Elecon engineering ic- 14-05-10

Initiating Coverage | Capital Goods
May 14, 2010

Elecon Engineering BUY
CMP Rs79
`Material’ising Growth Target Price Rs102
Elecon Engineering (EEC) is a leading and experienced Material Handling Equipment Investment Period 12 Months
(MHE) turnkey solutions and Gear provider for the core sectors of the economy
Stock Info
such as Power, Steel and Infra. Additionally, over the years, the company has built
a strong domain expertise in coal-handling. Hence, we believe that EEC is well Sector Capital Goods
placed to capitalise on the burgeoning industrial capex (that majorly comprises of Market Cap (Rs cr) 734
power). We estimate the company to register a CAGR of 13.5% in Sales and of Beta 1.3
37% in Adj. Profit over FY2010-12E. At Rs79, the stock is trading at attractive
52 Week High / Low 111/59
valuations of 7.7x FY2012E Earnings and 5x FY2012E EV/EBITDA. We Initiate
Target Price
Coverage on the stock, with a Buy recommendation and Target Price of Rs102. Avg. Daily Volume 322951
Face Value (Rs) 2
Recovery augurs well for the Sector: We expect industrial capex to revert back to
the growth path, with the economy reviving (indicated by the improvement in BSE Sensex 16,995
the IIP), the continuous government focus on infrastructure spend, and a pick up in Nifty 5,094
private capex. The Domestic MHE Industry (Rs5,700cr in FY2009) has a strong Reuters Code ELCN.BO
correlation with industrial growth. As per Crisil Research, overall emerging
Bloomberg Code ELCN@IN
opportunities in the MHE Industry are estimated to be around Rs32,500cr over
FY2009-12E. This augurs well for MHE solution players like EEC. The near-term
Shareholding Pattern (%)
growth for the MHE companies is expected to be driven by high capex likely to be
incurred in the core sectors of Power and Steel (Rs25,500cr). Promoters 45.7

Improving financials: We estimate EEC to post a CAGR of 13.5% in its Revenues MF / Banks / Indian FIs 20.2

over FY2010-12E. The OPMs are expected to remain stable at the current levels of FII / NRIs / OCBs 3.1
15%. We believe that due to a strong correction in the commodity prices and easing Indian Public / Others 31.0
of the working capital cycle, EEC’s net working capital would start aligning with the
historical average and stand reduced. Overall, this is likely to de-leverage the Abs. (%) 3m 1yr 3yr
company’s Balance Sheet and lower its Interest outflow, improving the overall
Sensex 5.2 43.1 21.7
Profitability. We expect a CAGR of 37% in the Adj. PAT over FY2010-12E, as against
the 13% CAR decline witnessed during FY2008-10. We expect the RoCE and RoE Elecon Engg. (2.7) 35.1 (41.9)
to improve from 15% and 17% in FY2010, to 21% and 23% in FY2012E, respectively.

Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 955 1,054 1,201 1,358
% chg 15.6 10.4 13.9 13.1
Adj Profit
Profit 55.0 50.6 73.1 94.9
% chg (18.2) (8.0) 44.6 29.8
EPS (Rs) 5.9 5.4 7.9 10.2
EBITDA Margin (%) 17.3 15.1 15.0 15.4
P/E (x) 13.4 14.5 10.0 7.7
RoE (%) 21.5 16.8 20.8 23.1
RoCE (%) 18.0 14.8 18.0 20.9
P/BV (x) 2.7 2.3 2.0 1.7
Sageraj Bariya
EV/Sales (x) 1.3 1.1 0.9 0.8
Tel: 022 - 4040 3800 Ext: 346
EV/EBITDA (x) 7.7 7.1 6.0 5.0
E-mail: sageraj.bariya@angeltrade.com
Source: Company, Angel Research

Please refer to important disclosures at the end of this report

Elecon Engineering | Initiating Coverage

Investment Arguments
Recovery augurs well for the MHE Sector

The Domestic Rs5,700cr (FY2009) Material Handling Equipment (MHE) Industry has
a strong correlation with industrial growth. During the last five years (FY2004-08), the
domestic MHE Industry recorded a CAGR of 28%. However, in FY2009, the industry
witnessed a slowdown and registered a lower, 12% yoy growth, due to the global
meltdown.

Exhibit 1: MHE Industry - Sales Trend Exhibit 2: MHE Industry - Sales v/s IIP Growth Trend
6,000 6,000 14

5,000 5,000 12

10
4,000 4,000
(Rs cr)

8
(Rs cr)

(%)
3,000 3,000
6
2,000 2,000
4
1,000
1,000 2
0
0 0
FY2002

FY2003

FY2004

FY2005

FY2006

FY2009E
FY2007

FY2008

FY2002

FY2003

FY2005
FY2004

FY2006

FY2009E
FY2008
FY2007
Imports Domestic consumption MHE Sales IIP Growth %
Source: Crisil, Angel Research Source: Crisil, Angel Research

MHE industry has a strong correlation The MHE industry has a strong correlation with Industrial activity, as visible from
with Industrial activity Exhibit 2, which highlights correlation of MHE sales with the IIP Industrial production
.
growth has managed to remain in double digit since December 2009, mainly on
account of strong performance by manufacturing sector which accounts for 80% of
industry. According to the latest data, IIP grew by an impressive 13.5% in March
2010, with the manufacturing sector growing by 14.3%. Going ahead, we expect the
industrial capex to maintain its growth path, with the economy reviving (indicated by
the improvement in IIP), the continued government focus on infrastructure spends,
and the pick-up in private capex.

Exhibit 3: IIP revival indicates uptick in Capex
20

15

10
(%)

5

0

(5)
Aug-08

Aug-09
Jun-08

Jul-08

Sep-08

Oct-08

Dec-08

Jan-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Sep-09

Oct-09

Dec-09

Jan-10

Feb-10

Mar-10
Nov-08

Nov-09

Source: Bloomberg, Angel Research

May 14, 2010 2


Overall emerging opportunities in the The overall, emerging opportunities (as per Crisil Research) in the MHE Industry are
Industry are estimated to be around estimated to be around Rs32,500cr over FY2009-12E. This augurs well for the
Rs32,500cr over FY2009-12E companies providing MHE solutions. Nonetheless, the near-term growth for MHE
companies is expected to be driven by the high capex likely to be incurred in the key
core sectors of the economy, such as Power and Coal.

Exhibit 4: Business opportunity over FY2009-12 (Rs32,500cr)
Port
Rs2,400 cr
Mining
Rs4,600 cr

Power
Rs17,800 cr
Steel
Rs7,700 cr

Source: Crisil, Angel Research

Total opportunity arising from Power Sector: The government's focus on the Power Sector, through "Power for all by
Power
the Power Sector is estimated to be 2012", is expected to be achieved via the Accelerated Power Development and Reform
in the region of Rs17,800cr over Programme (APDRP), Ultra Mega Power Projects (UMPPs) and a rising trend of captive
FY2009-12E power plants, which, in turn, would boost the demand for the Material Handling
Equipments. The expansion plans in the Power Generation Segment would drive the
demand for feeders, crushers, conveyers and screeners. As per Crisil, the total
opportunity arising from the Power Sector is estimated to be in the region of Rs17,800cr
over FY2009-12E.

Steel: The Steel Industry is likely to witness total capacity addition of 45mn tonnes over
the next five years, resulting in Order inflows worth Rs7,700cr for MHE companies.

Coal and Mining: We believe that higher investments in the Power Sector would drive
the capex plans of the Mining Industry, which would primarily be led by the Coal
Industry. Hence, we expect Coal India, as well as captive coal mining companies, to
increasingly source MHE equipment like feeders, crushers and other equipment. As
per Crisil, total opportunity of Rs4,600cr would come up for the MHE companies
under this segment over FY2009-12E.

Ports: This Segment comprises of cargo handling, container, bulk and liquid handling
systems. Overall, the MHE companies are expected to cash in on potential emerging
opportunities to the tune of Rs2,400cr over FY2009-12E.

May 14, 2010 3


Order inflows to pick up pace in FY2011
EEC's Order inflows have been on the rise, having increased from Rs700cr in FY2005
to Rs1,294cr in FY2009, posting a CAGR of 17%, on the back of a strong economic
environment, higher government investments and private capex in basic infrastructure.
However, due to the global meltdown, the company's order book declined by 24%
over FY2008-10.

Exhibit 5: Order inflow to pick up in pace in FY2011
1,600 1,573
1,378
1,294

1,200 1,123
1,025
(Rs cr)

802
800 700 727

400

-
FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

CAGR
Order inflow to register a CAGR of 40% EEC's current Order Book is pegged at Rs1,243cr (end of 4QFY2010), translating into
over FY2010-12E 1.1x FY2010 Revenues. The MHE Segment is the largest contributor, with a share of
Rs997cr, followed by Gears, which accounts for Rs246cr of the Order Book. We estimate
EEC's order inflow to increase by a CAGR of 40% over FY2010-12E.

We expect Order inflows to gather pace in FY2011, which is evident from around
Rs400cr of orders registered in the first two months of the current fiscal. We have
conservatively estimated EEC's MHE Segment's Order inflows to register a CAGR of
60% over FY2010-12E. Considering that the industry's total annual opportunity is
estimated at Rs10,800cr (Rs32,500cr over FY2009-12E) and given EEC's historical
market share of 12-14% in the MHE space, this translates into a cumulative Order
flow of Rs2,800cr in FY2011-12E (against our estimate of Rs1,500cr). In the case of
the Gear Division, we expect a CAGR of 20% in the order inflow over FY2010-12E.

Exhibit 6: Revenue & Order Inflow Trend
Rs cr FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E

Order back log (Y/E) 390 626 837 1,287 1,550 1,243 1,030 1,091

Order inflow 700 727 1,025 1,378 1,294 802 1,123 1,573

% YoY - 3.8 41.0 34.4 (6.1) (38.0) 40.0 40.0

Gross Sales 310 491 814 928 1,031 1,109 1,336 1,512

% YoY - 58.3 65.8 14.0 11.1 7.6 20.4 13.1

May 14, 2010 4


Strong hold in Gear market helps maintain profitability

Elecon is Asia's largest manufacturer of EEC is Asia's largest manufacturer of a diverse range of gears and supplies. The
Gears company has expertise in designing and manufacturing worm gears, parallel shaft
and right angle shaft, helical and spiral bevel helical gears, fluid, geared and flexible
couplings, and planetary gear boxes. EEC supplies gears to numerous sectors, such
as Sugar, Cement, Chemical, Fertiliser, Steel, Plastic Extrusion and Rubber.

With a market share of 26%, Elecon is We attribute EEC's leadership position in the gear market to be the key reason in
the leader in the domestic gear market generating constant profits. The total gear market in India is estimated to be worth
Rs1,600cr, of which Elecon has a 26% share, followed by Shanthi Gears at 17%.
Gears are used across industries, have constant demand from Replacement market
apart from new demand. EEC is Asia's largest manufacturer of variety of gears and
supplies to various industries.

Exhibit 7: Market Share of Gear Industry (Rs1,600 cr)

Others Elecon
24% 26%

NAW
6%

Flender Shanthi
10% 17%

Premium
17%


EEC's leadership position in the Gear market has primarily helped in generating constant
Profits. Over FY2003-04, EEC's MHE Division posted a Loss, but the Gear Division
continues to record Profits and helps maintain overall Profit of the company. Hence,
even during a rough economic scenario, EEC's gear division continued to post profits
and supported overall profitability of the company, due to its dominant market share
and strong competitive edge, as compared to the peers.

Exhibit 8: Segmental EBIT Margin trend Exhibit 9: EBIT trend
25 180 167 20
160 142 18
20 140 141
140 16
120 124
15 14
120
12
(Rs cr)
(%)

10 100
(%)

10
5 80 67
8
60
0 39 6
40 4
(5) 17
20 11 2
(10) 0 0
FY2003

FY2004

FY2003

FY2004

FY2005

FY2006

FY2007

FY2008

FY2009
FY2005

FY2006

FY2009

FY2010

FY2011E

FY2012E
FY2011E

FY2012E
FY2007

FY2008

FY2010

MHE Gear Total EBIT EBIT %
Source: Company, Angel Research Source: Company, Angel Research

May 14, 2010 5


Windmill segment - yet to gather steam

EEC used to supply gear boxes and had installed around 50 Wind Turbines (300 KW)
over 1995-98 in Gujarat. Hence, diversification into the windmill business was a
logical move for the company. During 2001, EEC decided to diversify the Wind Turbine
Business and installed 2 Wind Turbine Generators (WTGs) (600 KW) in Gujarat, and
2 WTGs in Tamil Nadu as prototype turbines.

Revenue from windmill business over Although EEC entered the windmill business quite a while ago, the company has not
FY2005-09 has averaged Rs9cr only been able to achieve a ramp-up in its operations. Over FY2005-09, the revenue has
averaged at Rs8cr; however, it spiked to Rs18cr in FY2008, before retreating back to
Rs6cr in FY2009.

Exhibit 10: Windmill revenue trend
25

20
20
(Rs cr)

15

10
6 7
6
5

1
0
FY2005 FY2006 FY2007 FY2008 FY2009

Currently, the gearboxes for the systems are in-house made, while, in the case of
turbines, EEC has a technical collaboration with Turbowind N.V of Belgium. Under the
Eleventh Five-Year Plan (2007-12), the Government of India has set a target of 10,500
MW to be added through Windmills, while, globally, the annual installation is likely to
increase from 28,500 MW to 51,000 MW. Hence, EEC has ample opportunities to
capitalise on, going ahead.

The Management expects pick up in Currently, EEC's wind turbines are undergoing C-Wet Certification, which, the
Windmill Business after the C -Wet management expects, would help their wind business get global recognition; this, in
Certification turn, would help the company in reviving its sales. The management expects to sell
100 units in FY2012E, translating into additional revenue of Rs350cr. However, we
have not factored the same into our estimates, as we await further developments and
ramp ups in this business.

Restructuring
EEC is planning to restructure its business, under which it plans to either merger or
demerge companies where it has any holding. EEC has interests across many
companies, with varying shareholdings. We believe that any such restructuring will be
a positive step for the minority shareholders of EEC, as it can free up capital and
reduce leverage on the balance sheet. However, the final details of restructuring are
likely to be announced by the end of June, 2010.

May 14, 2010 6


Financials
CAGR
Revenue to post a CAGR of 13.5% over During FY2008-10, EEC's Sales grew at a CAGR of 13%, while Order inflows de-grew
FY2010-12E,
FY2010-12E , on the back of a 40% by 24%. EEC's current Order Book stands at Rs1,243cr (end of 4QFY2010), with MHE
increase in total order inflows over the contributing Rs997cr and Gears Rs246cr. The current order book stands at 1.1x its
same period. FY2010 revenue, providing the company with strong Revenue visibility. We have
conservatively estimated EEC's MHE division to register a CAGR of 11% in its sales
over FY2010-12E, against 18% registered over FY2008-10. The gear division's revenue
is likely to post CAGR of 14% over FY2010-12E, on the back of a 21% CAGR in order
inflows during the same period. Overall, we estimate the company's to post a Revenue
CAGR of 13.5% over FY2009-12E, on the back of a 40% increase in total order
inflows over FY2010-12E.

Exhibit 11: Revenue mix Exhibit 12: Strong Order Book to support Revenues
1,600 1,600 70

1,400 1,400 1,358
60
1,201
1,200 1,200
1,054 50
549
(Rs cr)

1,000 1,000 955
(Rs cr)

460
826 40
426

(%)
800 394 800 721
389 30
600 311 600
20
400 800 400
655 732
588
200 448 471 200 10

- - 0
FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
MHE Gears Sales % YoY

Over FY2008-10, EEC's OPM declined from 16.3% to 15.1%, on account of a slowdown
in order inflows and volatile raw material prices. Depreciation and Interest costs during
the same period increased by a CAGR of 53% and 46%, respectively. Thus, EEC's PAT
declined by a CAGR of 13.3% over FY2008-10. Going ahead, we estimate EEC's
OPM to remain stable at the current level of 15% over FY2011-12E, on the back of
robust order inflows, better execution and a reduction in the working capital cycle.

Exhibit 13: EBITDA Margin to remain stable Exhibit 14: Declining interest cost
17.5 70
17.3 62
60

16.3 51
50
16.5
40
40
(Rs cr)

36
(%)

30
15.4 15.4
15.5
20
15.1 15.0

10

14.5 0
FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E FY2009 FY2010 FY2011E FY2012E

May 14, 2010 7


Improvement in Working capital cycle to reduce leverage

Working capital cycle to align with EEC's working capital requirements jumped to 185 days of sales in FY2009, compared
historical average and would stand to 175 days and 135 days of sales in FY2008 and FY2007, respectively. We believe
reduced that this was primarily due to a higher order inflow (34% yoy) in FY2008. Since most
of the basic metal commodities were ruling at high prices during that period, this led
to a high-cost inventory for the company. Higher order inflows also led to a relaxation
of receivables, in turn elongating the debtor cycle. However, going ahead, we believe
that due to the strong correction in commodity prices and the easing of available
working capital finance, the net working capital cycle would start aligning with its
historical average and would stand reduced.

Exhibit 15: Working capital cycle (ex-cash) (days) Exhibit 16: Better working capital to reduce leverage
230 2.0 1.9

1.8
1.8 1.7
200
1.6
1.4
170
(Days)

1.4
(X)

1.2
140 1.2

110 1.0 0.9

0.8 0.7
80
FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E 0.6
Inventory Receivables Payables Net Days FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E


ECC is likely to take advantage of the better, order inflow and working capital cycle,
by deleveraging its balance sheet. Over FY2010-12E, we expect the net leverage of
the company to come down, from 1.2x in FY2010 to a level of 0.7x by the end of
FY2012E.

PA CAGR
Adj. PAT to register a CAGR of 37% over Over FY2008-10, the Adj PAT decline from Rs67cr at Rs51cr; however, going ahead,
FY2010-12E the expected deleveraging of the balance sheet and a consequent reduction in interest
outflow would help the Adj PAT to grow at a CAGR of 37% over FY2010-12E.

Exhibit 17: Adjusted PAT Trend
100 95 55

80 73 40
67
(Rs cr)

60 55 55 25
51
(%)

40 10

20 (5)

- (20)
FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Adj. PAT % YoY

May 14, 2010 8


Improving profitability
RoCE and RoE to improve from 15% and On back of the slowdown in order inflows, pressure on EBITDA margins and a higher
17% in FY2010, to 21% and 23% in investment in working capital, the RoCE and RoE remained muted in FY2010. However,
FY2012E, respectively.
FY2012E, respectively. we believe that the profitability has bottomed-out in FY2010 and expect it to improve.
Going ahead, on the back of a higher order inflow, an improvement in EBITDA margins
and a decrease in the working capital cycle. We expect the RoCE and RoE to improve
from 15% and 17% in FY2010, to 21% and 23% in FY2012E, respectively.

Exhibit 18: Return ratios to improve
24

23
21
21
21 21
(%)

18
18 18
17
15
15

12
FY2009 FY2010E FY2011E FY2012E

RoCE RoE

Exhibit 19: DuPont Analysis
FY2009 FY2010E FY2011E FY2012E
EBITDA / Sales (%) 17.3 15.1 15.0 15.4
Sales / Total Asset (x) 1.2 1.3 1.5 1.7
PBT / EBITDA (x) 0.5 0.5 0.6 0.7
PAT / PBT (x) 0.6 0.7 0.7 0.7
Total Asset / Networth (x) 3.1 2.8 2.2 2.0
RoE (%) 21.5 16.8 20.8 23.1

May 14, 2010 9


Key Downside Risks
Over-exposure to coal handling: EEC's revenue has an extremely high exposure to
Over-
contributions from its coal-handling segment (pertaining to the power sector). At the
end of FY2009, it contributed 54% of the total revenues. As most of the power projects
are financed by the central government, any delay in execution can impact the
performance of the company and, in turn, our estimates. However, given the company's
long track record in executing power-related projects, we expect company to face
minimal risks on this front.

Lack of skill set in metals hinders growth opportunity: EEC has been a focused player
with a strong skill set and execution ability pertaining to the coal-handling segment.
However, given the fact that it is present in the material-handling solutions segment,
EEC lacks a similar, strong skill set in the metals (ferrous + non-ferrous) vertical.
However, going ahead, EEC plans to develop its overall skill set to take advantage of
the opportunity arising from the metal segment

Fixed price contracts: Most of EEC's order are fixed price contracts; hence, any abnormal
up move in basic metal prices can negatively impact the operating margins of the
company.

Order cancellation: EEC's order from Brahmani Steel worth Rs323cr has been on
hold, as that company is likely to be taken over by another steel manufacturer. In the
case of a takeover, the order might be cancelled and can go for re-bidding. In this
case, the current order book would stand reduced by Rs323cr.

Other risks: The company is also exposed to other broader economic risks, including
a contraction in private capex activity and an increase in competition.

May 14, 2010 10


Outlook and Valuation
We believe that an improving economic scenario (indicated by the revival in the IIP),
the continued government focus on infrastructure spends, and the pick-up in private
capex augurs well for companies providing MHE solutions for the core sectors of the
economy. Overall, emerging opportunities for EEC are expected to be around
Rs32,500cr over FY2009-12E. The Power and Steel Sectors are likely to offer the
highest opportunity of Rs25,500cr. The government's strong focus on the Power Sector,
through "Power for all by 2012", is expected to result in an expansion of generation
capacity in the Sector, leading to higher opportunities for MHE players. While the
Mining and Port Sectors would throw up combined opportunities worth around
Rs7,000cr.

We believe that EEC is well placed to seize the upcoming opportunities in the power
sector, due its strong Order Book of Rs1,243cr at the end of 4QFY2010 (1.1x FY2010
Sales), which renders a high Revenue visibility for the company. Going ahead, over
FY2010-12E, we estimate the company's Adj PAT to register a CAGR of 37%, 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 15% and 17% in FY2010, to 21% and 23% in
FY2012E, respectively.

On the valuation front, during the last five years, EEC has traded in a one-year forward
P/E band of 1-53x, and average 14x. At Rs79, the stock is available at attractive
valuations of 7.7x FY2012E Earnings and 5x FY2012E EV/EBITDA, respectively. We
Target Price
Initiate Coverage on the stock, with a Buy recommendation and Target Price of Rs102,
valuing the company at 10x FY2012E EPS .

Exhibit 20: One-year Forward Rolling P/E Band
350

300

250
Share Price (Rs)

25x
200
20x
150
15x
100
10x
50 5x

0
Apr-04

Oct-04

Apr-05

Oct-05

Apr-09

Oct-09
Apr-06

Oct-06

Apr-08

Oct-08
Apr-07

Oct-07

Apr-10

Source: C-line, Angel Research

Exhibit 21: Peer valuation
Mkt cap P/E (x) P/B (x) EV/EBITDA (x)
EV/EBITDA EV/Sales (x) RoE (%) RoCE (%)
( Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11E FY12E FY11 FY12E
TRF 1,179 17.5 14.1 5.4 4.0 12.2 9.7 1.1 1.1 36.9 33.6 26.9 26.9
TIL 443 11.1 7.4 1.9 1.3 5.6 3.9 0.4 0.4 17.8 19.0 25.2 25.2
Eng.
Elecon Eng. 734 10.0 7.7 2.0 1.7 6.0 5.0 0.9 0.8 20.8 23.1 18.0 20.9
Source: Bloomberg, Angel Research

May 14, 2010 11


Company Background
Elecon Engineering Company was established in 1951, as a designer and manufacturer
of Elevators and Conveyors, from which, incidentally, the company derives its corporate
name (Elecon). Over the years, the company has evolved, and, currently, it is a leading
manufacturer of Material Handling Equipment and Power Transmission Solutions. With
regards to its MHE division, the company is regarded as a specialised player in coal
handling plants. The company designs, manufactures and markets its sophisticated
range of products through its domestic network, and internationally in markets like
Singapore, Australia, South Africa, China and Dubai in the Middle East.

Exhibit 22: Revenue mix
1,600

1,400

1,200
549
(Rs cr)

1,000
460
426
800 394
389
600 311

400 732 800
232 588 655
200 448 471
202
226
- 79

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
MHE Gears

EEC's product range includes the design, engineering, manufacture, supply, erection
and commission of the products mentioned below:

Wagon tipplers Crawler-mounted trippers
Bucket wheel stacker/reclaimers Stationary and shiftable conveying systems,
for open cast lignite mines
Barrel-type blender reclaimers Integrated coal handling plants, for power
stations
Fertilizer reclaiming scrapers Underground mining conveyors
Limestone pre-homegenizing and Open-cast conveying systems
blending plants
Single and twin bucket Ferrous and non-ferrous foundry products
wheel bridge-type reclaimers

In the case of its transmission gear division, the company offers the following types of
gears:
Helical and Bevel Helical Gear boxes Planetary Gear boxes
Worm Gear boxes Marine Gear boxes
Elevator Traction Machines (Lift Gear boxes) Geared Motors
Couplings Custom-built Gear boxes
Wind Mill Gear boxes Vertical Roller Mill Drive (VRM)
High Speed Gear boxes

May 14, 2010 12


Profit & Loss Statement (Consolidated) Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Gross sales 814 928 1,031 1,109 1,336 1,512

Less: Excise duty 93 101 76 63 143 162

Net Sales 714 800 942 1,046 1,193 1,350

Other operating income 7 27 13 8 8 9

Total operating income 721 826 955 1,054 1,201 1,358
% chg 62.9 14.7 15.6 10.4 13.9 13.1

Total Expenditure 611 696 793 897 1,023 1,151

Net Raw Materials 443 490 503 728 653 739

Other Mfg costs 134 165 239 125 262 289

Personnel 27 34 44 44 78 88

Other 6 7 7 - 29 34

EBITDA
EBITDA 110 131 163 157 179 208
% chg 84.5 18.6 24.5 (3.1) 13.3 16.4

(% of Net Sales) 15.4 16.3 17.3 15.1 15.0 15.4

Depreciation& Amortisation 12 14 22 33 38 41

EBIT 98 116 140 124 141 167
% chg 94.8 18.9 20.7 (11.4) 13.0 19.0

(% of Net Sales) 13.7 14.5 14.9 11.9 11.8 12.4

Interest & other Charges 18 24 62 51 40 36

Other Income 7 6 10 1 7 8

(% of PBT) 7.6 6.4 10.9 1.2 6.2 5.8

Share in profit of Associates

Recurring PBT 87 99 88 74 107 140
% chg 94.7 13.8 (10.7) (15.6) 44.4 30.0

Extraordinary Expense/(Inc.) 2 - - (16) - -

PBT (reported) 84 99 88 90 107 140

Tax 30 31 31 24 34 45

(% of PBT) 35.0 31.9 34.8 26.7 31.9 32.0

PAT (reported) 55 67 57 66 73 95

Add: Share of earnings of associate - - - - - -

Less: Minority interest (MI) 0 0 - - - -

Prior period items 0 - 2 - - -

PAT after MI (reported) 55 67 57 66 73 95
ADJ. PAT
ADJ. PA 55 67 55 51 73 95

% chg 97.1 22.4 (18.2) (8.0) 44.6 29.8

(% of Net Sales) 7.7 8.4 5.8 4.8 6.1 7.0
Basic EPS (Rs) 17.8 7.2 5.9 5.4 7.9 10.2

Fully Diluted EPS (Rs) 17.8 7.2 5.9 5.4 7.9 10.2

% chg 81.9 (59.2) (18.2) (8.0) 44.6 29.8

May 14, 2010 13


Balance Sheet (Consolidated) Rs crore
SOURCES OF FUNDS
Equity Share Capital 6 19 19 19 19 19

Preference Capital - - - - - -

Reserves& Surplus 182 218 257 307 358 426

Funds
Shareholders Funds 188 237 275 325 377 444
Minority Interest 0 - - - - -

Total Loans 284 409 592 419 377 339

Deferred Tax Liability 17 17 33 33 33 33

Total Liabilities 488 663 900 777 786 816

APPLICATION OF FUNDS
APPLICATION

Gross Block 247 301 428 523 563 597

Less: Acc. Depreciation 124 123 145 178 216 257

Net Block 122 177 283 345 347 340
Capital Work-in-Progress 4 16 28 21 23 24

Goodwill / Intangilbles - - - - - -

Investments 8 9 11 5 5 5
Current Assets

Cash 13 8 61 28 41 22

Loans & Advances 39 57 75 50 56 64

Other 557 745 872 798 819 905

Current liabilities 256 350 432 472 505 545

Net Current Assets 353 460 577 405 411 446

Others 0 1 2 2 2 2

Total Assets
Total 488 663 900 777 786 816

May 14, 2010 14


Cash Flow Statement (Consolidated) Rs crore
Profit before tax 104 126 137 90 107 140

Depreciation 10 13 18 84 78 76

Change in Working Capital (151) (127) (58) 139 1 (59)

Less: Other income - - - - - -

Direct taxes paid (25) (32) (26) (24) (34) (45)

Cash Flow from Operations (62) (20) 71 289 152 112

(Inc.)/ Dec. in Fixed Assets (42) (80) (140) (88) (42) (35)

(Inc.)/ Dec. in Investments 1 1 5 6 - -

(Inc.)/ Dec. in loans and adv. - - -

Other income - - - - - -

Cash Flow from Investing (41) (79) (135) (82) (42) (35)
Issue of Equity 36 0 - - - -

Inc./(Dec.) in loans 78 126 183 (173) (42) (38)

Dividend Paid (Incl. Tax) (3) (5) (16) (16) (16) (22)

Others (19) (27) (49) (51) (40) (36)

Financing
Cash Flow from Financing 91 94 118 (240) (98) (95)
Inc./(Dec.) in Cash (12) (5) 54 (33) 12 (18)

Opening Cash balances 25 13 8 61 28 41

Closing Cash balances 13 8 61 28 41 22

May 14, 2010 15


Key Ratios
Valuation Ratios (x)
P/E (on FDEPS) 4.5 10.9 13.4 14.5 10.0 7.7

P/CEPS 3.6 9.0 9.2 7.4 6.6 5.4

P/BV 1.3 3.1 2.7 2.3 2.0 1.7

Dividend yield (%) 1.9 1.9 1.9 1.9 2.5 3.2

EV/Sales 0.7 1.4 1.3 1.1 0.9 0.8

EV/EBITDA 4.6 8.6 7.7 7.1 6.0 5.0

EV / Total Assets 1.0 1.7 1.4 1.4 1.4 1.3

Per Share Data (Rs)
EPS (Basic) 17.8 7.2 5.9 5.4 7.9 10.2

EPS (fully diluted) 17.8 7.2 5.9 5.4 7.9 10.2

Cash EPS 21.7 8.8 8.6 10.7 12.0 14.6

DPS 1.5 1.5 1.5 1.5 2.0 2.5

Book Value 60.8 25.5 29.7 35.0 40.6 47.9

Dupont Analysis
EBIT margin 13.7 14.5 14.9 11.9 11.8 12.4

Tax retention ratio 65.0 68.1 65.2 73.3 68.1 68.0

Asset turnover (x) 1.8 1.5 1.3 1.3 1.6 1.7

ROIC (Post-tax) 16.3 14.4 12.4 11.2 12.7 14.5

Cost of Debt (Post Tax) 5.1 5.4 6.3 7.4 6.8 6.8

Leverage (x) 1.5 1.6 1.8 1.5 1.0 0.8

Operating ROE 33.5 28.6 23.5 16.9 18.8 20.7

Returns (%)
ROCE (Pre-tax) 24.2 20.2 18.0 14.8 18.0 20.9

Angel ROIC (Pre-tax) 20.7 17.9 16.9 16.6 18.8 21.1

ROE 37.8 31.7 21.5 16.8 20.8 23.1

Turnover ratios (x)

Asset Turnover (Gross Block) 3.2 3.0 2.6 2.2 2.2 2.3

Inventory / Sales (days) 84 93 125 109 100 98

Receivables (days) 154 201 187 181 165 160

Payables (days) 138 151 169 193 180 170

WC cycle (ex-cash) (days) 135 175 185 154 113 107

Solvency ratios (x)

Net debt to equity 1.4 1.7 1.9 1.2 0.9 0.7

Net debt to EBITDA 2.4 3.0 3.2 2.5 1.9 1.5

Interest Coverage (EBIT / Int.) 6.0 4.8 3.4 2.4 3.5 4.7

May 14, 2010 16

Elecon Engineering

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 Securities 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, and is for general guidance only. Angel Securities Limited has not independently verified all the information contained
within this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contents
or data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the information
discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

This document is being supplied to you solely for your information, and its contents, information or data may not be reproduced, redistributed
or passed on, directly or indirectly.

Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other
advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in
connection with the use of this information.

Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section).

Disclosure of Interest Statement Engg.
Elecon Engg.
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: Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies.

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

Elecon engineering ic- 14-05-10

Elecon engineering ic- 14-05-10

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