Elecon Engineering Limited - Asit C. Mehta Elecon Engineering Limited ACMIIL COMPANY ... SWOT Analysis Strength ... BGR Energy Ltd, etc in addition to

Elecon Engineering Limited ACMIIL �

C O M P A N Y R E P O R T

Elecon Engineering Limited

AnalystChinmay [email protected]: (022) 2858 3407

Key Data `

CMP 87

Target Price 100

Key Data

Bloomberg Code ELCN IN

Reuters Code ELCN.BO

BSE Code 505700

NSE Code ELECON

Face Value (`) 2

Market Cap. (` Bn.) 8.2

52 Week High (`) 110.9

52 Week Low (`) 70.5

Avg. Daily Volume (6m) 505,092

Beta (Sensex) 1.1

Shareholding %

Promoters 45.7

FII 1.0

DII 13.8

Others 39.5

Total 100

` mn FY10 FY11E FY12E

Net Sales 10,463.7 12,789.9 14,663.5

Operating Profits 1,495.5 1,918.5 2,170.2

OPM (%) 14.3 15.0 14.8

PAT 661.8 727.4 844.7

PATM (%) 6.3 5.7 5.8

EPS (`) 7.1 7.8 9.1

31 Aug, 2010

A C C U M U L A T E

We initiate coverage on Elecon Engineering Limited (EEL) with an ACCUMULATE recommendation and a price target of ` 100. The company manufactures material handling equipments and industrial gears. The material-handling segment manufactures equipments used in coal handling plants (CHP), cement plants and open cast mines, while in the industrial gear segment the company manufactures various types of gears like worm gears, parallel shafts, helical and spiral gears, etc. which find their application across various sectors.

Investment Rationale

Investments worth ` 4.15 trillion expected in core sectors: Core sectors like power generation, coal mining, steel and port are expected to witness investments worth almost ~ ` 4.15 trillion, which translate into an opportunity worth ~ ` 325 billion for material handling equipments industry. Lion share of these investments (~ ` 178 billion) are expected to be made in power sector.

Industrial capex picking up: Industrial capex has started gaining traction as new projects announcements as well projects under implementation are showing an up trend. New projects announcements have increased from ` 1.9 trillion in June `09 to ` 5.8 trillion in June`10, while projects under implementation have increased from ` 39.1 trillion to ` 55.8 trillion in June`10.

Strong presence in coal handling plant segment of balance of plant: EEL has dominance in CHP segment of BOP as the company is among the 8 manufacturers that qualify for manufacturing equipments required for a CHP. Thus, EEL not only receives EPC orders from utilities but also product orders from other EPC contractors like Tecpro Systems, BGR Energy Ltd, etc.

Market Leader in industrial gears: EEL is a market leader in industrial gears with a market share of ~26%. It has strong foothold in worm gears, helical gears, couplings, customized power transmission products and is one of the few manufacturers with capabilities of manufacturing large size customized gearboxes.

Strong order backlog: EEL’s has a strong order backlog of ̀ 15.8 billion, ~1.5x TTM net sales. Current order backlog gives revenue visibility till FY12.

Valuation & Recommendation

We expect net sales to grow at CAGR of 18.4% to ` 14,663.5 million in FY12E, driven by pick up in the industrial capex and execution of current order backlog. EPS is expected to increase from ` 7.1 in FY10 to ` 9.1 in FY12E at CAGR of 13.2%. At CMP of ` 87, EEL is trading at a P/E of 11.1x its FY11E earnings and 9.6x its FY12E earnings. Considering GOI thrust on power sector, industrial capex gaining momentum, EEL’s strong presence in gear and MHE segment, robust current order backlog and strong order inflows in recent quarters, we assign a P/E multiple of 11x to its FY12E earnings and recommend an “ACCUMULATE” on the stock with a price target of ` 100.

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Company Background

The company operates through two divisions, material handling equipments (MHE) and industrial gears. For FY10, MHE segment contributed 59% to the total revenue, while industrial gears constituted the remaining 41%.

Material handling equipment (MHE) division MHE division manufactures various equipments like wagon tipplers, feeders, crushers, stackers, screeners, etc that form part of systems like coal/lignite handling system (for open cast mine and power plants) and raw material handling, crushing and blending systems (for cement plant) and ore handling system (for steel plants).

The MHE division undertakes product orders as well as complete erection procurement and construction (EPC) project orders. Products orders include tipplers, feeders, crushers, stackers, screeners, etc that form an integral part of a plant (eg; a coal handling plant - CHP), while project orders include erecting entire CHP (Annexure) on an EPC basis. EEL is one of the few companies that manufacture their own equipment for the project orders.

Being primarily a manufacturer of equipments, PBIT margins of MHE segment are higher as compared to its peers. For FY10, EEL’s PBIT margins were 13% as compared to 9% of Mcnally, 11% of Tecpro Systems and 12% of TRF Ltd.

MHE Segment EEL TRF Mcnally Bharat Tecpro Systems

PBIT % 13 12 9 11

Source: ACMIIL Research, company

Note: Margins are as of FY09 for Tecpro systems

Sales Break up (FY10 - INR 10.46 bn)

Material handling equipments59%

Industrial Gears41%

Source: Company

Wagon tipplersApron FeederDouble Roll CrusherStacker ReclaimerRoller ScreenSide arm chargersPaddle FeederCable Reeling DrumIdlers

Power Generation /Coal Handling Mining Industry Cement Industry Port Mechanization Steel Industry Fertilizer Industry

PROD

UCTS

Shiftable ConveyorsPulleyConveyorsIdlers

Stacker-reclaimerScrapersTwin Boom StackerShip loadersImpactorCircular Stock Pile

Ship loadersWagon TipplersRail Pusher CarWagon MarshallingEquipment

Wagon TipplersBarrel TypeReclaimerStacker-reclaimer

Scrapper ReclaimerWagon loader

Source: Company

Type of ordersexecuted byMHE division

Project orderseg: Erection of entireCoal Handling plant

Product orderseg: stacker reclaimers,feeders, ring granulator

EEL is one of the few companies that manufacture their own equipment required for the

project orders.



Revenues for the segment have grown from ` 4,100 million in FY07 to ` 6,200 million in FY10 at a CAGR of 15%. In FY10 power sector contributed 55% of the revenue, followed by steel (21%), cement (10%) and others.

Industrial Gear Division

Industrial gear division manufactures variety of gears (Annexure), which find their application across various sectors.

Products Application in Industries

Helical gears Sugar industry, MHE (Stacker Reclaimers), marine application, cooling tower in

Power plants, wind mills, Tube mills (Steel)

Worm gears Rolling mills (Steel), MHE (Conveyor systems)

Lift gear Elevators (for capacity of up to 16 persons)

Couplings MHE (Conveyor systems)

Source: Company

Industrial gear segment sales have increased from ̀ 3,110 million in FY07 to ̀ 4,260 million in FY10 at a CAGR of 11%.

Industrial gear segment improves the company’s overall profitability as it earns higher PBIT margins ranging between 16% to 17% vs 12% to 13% PBIT margins of the MHE segment.

Material handling equipments

0

1000

2000

3000

4000

5000

6000

7000

FY07 FY08 FY09 FY10

4100 4370

56106200

Industry wise MHE division Sales break up - FY10

Wind mill2%

Port5%

Mining4%

Others3%

Cement10%

Steel21%

Power55%

`mn

Source: Company

Industrial Gears

3110

3890 39404260

0

1000

2000

3000

4000

5000

FY07 FY08 FY09 FY10

` Mn

Source: Company

Industrial gears - Sales CAGR of 11% from FY07 to FY10



Order Book

Order backlog has increased from ` 5.6 billion in FY07 to ` 12.4 billion in FY10. Current order backlog as of Q1 FY11 stands at ` 15.8 billion, result of strong order inflows in Q1 FY11. EEL registered order inflow worth ` 6 billion in Q1 FY11 as compared to 7.5 billion for the whole of FY10. MHE division constitutes ~80% of the order backlog, while gears division constitute the remaining 20%.

Source: Company

Unexecuted order backlog

MHE Gear

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

Mar 07Jun 07

Sep 07Dec 07

Mar 08Jun 08

Sep 08Dec 08

Mar 09Jun 09

Sep 09Dec 09

Mar 10Jun 10

`Mn

3,5406,450

9,480 8,76010,850 11,580

15,270 15,700 13,880 12,690 11,770 11,050 9,97012,530

2,230

2,130 2,1602,020

2,410

2,4202,390

2,230 2,470 2,5702,460

3,2902,450

2,020

MHE Industrial GearsQ1 FY10 Q2 FY10 Q3 FY10 Q4 FY100.0

2.04.06.08.0

10.012.014.016.018.0

%

12.211.4 12.1

12.9

16.1 16.7 16.5 15.8

PBIT Margins

Source: Company

Industrial gear segment improves the company’s

overall profitability

Order backlog as of Q1FY11 stands at ` 15.8 billion



SWOT Analysis

Strength

Strong presence in coal handling plant (CHP) segment: Over the years EEL has developed expertise in CHP vertical of balance of plant (BOP). It is has executed several projects and is one of the dominant players in the vertical. It is one of the few companies, which manufacture equipments as well as execute complete EPC contracts. Out of total 52 CHP projects under execution in 2009, EEL was executing 5 CHP (complete EPC) contracts, signifying EEL’s strong presence in the segment.

Major Bops For 11th Plan Thermal Projects Which Were Under Construction In 2009

Name of the Supplier/Erecting Agency No. of Coal handling Plants

EEL 5

L&T 7

TRF 2

Thyssenkrupp 3

Mcnally Bharat 1

BGR 2

Tecpro System Pvt Ltd. (TSL) 10

Tata Projects Ltd 3

Other Players 17 players executing 19 orders

Source: CEA

Qualified manufacturer for supplying BOP: As per CEA, there are limited numbers of companies in India who qualify for manufacturing equipments used in BOP. The numbers of vendors available for manufacturing equipments for CHP including EEL are 8. As a result EEL also receives product orders from other EPC contractors like Tecpro Systems, BGR Energy Ltd, etc in addition to turnkey EPC contracts orders.

Out of above-mentioned TSL’s 10 CHP project under execution, EEL received equipments order from TSL for 4 of its CHP projects. The company also received orders to supply equipments to BGR’s 2 CHP projects.

Strong presence in industrial gear: EEL is one of the largest gear manufacturer with a market share of ~26%. The company has a strong foothold in worm gears, helical gears, different types of couplings and customized power transmission products and has executed prestigious orders like large size planetary gearboxes, supply of marine gears for battle ship, etc. Other players in the industry include Shanthi gear, Premium, Flender and others.

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Source: Company

Industrial Gears - Market share (FY09)

Others24%

Elecon26%

NAW6%

Flender10%

Premium17%

Shanthi17%

Numbers of vendors qualified for manufacturing equipments

for CHP including EEL are 8



De- risked business model: Industrial gear segment constitutes ~40% of total revenue. Industrial gears have varied application and are used across industries, thus the gear segment is not dependent on capex in a particulars sector and benefits from investment across the industries. In FY10, no single sector contributed more than 25% to its revenue.

Order inflows in industrial gears segment are also relatively stable than order inflow in the MHE segment. Hence, presence in the gear segment provides diversification and reduces overall business risk of the company.

Order inflows gaining momentum: After muted order inflows through out FY10, order inflows improved significantly in Q1 FY11. Both divisions experienced significant jump in order intake as the company registered total order inflows ~` 6 billion in Q1 FY11 vs 7.5 billion for the whole of FY10. Going ahead, the current trend in order inflow is expected to sustain, the company currently has inquiries of ~` 40 billion worth of orders.

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Source: Company

Industrial gears - Sector wise sales break up - FY10

Sugar10%

Others11%

Plastic &Rubber9%

Steel Conversion15%

MHE/Power23%

Mining3%

Marine4%

Lift Gears6%

Cement9% Chemical & Fertilizers

3%Sponge Iron

7%

Order Inflows-Gears

0200400600800

100012001400160018002000

Jun 07Sep

07Dec 07

Mar 08Jun 08

Sep08

Dec 08Mar 09

Jun 09Sep

09Dec 09

Mar 10Jun 10

` Mn

MHE Order Inflows

1000

0

2000

3000

4000

5000

6000

Jun 07Sep

07Dec 07

Mar 08Jun 08

Sep08

Dec 08Mar 09

Jun 09Sep

09Dec 09

Mar 10Jun 10

`Mn

Source: Company

Source: Company

Order Inflows

Jun 07Sep 07

Dec 07Mar 08

Jun 08Sep 08

Dec 08Mar 09

Jun 09Sep 09

Dec 09Mar 10

Jun 100

1000

2000

3000

4000

5000

6000

7000

` mn

Gear segment benefits from investments across the industries and is not dependent on capex in a

particular sector

EEL registered order inflows ` 6 billion in Q1FY11



Weakness

Stretched working capital: EEL’s working capital block is higher than its peers, primarily on account of higher inventory days (required for gear division). EEL’s maintains inventory of ~110 days as compared to ~ 40 days maintained by peer group. Advances from customers are 8 % of sales for EEL as compared to peers who receive ~20% of sales, since advances are not received on all gear orders by EEL. This further stretches the working capital requirement.

Particulars EEL TRF Mcnally Tecpro

Debtor days (including retention money) 180.5 208.4 221.2 193.3

Debtor days (excluding retention money) 139.9 119.1 187.1 120.2

Inventory Days 109.9 38.2 24.3 40.9

Creditor Days 146.1 173.7 168.2 NA

Advances from customers (% of sales) 8.2 20.3 24.5 NA

CA/CL 2.2 1.6 1.2 1.1

Working capital loan as a % of sales 36.1 13.7 15.7 9.2

D/E 1.6 0.9 1.4 0.6

Source: ACMIIL Research, Company

Higher working capital requirement results in higher debt; EEL D/E ratio is highest among its peers. Working capital loans required are ~36% of the sales as compared to peers requirement which is ~15% of sales.

Thus, as the business is working capital intensive and as working capital requirement is primarily funded through short-term loans, working capital management is important. Increase in working capital requirement has a direct impact on interest cost and profitability

Scenario Analysis: Effect of cost of borrowing and working capital loan on EPS

EPS: ` 9.1 Interest Cost (%)

Working capital

loan as a % of

Sales

9.25% 9.50% 9.75% 10.00% 10.25% 10.50% 10.75%

30% 9.7 9.6 9.5 9.4 9.3 9.2 9.1

32% 9.6 9.5 9.4 9.3 9.2 9.1 9.0

34% 9.5 9.4 9.3 9.2 9.1 9.0 8.9

36% 9.4 9.3 9.2 9.1 9.0 8.9 8.8

38% 9.3 9.2 9.1 9.0 8.9 8.8 8.7

40% 9.2 9.1 9.0 8.9 8.8 8.7 8.6

42% 9.1 9.0 8.9 8.8 8.7 8.6 8.4

Source: ACMIIL Research

Opportunities

Industrial capex picking up: Industrial recovery started gaining traction in the later half of 2009-10, with IIP registering a double-digit growth. Growth in the economy is not only strong but also broad based with large number of sectors contributing to growth. The Capital goods and consumer durables have contributed the most to industrial growth. Consistent good performance of capital goods sector suggests investments activities gaining momentum and growing confidence in the economy.

As per CMIE, fresh projects announcements have increased significantly from ` 1.9 trillion in June `09 to ` 5.8 trillion in June`10. Industry is not only witnessing announcements of fresh projects but also increase in projects under implementation, indicating conversion of announcements in to investments.

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●

Higher inventory days and lower advances from customer

Working capital loan required are ~36% of the sales

Industry is not only witnessing announcements of fresh

projects but also increase in projects under implementation



Increase is investments activity augurs well for EEL as both MHE and gear division are dependent on industrial capex.

GOI thrust on power sector: GOI has planned 1,00,000 MW of capacity addition during the twelfth plan. Considering a ~70,000 MW of capacity addition expected during the twelfth plan, investments worth ~ ̀ 231 billion would be required to be made in CHP segment of BOP, which presents significant opportunity for EEL.

Threats

Competition: Competition is intense, especially for CHP projects tendered as complete EPC orders. There are ~25 to 30 players including EEL, TRF, Mcnally Bharat, Tecpro systems, L&T that compete for these projects.

Gear division also faces competition from players like Shanthi gears, Flender, Premium & other unorganized players.

Slow down in industrial capex: Revenues are largely dependent on capital investments made by user industries. Hence, any deceleration in industrial capex has an adverse impact on growth of the company.

Peer Profile

In the MHE segment EEL primarily competes with players such as TRF, Mcnally Bharat Ltd, Tecpro systems and conglomerates such as L&T. As many user industries need various types of equipments, players in this segment specialize and have a strong position in specific types of material handling systems. For example, EEL, Tecpro system, L&T, TRF and McNally Bharat are primarily present in coal handling systems.

Financial Comparison

Particulars – ` Mn McNally Tecpro Systems TRF EEL Shanthi Gears Flender

Presence/ Division MHE MHE MHE MHE division MHE & Gears combined Gears division Gears Gears

Net Sales – FY10 18,321.7 7,069.8 6,499.5 6,200.0 10,463.7 4,260.0 1,237.4 1,966.9

Sales CAGR FY06-10 52.6 129.1 31.6 38.2 24.0 16.7 -ve 19.2

OPM (%) – FY10 9.2 12.6 12.4 - 14.3 - 40.7 19.3

EBIT (%) – FY10 8.5 10.7 11.9 12.7 13.5 17.5 18.9 15.6

NPM (%) – FY10 3.3 7.2 7.3 - 6.3 - 13.1 10.6

PAT CAGR FY06-10 83.3 85.5 60.7 - 24.1 - -ve 16.8

Capital Employed – FY10 6,885.2 2,387.1 3,157.4 4,830.3 8,879.4 4,066.3 2,539.7 930.5

D/E – FY10 1.4 0.6 0.9 - 1.6 - 0.1 0.0

RONW (%) – FY10 22.9 33.5 27.8 - 20.3 - 7.7 23.3

ROCE (%)- FY10 22.7 31.8 24.5 16.2 15.9 15.6 9.2 33.1

Source: ACMIIL Research, Company, CMIE, RHP

Note: Numbers of Flender and Tecpro systems are as of 2009.

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Increase in project under implemenation

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10

` Trill

ion

New Projects Announcements

0123456789

10

Jun 07Sep 07

Dec 07Mar 08

Jun 08Sep 08

Dec 08Mar 09

Jun 09Sep 09

Dec 09Mar 10

Jun 10

` Trill

ion

Source: CMIE



Players in MHE segment have registered healthy sales growth of ~35% and above on back of strong investments in power, steel, cement and other key industries. In the gear segment, players like EEL and Flender have recorded ~15 to 20% sales, while Shanthi gears has recorded negative growth on account of significant drop in sales in FY10.

In the MHE segment, EEL & TRF enjoys higher margins (EBIT) than others, as the company is primarily manufacturer of equipments. EBIT margins range 15% to 20% in the gear segment.

Most of the players present in MHE are leveraged, with D/E of ~1x & above, primarily on account of working capital requirement.

Players in both MHE and gears segments have healthy return ratios

Valuation & Recommendation

We expect net sales to grow at CAGR of 18.4% to ` 14,663.5 million in FY12E, driven by pick up in the industrial capex and execution of current order backlog. EPS is expected to increase from ` 7.1 in FY10 to ` 9.1 in FY12E at CAGR of 13.2%. At CMP of ` 87, EEL is trading at a P/E of 11.1x its FY11E earnings and 9.6x its FY12E earnings. Considering GOI thrust on power sector, industrial capex gaining momentum, EEL’s strong presence in gear and MHE segment, robust current order backlog and strong order inflows in recent quarters, we assign a P/E multiple of 11x to its FY12E earnings and recommend an “ACCUMULATE” on the stock with a price target of ` 100.

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Elecon Engineering Limited ACMIIL �0


Industry

Growth in the industry is primarily dependent on capital investment in user industries. Power, steel, cement, mining and ports are main user industries for players setting up material handling systems.

Power sector comprises 55-65% of the industry’s revenue, followed by steel, mining, cement and port.

Industry End user share

Power 55-65%

Steel 5-15%

Others (primarily mining, cement and ports) 25-35%

Source: CRISIL

Power industry

Demand/supply scenarioPower demand increased at 6% CAGR to ~750 billion Kwh in 2008-09 from 290 billion Kwh in 1991-92. However, supply remains a concern. Supply increased to 660 billion Kwh in 2008-09, from 270 billion Kwh in 1991-92

Demand is estimated to grow at 7% and 8% CAGR during eleventh and twelfth five-year plans respectively, which would be catered to by new capacity additions In line with power requirements of the country, GoI is targeting capacity additions of 70,000MW and 100,000MW during eleventh and twelfth five-year plans respectively. However, looking at the trend of actual capacity additions, ~54,000MW is expected to be added during eleventh five-year plan and ~70,000 MW during the twelfth plan.

●

Growth in the economy and infrastructure investments

Power, Mining, steel, Ports, Cement

Material handling / Coal handling / Gears

Source: Ministry of Power and Central Electricity Authority, CRISIL

Power - Aggregate Demand Supply

0100200300400500600700800900

1991-9

2199

2-93

1993-9

4199

4-95

1995-9

6199

6-97

1997-9

8199

8-99

1999-0

0200

0-01

2001-0

2200

2-03

2003-0

4200

4-05

2005-0

6200

6-07

2007-0

8200

8-09 0

2468

101214

Demand (LHS) Supply (LHS) Deficit (RHS)

(Billion kwh) (per cent)

Power sector comprises 55% - 65% of the MHE industry’s

revenue

Elecon Engineering Limited ACMIIL ��


Approximately investments worth ` 1.82 trillion are expected during 2009-12. It includes anticipated investments worth ̀ 178 billion in material handling equipments like ash handling, coal handling plants and their components such as screeners, feeders, crushers etc

Coal Industry

In India, coal is produced by Coal India Limited ‘s (CIL), its subsidiaries, South Eastern Coalfields Limited (SECL) and captive mines. Coal production in India was 493 million tonne in 2008-09. CIL’s subsidiaries accounted for around 82 per cent (~403 mt) of country’s total production. Overall, non-coking coal constitutes ~93 per cent of the total coal production and coking coal accounted for rest ~7%.

Domestic coal demand is expected to grow at a CAGR of 11.2 per cent from 549 million tonne in 2008-09 to 933 million tonne in 2013-14 on back of strong demand from power, steel, cement and other industries.

Overall production of coal in India is expected to increase at a CAGR of 8.6% to ~750 million tonne by 2013-14. CIL and its subsidiaries are expected to be the largest contributors to country’s coal production over next 3-4 years. SECL and captive blocks are expected to contribute around 22 mt and 42 mt, respectively.

During 2009-12, coal industry is expected to attract investments worth ̀ 307 billion. This includes anticipated investments worth ` 46 billion in material-handling systems.

Source: CRISIL, ACMIIL Research

Planned Vs Actual Capacity addition

1980-85 1985-90 1992-97 1997-02 2002-07 2007-12E 2012-2017E0

100002000030000400005000060000700008000090000

100000

Target Actual

Mw

Source: CRISIL

Domestic Demand & Supply

Demand Supply2009 2010E 2011E 2012E 2013E 2014E

0

200

400

600

800

1000

Million

Tonne

Investments worth ` 178 billion expected in MHE




Steel Industry

Demand

Over next 3-4 years, the growth of sectors like construction & infrastructure, power automobile and oil &gas is expected to spurt the demand of steel. The demand of steel is expected to grow at CAGR of 8-9 per cent over next 5 years. Domestic demand for steel is expected to rise to 74.4 million tonnes in FY14E, as compared to 48.8 million tonnes in FY09.

Expected Capacity addition

Strong demand in the last 5 years along with cheap availability of domestic iron ore and strong prospects for future demand growth prompted steel majors to go for ambitious capital expansion plans. As per the announced capital expansion plans, around 51 million tonnes of steel making capacity is scheduled to be added over the next 5 years. SAIL has planned a massive modernization cum expansion plan of ` 560 billion to increase its capacity from 14.4 MT to 26.2 MT. Other players include Jindal steel and power (9 Mn MT), JSW Steel (3 Mn MT), RINL (4.9 Mn MT), Bhushan Steel (3.5 Mn MT), Monnet Ispat (1.2 MN MT), Essar Steel (4.6 Mn MT), Tata steel (6 Mn MT), Posco (4 Mn MT) and Arcelor (3 Mn MT). However on account of expected oversupply in the global market, players have started to either postpone their expansion plans or shelve them. Hence instead of 51 million tonnes, 32 million tonnes of capacity is expected to be added in the industry. Capital investments of ` 1.37 trillion are expected in steel industry during 2009-12, of which ~` 77 billion are expected to be invested in material handling equipments.

Summary

Investment Summary - Expected investments in key user sectors (2009-12)

Industries Total Investment

Expected (` billion)

Opportunity for the Material

handing industry (` billion)

Share of investment

in these sector (%)

Power 1,825 178 55%

Steel 1,376 77 24%

Coal 307 46 14%

Ports 637 24 7%

Total 4,145 325 100%

Source: CRISIL

Source: CRISILFlat Steel Long Steel

Demand for steel products in india

Million

T onnes

0

20

30

40

50

60

70

80

10

2007-08 2008-09E 2009-10P 2010-11P 2011-12P 2012-13P 2013-14P

22.5 22.0 22.7 25.1 28.1 30.7 33.4

26.5 26.8 29.131.8

34.437.5

40.949.0 48.8 51.856.9

62.568.2

74.4




Financials

Profit & Loss Account ` Mn

Particulars FY08 FY09 FY10 FY11E FY12E

Net Sales 8,264.4 9,550.6 10,463.7 12,789.9 14,663.5

Total Expenditure 6,959.2 8,060.3 8,968.2 10,871.4 12,493.3

Operating Profit 1,305.2 1,490.4 1,495.5 1,918.5 2,170.2

Other Income 97.9 95.8 247.7 100.0 100.0

EBIDTA 1,403.0 1,586.2 1,743.3 2,018.5 2,270.2

Depreciation 142.0 221.5 331.2 370.4 401.2

EBIT 1,261.1 1,364.7 1,412.1 1,648.1 1,869.0

Interest 274.3 483.7 508.9 546.0 589.2

PBT 986.8 881.0 903.2 1,102.1 1,279.8

Taxes 314.7 306.5 241.4 374.7 435.1

PAT 672.0 574.5 661.8 727.4 844.7

Growth in sales (%) 14.3 15.6 9.6 22.2 14.6

Growth in Operating profits (%) 16.8 14.2 0.3 28.3 13.1

Growth in PAT (%) 22.4 -14.5 15.2 9.9 16.1

OPM (%) 15.8 15.6 14.3 15.0 14.8

Net Profit Margin (%) 8.1 6.0 6.3 5.7 5.8


Balance Sheet ` Mn


Sources of Funds

Share Capital 185.7 185.7 185.7 185.7 185.7

Reserves and Surplus 2,181.5 2,568.3 3,075.3 3,641.2 4,324.2

Total Shareholders Funds 2,367.3 2,754.0 3,261.1 3,826.9 4,510.0

Total Loan Funds 4,092.6 5,920.8 5,215.8 5,704.4 6,078.8

Net Deferred Tax Liability 171.1 327.8 402.6 402.6 402.6

Total Capital Employed 6,630.9 9,002.6 8,879.4 9,933.8 10,991.4

Application of Funds

Gross Block 3,005.6 4,277.4 5,094.2 5,698.0 6,173.0

Less: Accumulated Depreciation 1,234.1 1,448.3 1,650.8 2,021.1 2,422.4

Net Block 1,771.5 2,829.1 3,443.4 3,676.8 3,750.6

Capital Work in Progress 159.2 281.1 178.8 175.0 150.0

Investments 94.6 108.7 56.8 56.8 56.8

Net Current Assets 4,595.7 5,766.9 5,174.4 5,999.2 7,008.0

Misc Exp 9.7 16.9 26.0 26.0 26.0

Total Assets 6,630.9 9,002.6 8,879.4 9,933.8 10,991.4




Cashflow Statement ` Mn


PBIT 1,262.9 1,367.5 1,257.0 1,648.1 1,869.0

Add

Depreciation 142.0 221.5 331.2 370.4 401.2

Profit before working capital changes 1,388.1 1,548.5 1,550.0 2,018.5 2,270.2

Working capital changes -1,258.5 -566.0 339.2 -823.8 -939.4

Less Taxes -324.2 -258.8 -180.0 -374.7 -435.1

Net Cash flow from operating activities -202.2 712.5 1,701.1 820.0 895.6

Net Cash flow in investment activities -793.2 -1,353.3 -602.1 -600.0 -450.0

Net Cash flow from financing activities 943.0 1,176.2 -1,321.5 -219.0 -376.3

Net increase /(decrease) in cash -52.4 535.4 -222.5 1.0 69.4

Op. balance of cash and cash equivalents 127.6 75.2 610.6 388.1 389.1

Cl. balance of cash and cash equivalents 75.2 610.6 388.1 389.1 458.5


Ratios


Profitability Ratios

OPM (%) 15.8 15.6 14.3 15.0 14.8

PAT Margin (%) 8.1 6.0 6.3 5.7 5.8

RONW (%) 28.4 20.9 20.3 19.0 18.7

ROCE (%) 19.0 15.2 15.9 16.6 17.0

Per Share Ratios

EPS (Rs.) 7.2 6.2 7.1 7.8 9.1

CEPS (Rs.) 8.8 8.6 10.7 11.8 13.4

BV Per Share (Rs.) 25.5 29.7 35.1 41.2 48.6

Valuation Ratios

P/E (x) - - 15.3 11.1 9.6

P/CEPS (x) - - 8.1 7.4 6.5

P/BV (x) - - 2.5 2.1 1.8

Capital Structure Ratios

Debt/Equity 1.7 2.1 1.6 1.5 1.3

Current Ratio 2.3 2.3 2.3 2.1 2.1

Turnover Ratios

Debtors turnover ratio 1.7 2.0 2.0 2.1 2.0

Inventory turnover ratio 3.3 2.4 3.3 3.3 3.3

Fixed Asset Turnover 4.7 3.4 3.0 3.5 3.9




Material handling process

Raw material handling is an important part of several applications in power plants, cement plants, steel plants and ports. The diagram below sets forth a basic material handling process. In the material handling process, the raw material is first received at the plant and thereafter; the raw material is transported to the crushing and/or the screening point. The crushed material or screened material is then transported to the storage point, which is later reclaimed depending on specific requirement. From the storage point, the reclaimed material is conveyed to the feeder through a belt or pipe conveyor systems and is then fed at the desired point or machinery, which could also be a crusher, feeder or screen.

Coal handling plant

Coal/lignite handling plants are required for feeding coal/lignite to the bunkers in the coal fired thermal power plants and in plants using boilers for steam generation. The coal/lignite is received in the plants through conveyors or wagons from coalmines and is unloaded with the help of systems such as wagon tipplers and track hopper. The unloaded material is subsequently transported through belt conveyors to the crushing and screening systems or to the stockyard, depending upon clients specific requirements. After the coal is crushed and screened into the specified size, it is transported to the bunker for storage and further utilization. These systems are automated in order to reduce manual interface and are controlled through centralized system.

Industrial Gears

Gears are now used for a wide range of industrial applications. There are gears weighing from 15grams to 15 tons. Many industries use gears for transmitting power or rotational force from one component to another. Gears have varied application starting from textile looms to aviation industries. Cement plants use gears for crushing raw materials. Gears have high strength and highly durable and can be used in any operating environment. For rotating equipments in the cement industry power transmission is essential and is provided by various open gear drives. Other types of gears that are used in cement industries are reduction gears, pinions, sprockets, pinion shafts and helical gears. Coal plants also most commonly use gears in their mining equipments. Gears are used in many mining machines such as special cutting machines, axle for forming tunnels for locomotives, etc. Gears are also used in compressors, cages, trolleys and diesel locomotives that are used for coal mining. Gears are have also used in the steel industries and construction machinery. Planetary gearboxes, reduction gearboxes and pinion gearboxes, worm gears, bevel gears and spur gears are commonly used in steel industries. Gears are also used for loaders, lifters, excavators and all such machines.

Annexure

Materialreceived

Crushing /screening

Storage Feeding

Uncrushed materialstorage



Disclaimer:

This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or

any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information

contained in the report. ACMIIL and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report.

To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should however not be treated as endorsement of the views

expressed in the report

Disclosure of Interest Elecon Engineering Ltd

1. Analyst ownership of the stock NO

2. Broking Relationship with the company covered NO

3. Investment Banking relationship with the company covered NO

4. Discretionary Portfolio Management Services NO

This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for

circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.

The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We

may from time to time have positions in and buy and sell securities referred to herein.

Notes:

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