Focus on operation improvement

Execution of healthy order book, focus on profitable products business with exit from loss making MHE project business and strengthening of balance sheet are to drive profitable growth

Elecon Engineering Company (EECL) is one of the largest manufacturers of industrial gears and material handling equipment in Asia with market presence of over five decades.

The company has manufacturing units at Vallabh Vidyanagar, Gujarat, and marketing branches all over India.

In 2010 it has acquired Benzlers and Radicon, manufacturers of screw jacks, shaft mounted gearboxes and industrial reducers. And this has enhanced its overseas presence and currently it has major overseas subsidiaries in the US and UK. In 2012 it has taken up business restructuring by transferring MHE Business to its subsidiary Elecon EPC and acquiring PTE Business from Prayas and EMTICI.  The company has a Transmission Equipment manufacturing and material handling equipment manufacturing division.

Operations of the company is divided into two divisions Transmission equipment (gears) division and material handling equipment division. In FY21 about 87% of the revenue came from transmission Equipment and balance 13% from Material Handling Equipment. In FY21 the company reported an exports of Rs 105.77 crore.

Offers comprehensive range of industrial gears and MHE to large number of industries

The company is the largest gearbox manufacturer in Indian subcontinent as well as Asia with vast experience of around five decades.  The company manufacturers both catalogue (standard) and engineered (custom made) gearboxes for various end user industries.

The TE division product profile consists of worm gearboxes, helical/bevel gearboxes, high speed gearboxes, planetary gearboxes, wind turbine gearboxes, marine gearboxes, parallel shafts, right-angle shafts, helical and spiral level helical gears, fluid geared and flexible couplings, rolling mill pinion stands and loose gears. 

Expertise in the manufacturing of custom-made Gearboxes for Steel/Cement/Rubber/Sugar Mills, High Speed Turbines, Marine Applications, Plastic Extrusions, Satellites for ISRO, Naval Aircraft carrier, etc.

First in India to manufacture sophisticated equipment for bulk Material Handling and a product range that caters to almost every industrial sector in India. The MHE division product profile division consists of raw material handling systems, stackers, reclaimers, bagging and weighing machines, wagon and truck loaders, crushers, wagon tipplers, feeders and port equipment. The company’s products find applications in diverse industries such as cement, iron and steel, sugar, power, mining, ports, defense equipment and paper.

MHE is now focuses on products and aftermarket (spares sales) rather than projects

The MHE division is right now not interested in taking contracts and projects as the projects business given its inherent high execution risk of cost overruns and high receivables etc leading to hit in profits often losses. Though it is not to focus on projects, it would still selling its products and spares, which are profitable business for the company.   MHE aftersales (spares) business continue to be healthy. 

Efforts are being taken towards completing the punch list items being part of the COD process to hand over legacy projects. Trying to close all legacy projects one by one and get the retention money back.  

Organisational structure of MHE operations is pruned considerably so as that there will be no cash loss.  From next year onwards MHE will make cash profits and will complete all legacy orders.  When the company try to close contract aggressively, the customer quite often negotiate that this is the amount they will pay and this is what they won’t pay. Usually this will be decided across the table between parties. But sometimes there will be disagreement and that will lead to dispute resolution through arbitration. 

The company have Rs 63 crore of arbitration award in its favour. Counter parties are appealing but Elecon is confident of recovery it. 

Alternate use of MHE facility is possible but want to get into areas that give better/high margin such high precision products.

The exit of projects business has resulted in no cash losses for this business unless there is any write off of pending legacy orders.

The company is expecting to complete major project of NTPC by Q4 FY22 and another major project is expected to close by Q1 FY23. Apart from these there are some projects not started so there won’t be any issue with them.

Experienced Management

The Elecon Group has more than 7 decades of business operations and Prayasvin Patel, the CMD of the company has over four decades of experience in the engineering industry.

 The promoter and promoter group holds 59.21% stake in the company as end of Dec 31, 2021.  However 11.29% of the promoter stake is pledged as end of Dec 2021.

Q3FY22 top-line declined on higher base 

For the quarter ended Dec 2022, the consolidated sales was down by 9% to Rs 270.87 crore as both business segments report lower revenue. While the material handling equipment (MHE) business report a steep 31% fall in revenue to Rs 20.78 crore, that of transmission equipment (TE) witnessed 6% fall in revenue to Rs 250.10 crore on higher base as Q3Fy21 had the benefit of spill-over as H1FY21 was hit by covid pandemic.  EBIT was down by 8% to Rs 42.77 crore with segment profit of TE down by 22% to Rs 50.33 crore hit by lower sales and lower margin. However with the company aggressively closing legacy turnkey MHE order writing of claims/receivables, the MHE reported lower losses of Rs 7.57 crore compared to a loss of Rs 18.53 crore in the corresponding previous period.  The interest cost was down 66% to Rs 4.83 crore and thus gained the PBT (including share of profit from associates) was up 19% to Rs 37.10 crore. Eventually the net profit was up 28% to Rs 31.54 crore.

For the nine month ended Dec 2021, the consolidated sales was up 26% to Rs 873.82 crore with sales of MHE up 18% to Rs 98.71 crore and that of TE was up 27% to Rs 775.11 crore. The EBIT was up 81% to Rs 148.74 crore with segment profit of TE up 28% to Rs 150.12 crore and that of MHE report lower losses of Rs 1.39 crore compared to a loss of Rs 35.35 crore in the corresponding previous period. The interest cost was down 34% to Rs 30.02 crore and thus gained further the PBT (including share of profit from associates) jumped up 242% to Rs 116.73 crore. Eventually the net profit was up 262% to Rs 94.19 crore.

Healthy order book

Standalone order book of the company as end of Dec 31, 2022 was Rs 411 crore of which gears order book was Rs 345 crore and MHE orders were Rs 66 crore. The consolidated order book as end of Dec 2021 was Rs 501 crore.  Order inflow in Q3FY21 was Rs 211 crore in gears and Rs 30 crore in MHE. The company sees steady inflow of orders.

Unlike last couple of years where gears orders come in spurt, the order inflow currently is consistent and this is a healthy scenario.  The company is optimistic about demand environment for gears business with Pharma doing extremely well along with traction in orders from Cement. Even steel is also start finalising orders. Moreover the proposed increase in capital expenditure by   GOI is to augur well for industry and the sector. Infrastructure building is in healthy situation and that is to keep on increasing with additional amount given in the budget.  The PLI scheme by Government is going to boost the domestic manufacturing output and in turn provide tremendous growth opportunities to the Engineering industry. As such, the Company is confident of improved performance going forward.

Unexecuted order book of gears include unexecuted Navy order worth Rs 70 crores, which is expected to be completed in next 2 quarters.  However the company expects some navy order under pipeline which the company expected to start contributing to topline of gears division by latter part of the FY23.

Capacity utilisation of gears division though improved to 55-60% from much lower earlier, considers it operates just at 55-60% there is strong scope to ramp up the production. So there is a scope to further increase the turnover, it all depends on the order inflow.

Continues to strengthen the balance sheet

The Company continues to strengthen the balance sheet by way of reducing debt and other liabilities and is working towards becoming a net debt free company by 2023. Consolidated current and non-current borrowings together was down to Rs 202.60 crore (non-current Rs 22.69; current Rs 179.91 crore) as end of Sep 2021 from Rs 280.48 crore (Rs 117.42 crore non-current; Rs 163.06 crore current) as end of Mar 2021.  Cash and bank balance as end of Sep 2021 was Rs 147.30 crore up from Rs 141.49 crore as end of March 2021.

Outlook

Execution of healthy order book along with traction in order inflow with revival in private sector capex in the country boosted further by PLI scheme and investment in infrastructure development as well as increased thrust on exports is expected to drive growth going forward for the company. The execution of large naval order though expected to complete soon, the company have another in pipeline and the contribution from that to top line to facilitate 20% growth for gears business in FY23. Similarly the focus on products and spares and closure of legacy projects to facilitate profits for MHE division. 

Input commodity price inflation though exert pressure on margin along with logistics cost the company managed to mitigate it to large extent well with operational efficiency improvement, passing on price to customer, product mix and operating leverage.

Valuation  

We expect the company to register an EPS of Rs 10.8 for fiscal ended Mar 2022 and Rs 14.4 for fiscal ended Mar 2023. The scrip is trading around Rs 144, which discounts the projected FY23 EPS by around 10 times.

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