49.2 90.3 88.1 2.5
Ext items 0.0 0.0 0.0 0.0
PBT (incl of ext items) 19.2 12.9 90.3 88.1
Tax 5.8 4.4 24.1 30.6
Reported PAT 13.4 8.5 66.2 57.5
Minority & other item 0.0 0.0 0.0 2.5
Adj PAT 13.4 8.5 57.3 66.2 55.0 20.4
Report EPS (Rs) 1.4 0.9 7.1 6.2
Adj EPS (Rs) 1.4 0.9 7.1 5.9

Sales momentum picking up

EEC reported robust 1QFY2011 revenue of Rs247cr (up 15% yoy), supported by
16% growth in the material handling division (MHE) and 11% growth in the gear
division. We believe sales momentum that picked up pace in 4QFY2010 is likely to
be maintained on account of strong order intake.

August 3, 2010 2


Exhibit 2: Sales gaining momentum Exhibit 3: Segment sales mix
350 30 250

25 200
300 20
150
(Rs cr)

(%)
15

(Rs cr)
100
250 10

5 50

200 0 0
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11 1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
Sales % YoY MHE Gears

Source: Company, Angel Research Source: Company, Angel Research

Exhibit 4: Segmental performance
Y/E March (Rs cr) 1Q2011 1Q2010 % chg FY2010 FY2009 % chg
Net sales
MHE 149.8 129.1 16.0 654.9 587.6 (10.3)
Gears 101.0 90.7 11.4 425.9 394.4 (7.4)
Total 250.8 219.8 1080.8 982.0 (9.1)
Less - Inter-segmental 4.8 7.5 34.5 26.9
Total net sales 246.0 212.3 15.9 1046.4 955.1 (8.7)

PBIT
MHE 19.2 15.8 21.1 83.1 71.6 (13.9)
Gears 15.3 14.6 4.9 68.6 72.7 6.0
Total PBIT 34.4 30.4 13.3 151.7 144.3 (4.9)

PBIT margin (%)
MHE 12.8 12.3 12.7 12.2
Gears 15.1 16.1 16.1 18.4
Overall PBIT margin 13.7 13.8 14.5 15.1

Revenue mix (%)
MHE 60 59 61 60
Gear 40 41 39 40
PBIT mix (%)
MHE 56 52 55 50
Gear 44 48 45 50

August 3, 2010 3


Robust order book

Order inflow for 1QFY2011 increased 657% yoy to Rs1,840cr. The order backlog
stood at Rs1,582cr (MHE: Rs1,253cr, Gears: Rs329cr). Strong order inflow was
driven by demand from core sectors such as power, cement, steel and mining. The
company booked new order worth nearly Rs600cr against Rs700cr booked in
FY2010. Given the ongoing live-enquiries worth Rs2,500cr, management
continues to expect better traction in orders from major industries including power
and steel.

Exhibit 5: Order inflow trend Exhibit 6: Order backlog

700 1,600 1,582
585
560 1,492
1,500

420 1,424
(Rs cr)

(Rs cr)

286 1,400 1,362
280 210
187 188
104 1,300
140 77 1,243

0 1,200
2QFY09

3QFY09

4QFY09

1QFY10

2QFY10

3QFY10

4QFY10

1QFY10

2QFY10

3QFY10

4QFY10

1QFY11

Lower interest cost leads to higher PAT growth

Although EEC’s EBITDA margin for the quarter declined by 90bp to 15.3%, PAT
managed to grow by 57% to Rs13.4cr on account of lower interest outflow. Interest
outflow for the quarter decreased by 32% to Rs9.8cr (Rs14.4cr).

Exhibit 7: Declining interest outflow Exhibit 8: ...leads to higher PAT growth
16 30 80
14
13 25 60

11 12 20 40
12
(Rs cr)

10
(Rs cr)

15 20
(%)

10 0
8
5 (20)

0 (40)
4
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
1QFY10 2QFY10 3QFY10 4QFY10 1QFY11
PAT % YoY


August 3, 2010 4


Investment arguments

Recovery augurs well for the MHE sector: The Rs5,700cr (FY2009) domestic MHE
industry has a strong correlation with industrial growth. According to the latest
data, IIP grew by an impressive 11.5% in May 2010, with the manufacturing sector
growing by 12.3%. Going ahead, we expect industrial capex to maintain its growth
path, with the economy reviving (indicated by the improvement in IIP), continued
government focus on infrastructure spends and pick-up in private capex.

Opportunity abound: The overall emerging opportunities in the MHE industry are
estimated to be around Rs32,500cr over FY2009–12E (Source: Crisil Research
Report). This augurs well for companies providing MHE solutions. Nonetheless,
near-term growth for MHE companies is expected to be driven by the high capex
likely to be incurred in the company’s key core sectors, such as power and coal.

Robust order book: EEC's current order book is pegged at Rs1,582cr (end of
1QFY2011), translating into 1.5x FY2010 revenue. The MHE segment is the
largest contributor to the company’s order book, with a share of Rs1,253cr,
followed by the gears segment, which accounts for Rs329cr of the order book.

We expect order inflows to gather pace in FY2011, which is evident from around
Rs600cr of order booking that the company registered in 1QFY2011. We estimate
EEC's order inflow to increase by a 40% CAGR over FY2010–12E.

Outlook and valuation

We have revised our estimates upwards to take into account the company’s robust
order book and higher-than-estimated capex for FY2011.

Exhibit 9: Change in estimates
Old New % chg
Parameters (Rs cr) FY11 FY12 FY11 FY12 FY11 FY12
Sales 1,201 1,358 1,255 1,431 5 5
EBITDA 179 208 188 219 5 5
EBITDA margin (%) 15 15 15 15
PAT 73 95 80 99 10 4

We believe an improving economic scenario (indicated by the revival in IIP),
continued government focus on infrastructure spends and pick-up in private capex
augur well for companies providing MHE solutions for the core sectors of the
economy. The government's strong focus on the power sector, through ’Power for
all by 2012’, is expected to result in an expansion of the sector’s generation
capacity, leading to higher opportunities for MHE players, while the mining and
port sectors would throw up combined opportunities worth around Rs7,000cr.

We believe EEC is well placed to seize the upcoming opportunities in the power
sector due its strong order book of Rs1,582cr at the end of 1QFY2011 (1.5x
FY2010 sales), which renders a high revenue visibility for the company.

August 3, 2010 5


We estimate the company's adjusted PAT to register a 22% CAGR over
FY2010–12E, driven by the stronger order inflow and a reduction in interest
outflow due to de-leveraging of the balance sheet on account of better working
capital management. We expect the RoCE and RoE to improve from 13% and 22%
in FY2010 to 19% and 23% in FY2012E, respectively.

At Rs92, the stock is available at attractive valuations of 8.6x FY2012E earnings
and 5.7x FY2012E EV/EBITDA. We maintain our Buy view on the stock with a
revised Target Price of Rs107 (Rs102).

Exhibit 10: Key assumption
Parameters (Rs cr) FY2011E FY2012E
Order backlog (Y/E) 1,171 1,321
Order inflow 1,172 1,569
% yoy 46 34
Sales 1,393 1,589
% yoy 26 14
Order book to sales (x) 0.8 0.8

Exhibit 11: One-year forward rolling P/E band

350
300
250
200
(Rs)

150
100
50
0
Apr-06

Jul-06

Apr-07

Jul-07

Apr-08

Jul-08

Apr-09

Jul-09

Apr-10

Jul-10
Oct-06

Oct-07

Oct-08

Oct-09
Jan-07

Jan-08

Jan-09

Jan-10

Price 5x 10x 15x 20x 25x

Source: C-line, Angel Research

August 3, 2010 6


Profit & Loss
Y/E March (Rs cr) FY07 FY08 FY09 FY10 FY11E FY12E
Gross sales 814 928 1,031 1,109 1,393 1,589
Less: Excise duty 93 101 76 63 149 170
Net sales 714 800 942 1,036 1,244 1,419
Other operating income 7 27 13 10 11 12
Total operating income 721 826 955 1,046 1,255 1,431
% chg 62.9 14.7 15.6 9.6 19.9 14.0
Total expenditure 611 696 793 895 1,067 1,211
Net raw material 443 490 503 627 683 778
Other mfg costs 134 165 239 217 272 304
Personnel 27 34 44 44 82 93
Other 6 7 7 8 31 36
EBITDA 110 131 163 151 188 219
% chg 84.5 18.6 24.5 (7.0) 24.4 16.6
(% of net sales) 15.4 16.3 17.3 14.6 15.1 15.4
Depreciation & amortisation 12 14 22 33 38 44
EBIT 98 116 140 118 150 175
% chg 94.8 18.9 20.7 (15.9) 26.8 17.0
(% of net sales) 13.7 14.5 14.9 11.4 12.0 12.4
Interest & other charges 18 24 62 53 41 40
Other income 7 6 10 25 8 8
(% of PBT) 8 6 11 27 7 6
Share in profit of associates - - - - - -
Recurring PBT 87 99 88 90 116 144
% chg 94.7 13.8 (10.7) 2.5 28.8 23.6
Extraordinary Expense/(Inc.) (2) - - - - -
PBT (reported) 84 99 88 90 116 144
Tax 30 31 31 24 36 45
(% of PBT) 35.0 31.9 34.8 26.7 30.9 31.0
PAT (reported) 55 67 57 66 80 99
Add: Share of earnings of
- - - - - -
associate
Less: Minority interest (MI) - - - - - -
Prior period items - - 2 - - -
PAT after MI (reported) 55 67 57 66 80 99
ADJ. PAT 55 67 55 66 80 99
% chg 97.1 22.4 (18.2) 20.4 21.4 23.4
(% of net sales) 7.7 8.4 5.8 6.4 6.5 7.0
Basic EPS (Rs) 17.8 7.2 5.9 7.1 8.7 10.7
Fully Diluted EPS (Rs) 17.8 7.2 5.9 7.1 8.7 10.7
% chg 81.9 (59.2) (18.2) 20.4 21.4 23.4

August 3, 2010 7


Balance Sheet
SOURCES OF FUNDS
Equity share capital 6 19 19 19 19 19
Preference capital - - - - - -
Reserves & surplus 182 218 257 308 366 438
Shareholders’ funds 188 237 275 326 385 457
Minority interest - - - - - -
Total loans 284 409 592 522 399 459
Deferred tax liability 17 17 33 40 40 40
Total liabilities 488 663 900 888 824 956
APPLICATION OF FUNDS
Gross block 247 301 428 509 584 672
Less: Acc. depreciation 124 123 145 165 203 247
Net block 122 177 283 344 381 425
Capital work-in-progress 4 16 28 18 23 27
Goodwill/Intangilbles - - - - - -
Investments 8 9 11 6 6 6
Current assets
Cash 13 8 61 39 39 55
Loans & advances 39 57 75 55 58 67
Other 557 745 872 833 835 949
Current liabilities 256 350 432 409 520 575
Net current assets 353 460 577 517 412 497
Others - 1 2 3 3 3
Total assets 488 663 900 888 824 956

August 3, 2010 8


Cash flow
Profit before tax 104 126 137 126 116 144
Depreciation 10 13 18 29 80 84
Change in working capital (151) (127) (58) 33 101 (74)
Less: Other income - - - - - -
Direct taxes paid (25) (32) (26) (18) (36) (45)
Cash flow from operations (62) (20) 71 170 261 109
(Inc.)/ Dec. in fixed assets (42) (80) (140) (84) (81) (91)
(Inc.)/ Dec. in investments 1 1 5 24 - -
Inc./ (Dec.) in loans and advances - -
Other income - - - - - -
Cash flow from investing (41) (79) (135) (60) (81) (91)
Issue of equity 36 0 - - - -
Inc./(Dec.) in loans 78 126 183 (71) (122) 60
Dividend paid (incl. tax) (3) (5) (16) (16) (16) (22)
Others (19) (27) (49) (46) (41) (40)
Cash flow from financing 91 94 118 (132) (180) (2)
Inc./(Dec.) in Cash (11.9) (5.2) 53.5 (22.2) 0.5 16.0
Opening cash balances 25 13 8 61 39 39
Closing cash balances 13 8 61 39 39 55

August 3, 2010 9


Key ratio
Y/E March FY07 FY08 FY09 FY10 FY11E FY12E
Valuation ratio (x)
P/E (on FDEPS) 5.2 12.8 15.6 12.9 10.7 8.6
P/CEPS 4.3 10.5 10.8 8.6 7.2 6.0
P/BV 1.5 3.6 3.1 2.6 2.2 1.9
Dividend yield (%) 1.6 1.6 1.6 1.6 2.2 2.7
EV/Sales 0.8 1.5 1.4 1.3 1.0 0.9
EV/EBITDA 5.0 9.6 8.5 8.8 6.4 5.7
EV / Total Assets 1.1 1.9 1.5 1.5 1.5 1.3
Per share data (Rs)
EPS (basic) 17.8 7.2 5.9 7.1 8.7 10.7
EPS (fully diluted) 17.8 7.2 5.9 7.1 8.7 10.7
Cash EPS 21.7 8.8 8.6 10.7 12.8 15.4
DPS 1.5 1.5 1.5 1.5 2.0 2.5
Book value 60.8 25.5 29.7 35.1 41.4 49.2
DuPont analysis
EBIT margin 13.7 14.5 14.9 11.4 12.0 12.4
Tax retention ratio 65.0 68.1 65.2 73.3 69.1 69.0
Asset turnover (x) 1.8 1.5 1.3 1.2 1.5 1.7
ROIC (post-tax) 16.3 14.4 12.4 10.0 12.5 14.2
Cost of debt (post-tax) 5.1 5.4 6.3 6.7 6.2 6.4
Leverage (x) 1.5 1.6 1.8 1.7 1.2 0.9
Operating RoE 33.5 28.6 23.5 15.6 20.0 21.2
Returns (%)
RoCE (pre-tax) 24.2 20.2 18.0 13.2 17.5 19.7
Angel RoIC (pre-tax) 20.7 17.9 16.9 13.9 19.1 19.5
RoE 37.8 31.7 21.5 22.0 22.6 23.6
Turnover ratios (x)
Asset turnover (gross block) 3 3 3 2 2 2
Inventory/Sales (days) 84 93 125 125 100 98
Receivables (days) 154 201 187 174 165 160
Payables (days) 138 151 169 161 180 170
Working capital cycle (ex-cash) (days) 135 175 185 173 124 104
Solvency ratios (x)
Net debt to equity 1.4 1.7 1.9 1.5 0.9 0.9
Net debt to EBITDA 2.4 3.0 3.2 3.2 1.9 1.8
Interest coverage (EBIT/Interest) 6.0 4.8 3.4 2.4 3.6 4.4

August 3, 2010 10


Research Team Tel: 022 - 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com

DISCLAIMER

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment
decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make
such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies
referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and
risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make
investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this
document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and
trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's
fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable
sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this
document is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any way
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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please
refer to the latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Limited and
its affiliates may have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement Elecon Engineering
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies' Directors ownership of the stock No
4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Ratings (Returns) : Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)
Reduce (-5% to 15%) Sell (< -15%)

August 3, 2010 11

Elecon

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