Elecon Enginerring

India Equity Research | Engineering and Capital Goods Result Update

ELECON ENGINEERING INR 493

Expanding growth opportunities BUY

Elecon Engineering’s (Elecon’s) Q4FY07 results were in line with our expectations in terms
of the topline. They were however marginally below our expectations on the operating June 18, 2007
margin front due to higher share of bought out components in the MHE division. Sales for
the quarter grew 52% Y-o-Y to INR 2848 mn on the back of 61% and 40% growth in MHE Harish Sharma
+91-22-2286 4307
and transmission divisions respectively. EBITDA and PAT grew 54% and 45% Y-o-Y to harish.sharma@edelcap.com
INR 384 mn and INR 185 mn respectively; EBITDA margins, at 13.5%, grew 20bps Y-o-Y.
Bhargav Buddhadev
For the full year though, the margins increased 150bps to 15.1%, and we expect this trend +91-22-4009 4360
to continue going forward. bhargav.buddhadev@edelcap.com

Full year highlights

The key highlight for FY07 was the strong sales growth of 77% and EBIT margin
improvement of 400bps in the MHE division. We expect this division to grow at a CAGR of
32% over FY07-09E on the back of strong demand from the thermal-based power plants,
steel, and cement sectors. Performance of the transmission division has been steady with
sales growing 42% Y-o-Y to INR 3135 mn and EBIT margins remaining constant at 20%.
The capital employed during this quarter has increased by INR 650 mn to INR 2950 mn,
representing investment on the wind mill gear manufacturing front. Elecon is on the verge
of entering into collaboration with an European company for manufacturing wind mill gear
boxes.

Order book
Reuters : ELCN.BO
Elecon’s order book, as of now, is INR 8360 mn with INR 6150 mn in MHE and INR 2150
Bloomberg : ELCN IN
mn in transmission divisions. The execution period for MHE and transmission divisions is
close to 12-15 months and 3-5 months respectively. This however does not include the
INR 1000 mn sales expected from the wind mill division. Market Data
52-week range (INR) : 528 / 156
We continue to maintain our ‘BUY’ recommendation on the stock on the back of robust Share in issue (mn) : 30.9
outlook on the user industries namely coal-based thermal power plants, steel, and cement. M cap (INR bn/USD mn) : 15.2 / 372.6
We envisage a demand of ~INR 30 bn for material handling equipment on an annual basis Avg. Daily Vol. BSE (‘000) : 89.6
for the next five years. Elecon is on the verge of entering into a collaboration for
manufacturing wind mill gear boxes, an INR 20 bn market in India. At the outset, Elecon is
looking at manufacturing 650 KV of wind mill transmissions and then scale up to 1.5 to 2.5 Share Holding Pattern (%)
MW. If this comes through, then the company will have another feather in its cap, which Promoters : 42.2
could lead to its potential re-rating. At INR 493, the stock trades at a P/E of 18.8x and MFs, FIs & Banks : 20.7
13.1x FY08E and FY09E earnings of INR 26.3 and INR 37.6 respectively. We maintain our FIIs : 5.0
‘BUY’ recommendation on the stock.
Others : 32.2

Financials
Year to March Q4FY07 Q4FY06 Y-o-Y% Q3FY07 Q-o-Q% FY06 FY07 FY08E
Revenue (INR mn) 2,848 1,874 52 1,682 69 4,425 7,231 9,727
EBITDA (INR mn) 384 250 54 296 30 597 1,094 1,625
Net profit (INR mn) 185 127 45 152 21 279 548 822
EPS (INR) 5.9 4.5 32.7 1.7 242.4 8.9 17.5 26.3
P/E (x) 57.2 29.1 19.4
EV/EBITDA (x) 26.7 16.2 11.4
ROE (%) 31.7 38.7 39.0
1 Edelweiss Research is also available on Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.
Elecon Enginerring

Result Highlights

Š Sales for the quarter grew 52% Y-o-Y to INR 2848 mn and for the full year by 58% to INR 7232
mn.

Š MHE division and transmission division accounted for 67% and 33% of sales, respectively,
on a quarterly basis. Annually, the contribution was 62% and 38% from the MHE and
transmission divisions respectively.

Š On a segmental basis, sales in the MHE division grew 61% Y-o-Y, whereas growth in the
transmission division was 41%. On a full year basis, the Y-o-Y growth in MHE and
transmission divisions was 98% and 35% respectively.

Š EBITDA for the quarter grew 54% Y-o-Y to INR 384 mn. EBITDA margin improved by 20bps
from 13.3% in Q4FY06 to 13.5% in Q4FY07. However, on a sequential basis, there was a
decline 400bps, primarily because of the following reasons:

Š The proportion of bought out components in the MHE division was higher at INR 520 mn in
Q4FY07 as against INR 330 mn in Q3FY07. We however do not expect this trend to
continue, going forward, as it is a one off aberration and an inconsistent phenomenon.

Š Other expenses, as a percentage of sales, stood at 14% of sales as against 12.2% in

Q3FY07, which was abnormal considering the full year trend of 14%. As a result, there was
a direct hit of 200bps on the operating margin front.

Š For the full year, EBITDA grew 83% to INR 1094 mn. EBITDA margins increased 150bps to
15% on the back of 310bps improvement in the EBIT margins of the MHE and stable margins
for transmission division. We expect this trend to continue going forward on the back of
improved demand scenario from the user industries and operating leverage kicking in.

Š Other income for the quarter increased 18% Y-o-Y to INR 23 mn in Q4FY07. For the full year
though there was a decline of 21% Y-o-Y to INR 66 mn.

Š PAT for the quarter grew 45% Y-o-Y to INR 185 mn in Q4FY07. For the full year, the same
grew 96% to INR 548 mn. Net profit margin for the quarter declined marginally by 30bps to
6.5% in Q4FY07. For the full year though, margins improved 130bps to 7.6%.

Other details

Venture into manufacturing of large-size windmill gear boxes

Elecon is venturing into the manufacture of large-size windmill gear boxes (between 1 and 2
MW). It will also be selling entire windmills on a turnkey basis for turbine sizes of up to 600 KW
and has recently signed an agreement with Centre for Wind Energy Technology for certification
of 600 KW windmills. For higher turbine sizes, it is looking at tying up with global windmill
companies for their gear box sourcing requirements. It is setting up a separate plant for this
purpose, entailing a capital expenditure of INR 800 mn. Though Elecon is targeting revenues of
~INR 1 bn in FY09E, we have factored in sales of INR 500 mn in FY09E from this segment. We
have adopted a conservative approach because we would prefer waiting for the company to get
a few orders, given the complexity of this business and presence of established players in the
turnkey market.

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Elecon Enginerring

Capex plan of INR 1500 mn over the next two years

We estimate a capex of INR 1.5 bn for Elecon over FY08-09E. The break-up of the same is as
follows:

Table 1: Expansion plan

Particulars Amount (INR mn)
Wind mill transmission 800
Wind mill 100
MHE 300
Transmission 300
Total 1,500
Source: Company, Edelweiss research

The company is likely to finance 30% of this capex through internal accruals and balance by
way of term loans. We expect Elecon’s strong earnings to keep its debt-to-equity ratio at the
current levels, going forward.

Bonus and dividend

Elecon declared bonus of 2 shares for every one held and a dividend of 75%. Post the record
date we shall be incorporating the impact of bonus shares in our model.

Financials snapshot (INR mn)

Year to March Q4FY07 Q4FY06 Y-o-Y % Q3FY07 Q-o-Q % FY06 FY07 FY08E
Net sales 2,848 1,874 52.0 1,682 69.3 4,425 7,231 9,727
Raw materials 1,984 1,299 1,113 3,086 4,872 6,880
Raw material consumed 1,750 1,151 1,214
Stock adjustment 234 148 (101)
Employee expenses 82 50 67 191 271 325
Other expenditure 398 276 206 552 993 897
Total expenditure 2,464 1,624 1,386 77.7 3,828 6,137 8,102
EBITDA 384 250 53.6 296 29.7 597 1,094 1,625
Other income 23 13 15 83 66 23
Depreciation 34 25 33 94 122 169
Interest 58 35 54 140 194 251
PBT 315 203 55.1 225 40.1 410 843 1,227
Provision for taxation - current 130 76 72 131 295 405
PAT 185 127 45.3 152 21.3 279 548 822
Tax rate (%) 41 37 32 32 35 33
Equity capital (FV INR 10) 63 57 63 57 63 63
No. of shares (mn) 31 29 31 29 31 31
Adj EPS (INR) 6 4 5 9 18 26
P/E (x) 57 29 19
Margins (%)
R.M. (% of sales) 69.7 69.3 0.5 66.2 5.3 69.7 67.4 70.7
Emp exp (% of sales) 2.9 2.6 8.8 4.0 (27.8) 4.3 3.8 3.3
Other exp (% of sales) 14.0 14.7 (5.0) 12.2 14.1 12.5 13.7 9.2
OPM (%) 13.5 13.3 1.1 17.6 (23.4) 13.5 15.1 16.7
NPM (%) 6.5 6.8 87.1 9.1 30.8 6.3 7.6 8.5

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Elecon Enginerring

Q4FY07 Q4FY06 Y-o-Y% Q3FY07 Q-o-Q% FY07

Segment revenue (INR mn) 2,849 1,874 52.1 1,682 69.3 7,232
Material handling equipment (INR mn) 1,913 1,187 61.2 999 91.4 4,485
Transmission equipment (INR mn) 1,104 784 40.9 790 39.8 3,135
Less: Intersegment (INR mn) 168 97 73.6 107 57.7 388

PBIT (INR mn) 451 274 64.7 297 52.1 1,196

Material handling equipment (INR mn) 223 129 73.5 130 71.1 551
Transmission equipment (INR mn) 228 145 56.9 166 37.2 645

Profitability (%) 15.8 14.6 17.6 16.5

Material handling equipment (%) 11.7 10.8 13.0 12.3
Transmission equipment (%) 20.7 18.5 21.1 20.6

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Elecon Enginerring

Company Description
Elecon Engineering (Elecon) was incorporated in 1951 and has supplied equipment to major core
sectors such as steel, fertilizers, cement, coal, lignite and iron ore mines, power stations, and port
mechanisation in India and abroad. It used to be a two-product company (elevators and conveyors),
but now it operates in two broad business segments- MHE and industrial transmission equipment

Investment Theme
With 42, 625 MW of capacity addition expected over FY07-12, we expect a total capital expenditure
of Rs.112.5 bn on the material handling equipment front over the period of six years. Elecon being
one of the bulk material handling equipment players is expected to benefit from the same.

Elecon is the largest manufacturer of transmission equipment in India. Order book for the
transmission division is driven by the corporate capex plans that have increased from a low of 23%
of GDP to 26% in 2004. With average capacity utilisations running at higher levels currently, India is
on buoyant corporate capex cycle for the next three years, which will provide growth for the
transmission business.

Key Risk
Any slowdown in the capex plans of the user industries, namely coal-based power plants, steel, and
cement, could be a major threat to the company’s expansion plans.

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Elecon Enginerring

Financial Statements
Income statement (INR mn)
Year to March FY05 FY06 FY07E FY08E FY09E
Income from operations 2,728 4,425 7,230 9,727 12,614
Direct costs 1,915 3,086 4,872 6,880 8,927
Employee costs 157 191 271 325 407
Other expenses 337 552 993 897 1,032
Total operating expenses 2,409 3,828 6,136 8,102 10,365
EBITDA 319 597 1,094 1,625 2,249
Depreciation and amortisation 82 94 123 169 196
EBIT 237 502 971 1,455 2,053
Interest expenses 93 140 194 251 318
Other income 31 83 66 23 20
Profit before tax 175 445 843 1,227 1,755
Provision for tax 74 131 295 405 579
Extraordinary items - 36 - - -
Reported profit 101 279 548 822 1,176
Adjusted net profit 101 279 548 822 1,176
Shares outstanding 28 29 31 31 31
Dividend per share 0.6 1.1 1.5 6.6 9.4
Dividend payout (%) 15.9 11.0 8.6 25.0 25.0

Common size metrics- as % of net revenues

Year to March FY05 FY06 FY07E FY08E FY09E
Operating expenses 88.3 86.5 84.9 83.3 82.2
Depreciation 3.0 2.1 1.7 1.7 1.6
Interest expenditure 3.4 3.2 2.7 2.6 2.5
EBITDA margins 11.7 13.5 15.1 16.7 17.8
Net profit margins 3.7 6.3 7.6 8.5 9.3

Growth metrics (%)

Year to March FY05 FY06 FY07E FY08E FY09E
Revenues 71.2 62.2 63.4 34.5 29.7
EBITDA 138.3 87.0 83.4 48.5 38.4
PBT 731.0 155.0 89.2 45.7 43.0
Net profit 375.2 176.3 96.4 50.2 43.0
EPS 375.2 176.3 96.4 50.2 43.0

Cash flow statement (INR mn)

Year to March FY05 FY06 FY07E FY08E FY09E
Net profit 101 314 548 822 1,176
Add: Depreciation 82 94 123 169 196
Add: Misc expenses written off 32 27 23 - -
Add: Deferred tax 24 (2) - - -
Gross cash flow 239 434 694 992 1,372
Less: Dividends 16 31 47 206 294
Less: Changes in W. C. 188 914 657 887 819
Operating cash flow 34 (511) (10) (101) 260
Less: Change in investments (1) 13 - - -
Less: Capex 229 401 700 700 1,000
Free cash flow (193) (926) (710) (801) (740)

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Elecon Enginerring

Balance sheet (INR mn)

As on 31st March FY05 FY06 FY07E FY08E FY09E
Equity capital 57 57 63 63 63
Reserves & surplus 677 970 1,738 2,354 3,236
Shareholders funds 733 1,027 1,800 2,417 3,299
Secured loans 670 1,506 1,706 2,206 2,706
Unsecured loans 292 551 589 789 989
Borrowings 962 2,057 2,295 2,995 3,695
Sources of funds 1,695 3,084 4,095 5,412 6,994
Gross block 1,725 2,027 2,727 3,427 4,427
Depreciation 1,112 1,182 1,305 1,474 1,670
Net block 613 846 1,423 1,953 2,757
Capital work in progress 7 107 107 107 107
Total fixed assets 621 952 1,529 2,060 2,864
Investments 50 63 63 63 63
Inventories 1,200 1,639 3,010 3,663 4,754
Sundry debtors 1,140 2,142 2,975 4,002 5,011
Cash and equivalents 92 247 48 (53) (94)
Loans and advances 251 306 383 478 560
Total current assets 2,682 4,334 6,415 8,090 10,231
Sundry creditors and others 1,539 2,122 3,502 4,268 5,454
Provisions 45 45 289 412 588
Total CL & provisions 1,584 2,167 3,790 4,680 6,042
Net current assets 1,097 2,167 2,624 3,410 4,189
Net deferred tax (123) (121) (121) (121) (121)
Others 50 23 0 0 0
Uses of funds 1,695 3,084 4,095 5,412 6,994
Book value per share (BV) (INR) 26 36 58 77 106

Ratios
Year to March FY05 FY06 FY07E FY08E FY09E
ROE (%) 14.6 31.7 38.7 39.0 41.1
ROCE (%) 17.6 23.0 28.9 31.1 33.4
Current ratio 1.7 2.0 1.7 1.7 1.7
Debtors (days) 152 177 150 150 145
Fixed assets t/o (x) 5.1 5.6 5.8 5.4 5.1
Debt/Equity 1.3 2.0 1.3 1.2 1.1

Valuations parameters
Year to March FY05 FY06 FY07E FY08E FY09E
EPS (INR) 3.2 8.9 17.5 26.3 37.6
Y-o-Y growth (%) 375.2 176.3 96.4 50.2 43.0
CEPS (INR) 32.4 65.4 107.3 158.6 219.5
P/E (x) 153.0 55.4 28.2 18.8 13.1
Price/BV(x) 19.0 13.7 8.6 6.4 4.7
EV/Sales (x) 5.4 3.6 2.4 1.9 1.5
EV/EBITDA (x) 46.5 26.7 16.2 11.4 8.6

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Elecon Enginerring
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RATING INTERPRETATION
Buy Expected to appreciate more than 20% over a 12-month period Reduce Expected to depreciate up to 10% over a 12-month period

Accumulate Expected to appreciate up to 20% over a 12-month period Sell Expected to depreciate more than 10% over a 12-month period

Trading Buy Expected to appreciate more than 10% over a 45-day period Trading Sell Expected to depreciate more than 10% over a 45-day period

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