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 Mkt Cap 8919 order-book, lend greater confidence to its earnings visibility. We expect 52 wk Hi / Low Rs. 105 / 24 revenues to grow at a CAGR of ~20% over FY09-11 and expect net Avg Daily Vol(Wkly) 778486 earnings to grow at a CAGR of ~24% over the same period. 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 Bramhani Industries, 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% 61% 59% 60% 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.