Elecon Engineering (EECL) registered 9.6% YoY growth in net sales to Rs2,795mn. OPM declined by 40bps YoY to 14.2%due to higher employee cost and other expenditure. Net profit grew by 32% to Rs142mn mainly led by lower interest cost which declined by 20% to Rs107mn. Transmission Equipments (TRE) drives growth Material handling equipment (MHE), which accounted for 56% of the sales, registered a degrowth of 3% to Rs1610mn. TRE witnessed a growth of 32.7% to Rs1250mn, therby resulting in an overall growth of 9.6% in sales. Net profit registered a growth of 32% to Rs142mn led by continues decline in interest cost.

Order Book After a subdued FY10 where order inflows were dried off, EECL witnessed healthy growth in order inflow in the H1FY11. The order inflow in the H1FY11 at Rs8.31bn has already crossed the total inflows of FY10 of Rs7.48bn. Orders worth Rs40bn are in the pipeline which would get finalised in the next 8-9 months. We believe healthy order flows in the coming quarters for the company. The current order book stands at Rs15bn (Rs. 11.7bn for MHE and Rs3.4bn for TRE division). However, it includes order from Brahmani Steel (Rs3.2bn) which is still on hold.

Overseas acquisition to focus on exports EECL through its SPVs have executed a sale and purchase agreement with David Brown Gear Systems Group to acquire the Radicon Group of business at a gross value of GBP18.4mn as a going concern on a debt and cash free basis. It will start contributing to EEC revenues from Q4FY11 onwards.

VALUATIONS AND RECOMMENDATION

At CMP the stock is attractively valued at 10xFY12E given healthy order book, resumption of industrial capex cycle, robust order pipeline and expected improvement in margins. We upgrade our recommendation to BUY with a target price of Rs115 at 12xFY12E.