Elecon Engineering Company Limited

Initiating Coverage

CMP Rs 96 Accumulate Target Rs 114

Sensex 17135 Elecon Engineering Company Limited is a leading manufacturer of

Nifty 5083 mission critical Material Handling Equipment and Power Transmission

BSE Code 505700 Solutions for Defence, Mining, Power, Steel, Plastic, Sugar and Cement

NSE Code ELECON amongst other sectors. We believe, with an established set-up, Elecon

Bloomberg Code ELCN IN Engineering would be among the key beneficiaries of the increased

Reuters Code ELCN.BO investment in sectors such as power, cement, mining and steel, which

contribute significantly to its bottom line. Further, the changes in the

Out Standing Eq (No.of Shares) 92.86 mn product mix, entry into the wind energy segment, coupled with a healthy

order-book, lend greater confidence to its earnings visibility. We expect Mkt Cap 8919 revenues to grow at a CAGR of ~20% over FY09-11 and expect net 52 wk Hi / Low Rs. 105 / 24 earnings to grow at a CAGR of ~24% over the same period. Avg Daily Vol(Wkly) 778486 Face Value Rs.2.00

Share Holding Pattern Leading player in MHE and Industrial Gears segment Elecon Engineering is a leader in industrial gears with a market share of 26% Public 29% and also has a dominant presence in the Material Handling Equipment.

De-Risked Business Model Elecon Engineering offers a range of products and solutions for various Promoters industries which helps the company to distribute the risk across a wide 46% FIs/MFs 16% spectrum of industries. FIIs 3% Strong Order Book Bodies Corporates The Company has a strong order book of Rs 15490 mn, of which Rs 13040 mn 6% (84.18%) is from the Material Handling Equipment segment and the rest Rs 2450 mn (15.82%) is from the Industrial Gears segment.

Stock Performance (%) Valuations 3Mths 6Mths 1Year We possess a positive outlook on the MHE and the Power Transmission Absolute 39 146 4 business of the company. However we don’t see any significant business Relative 22 73 -27 traction from the wind mill and wind mill gear box segments in the near term. At the current market price of Rs.96, the stock trades at 15.5x its FY09 earnings Price Movements of Rs 6.19, 14x its FY 10E earnings of Rs 6.87 and 10x its FY 11E earnings of Rs 9.50. We recommend Accumulate with a target price of Rs 114 based on 19000 12x its FY11E earnings i.e. a potential upside of 19% from its current levels. 140 17000 120 15000 100 80 13000 Financial Snapshot (Rs.in Mn) 11000 60 Particulars FY2008 FY2009 FY2010(E) FY2011(E) 40 9000 Operating Income 8301 9585 11050 13850 20 7000 0 5000 EBIDTA 1342 1524 1824 2238 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 EBIDTA(%) 16.2 15.9 15.9 15.6 Elecon Engineering Co.Ltd., Sensex PAT 672 575 638 882 PAT(%) 8.16.05.86.4 EPS (Rs.) 7.2 6.2 6.9 9.5 Amit Shah ROCE(%) 22.3 19.4 21.5 22.7 [email protected] ROE(%) 28.3 20.8 19.8 22.3 P/Ex 13.3 15.5 14.0 10.1 TEL +91-22-6777 6777 EV/EBIDTAx 9.6 9.3 8.0 6.7

Source: Company, India Capital Markets Research

October 05, 2009 Elecon Engineering Company Limited

Investment Rationale

Leading player in MHE and Industrial Gears segment Elecon Engineering is a leader in industrial gears with a market share of 26% and also has a dominant presence in the Material Handling Equipment.

Material Handling Equipment Division The Company’s MHE division caters to the hi-tech equipment requirements of core sectors such as power, steel cement fertilizers etc. The Company has a composite range of almost all type of bulk material handling equipment and related products. Elecon’s MHE division has recently bagged a huge order of Rs 3235.40 million from , and the total outstanding order bag as on date is worth Rs 13040 million, which the company expects to execute over the next 2 years. The unexecuted order book position provides a good visibility on the revenue front for Elecon. Elecon has an execution period of 18-24 months in the MHE division. Elecon procures orders on the basis of project as well as the product. 70% of the current order book position is on the project basis and the remaining 30% on the product basis.

MHE's contribution to the Total Revenue

9000 62% 59% 60% 61% 55% 7500 49%

6000

4500 28% 8450

Rs in Mn in Rs 6850 3000 5876 4484 4705 1500 2260 788 0 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10E 2010-11E

Material Handling Equipment % of Total Revenue

Source : Company, India Capital Markets Research Industrial Gears Division Elecon Engineering is a leader in industrial gears with a market share of 26%.Elecon’s gear division is acknowledged as one of the most modern in the gear industry. Most of Elecon’s machinery is computerized numerically controlled (CNC) machines that ensure high degree of precision in design, manufacture and quality testing of gear components to DIN/AGMA specifications. Elecon’s Industrial Gear division has an outstanding order book position of Rs 2450 million, which it expects to execute over the next 6 months. The normal execution cycle for the gears division is 3-6 months. Out of the current order book position, 55%-60% orders are for the standard gears and the rest for the customized gears. It has also bagged an order of Rs 5.8 million from the naval department which will be executed within this financial year.

De-Risked Business Model Elecon Engineering offers a range of products and solutions for various industries like power, chemicals, steel, plastic, elevators, palm oil, marine engineering, cement, sugar, mining, petroleum, coal handling and fertilizers, this helps the company to distribute the risk across a wide spectrum of industries.

India Capital Markets Pvt.Ltd 2 Elecon Engineering Company Limited

Strong Order Book

The Company has a strong order book of Rs 15490 mn, of which Rs 13040 mn (84.18%) is from the Material Handling Equipment segment and the rest Rs 2450 mn (15.82%) is from the Industrial Gears segment. The Current order book is ~ 1.62 times FY 09 revenues which provide good visibility for the near future. Majority of the orders in the order book (~59%) come from the steel sector and the rest come from the cement, power and other sectors. The average execution cycle for the Industrial Gears segment is 3-6 months whereas for the MHE segment it is 18-24 months. In the MHE segment, the company has bidded for projects worth Rs 30000 mn-35000 mn, which are expected to be finalized in the second half of the current fiscal year.

Order Book Position

MHE 84%

Industrial Gears 16%

Source : Company, India Capital Markets Research

Expansion Plans by User Industries to drive Future growth Several Companies across sector have announced expansion plans. There seems to be huge opportunity for Elecon Engineering, as the material handling equipment and the power transmission equipment which it manufactures, are utilized by these companies. Elecon Engineering will be one of the major beneficiaries of these huge investments in the core sectors like power, steel, coal, cement, ports, etc.

Alternate Energy Division The Company has entered the high growth Wind Energy segment. It manufactures and sell wind mills up to 600kw. Elecon currently manufactures only the windmill gearbox and out sources the remaining components required for the wind mill i.e. it manufactures only 10% and the rest 90% is outsourced. Elecon expects the wind mill division to generate revenue of Rs 500 million in the current financial year. It has recently bagged a 10 windmill contract worth Rs 350 mn – Rs 400 mn from Nigeria which it expects to execute in the current financial year. It has also bagged an order of 2 windmills from U.S.A.

Elecon has also put a wind mill gear box plant to manufacture wind mills gear box up to 1-2 mw. Elecon has recently signed an agreement with one of the Companies to supply gearboxes with them. It expects to deliver the prototype by December 2009 and once approved will start the full commercial production for the same by March 2010.

India Capital Markets Pvt.Ltd 3 Elecon Engineering Company Limited

Plans to penetrate the International Market The Company plans to increase its revenue from exports and is targeting to achieve an export turnover of close to Rs 1000 mn in the current financial year; Elecon Engineering has formed five joint ventures (JVs) for marketing its products in line with this target. For the gears division the Company has set an export target of Rs 500 mn for FY 09-10, and it also sees a huge export market potential for the MHE segment. It sees a huge business potential from Africa as a lot of activity is going on specifically in the mining, port and power sectors there.

Strong technological tie-ups In order to acquire the required expertise and technical know-how to design and manufacture gearboxes for the vertical rolling mill used in the cement and coal industries, Elecon has entered into an agreement with Renk, AG of Germany. It has also signed a technical collaboration agreement for availing the technology to design and manufacture the Lift Gear box with Haisung Industrial Company Limited of Korea.

India Capital Markets Pvt.Ltd 4 Elecon Engineering Company Limited

Company Overview and Business Oulook

Incorporated in 1951, Elecon Engineering Company Limited is a leading manufacturer of mission critical Material Handling Equipment and Power Transmission Solutions for Defence, Mining, Power, Steel, Plastic, Sugar and Cement amongst other sectors.

From a modest two product Company, Elecon has diversified its product portfolio which caters to diverse requirements of two broad segments: - Material Handling Equipment and Power Transmission Equipment.

Business Segments

Material Handling Division The company is a pioneer in material handling equipment manufacturing – especially in Bulk Material Handling Equipment. For over five decades, Elecon has supplied hi-tech equipment to core sectors such as steel, fertilizer, cement, coal, lignite and iron ore mines, power stations and port mechanization in India as well as abroad. Elecon has a modern, well equipped MHE manufacturing plant spanning over 1,17,000 sq mt., in Gujarat.

The company derives 73.7% of this segment’s revenue from the power sector. The massive power generation capacity additions planned (‘Power for all by 2012’ – addition of 78577 MW) can bolster demand for the Company’s product.

Industry wise order book as on march 2009 Industry wise Sales Breakup for FY 2009

Wind mill Port Port 1.0% Others 0.2% Cement Power 17.2% Steel 0.1% Cement Others 10.9% 22.4% 8.5% 1.5% 1.6% Mining Mining 0.4%

4.2%

Power Steel 73.7% 58.5%

Source:Company, India Capital Markets Research

Demand drivers for the segment

Power The Ministry of Power has projected an addition in installed capacity of 78,677 MW during the Eleventh Five Year Plan, of which ~60000 Mw is planned from thermal source. An investment of ~ Rs. 2400 bn will be required to successfully achieve the target set for the Eleventh Five Year Plan. Considering about 9%-10% is spent towards material handling, it works out to an opportunity of about Rs 216 bn-Rs 240 bn. Even if 80% of the planned thermal power capacity is achieved, it translates into an opportunity of ~ Rs 173 bn-Rs 192 bn for material handling equipment and services.

India Capital Markets Pvt.Ltd 5 Elecon Engineering Company Limited

Steel CRISIL report expects a total investment of about Rs 827 bn to materialize over 2009-10 to 2011- 12.These investments would add to a total capacity of about 18 mtpa being commissioned in the next 3 years, an increase of about 30 per cent in the overall capacity. As a thumb rule ~7%- 8% of the total capex incurred is the addressable market for the MHE players which will create an opportunity to the tune of Rs 58 bn – Rs 66 bn over the next three years.

Port For the current five year plan, Government has planned a capacity addition of 485 million MT in major ports and 345 million MT in minor ports which will entail an investment of ~ Rs 600 bn. As a thumb rule ~10%-12% of the total capex incurred is spent on material handling equipment, will create an opportunity to the tune of Rs 60 bn – Rs 72 bn for the MHE players.

Potential opportunity in MHE segment (Rs in bn)

Implementation Investment Related to Industries Total Investment Annual Average period MHE

Power 2400 2007-12 216-240 43-48 Steel 827 2007-12 58-66 12-13 Coal 275 2006-15 20 2 Ports 600 2007-12 60-72 12-14 Total 4102 2006-15 354-398 69-77 Source: Company presentation, India Capital Markets Research

Order book status Currently, the company has a total order book position of Rs. 15490 mn of which more than Rs. 13040 mn is in the MHE division. As of FY09 end, the order book position of the MHE division was Rs. 13880 mn. The incremental order inflow during last few quarters has slowed down considerably on account of the prevailing economic slowdown and capex postponement decision taken by several companies. With the economy on revival path and government impetus on the infrastructure development, company expects good number of tenders to be finalized during the second half of the current fiscal year.

MHE

Rs in mn 15000

12000

9000

6000 5280 4990 4140 3400 3260 3000 1950 1390 660 450 190 0 3540 6450 9480 8760 10850 11580 15270 15700 13880 12690 Dec 07 Dec 08 Sept 07 Sept 08 June 07 June 08 June 09 March 07 March 08 March 09

Order inflow Order backlog

Source :Company, India Capital Markets Research

India Capital Markets Pvt.Ltd 6 Elecon Engineering Company Limited

Major orders bagged since April 2009 Rs mn

ABG Cement, Mumbai for supply of Stacker & Reclamimers. 199.9

Tecpro Systems Limited, Chennai for supply of Slewing & Luffing Stacker, Bucket Wheel type 162.5 Reclaimer and Drive units for Utkal Alumina Project. BGR Energy Systems Ltd., Chennai for supply of Rotary Breaker, Ring Granulator, Roller 102.9 Screen & Mandatory Spares for TNEB’s Mettur Thermal Power Station, 600 MW. Radha Engineering Works (P) Ltd., Chennai for supply of 1 no. replacement of Rotary Wagon 54 Tippler – 149 at IOHP of Paradip Port Trust.

National Mineral Development Corporation Ltd., Hydrabad for supply of Apron feeders. 53.3

Shivam Cement Pvt Ltd., Nepal for supply of Primary & Secondary Crushing System. 22.8

Bevcon Wayors Pvt. Ltd., Hydrabad for supply of Crushers. 14

Total 609.4

Source: Company, India Capital Markets Research

Key Customers MHE Segment Client Power BHEL, NTPC, BGR Energy, Torrent power AEC Limited Steel SAIL, JSW Steel Ltd, Sical Iron ore Terminals Mining and Coal DVC, Neyvelli Lignite Corporation, NMDC Cement Gujarat Ambuja Cement, penna cement, madras Cement Others Mcnally Bharat Engg co Ltd, Tecpro Systems Pvt Ltd Source: Company, India Capital Markets Research

Transmission Equipments (Gear division) Elecon is the market leader in this segment with a diversified product range. The major categories of gears manufactured are spiral bevel and helical gears, planetary gears, worm gears, couplings and gear boxes for specialized applications. The TE division services various industries such as Steel, Marine, Mining, Cement, Fertilizers, Windmills, Sugar, Plastics, Rubber, etc. The company has the maximum range of gears than any other company in the business costing from Rs. 10,000 to Rs. 100 mn.

Industry Wise Sales break-up for FY2009 Transmision Gears order book break up as on march 2009

Plastic and MiningMarine rubber Others Mining Fertilizer Material Chemical and 3% 5% 8% Material 13% 4% 5% Rubber handling fertilizer handling 9% 22% 3% 23% Lift gears Others 7% 13%

Lift gears Sugar Sponge iron 8% 11% Cement 4% Sponge iron Steel 12% Steel coversion 5% Cement Sugar coversion 10% 11% 14% 10%

Source : Company, India Capital Markets Research

India Capital Markets Pvt.Ltd 7 Elecon Engineering Company Limited

Massive capex planned by user industries is likely to ensure strong demand The key growth driver for the industrial gears segment has been the capex in Power, mining, defence, sugar, steel and overall industrial expansion. All capex in the afore-said sectors would create a robust demand for the industrial gears as it forms an important part of the machine. They are used for two basic purposes, increase or decrease of rotation speed and increase or decrease of power or torque. According to industry sources, over the next 8-10 years, capex of about Rs 9000 billion in the power reports, Infrastructure Industries, SEZs, and general industrial expansion is likely to be incurred, which will ensure strong demand for Industrial gears. Gear Industry in India is estimated at about Rs 15000 mn which has been growing at a rate of 12%-15% annually for the last few years. Elecon Engineering will be one of the major beneficiaries of these huge investments in the core sectors like power, steel, coal, cement, ports, etc.

Order book status Out of the total order book position of Rs 15490 mn, industrial gears division accounts for Rs 2450 mn. The Company’s gears division order book historically has a 70:30 ratio between standard and specialized gears. Of late Elecon has received few good orders for the specialized gears (40%-45% of the total gears division order book) where the margins are better than those of standard gears. This will help Company to sustain the currently existing margins in the gears division.

Gears Rs in mn 2500

2000

1500 1320

1210 1160 1060 880 880

1000 830 840 830 810

500

0 2020 2230 2130 2160 2020 2410 2450 2420 2390 2230

Dec 07 Dec 08 Sept 07 Sept 08 June 07 June 08 June 09 June

March 07 March 08 March 09

Order inflow Order Backlog

Source :Company, India Capital Markets Research

Key Customers Gears

Segm ent Client

Power NTPC, MSEB M in in g N M D C , N e yve lli L ig n ite C o rp o ra tio n Defence Indian Navy, Coast Guard

Lift Gears Schindler India

W ind Mill NEPC, Pioneer W incon Sugar Bajaj Hindustan Ltd Core sectors MHE L & T, ThysennKrupp Elevator Pvt Ltd. Steel , JSW Steel Ltd, SAIL Sponge Iron Cem ent ACC, Penna Cem ent, Ultra tech Cem ent C h e m ica l R a sh triya C h e m ica ls a n d F e rtilize rs Plastic industries Rajoo Engineers, DGP W indsor Source: Com pany, India Capital Markets Research

India Capital Markets Pvt.Ltd 8 Elecon Engineering Company Limited

Wind Energy Segment The Company has entered the high growth Wind Energy segment. It manufactures and sell wind mills up to 600kw. Elecon currently manufactures only the windmill gearbox and out sources the remaining components required for the wind mill i.e. it manufactures only 10% and the rest 90% is outsourced. Elecon has also put a wind mill gear box plant to manufacture wind mills gear box up to 1-2 mw. It has also supplied prototypes of wind mill gear box to a German client for trial purpose which once approved will provide Elecon with a confirmed order for the same. Elecon is also in talks with another probable client.

Huge opportunity seen in the Wind Energy segment India is the fourth largest wind energy producer in the world and the total installed capacity in India stood at around 10464 mw as on August 2009 as against 7800 mw as on January Wind Energy potential in india according to c-wet 2008 and 6053 mw as on January 2007. Growing concern towards global warming has State Potential (MW) drawn attention of several governments across the globe towards renewable energy 8968 Gujarat 10645 sources. Though thermal plants are going to be the Key energy power suppliers going Karnataka 11531 forward, wind energy would act as a supplement to the total power. As such, many Kerala 1171 countries, such as India, the United Kingdom, the United States and Germany, have madhya pradesh 1019 provided fiscal incentives and schemes to encourage the growth of renewable energy Maharashtra 4584 sources. With installed capacity of 120 GW (2008), the global wind market is expected to Orissa 255 grow rapidly by 19% CAGR to reach installed capacity of 240 GW by 2012 contributing to Rajasthan 4858 3% of the total world energy generation. World over there exist a shortage of wind-mill Tamil Nadu 5530 manufacturing facilities which provides a huge opportunity for the exports, currently catered total 48561 by a few major players. Source: C-Wet study, India Capital Market Research (units in MW) Total Cumulative Forecast for Wind Energy Development CY 06 CY07 CY08 CY09 CY10 Installed in installed by 2006-10 2010 Total America 3800 4100 2900 3950 4750 19500 29562 Total Europe 6865 7480 8725 10590 12990 46650 87694 Total South and East Asia 1750 2250 3400 3700 4200 15300 20918 Total OECD- Pacific 700 775 1050 1200 1400 5125 7257 Total Others 185 395 550 750 1075 2955 3362 Total 13300 15000 16625 20190 24415 89530 148793 Source:Company, India Capital Markets Research

Capex Programme Elecon has a capex programme of Rs 650 mn for the current financial year. It has already capitalized capex of Rs 1280 mn incurred during the last financial year. The entire capex would be funded through the $ 10 million ECB, which the Company has already tied up for. This capex would be spent across segment.

C apex

Rs in Mn 1400 1280 1200 1000 820 800 600 430 440 400 240 200 60 0 2004 2005 2006 2007 2008 2009

Source : Company, India Capital Markets Research India Capital Markets Pvt.Ltd 9 Elecon Engineering Company Limited

Group Restructuring Exercise The promoter group has around 20 group companies, of which many are in the same line of business. In order to stream line the business and prevent excessive tax outflow, the company is looking at restructuring the entire group. It has asked management consultants to provide restructuring options. The company intends to shortlist one of the options and complete the restructuring exercise in the current financial year.

India Capital Markets Pvt.Ltd 10 Elecon Engineering Company Limited

Risks and Concerns

Overall Slowdown in the Economy Growth in the MHE segment as well as the Industrial Gears segment is dependent on investment happening in the core sectors like power, steel, sugar, cement, etc. Hence any slowdown in investment will impact the demand for the MHE and the industrial gears segment and thus also impact the company’s financials. Although the Company has a good revenue visibility for the next 2 years, any slow down in the economy will impact the incremental order booking inflow which in turn would impact the company’s growth in the years ahead.

Rising Raw Material Cost Iron and steel, pipes and tubes, nickel and chrome are the main raw materials required for the manufacturing of the Company’s products; hence any rise in the prices of these raw materials may impact the margins of the company as about 75% of the orders bagged by the company are on the fixed price contract.

Highly leveraged balance sheet Elecon has a Debt: Equity ratio of 2:1 as on March 2009. With such high leverage it will be difficult for the company to raise further capital for any further expansion or opportunity. This might also lead to the possible equity dilution in the near future, which in turn will impact the EPS of the company. On account of the existing leverage, interest cost will also be on a higher side, which might affect the potential earnings growth.

Deferral of projects

Any deferrals from the client for execution of the project may affect the top line as well as the

bottom line of the company.

India Capital Markets Pvt.Ltd 11 Elecon Engineering Company Limited

Outlook, Valuation and Rating

The company looks well-placed with increasing investments in the infrastructure sectors. With an established set-up, Elecon Engineering would be among the key beneficiaries of the increased investment in sectors such as power, cement, mining and steel, which contribute significantly to its bottom line. Further, the changes in the product mix, entry into the wind energy segment, coupled with a healthy order-book, lend greater confidence to its earnings visibility. We expect revenues to grow at a CAGR of ~20% over FY09-11and expect net earnings to grow at a CAGR of ~24% over the same period. At the current market price, the stock trades at 14x its FY 10E earnings of Rs 6.87 and 10x its FY 11E earnings of Rs 9.50. We possess a positive outlook on the MHE and the Power transmission business of the company. However we don’t see any significant business traction from the wind mill and wind mill gear box segments in the near term. At the current market price of Rs.96, the stock trades at 15.5x its FY09 earnings. Although historically over the past 5 years the stock has traded at an average of 14x its one year forward earnings, taking into account its existing leverage position, we recommend Accumulate with a target price of Rs 114 based on 12x its FY11E earnings i.e. a potential upside of 19% from its current levels.

One Year Forward Rolling Valuation Band Chart

PE Ratio PB Ratio

11x 400 350 40x 300 8x 300

250 30x 200 200 5x 20x 150

100 100 2x 50 10x

0 0 Jul-06 Jul-07 Jul-08 Jul-09 Apr-06 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jul-06 Jul-07 Jul-08 Jul-09 Jan-07 Jan-08 Jan-09 Apr-06 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jan-07 Jan-08 Jan-09

EV -EBIDTA EV - Sales

50000 40000 22x 2.8x 40000 30000 2.2x 17x 30000 12x 1.6x 20000 20000 Enterprise Value

Enterprise Value 7x 1 x 10000 10000

0 0 Jul-06 Jul-07 Jul-08 Jul-09 Apr-06 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jan-07 Jan-08 Jan-09 Jul-06 Jul-07 Jul-08 Jul-09 Apr-06 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jan-07 Jan-08 Jan-09 M-Cap Sales

40000 3.5x 35000

30000 2.5x 25000 20000 1.5x 15000 Market Cap Market 10000 0.5x 5000 0 Jul-06 Jul-07 Jul-08 Jul-09 Apr-06 Apr-07 Apr-08 Apr-09 Oct-06 Oct-07 Oct-08 Jan-07 Jan-08 Jan-09

Source : Company ,India Capital Markets Research

India Capital Markets Pvt.Ltd 12 Elecon Engineering Company Limited

Financial and Earnings Outlook

15000 Rs in mn 13850 80% Strong Top Line Growth 12000 11050 The Company’s revenues increased to Rs 9585 mn in 9584 60% 61% 61% FY09 from Rs 4492.71 mn in FY06, i.e. a CAGR growth 8301 9000 7250 of 29%. Given the industry scenario and the current order 40% 6000 book position of Rs 15490 mn, we expect the revenues to 4493 grow at a CAGR of 20% to Rs 13850 mn by FY11E. We 20% 3000 25% believe that the government’s focus on infrastructure will 14% 15% 15% help the company to post the above mentioned growth. 0 0% FY06 FY07 FY08 FY09 FY10E FY 11E Revenue %growth Y-o-Y

Raw material cost Raw Material forms the major component of the total cost 8000 Rs in mn 80% 54% of sales of the Company. It constitutes approximately 59% 59% 60% 58% 54% 6000 50% 60% ~60% of net sales. Steel in its various forms is the key raw material for the Company. It procures most of its 4000 40% requirement from SAIL. Elecon has been able to manage 7520 its raw material cost in effective way in the past and we 5936 4811 2000 4774 20% 4361 expect the same in the near future from the company.

2653 1658 0 0% FY05 FY06 FY07 FY08 FY09 FY10 FY11 Raw material Cost % of net Turnover Employee Cost Elecon’s current workforce strength is of 889 people. Elecon has been successfully able to reduce the employee 12 Rs in mn 10.5 10.9 cost from 5.05% in FY06 to 4.58% in FY 09. This has 9.7 10 helped to improve the turnover per employee from Rs 6.5

8 6.5 mn in FY 06 to Rs 10.9 mn in FY09. This has happened as 6 the Company has adopted CNC machines which helps to 4.1 4 increase the accuracy and are computerized. We expect 2.4 the total employee cost to stabilize around 4% to 4.5% of 2 the revenues over the next few years. 0

2004 2005 2006 2007 2008 2009

Turnover per Employee Margins Elecon’s operating profits have grown at a CAGR of 32% 1000 Rs in mn 18% from FY 06-09 due to change in product mix. The 15% 800 Company’s revenue has increased on account of volumes

12% generated from MHE division which in turn has helped the 600 company to generate better operating profits The 9% Company currently enjoys blended operating margin of 400 6% 16% and has been able to maintain the margins over the last few years. We expect the margins of the Company to 200 3% stabilize around 15.5%-16% over the next few years. We

0 0% believe that the existing revenue mix will help the FY05 FY06 FY07 FY08 FY09 FY10 FY11 Company to maintain its blended margin; however the higher interest cost on account of the higher debt will suppress the net profit margins of the company. Net Profit EBDITA Margin EBDT margin Net Profit Margin

Source : Company, India Capital Markets Research

India Capital Markets Pvt.Ltd 13 Elecon Engineering Company Limited

Elecon Engineering Company Limited

Financial Statements Income Statement FY 2008 FY2009 FY2010(E) FY2011(E) Ratio Analysis FY2008 FY2009 FY2010(E) FY2011(E) (Rs in mn) Return Ratios (%) Operating Income 8301 9585 11050 13850 EBIDTA 16.2 15.9 15.9 15.6 Growth (%) 15 16 15 25 PBT 11.9 9.2 8.7 9.6 Material Cost 5393 6100 6943 8893 PAT 8.1 6.0 5.8 6.4 Employee Cost 344 439 486 565 RoA 6.6 4.3 4.5 5.4 Power and fuel exp 68 71 92 135 RoCE 22.3 19.4 21.5 22.7 Administration, Selling and General Expenses 1155 1451 1705 2020 RoE 28.3 20.8 19.8 22.3 Growth Ratios (%) Total Operating Expenses 6959 8060 9226 11613 Revenue 14.5 15.5 15.3 25.3 EBIDTA 1342 1524 1824 2238 EBIDTA 18.1 13.6 15.0 23.2 Margins (%) 16.2 15.9 15.9 15.6 PAT 22.4 -14.5 11.1 38.2 Interest 274 484 628 642 Per Share data Depreciation 142 221 245 280 EPS 7.2 6.2 6.9 9.5 Other Income 61 62 10 13 CEPS 8.7 8.4 9.4 12.3 PBT 987 881 961 1328 BV 25.5 29.7 34.8 42.5 Tax 315 306 323 446 DPS 1.5 1.5 1.5 1.5 PAT 672 575 638 882 Valuation Ratios (x) Margins (%) 8.1 6.0 5.8 6.4 PE 13.3 15.5 14.0 10.1 EPS 7.2 6.2 6.9 9.5 CPE 11.1 11.4 10.3 7.8 FV 2222M Cap/Sales 1.10.90.80.6 EV/Sales 1.6 1.5 1.3 1.1 Balance Sheet EV/EBIDTA 9.6 9.3 8.0 6.7 (Rs.in Mn.) (YE March) FY 2008 FY2009 FY2010(E) FY2011(E) CMP/BV 3.83.22.82.3 Dividend Payout (%) 75.0 75.0 75.0 75.0 Equity Capital 186 186 186 186 Turnover Ratios Reserves and Surplus 2182 2568 3044 3763 Sales/Total Assets (x) 2.1 1.8 2.9 2.9 Shareholders funds 2367 2754 3229 3948 Sales/Net FA (x) 2.8 2.2 2.3 2.8 Secured Loans 3209 5236 5386 5618 Debtors turnover (days) 216 180 182 173 Unsecured Loans 884 685 725 992 Inventory turnover (days) 152 196 204 195 Total Loans 4093 5921 6111 6610 Payable turnover (days) 144 164 170 171 Deferred Tax Liability 171 328 328 328 Work. Cap. Turn (days) 224 212 215 197 Capital Employed 6631 9003 9668 10886 Other Key Ratios Debt-Equity Ratio 1.7 2.1 1.9 1.7 Gross Block 3006 4277 4727 4877 Interest coverage Ratio 4.9 3.2 2.8 3.4 Less: Depreciation 1234 1448 1693 1973 Current Ratio (x) 2.3 2.3 2.5 2.4 Net Block 1772 2829 3034 2904 Quick Ratio (x) 1.6 1.4 1.5 1.4 CWIP 159 281 0 0 Du Pont Analysis - ROE Investments 95 109 110 115 Net Margin (%) 8.1 6.0 5.8 6.4 Inventory 2526 4007 4419 5569 Asset turnover (x) 1.5 1.2 1.3 1.5 Receivables 4923 4717 5500 6550 Leverage Factor (x) 2.3 2.8 2.6 2.4 Cash and Bank 75 611 349 498 ROE (%) 28.3 20.8 19.8 22.3 Loans and Advances 572 749 730 760 Cash Flow Statement Current Assets 8096 10085 10998 13377 (Rs.in Mn.) (YE March) FY 2008 FY2009 FY2010(E) FY2011(E) Payables 3289 4087 4235 5250 Cash generated from operations -195 710 438 596 Other Liabilities and Prov. 211 231 239 260 Cash flow from Investments -790 -1353 -98 -141 Current Liabilities 3500 4318 4474 5510 Cash Flow from Financing 932 1182 -601 -306 Net Current Assets 4596 5767 6524 7867 Net addition to cash during the year -52 538 -261 149 Misc. Expenses not w/o 10 17 0 0 Opening Cash and cash balance 128 75 611 349 Capital Deployed 6631 9003 9668 10886 Closing cash and cash balance 75 611 349 498

Source: Company, India Capital Markets Research

India Capital Markets Pvt.Ltd 14 Elecon Engineering Company Limited

India Capital Markets Pvt Ltd Name E-Mail Telephone Nos. Research

Divyesh Parikh [email protected] +91-22 6777 6777 Ext-707 Krupesh Thakkar [email protected] +91-22 6777 6777 Ext-832 Rohit Gala [email protected] +91-22 6777 6777 Ext-830 Jignesh Dhabalia [email protected] +91-22 6777 6777 Ext-831 Jisha Nair [email protected] +91-22 6777 6777 Ext-824 Amit Shah [email protected] +91-22 6777 6777 Ext-825 Jitendra Gupta [email protected] +91-22 6777 6777 Ext-827 Shital Kadam [email protected] +91-22 6777 6777 Ext-823 Bhadresh Nayee [email protected] +91-22 6777 6777 Ext-828 Imtiyaz Qureshi [email protected] +91-22 6789 3530

Institutional Sales /Dealing Devang Shah [email protected] +91-22 6777 6777 Hitendra Nayee [email protected] +91-22 6777 6888 Ext 722 Sameer Doshi [email protected] +91-22 6777 6888 Ext 726 Jigar Kamdar [email protected] +91-22 6777 6888 Ext 725

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