Elecon Engineering Company Ltd. share price target

Initiating Coverage Report

Continuation of margin trend cushions soft revenue

Strong margin trend cushions soft revenue growth

The strong margin trend continues

ELCN has ~40% share in gearbox and components, catering to industries such as sugar, power, steel, cement, rubber and fertilisers

Strong performance, big beat on margin

Steady performance, guidance unchanged

Strong numbers deliver big beat, outlook maintained

In-line performance, outlook maintained

Geared for Growth

Recuperating from the Losses, Recovery Seems Farther Disappointing results for Q3FY17: ECNL has registered a turnover growth of 15.1% sequentially and a negative -12.9% YoY growth for Q3FY17 mainly owing tolower than anticipated off-take from key customers. Despite the smooth integration of the merger between transmission & Materials Handling Equipment (MHE)business, the company has faced some teething issues which resulted in lower than expected numbers for 9MFY17.

Disappointing results for Q2FY17: ELCN has registered a meager turnover growth of 1.5% sequentially and a negative -12.9% YoY growth for Q2FY17 mainly owing to lower than anticipated off-take from key customers. Despite the smooth integration of the merger between transmission & MHE (Material Handling Equipment) business, the company has faced some teething issues which resulted in lower than expected numbers for H1FY17.

For 3QFY2016, Elecon Engineering reported a disappointing set of numbers on both the standalone and consolidated basis. The standalone top-line grew by 6.0% yoy to `120cr while the EBITDA margin declined by 891bp yoy mainly on account of unfavorable revenue mix involving bulk of the shipments of low margins. The consolidated top-line grew by 10.6% on a yoy basis to `330cr mainly led by the overseas business and growth in the Material Handling Business (MHE) business. But the EBITDA margin deteriorated sharply by 872bp yoy to 2.8%, mainly owing to a spike in raw material cost and other expenses. The company has reported higher other income on its standalone business related to profits from sale of land amounting to ~`22cr, adjusting for which, the standalone bottom-line declined by 66.3% yoy to `2cr. On the consolidated basis, the bottom-line after adjusting for the above mentioned exceptional gains and minority interest reported a loss of `11cr. Recovery in capex taking longer than expected, long term prospects intact: The performance of the MHE business of the company has remained under pressure on account of delay in capex in the core sectors and due to slower execution at customer level. On the other hand,...

For 2QFY2016, Elecon Engineering Company (Elecon) reported standalone numbers broadly below our estimates, except at the operating level. The top-line for the quarter declined by 5.5% yoy to `111cr. However, the operating performance improved significantly, led by a 1,516bp yoy decline in raw material cost to 43.9% of sales. Although, this benefit was partially offset by a 394bp yoy and 236bp yoy increase in employee and other expenses to 12.4% and 18.9% of sales, respectively; overall, the EBITDA margin expanded by 859bp yoy to 24.9%. Led by the favorable operating performance, the standalone net profit increased by 158.9% yoy to Rs7cr. Recovery in capex taking longer than expected, long term prospects intact: The Material Handling Equipment (MHE) business of the company continued to remain under pressure on account of delay in capex in core sectors and due to slower execution at the customer level. On the other hand, the Power Transmission Equipment (PTE) business, which had been holding its ground, has now been facing some pressure (in 1HFY2016). However, the margins have improved considerably, which is a positive sign for the business. Although the recovery in capex in core sectors has been slower than expected, the long term prospects for...

Rebound in core sector CapEx cycle coupled with adequate capacity headroom may augur well for transmission equipment segment: Growth in investment activities and increased investments in key sectors like power, steel, sugar and cement are giving an optimistic outlook for future. We believe the GFCF to GDP to improve by over 33% by FY17E resulting in increased activity in domestic transmission equipment segment, also EECL's current capacity utilization levels of ~ 45% leaves enough headroom to sustain the anticipated increase in demand. We expect the segment to grow at 11.9% CAGR for FY15-17E.