By Nirmal Bang
Snap shot
cmp 88 tgt 121
Elecon Engineering Ltd (EEL) caters to the need of core sector likes Power, mining,cement, sugar, steel & port sector. It provides engineered equipment, system and services related to Materlial Handling Equipments (MHE), for steel plant, port, and thermal power plants etc. Industrial Gears division produces different type of power transmission equipments gearboxes for core sector.
Investment Rationale
- Opportunity of over Rs. 320bn from FY10©\12E coupled with turnaround in capex cycle to drive demand for MHE segment. The MHE Industry is all poised to gain immensely from capacity addition in Power, Steel, ports etc.
- EEL is witnessing good order traction this year: The Order booking in MHE which came down sharply in FY10 to Rs.311 Cr against Rs. 907 crs In FY09, has gained momentum In Q1FY11 wherein it has won fresh orders worth of Rs. 578 crs and further more is expected in near term.
- Financials to Improve: We expect EEL to post CAGR of 22% revenue over FY10©\12E. EBIDTA Margin is expect to reamin at 16% levels while PAT to grow at 22% CAGR from FY10©\FY12E.
- Restructuring to add growth, value & synergy Elecon has initiated a corporate restructuring with a view to consolidated business within group companies. The rationale behind this is to enhance shareholders value, synergy realization & to provide financial flexibility to raise further debt or dilute further equity for future expansion
Valuation
At the current market price of Rs.88, EEL is currently trading at a 10.1xFY11E & 8.33xFY12E, on expected EPS of Rs.8.6 & 10.8 respectively. Traditionally EEL has traded in a P/E of 12©\14x and hence we believe it is looking quiet attractive at current level.We are recommending BUY rating on stock with target price of Rs. 121 considering attractive valuation, strong revenue visibility & expected healthy order book.
Investment Highlights
Huge opportunity in MHE Industry
EEL has strong all around capabilities , experience & diversified skills in material handling equipment (MHE) for most industry verticals like power, steel, minerals & ports. With huge opportunity starting to go under way in the key industry like steel, power & ports etc. the MHE industry stands to gain immensely from capacity addition We expects total opportunity available with MHE industry is more than 320 bn by FY12E
Armed with engineering prowess and strong skills coupled with diversified knowledge, EEL is all set to tap the INR 320 bn opportunity. We believe that, EEL with its all round capabilities, diversified skills and ability to develop products and solution across all industry verticals, is likely to be amongst the key beneficiary of the buoyancy in the MHE Industry.
Galloping Industrial Production
IIP Index is the testimony to positive trends in the Indian economy. After decline to negative territory for most part of FY09©\10, IIP has started upwards journey from Oct©\09 with significant contribution from the Manufacturing segments. We have achieved sustainable double digit growth since Oct©\09 registering 10.3%, 11.7%, 17.6%, 16.7%, 15.1%, 13% & 17% growth in Oct©\09, Nov©\09, Dec©\09, Jan©\10, Feb©\10, March©\10 & April©\10 respectively. Where IIP has lodged double digit growth, capital goods has outperformed segment with registering a growth of 11%, 11.8%, 38.8%, 56.6% & 44.4%, 28% & 72% in Oct©\09, Nov©\09, Dec©\09, Jan©\10, Feb©\10, Mar©\10 & April©\ 10.We expect allaround buoyancy in the economy is likely to ensure fuelling of strong Industrial growth in future.
Order book likely to pick up this fiscal
EEL is sitting on a strong order book of Rs. 1528crs.( Q1FY11). It has witness a growth of more than 35% CAGR in last 7 years,from Rs. 141.2 crs in FY02 to more than Rs. 1624 crs in FY09, before it came down to Rs. 1243 crs in FY10 on account of economic slow down.
The consistant order growth is again likely to resume from FY11 onwards. We expect order backlog to grow by 24% in FY11E & 31% in FY12E
With picking up in industrial demand, management expect minimum of Rs. 1200 order inflow till September 2010 with live enquires of Rs. 5000 crs. Company has already bagged order worth of Rs. 578 crs till Q1FY11. Going forwards, apart from power sector, management expects orders mainly from Cement, steel & port sector.
Restructuring of Group
Elecon has initiated a Corporate restructuring with the view to consolidate the business within the group companies. This will result in enhancing the shareholder¡¯s value, synergy & will provide financial stability going forward. Apart from Elecon Engineering, Elecon group has six flag ship companies under its portfolio.
We believe restructuring of group will help Elecon to raise finance efficiently which will help in funding their increasing capex going forward.
Business & Background
Established in 1951 & promoted by Elecon group, EEL has grown steadily to become one of the prominent players in MHE Industry & Industrial gear boxes. In 2007, EEL diversified its portfolio into windmills & wind gear boxes to tap the opportunity in Wind Power business. EEL has mainly two divisions:©\
MHE cater to the needs with wide range of products like: Stacker reclaimer, Wagon tippler, Crusher & Impactors, Tripper, Screens pulley, conveying system. Etc caters to the needs of core sector like Power, Steel, Ports & cements. Company derives majority of its revenue from MHE division (power sector contributed 80% FY10).
Industrial Gears: It produces different types of gear boxes likes of helical gears, worm gears, special gears, plantery gearboxes, coupling & geared boxes. It caters to the needs of industries like sugar, defence, Wind, MHE, fertilizers etc. EEL is market leader in domestic gear division & commands 26% market share.
Industry Overview
Bulk material handling (BMH) is an engineering field, centred around the design of equipment used for transportation of material such as ores in loose bulk form. BMH system are typically composed of moveable items of machinery such as stackers, reclaimers, unloaders, conveyer belts, hoopers, & diverters, combined with storage facilities such as stockpiles, stockyards etc. The purpose of a BMH facility is to transport material from one of several location to an ultimate user. BMH is mainly use at processing facilities (likes of iron & steel, thermal power plant), port sites (loading & or unloading of ores & minerals). On an average, MHE constitute 5©\10% of total project cost.
POWER
We estimate MHE to be an INR 320 bn opportunity by FY12E, which are likely to be driven mainly by investment in power sector. India¡¯s Power capacity has increased 7x from 18878 MW in 1956 to 132000 MW by end of 11th plan. Approximately 40000 MW of power generation is likely to add by FY12E. The expansion plans in the power Generation Segment would drive the demand for , crushers, feeders, conveyers, & Screeners. As per the Crisil, the total opportunity arising from the power sector is estimated to be more than Rs. 17000 Crs.
Port
Indian port capacity is likely to be doubles by FY14 to INR 1500 mn tonnes with estimated capex of Rs. 557 bn. According to Industry sources, MHE constitutes 11©\12% of total port capex which includes cranes, BMH plants etc. which translates into addressable market share of Rs. 6600 ©\7200 Crore for port equipment division.
Steel
We expect Rs. 262000 Crores investment in steel to be added over next ten year. As a thumb rule , 5©\7% of total capex is addressable market share of MHE players which translates into opportunity of Rs. 12500©\18000 Crore, which includes various opportunity such as coal handling.
Wind
EEL enetered Wind turbine business in FY2007©\08 with capex of Rs. 150 crore. Over the period company has not been able to achive significant revenue EEL used to supply gear boxes and had installed around 50 Wind Turbines (300KW) in 1995©\98 in Gujarat. Currently , the gearboxes for the system are made in house, in case of turbines, company has collaboration with Turbowind N.V of Belgium.
Currently , EEL Wind business are under going C©\wet Certification, which management expects would help their Wind business get global recongnisation; this will help company to revap its sales. Management expect to sell around 100 Units by FY12E which would fetch around Rs 300©\350 crore of business.
Note:©\We have not factored any revenue from wind Business in our Projection.
Risk Concerns:©\
Slowdown in the Economy: Slowdown in the Economy could affect the EEL¡¯s clients, there by affecting its performance.
Delay in awarding Projects: We expect major chunk of future revenues will come from power sector, steel , port & Wind. Any delay in awarding the project will hamper the growth.
Rise in Cost: Raw material accounts for around 70% of direct cost. Any increase in commodity prices may reduce the margin going forward.
Delay in execution of projects: Delay in executions of the projects on account any resource constraints or otherwise might impact the revenue of the company
Financials
Revenue to surge on account of huge order inflow
We expect Elecon to earn revenue at a CAGR of 22% from FY10©\FY12E. We believe that the healthy business environment for MHE industry will result in strong order inflow and order booking in future. Elecon has Strong Order book of Rs. 1578 cr, ensure revenue visibility ¨Cequivalent to 1.42x FY10 earnings. We are positive on the engineering skills and execution capabilities of the company and its ability to maintain grip of order booking.
Margins likely to remain stable coupled with rising exports
EBIDTA margin (which is highest in the industry) are likely to remain stable, while net profit margin is likely to remain in the range of( 6©\7%. ) In FY10, Exports accounts for 7% of total revenue, which is likely to increase to 12% in FY12E.
Valuation
EEL, with its strong presence in bulk handling material, is one of the major beneficiaries of strong investment in the core sector of power, steel, port etc. Pertinently, the power sector alone is expected to add 40000 MW by FY12, which will turn out to be an emerging opportunity of more than Rs.17000 Crs. Further, as Indian Corporate continue to invest in capacity expansion, we believe demand for the Elecon¡¯s product especially Industrial gears continue to remain high. Elecon continue to enjoy highest EBIDTA Margin in Industry ( 15%©\16%) & Management is confident of stable margin going forward despite increasing in commodity prices.
The Order book which declined in FY10, is expected to bounce back. The initial sign of same is visible in Q1FY11 where company has already bagged freash order of Rs. 578 crs against Rs. 768 crs in whole FY 10.We expect going forward huge order inflow especially from Power, Steel & Port sector. At CMP of 88 the stock is trading at a PE of 10.18x & 7.22x and interms of P/BV it is trading at 2.1 & 1.7 times to FY11E & FY12E respectively.
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