20th May, 2010

Q4 and FY10 Result Update Q4FY10 Result Update

CMP : Rs. 78.35 TARGET : Rs. 108.00 Recommendation
Q4 and FY10 Result and Concall Highlights:

COMPANY DETAILS BSE Code NSE Symbol Bloomberg Market Cap. (Rs. Crs) Free Float 52 Week High 52 Week Low Dividend Yield -% Beta 505700 ELECON ELCN IN 727 55% 110.85 60.05 1.9 1.28

! Net sales for the quarter stood at Rs. 329.09 crs compared to Rs. 288.53 crs last
year. For full year FY10, the net sales stood at Rs. 1046.37 crs, i.e 9.56% higher than Rs. 955.06 crs last year.

! EBIT for the quarter stood Rs. 37.52 crs, down from Rs. 43.02 crs last year. The
increase in depreciation (Rs. 2.55 crs - Due to capacity addition), a rise in other expenses to the tune of Rs. 3.32 crs., and huge draw down of the inventory lead to decrease in EBIT margin from 14.64% last year to 11.28% this year. For the full year EBIT was down from Rs. 135.74 crs to Rs. 124.37 crs, where margins shrank from 14.08% last year to 11.8% in FY10.

! The management opines that last year saw drying up of orders for the sector
which lead to a lot of under-cutting in the margins leading to disturbed order flow and depressed margins.

Promoter Group FII DII Others Total

45.71 1.04 13.8 39.45 100

! Interest expense for the quarter was down from Rs. 15.8 crs last year to Rs.
11.73 crs. For the full year interest expense was up from Rs. 48.36 crs to Rs. 50.88 crs.

! Due to rise in other income in the fourth quarter as well as the full year, the
Q4FY10 PBT stood increased to Rs. 34.11 crs from Rs. 27.22 crs last year. A similar impact was seen in full year results where PBT increased marginally by Rs. 2 crs and stood at Rs. 90.31 crs.

! Net profit for the quarter stood at Rs. 27.07 crs, 60% greater than Q4FY09. For
the full year the growth was much less at 15%, where the PAT currently stood at Rs. 66.17 crs.

! The board has recommended a dividend of Rs. 1.5 (i.e 75% for face value of Rs.
2) per share.
Share price graph (Rs)

Order Book Status The outstanding order book for the company stood at Rs. 1313 crs till April 30th, 2010. The Company has received orders worth Rs. 398 crs till 18th May, 2010 from the year end. Which is greater than the total order inflow for full year FY10.

ANALYST Mohammad Riazuddin Ankit Shah

Source: Company, Eureka Research EUREKA RESEARCH

riazuddin@eurekasecurities.com 09903062346 / 91-33-3918 0386 - 87

20th May, 2010

Order Bagged after March 2010 Client Jindal Steel & Power Ltd Larson & Turbo Limited Sical Logistics Ltd GMR INFRA LTD Zubery Engineering Adhunik power & natural resources SAIL BGR Energy BGR Energy TOTAL Date 04/07/2010 04/07/2010 04/08/2010 05/12/2010 05/12/2010 05/12/2010 05/12/2010 05/12/2010 05/18/2010 Division MHE(Product) GEAR MHE(Product) MHE(Product) MHE(Product) MHE(Product) MHE(Product) MHE(Product) MHE(EPC) Value (Rs. Crs) 47.8 40.55 49.9 94.8 39.27 30.39 8.99 35.05 51.92 398.67

Source: BSE, Eureka Research Taking this incremental order flow, the order book outstanding would sum upto Rs. 1570 crs. This happens to be 1.47 times its FY10 sales and 1.62 times its FY09 sales BUSINESS DETAILS Material Handling Elecon is one of the renowned players in the Material Handling Equipment (MHE) industry with solutions for design, engineering, manufacture, supply, erection and commissioning of the project. It provides material handling solutions to sectors like 1) 2) 3) 4) 5) Mining Cement Port Mechanisation Fertiliser Coal based power generation units
EQUIPMENT • • • • Cement • • • • • Port Mechanization • • • • Idlers Pulley Shiftable Conveyors Conveyors Broadly used in the movement of raw materials Stacker-reclaimer Ship loaders Scrapers Impactor Twin Boom Stacker Circular Stock Pile Ship loaders Rail Pusher Car Wagon Tipplers Wagon Marshalling Equipment (transportation and placement of wagons) (designed for unloading broad-guage open rail wagons) (charging and spotting of wagon) Used for loading, unloading and movement of goods (stacking and storing materials) (type of scraper) (type of scraper) Used for storing (stacking) and reclaiming purpose (stacking the material invoiced through railway wagons and reclaiming it for main production activity) DESCRIPTION (rollers on which conveyor belt rests) (used for moving conveyor belt)

Product Portfolio INDUSTRY Mining




20th May, 2010


• • •

Wagon Tipplers Stacker-reclaimer Barrel Type Reclaimer (Barrel Type Blender Reclaimer for handling coal, iron ore, lime stone in a homogenisation stock yard) Used for storing and handling raw material


• • • • •

Scrapper Reclaimer Wagon loader Wagon tipplers Side arm chargers Apron Feeder (for hauling rake of wagons, placement of wagons on tippler table and evacuation of empty wagons from tippler table. (designed to receive and control the flow of material from bins(temporary usualy mobile storage container) and hoppers(storage place within the plant).) (used for loading to railway wagons)

• • • • • •

Paddle Feeder Single & Double Roll Crusher Cable Reeling Drum Stacker Reclaimer Idlers Roller Screen

(it is for reclaiming bulk material from bunkers and stockpiles) (it is for crushing of coal, coke, cinter, moderately hard rock, ore, chalk, etc) (used for power supply)

(Roller Screen is suitable for separating coarse, wet, sticky and clay raw material.) Used for storing and handling raw materials

Contribution to Revenue: Contribution of MHE division to the revenue of the company has increased from 28.09 % in the year 2005 to 59.30%. In FY10 the division has generated 54.77% of companies earnings (EBIT) which is an increase of 50% compared to 4% of total EBIT in 2005.
YEAR 2010 2009 2008 2007 2006 2005 MHE Sales 620.45 560.67 437.34 409.66 225.96 78.78 TOTAL 1046.37 955.06 826.44 720.65 457.82 280.46 % of MHE 59.30 58.71 52.92 56.85 49.36 28.09 MHE EBIT 83.08 71.57 62.74 55.04 20.71 1.62 Total(EBIT) 151.7 144.31 142.01 119.51 67.16 39.48 % of MHE 54.77 49.59 44.18 46.05 30.84 4.10

Company has been able to maintain high margin in MHE division due to its technical expertise and economies of scale, even during FY09 it was able to hold its margin at 12.77%. The company takes two kinds of orders in the segment. First where it takes the orders for equipment only. Here the EBIT margins are around 14-15% and the execution period is around 10-12 months. These kinds of orders give greater margins as well as shorter execution time. Besides this, the company also accepts EPC orders where it sub-contracts other construction activities. Here the execution period increases significantly with a decrease in margins. However, with more subcontracting, asset turnover and ROE improves. Currently the strategy was to capitalize on small projects (mainly product orders) with high margins rather than going for huge EPC projects with low or no margins. The company derives 73.7% of this segment's revenue from the power sector. The massive power generation capacity additions planned can bolster demand for the Company's product. Besides power, port mechanization and mining activities will also keep the order flow of the company ticking. Elecon Eng. will also be introducing new products like Pipe conveyors, High Speed conveyors and Curbed conveyors. Hence, we do not see a possibility where the order flow dries down to an extent where revenues and profitability of the company gets hampered in several quarters to follow. EUREKA RESEARCH 3

20th May, 2010

Source: Company

Growth in target industries Power The target of the current 11th plan is set ambitiously at 78700MW. According to CRISIL research estimate about Rs. 750000 crore would be invested in power sector over the next five years by 2013-14. Of this Rs. 480000 crore would be invested in power generation space. Approximately, 10 % of this investment would be directed towards material handling, providing a huge scope of business for Elecon.

Cement The cement industry is expected to increase at 11.5 % annually during the 11th plan years. Accordingly, the targeted cement capacity by the end of the XI plan is 298mn.t from 180 mn.t (apprx) which would require an investment of Rs. 52400 crores

Steel The target capacity for next 4-5 years in the steel industry is 125 mn tons. With current capacity of 58 mn tons we expect an addition of another 50 mn tons. This would involve a capex of Rs. 200000 crore (apprx). Considering about 5%-6% is spent towards material handling, it works out to be an opportunity of about Rs 10000 cr- Rs 12000 cr.

Ports The National Maritime Development Programme (NMDP) had earmarked an outlay of Rs 55800 cr to develop additional capacity of 434 million ton (mt) in five years, only Rs 5717 cr could be invested to create additional capacity in the first three years of the Plan. There is still a lot of capex to be made in this sector out of which 5% would flow in to the material handling works.

Sr. No


Investment Total

Investment Related to MHE 30000 12500 2000 3000

Implementation period 2006-15 2006-20 2006-15 2006-15

Annual Average 3000 900 200 300

Anticipated Share by Elecon 300-450 100-150 20-25 30-45

1 2 3 4

Power Steel Coal Ports

220000 262000 27500 60000

Source: Company Presentation EUREKA RESEARCH 4

20th May, 2010

Key customers Power Steel Ports Cement MHE EBIT Margins: FY10 13.39% FY09 12.77% FY08 14.35% FY07 13.44% Reliance Energy, Maharashtra Electricity Board, Tamil Nadu Electricty Board, NTPC Steel Authority of India, Indian Iron & Steel Chennai Port Trust, Marmagaon Port Trust, Kandla Port J.K. Cement, Gujrat Ambuja Cement / ACC

Historically 50-60% of the orders in MHE division were EPC based and balance was equipment based. Going forward the company plans to take more equipment orders, may be of smaller size which would have a shorter execution cycle (10-12 months) compared to EPC orders where the cycle extends beyond 24 months. Hence, going forward we expect greater part of the Rs. 1021 crs outstanding as of April 10' along with further inflow of Rs. 260 crs after that (out of which only Rs. 52 crs is EPC, rest equipment) of order backlog to be booked in revenues in FY11 itself. As we have seen strong inflow in first two months, we continue to be bullish about the demand scenario and hence order inflow for the company.
Performance of the MHE for FY 2010 FY09 Turnover EBIT 561 72 FY10 620 83 Growth (%) 10.52 15.28

Taking into consideration the current order book, the expected execution cycle we estimate that the company will be able to clock a net revenue of Rs. 793.86 crs for FY11 from this segment (up 21% from RS. 654.91 crs last year) . We remain optimistic about the margins in the business as greater part of the fresh inflow of orders are on the equipment side (lesser on the EPC front). We conservatively take the EBIT margins to be 12.5%, though in tough situations like last year also the company was able to get a margin better similar to this number. We will see Rs. 99 crs contribution from the segment to EBIT (up from Rs. 83.08 crs last year). With commodities prices coming down on China concern and greater order flow due to govt. thrust, the margins and order flow would remain buoyant.

Power transmission Solution Elecon commenced manufacturing of reduction gears unit in 1962 and set up a separate gear division in 1976. The gear division of Elecon is at Vallabh Vidyanagar, Gujarat, with the installed capacity of 55,000 units, which has increased with the CAGR of 13% during the last four years. Market Share - Elecon is the largest player in the gear industry with the current market share of 26% followed by Shanthi Gears and Flender with the share of 17% and 10% respectively. This division contributed 45% to the revenues in FY10. Products manufactured by Elecon

! ! ! ! ! ! !

Worm Gear Boxes Couplings Helical & Bevel Helical Gear Box Wind Mill Gear Boxes Elevator Traction Machines Planetary Gear Boxes Marine Gear Boxes 5


20th May, 2010

! High Speed Gear Boxes ! Geared Motors
Growth in core sectors of the economy like construction, mining etc is likely to drive demand for gears. The demand for Gears and Gear Boxes depends on the growth in the industrial machinery. The Indian economy has been growing at a scorching pace. Above all, the manufacturing sector is also surging ahead. Huge industrial capex is expected across Elecon's user segments such as Sugar, Cement, Chemical, Fertilizer, Steel, Plastic Extrusion and Rubber. 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.

Source: Company
Key customers Power Minning Defence Steel Sponge Iron Chemical Windmill Sugar Palm Oil Cement NTPC, MSEB NMDC, Neyvely Lignite Corporation Indian Navy, Coast Guard SAIL, TISCO Jindal Steel & Power, Nova Iron & Steel Rashtriya Chemicals & Fertilizer, Alembic NEPC, Pioneer wincon Bajaj Hindustan Ltd, Harinagar Sugar Ltd Felda Gujrat Ambuja Cement / ACC

Order book Status In the gear segment, the company had an order backlog Rs. 292 crs. The execution cycle for standard gears is 4-6 months, and for complicated gears is 8-12 months. On average we take the execution cycle to be 8 months conservatively. Based on this we expect the revenues for the year FY11 to be Rs. 498 crs, (compared to management expectations of Rs. 500 530 crs). The EBIT margins in the segment has always been very healthy at 18-20%. With better capacity utilization and buoyant demand, we expect the margins to be at the historic level and for our calculations factor in a conservative 18% EBIT margin. Going by this we will see an EBIT contribution of close to Rs. 89.64 crs from the sector.

Alternative Energy Elecon diversified in the wind turbine business in 2001 with the technical collaboration with TURBOWIND N.V. of Belgium. The company manufactures and installs Wind Turbine Generators (WTG). Elecon has an installed capacity of the 50 WTGs per annum of up to 600 KW capacity. EUREKA RESEARCH 6

20th May, 2010

Elecon has also stepped in global markets with the successful commissioning of the first 600kw wind turbine at Newburyport, MA in February 2009. Apart from wind turbine, Elecon also undertakes the development of wind farm contracts. Elecon currently manufactures only the windmill gearbox and outsources the remaining components required for the wind mill i.e. it manufactures only 10% and the rest 90% is outsourced. The govt. is laying significant thrust on wind energy and mandating a certain percentage of the total electricity purchased by distribution companies to come from renewable sources like wind. India's installed wind power capacity is 10,925 MW (as on 2009). The government has set a wind capacity addition target of 10500MW for 11th plan period. Further, government estimates indicate that the total potential for wind power in India is over 48.5 GW. Elecon has entered this sector at the most appropriate time; it can capitalize on the immense growth potential of this sector. However, we have not factored in any revenue from this segment as they will be negligible in this financial year and will only increase gradually over the years. All the capital expenditures relating to the planned production has already been made, hence no capital outlay on this front is expected.

Capex Programme Elecon has a capex programme of Rs 40 cr for the current financial year. This capex would be spent across segment and would be majorly financed via internal accruals and the excess funds that still lie with the company from its recent debt issue. It has already capitalized capex of Rs 128cr and Rs 95 cr for FY09 and FY10 respectively.

Risk and Concerns

! Increased competition - Tremendous growth opportunities in the MHE sector has attracted lot of new players in the segment leading
to fierce competition, taking a toll on the margins of the existing players. However, with financing being available along with potent demand, we feel the pie will increase significantly to accommodate increased number of players.

! Delay in execution- Any deferrals from the client for execution of the project may affect the top line as well as the bottom line of the

! Increase in Input Price- Iron and steel, forgings, bearings, belts 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. However, about 90% of company's orders are of fixed price nature and any anticipated price rise has been factored in into the contract price. On the other hand company stands to gain from the downward movement of input prices, which is the most likely situation.

Valuation and Recommendation

As discussed above, we expect the business fundamentals to improve significantly to the benefit of the company and the stock price. The top line and bottom line is likely to expand without much addition in fixed or financing costs. However, we have factored in decent increase in other fixed costs and interest expenses as the general interest rates in the economy is hardening. The biggest positive for the company would be the uptick in order flow and improved execution which would result in better asset turnover, improved capacity utilization and hence better sales and profit numbers. At the current market price Rs. 78.35, the stock is trading at 11x its FY10 and only 8.66x its FY11E EPS of Rs. 9.04.Looking at the growth opportunity in both its existing and upcoming businesses, we ascribe a conservative P/E of 12 to the stock. This gives us a one year target price of Rs. 108, i.e 38% higher than the current market price of Rs. 78.4. Hence we are positive due to good growth in earnings as well as improvement in valuation multiple for the stock. We recommend a Buy on the stock.




20th May, 2010

Amount (Rs. Crs) Sales MHE Gears Total Sales Less: Inter Segment Transfer Net Sales EBIT Blended EBIT Margin (%) Unallocable Exp. Interest Expenses PBT Tax PAT EPS Target P/E Target Price

FY10 654.91 425.92 1080.83 34.46 1046.37 151.7 14.5% 10.49 50.89 90.32 24.14 66.18 7.13

FY11E 793 498 1291 39.84 1251.16 181.70 14.5% 12 55.2 114.50 30.60 83.90 9.04 12 108

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, but we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our judgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequence of reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID. Analyst : Mohammad Riazuddin Ankit Shah Email Phone : : riazuddin@eurekasecurities.com 9903062346 / 91-33-3918 0386 - 87

Registered Office : 7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001 Corporate Office : B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001 Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184 e: helpdesk@eurekasecurities.com Mumbai Office : 909 Raheja Chamber, 213 Nariman Point, Mumbai-400021 Phone : 91-22-2202 5941 / 5942 e: mumbai@eurekasecurities.com




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