Elecon Engineering

Investors can consider buying the stock of Elecon Engineering, which manufactures industrial gears and material handling equipment.

While slowing order inflows, especially in its industrial gears segment, absence of any material progress in its new windmill and windmill gearboxes venture, besides the increasing pressure on its working capital had kept the company from meeting its FY-09 guidance, with the economy now showing signs of revival, the tide may be turning for Elecon too.

At the current market price of Rs 56, the stock trades at about 8 times its likely FY-10 per share earnings. Investors however can accumulate the stock in lots on declines, as it may take a couple of more quarters for the order flow scenario to improve for Elecon.

Order pipelines

The company’s order book at end-March 09 quarter stood at about Rs 1,629 crore (about 1.7 times its FY-09 revenues), registering a growth of over 26 per cent year-on year. It has since added over Rs 200 crore worth orders from different companies. But even as the order book cover lends healthy visibility to its revenue, what remains a concern is that the order booking has been weak. While most companies in the capital goods space have also reported weak order inflows, for Elecon, the concern arises from delay in execution of a Rs 400-crore order included in the current order book.

This order, bagged in August 2008 from Bramhani Industries, was put on hold by the latter. This issue, however, may be addressed soon as the management expects the order to take off in the next couple of quarters.

Besides, considering that some of its user industries such as steel, power and cement have begun showing signs of bottoming out, a revival in these sectors could mean a renewal of order flows for the company. The company has so far received business-related inquiries worth Rs 3,000 crore.
Industrial capex key to growth

Driven by the economic downturn, most companies have either postponed or significantly cut down their capex plans for the year. While some pockets of the economy have sprung back, registering good numbers, there appears no clear trend of companies coming forward to announce major expansion plans or other capex spends. This does not bode too well for Elecon, given its exposure to industrial capex.

The company’s industrial gears division, which owes its fortunes to the increasing spends by its user industries, reported a 30 per cent decline in revenues for the March-09 quarter as against the same quarter last year.

The facility also clocked lower utilisation levels of about 25-30 per cent. This was also partly due to the deferment of some orders last quarter, which will most likely get reflected in its current quarter revenues. The division currently has an outstanding order book of about Rs 239 crore only (executable over three-five months). That industrial gears enjoy higher margins also makes it imperative that the company receives more orders from the gears segment.

The windmill gearbox segment revenues will also from now be covered under the industrial gears division; the gearbox facility is currently ready and the management expects to procure orders for the same soon.

Elecon’s material handling division (MHE) appears to be the only division on a firm footing for now. This division, which also makes up a bulk of the total order book, may continue to drive the company’s growth. Sustained spends by companies such as BHEL in the power sector with which Elecon enjoys a good rapport, may help the division hold its ground. This may also bode well for the industrial gears division (as MHE uses gears) to some extent.
Results scorecard

For the year ended March 09, Elecon managed a revenue growth of over 16 per cent, helped primarily by the strong growth in its MHE division (grew 25 per cent). The gears division reported flat growth. Falling revenues from the gears division have led to a greater share for the MHE division in the overall revenue pie.

The material handling business now has a share of about 60 per cent from 55 per cent last year, while the industrial gears division’s contribution has fallen to 40 per cent. On the margin front, Elecon improved its performance by 1.2 percentage points to 17 per cent, helped by lower raw material prices.

The company is likely to sustain (or marginally improve) profit margins once it exhausts its current raw material inventory (mostly by second half of the current fiscal). Net profits, however, fell by 15 per cent. Higher interest outgo and depreciation, besides lower revenues, led to the decline in profits.
Delay in windmill initiative

There has not been any material progress in Elecon’s touted entry into the windmills and windmill gearboxes business.

While the company had earlier begun prototyping for windmill gearboxes of about 1 MW range for its customer and installed six wind turbine generators in Gujarat and supplied four in Maharashtra, the development so far has not been impressive. This scenario may, however, change in the next few quarters as the management indicated that the issue of certification for its windmills has been resolved recently. The management expects to make Rs 50 crore revenue contribution from the windmill segment this year.