Company Background
Elecon Engineering Limited (EEL) is one of India’s largest manufacturer of Material Handling Equipments (MHE) and Industrial Gears and Power Transmission products. MHE systems primarily comprise of various conveyor systems. EEL is one of the largest manufacturers of industrial gears and was the first company in India to introduce modular design concept, case hardened and ground gear technology. EEL is the gear supplier of choice to core sectors like Sugar, Cement, Steel, Fertilizer, Plastic Extrusion and Rubber. They are the only manufacturers of Vertical Roller Mill Gear for the power and cement industry.
Investment Thesis
Turn around in capex cycle has meant that the order inflow has stabilized. EEC has acquired the Benzler-Radicon business from the David Brown Gear Systems Group for a consideration of ~132cr. The company proposes to fund 80% of the acquisition through debt. That means an additional debt burden of 105 cr. This acquisition provides EEL with access to European markets.
The order book is robust. The outstanding order book position on Jan 31, 2011 is 1690 crores. This includes 420 cr added in Q3 FY11. Out of this, MHE orders are 1350 cr and gears are 340 cr. EEL has also submitted bids worth 5000 cr and expects a hit ratio of 20-25%. With the existing order book, there is good revenue visibility for FY12.
Financials
FY10 | FY09 | FY08 | FY07 | FY06 | |
Sales | 1109.36 | 1030.84 | 927.85 | 816.6 | 507.75 |
Other Income | 18.72 | -7.89 | 0.88 | 0.89 | -0.32 |
Op Profit | 168.45 | 180.72 | 154.75 | 123.75 | 73.45 |
EBDIT | 187.17 | 172.83 | 155.63 | 124.64 | 73.13 |
PBT | 94.68 | 92.05 | 107.57 | 87.76 | 45.48 |
PAT | 66.18 | 57.45 | 67.2 | 54.9 | 27.88 |
EPS | 7.13 | 6.19 | 7.24 | 17.75 | 48.85 |
Depreciation | 33.12 | 22.15 | 14.2 | 12.22 | 9.43 |
Interest | 58.71 | 58.23 | 33.86 | 24.66 | 18.22 |
Effective Interest Rate(%) | 11.26% | 9.83% | 8.27% | 8.69% | 8.86% |
Tax | 24.14 | 30.65 | 31.47 | 29.5 | 13.09 |
Effective Tax rate (%) | 25.50% | 33.30% | 29.26% | 33.61% | 28.78% |
Assets | 847.68 | 867.5 | 646 | 471.57 | 308.41 |
Networth | 326.1 | 275.4 | 236.72 | 187.9 | 102.67 |
Debt | 521.58 | 592.1 | 409.28 | 283.67 | 205.74 |
Net Block | 344.34 | 282.91 | 177.15 | 122.27 | 84.55 |
Cap WIP | 17.88 | 28.11 | 15.92 | 4.47 | 10.66 |
Debt/Equit Ratio | 1.60 | 2.15 | 1.73 | 1.51 | 2.00 |
Book Value | 35.12 | 29.66 | 25.49 | 60.76 | 179.87 |
Debt-Equity Ratio is likely to go up after the acquisition. Increased debt of 105cr would mean an additional interest outgo of around 10-12 cr.
Net Cash (Operations) | 170.11 | 71.25 | -20.22 | -62.13 | -40.51 |
Net Cash (Investment) | -60.21 | -135.33 | -79.32 | -40.82 | -41.73 |
Capex | 84.32 | 140.1 | 80.53 | 43.75 | 104.64 |
Free Cash Flow | 85.79 | -68.85 | -100.75 | -105.88 | -145.15 |
FCF/Sales(%) | 7.73% | -6.68% | -10.86% | -12.97% | -28.59% |
Interestingly, EEL has turned net free cash flow positive in 2010 and has turned positive operational cash flow from 2009 onwards.
Dupont Analysis | |||||
OPM(%) | 15.18% | 17.53% | 16.68% | 15.15% | 14.47% |
NPM(%) -- (A) | 5.97% | 5.57% | 7.24% | 6.72% | 5.49% |
Asset turnover(avg) -- (B) | 1.31 | 1.19 | 1.44 | 1.73 | 1.65 |
RoA(%) | 7.81% | 6.62% | 10.40% | 11.64% | 9.04% |
Financial Leverage -- ( C) | 2.60 | 3.15 | 2.73 | 2.51 | 3.00 |
RoE(%) -- (=A*B*C) | 20.29% | 20.86% | 28.39% | 29.22% | 27.15% |
Quarterly Results
Q1 | Q2 | Q3 | |
Sales | 247.17 | 280.91 | 302.39 |
Other Income | 0.01 | 0.4 | 20.55 |
Op Profit | 37.91 | 39.96 | 49.65 |
EBDIT | 37.92 | 40.36 | 70.2 |
PBT | 19.16 | 19.95 | 48.03 |
PAT | 13.32 | 14.21 | 36.82 |
EPS | 1.43 | 1.53 | 3.97 |
Depreciation | 8.92 | 9.75 | 9.83 |
Interest | 9.85 | 10.66 | 12.34 |
Tax | 5.84 | 5.74 | 11.21 |
Effective Tax rate (%) | 30.48% | 28.77% | 23.34% |
Risks
Political instability may reduce the pace of infrastructure development and may harm the growth for the company.
Input cost of steel is important for margins and any sudden and large increase in prices may impact margins.
Valuation
Stock is currently at 68.95 (NSE closing price) and PE of 19.34 (based on FY2010 EPS) and 7 (based on TTM EPS of 9.85). So, it cannot be termed as expensive. Expected FY12 EPS is around 11-12, with an estimated PE range of 10-12, the expected price range is Rs 110 – Rs 144.
I would not be surprised if I see atleast a 50% price appreciation in one year. The downside risk seems to be limited to 10%-15%.