Elecon Engineering Result Review by PINC Research

Elecon Engineering Result Review by PINC ResearchElecon Engineering (EECL) results were in line with our expectations. Sales registered 20% YoY growth to Rs3bn. OPM improved by 90bps YoY to 16.4% due to decline in RM cost. Adjusted profit grew by 34% to Rs163mn. Order inflows witnessed healthy growth of 119% in Q3FY11 (YoY Basis). We remain positive on long term prospects of the company but lower our PE multiple from 12x to 10xFY12E in line with broader correction in valuation of infra stocks.

Transmission Equipments (TRE) again drives the growth

Material handling equipment (MHE), which accounted for 54% of the sales, registered a growth of 9.4% to Rs1,640mn. TRE witnessed a healthy growth of 35% to Rs1,423mn, resulting in an overall growth of 20% in sales. Net profit (after adjusting the impact of profit on sale of investment) registered a growth of 34% to Rs163mn.

Healthy Order Book & Inflows

EECL continue to witness healthy growth in order inflow. The order inflows in Q3FY11 grew by 119% to Rs4.23bn (up by 135% in 9MFY11). There are live enquiries worth Rs50bn but management sighted concern on slow conversion of enquiries into order book. The current order book stands at Rs17bn (Rs. 13.5bn 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 start contributing

The recent overseas acquisition is expected to start contributing from Q4FY11. Management has highlighted that the manufacturing operations currently outsourced to Czech Republic would gradually be transferred to India resulting in cost saving.

VALUATIONS AND RECOMMENDATION

At CMP the stock is attractively valued at 7xFY12E given healthy order book, increasing focus on project business, robust order pipeline and expected improvement in margins. However, we lower our PE multiple from 12x to 10xFY12E in line with broader correction in valuation of infra stocks. We maintain ‘BUY’ with a revised target price of Rs96 (10xFY12E).