Initiating coverage | Capital Goods

March 19, 2015

Elecon Engineering Company

BUY

CMP

`68

Initiating Coverage

Target Price

`84

Elecon Engineering Company (EECL) is one of the largest Power Transmission

Investment Period

12 Months

Equipment (PTE) and Material Handling Equipment (MHE) manufacturing

company in India. It has a leadership position in the PTE business with a market

Stock Info

share of ~30%. Its MHE business is through its 60.48% subsidiary - Elecon EPC

Sector

Capital Goods

Projects (promoters of EECL hold the balance share in the company). EECL

Market Cap (` cr)

745

acquired the Benzlers-Radicon group in 2010 from David Brown, thereby getting

Beta

1.3

a firm footing in the European and American markets. The Benzlers-Radicon

52 Week High / Low

70/25

group accounted for ~24.3% of the overall sales of the company in FY2014 with the

Avg. Daily Volume

128327

rest being equally split between the standalone PTE business and the MHE business.

Face Value (`)

Better times ahead for both MHE and PTE businesses: Owing to disappointing

BSE Sensex

28,622

operating environment over the past three years, the company, like many other

Nifty

8,686

players in the industry, saw disappointing or even negative growth rate. We

Reuters Code

ELCN.BO

expect the MHE business to benefit from the revival in capex in several core

Bloomberg Code

ELCN@IN

sectors in the economy, which it caters to. As far as the standalone PTE business is

concerned, it has managed to weather the storm, and has been able to maintain

a steady performance, largely due to its leadership position and diverse user

Shareholding Pattern (%)

base. The PTE business currently operates at utilization levels of 40-45% and is in

Promoters

58.1

a sweet spot in terms of capitalizing on the imminent improvement in demand.

MF / Banks / Indian Fls

9.9

Working capital situation to improve: The working capital cycle (excluding cash)

FII / NRIs / OCBs

1.2

witnessed a sharp jump in FY2014 to 194 days from 150 days in FY2013. EECL’s

Indian Public / Others

30.8

working capital cycle days are expected to come down to 166 days in FY2017E,

broadly in-line with its prior average, on account of revenue growth along with

lower inventory and lower expenditure. Additionally, there is no requirement of

Abs. (%)

3m 1yr

3yr

additional capex, which will result in a better asset turnover ratio.

Sensex

5.5

31.1

63.9

Elecon Engg

45.1

158.4

16.7

Outlook and Valuation: We expect ELCL’s consolidated revenues to post a CAGR

of 10.7% over FY2105E-17E to `1,521cr. Recovery in the MHE business margins

will result in EBITDA margins expanding by 230bp over FY2015E-17E to 14.6%.

3-year daily price chart

Consequently, the net profit is expected to improve to `66cr in FY2017E. At the

current market price, the stock is trading at 11.3x its FY2017E earnings. We

believe that these valuations are attractive considering its 5-year and 3-year

median P/E of 16.7x and 17.9x respectively. We initiate coverage on the company

with a Buy rating and with a target price of `84 based on a target PE of 14.0x.

Key Financials (Consolidated)

Y/E March (` cr)

FY2014 FY2015E FY2016E

FY2017E

Net Sales

1,293

1,241

1,372

1,521

% chg

(15.3)

(4.0)

10.5

10.9

Adj. Net Profit

% chg

(58.0)

49.6

66.0

94.5

Source: Company, Angel Research

EBITDA (%)

11.6

12.3

12.8

14.6

EPS (`)

1.2

1.9

3.1

6.0

P/E (x)

54.8

36.6

22.1

11.3

P/BV (x)

1.4

1.3

1.2

RoE (%)

2.5

3.8

6.0

10.9

RoCE (%)

6.2

6.7

8.4

11.6

Milan Desai

EV/Sales (x)

1.0

0.9

0.7

022 4000 3600

EV/EBITDA (x)

8.7

7.9

6.7

5.1

[email protected]

Source: Company, Angel Research; Note: CMP as of March 18, 2015

Please refer to important disclosures at the end of this report

Initiating coverage | Elecon Engineering

Investment Argument

Better times ahead, gradual elevation over long term

EECL is one of the largest manufacturers of MHE and power transmission solutions

in Asia. Its 60.48% subsidiary Elecon EPC Projects is the third largest MHE

company in India today. Its standalone business, which encompasses power

transmission, is the largest gear manufacturing unit in Asia and its market share in

India currently stands at 30%. Both the standalone and the MHE business of the

company accounted for ~39% (each) of the overall revenues.

Owing to disappointing operating environment over the past three years, EECL,

like many other players in the industry, saw disappointing or even negative growth

rate. Elecon EPC Projects serves the bulk material handling needs for the power,

mining, steel, cement, fertilizers and ports & marine industries while EECL’s

standalone business caters to power transmission equipment requirement of

various industries such as power, steel, cement, sugar, plastics, etc.

Exhibit 1: Standalone PTE Order book breakup

Exhibit 2: MHE Order book breakup

Others, 35%

Others, 15%

Sugar, 10%

Mining, 15%

Power, 60%

Power &

mining , 55%

Source: Company, Angel Research

We believe that the economy is set for a revival and gradual recovery at the macro

level will lead to better times for EECL. The company’s standalone business had

been managing to post good results with stable growth in the past (reporting EBIT

margins in the range of 15%), although the performance has been subdued in the

past two years, which we believe, will recover on the back of movement seen in key

industries like plastics, power and mining.

We expect the MHE business to be the main beneficiary of increase in capex in the

power, mining, and ports sectors. Speedier project clearances along with declining

interest rates should provide the much needed impetus to the sector, which in

recent times has been battling stalled projects, tightening cash flows and high

interest rates.

March 19, 2015

Initiating coverage | Elecon Engineering

Exhibit 3: MHE Revenues and Growth trend

Exhibit 4: Standalone PTE Revenue and Growth trend

900

MHE Revenue (LHS)

MHE Growth (RHS)

700

20.0

PTE Revenue (LHS)

Growth (RHS)

18.0

11.

800

9.9

11.5

12.6

15.0

600

700

12.9

10.0

3.7

500

600

5.0

500

400

(4.5)

(5)

400

(10)

(5.0)

300

(10.0)

(15)

(15.8)

200

(15.0)

(20)

(16.4)

100

(20.0)

(25)

(24.4)

(25.0)

(30)

FY2012

FY2013

FY2014

FY2015E FY2016E FY2017E

FY2012

FY2013

FY2014

FY2015E FY2016E FY2017E

Source: Company, Angel Research

Key Opportunities for MHE business

Power, mining, cement, and manufacturing sectors are the demand drivers for the

MHE business. The company has strong experience, diversified skills and

capabilities in the MHE business in terms of catering to various sectors. Sizable

investments in the core sector industries are likely to boost demand for the MHE

business. The MHE business’ current order book stands at `1,200cr with the power

sector accounting for 60%, mining accounting for 15% and others accounting for

the remaining 15%.

Power: India’s per capita power consumption still lags the consumption levels of

that in the developed countries, thereby providing huge potential for investment in

the sector. The company has significant exposure (~60-70%) to this segment

through its MHE business, ie mainly coal handling system. In the 12th Five Year

Plan the planning commission has projected power capacity addition to the tune of

88,537MW and the share of coal based plants is expected to be at 69,280MW.

Additionally, the government has also proposed to set up five Ultra Mega Power

Projects, each of 4,000MW, in the plug-and-play mode, with all clearances and

linkages in place.

Mining: There reportedly exists a correlation between the mining and

manufacturing sectors. The mining sector is a significant contributor to our

country’s GDP. However, the sector has been underperforming over the past

3-4 years owing to projects being stalled due to lack of environmental clearances

and land acquisition issues. We believe that the NDA government at the centre will

take the necessary measures to revive the stalled projects.

In our view, a pick-up in infrastructure activities in the country will directly drive up

demand for the power, steel and cement sectors, which in turn will result in

additional capex in the said sectors.

PTE business a steady performer; to benefit from operating

leverage

Despite a poor macro environment, EECL’s PTE business (standalone) has been

able to post decent numbers. This is largely due to its leadership position in the

industrial gear box segment, better product mix and prudent measures taken by

the Management to sustain profitability by way of taking cost cutting measures. It

March 19, 2015

Initiating coverage | Elecon Engineering

has good revenue visibility with current order book at `280cr. Within this, 55% is

constituted by the power and mining sector, sugar accounts for 10%, and the

balance is constituted by various industries like cement, steel, plastic, ports, etc.

Exhibit 5: Share of ~`1,670 Domestic gear industry

Others, 36%

Elecon

Engineering, 30%

Shanthi Geras,

Premium

Transmission,

New Allenberry

21%

Works, 4%

Source: Company, Angel Research

Since the company has exposure to various industries, we expect the standalone

PTE business to benefit from an imminent improvement in the capex cycle.

Moreover, as per our estimation, the capacity utilization currently stands at 40-

45%. With an expected surge in demand, the standalone business will stand to

benefit from operating leverage. Going forward, we expect the standalone

business to post a CAGR of 11.5% over FY2015E-17E to `596cr. Owing to

operating leverage coming into play, we expect the EBITDA margins to improve to

23.2% in FY2017E and expect the net profit to post a CAGR of 38.7% over

FY2015E-17E to `54cr.

Exhibit 6: Standalone EBITDA & EBITDA Margins

Exhibit 7: Standalone PAT and PAT Margins

160

EBITDA (LHS)

EBITDA Margins (RHS)

25.0

PAT (LHS)

PAT Margins (RHS)

10.0

23.2

9.1

140

22.5

21.8

8.0

20.0

120

7.6

17.3

100

15.0

6.0

5.9

5.4

10.0

4.0

2.8

5.0

2.0

FY2013

FY2014

FY2015E FY2016E FY2017E

FY2013

FY2014

FY2015E FY2016E FY2017E

Source: Company, Angel Research

Benzlers-Radicon restructuring to have a meaningful impact in the long

run: EECL bought Benzlers and Radicon, the gear divisions of David Brown

Systems (DB) in 2010, which were the catalogue business of DB. The acquisition

was made at a valuation of ~20mn GBP at the time (~`150cr). Although the

general consensus was that the acquisition would yield results from the get-go, the

economic scenario in Europe resulted in subdued performance by the subsidiary.

March 19, 2015

Initiating coverage | Elecon Engineering

EECL is in the process of restructuring its operations in Europe, which is more likely

to be along the lines of shifting of some production to India to develop higher

quality products that meets European standards at a lower cost. The company will

most likely shift a major portion of production to India in the longer run. This along

with other cost cutting measures undertaken by the Management and with a

gradual recovery in Europe, the subsidiary should have a meaningful contribution

over the longer term. At present the EBITDA margins for Benzlers-Radicon are

more likely to continue to be in lower single digits, which although would improve

to ~10% over the longer run.

Working capital situation to improve

The receivables for the company had spiked to `853cr in FY2014 to 66% of sales

(from 55% in FY2013), thus resulting in the working capital cycle jumping to 194

days in FY2014_from 150 days in FY2013. We believe the higher receivables

could mainly be attributed to Elecon EPC Projects with a major portion of it related

to retention money which is paid at the time of project completion. As far as the

retention money is concerned, the risk is almost non-existent and we expect the

company to recover the money once the projects get completed.

We expect that with faster completion of the projects, the company will see some

improvement in terms of working capital cycle. With improving overall top-line

growth and improving margins, we expect the working capital days (ex-cash) to

come down from 192 days in FY2015E to 166 days in FY2017E. With minimal

maintenance capex required, we expect the asset turnover ratio (gross block) to

improve from 1.3x in FY2015E to 1.6x in FY2017E.

March 19, 2015

Initiating coverage | Elecon Engineering

Consolidated Financials

Exhibit 8: Revenue and profit break up

FY2015E

FY2016E

FY2017E

Revenue

Elecon EPC Projects

477

538

606

EECL Standalone

479

534

596

Radicon-Benzler

308

324

346

Less: Inter Company

Consolidated

1,241

1,372

1,521

Profit

Elecon EPC Projects

EECL Standalone

Radicon-Benzler

(20)

(18)

Less: Inter Company

Consolidated

Source: Company, Angel Research

Recovery in Capex across industry to improve top-line

The impending improvement in the economic environment is expected to boost the

demand for both the PTE business as well as the MHE business of the company.

Judging by the standalone performance in the current year, we have accounted for

a decline in top-line for all businesses in FY2015E and gradually scaled up our

estimates from thereon. We believe that the above mentioned scenario will result in

a CAGR of 10.7% over FY2015E-17E to `1,521cr.

Exhibit 9: Revenues to improve on revival in capex

Exhibit 10: EBITDA Margins to witness improvement

1,800

15.0

EBITDA (LHS)

EBITDA Margins (RHS)

Revenue (LHS)

Revenue Growth (RHS)

250

16.0

1,600

14.6

10.0

14.0

10.5

13.6

1,400

200

12.8

12.0

5.0

12.3

11.6

1,200

10.0

150

1,000

8.0

800

(5.4)

(5.0)

(4.0)

100

6.0

600

(10.0)

400

4.0

(15.0)

200

(15.3)

2.0

(20.0)

FY2013

FY2014

FY2015E FY2016E FY2017E

FY2013

FY2014

FY2015E FY2016E FY2017E

Source: Company, Angel Research

EBITDA margin to expand

We expect the consolidated EBITDA margins to witness a 230bp expansion over

FY2015E-17E to 14.6%, mainly on back of revenue growth, particularly in the

MHE business. We have reduced the debt quantum for FY2015E in our estimates

and also taken lower reduction in debt in our estimates going forward. The

resultant lowered interest outgo will directly add on to the bottom-line. Adjusting

for minority interest, the company’s net profit is expected to be at `66cr for

FY2017E.

March 19, 2015

Initiating coverage | Elecon Engineering

Exhibit 11: PAT trajectory

PAT (LHS)

PAT Margins (RHS)

5.0

4.5

4.3

4.0

3.5

3.0

2.5

2.1

2.0

1.6

1.5

1.1

1.0

0.5

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Source: Company, Angel Research

Sensitivity Analysis

Currently, we are building in a revenue growth of -4% over FY2014-15E while the

same is expected to be 10.9% over FY2016E-17E. Assuming operating margins to

be above 14%, the net profit is expected to be at `66cr for FY2017E. However, if the

revenue growth slumps to ~6%, then the net profit would decline to ~`30cr levels.

Exhibit 12: Sensitivity Analysis

FY2017E Revenue growth rate (%)

PAT (` Cr)

6.4

7.9

9.4

10.9

12.4

13.9

15.4

16.9

104

Source: Company, Angel Research

Outlook and Valuation

The impending improvement in the economic scenario and the resultant capex is

expected to drive up demand for the MHE business. Also its PTE business stands to

benefit for the same reason. On account of operating environment turning

favorable, we expect EECL’s consolidated revenues to post a CAGR of 10.7% over

FY2105E-17E to `1,521cr. EBITDA margins of the MHE business had declined to

8.8% in FY2014 (from 13.3% in FY2013) on account of 24.4% yoy decline in

revenues. Recovery in the MHE business margins will result in the company’s

EBITDA margins expanding by 230bp over FY2015E-17E to 14.6%. Consequently,

the net profit is expected to improve to `66cr in FY2017E.

At the current market price, the stock is trading at 11.3x its FY2017E earnings. We

believe that these valuations are attractive considering its 5-year and 3-year

median P/E of 16.7x and 17.9x. We initiate coverage on the company with a Buy

rating and with a target price of `84 based on a target PE of 14.0x.

March 19, 2015

Initiating coverage | Elecon Engineering

Exhibit 13: Peer Comparison TTM

Company

Mcap

Sales

OPM

PAT

EPS

RoE

P/E

P/BV

EV/BITDA

EV/Sales

(` cr)

(%)

(` cr)

(`)

(%)

(x)

Elecon Engineering*

745

473

20.7

2.0

4.2

30.3

1.3

8.3

1.7

Shanthi Gears

1,012

140

16.9

1.4

4.2

87.6

3.7

40.1

6.8

Source: Company, Angel Research; Note: *Standalone numbers

Exhibit 14: One-year forward P/E band

200

Price (`)

10x

15x

20x

180

160

140

120

100

Source: Company, Angel Research

Key Risks

Competition - Competition from other smaller players who bid at lower margins

will have a negative impact on the company’s business growth.

Failure of revival in capex - Both main businesses of EECL benefit indirectly from

improvement in infrastructure as well as capex in core sectors. Contraction in

capex will have a negative impact on the business.

Higher exposure to Coal Handling - EECL’s MHE business derives most of its

revenues (60-70%) from the coal handling segment for power projects. Further

delay in allocation of blocks, environmental clearances, land acquisition and other

policy related issues will have a negative impact on the business.

Foreign Exchange - The Benzlers-Radicon group has transferred some lines of

production (~30% of subsidiary’s turnover) from Sweden to India. It plans on

scaling it up to ~60-80% in a gradual manner. Depreciating Euro against the INR

will have a negative impact on the margins of the subsidiary.

March 19, 2015

Initiating coverage | Elecon Engineering

Company Background

Established in 1951, EECL pioneered breakthrough innovations in the manufacture

of MHE and power transmission solutions and is one of the largest manufacturers

of MHE and industrial gears in Asia. EECL has expanded its skills and expertise to

execute EPC contracts and has transformed into a fully integrated EPC company

executing several projects in India. EECL’s acquisition of Benzlers - Radicon from

David Brown Gear Systems Group in 2010 adds to the expertise in manufacturing

customized gearboxes for steel mills, high speed turbines, and satellites for Indian

Space Research Program and Naval aircraft carriers.

Structure

During 2012, the company restructured its operations by transferring EECL’s MHE

business into its Aakaaish Projects Ltd., a wholly owned subsidiary of EECL.

Aakaaish Projects was later renamed Elecon EPC Projects Ltd. The sale was for a

consideration of `127cr. Additionally, the MHE businesses of its other group

companies, Prayas Engineering Ltd and EMTICI Engineering Ltd were transferred

to Elecon EPC Projects in return for issuance of shares in following ratio.



14 shares of Aakaaish for 143 shares of Prayas Engineering (Promoter).



3 shares of Aakaaish for 19 shares of EMTICI Engineering (Promoter).

Post the scheme of arrangement, Elecon EPC Projects became a 60.48% subsidiary

with the balance share held by the Promoters.

The second leg of the restructuring involved transfer of the GEAR business of its

group companies Prayas and EMTICI to EECL by the latter allotting shares in the

following ratio.



49 shares of EECL (FV `2/-) for 4 shares of Prayas Engineering (Promoter).



39 shares of EECL (FV `2/-) for 4 shares of EMTICI Engineering (Promoter).

EECL allotted 1,60,74,333 equity shares to the Shareholders of these two group

companies, thereby increasing its paid up share capital to 10,89,35,843 equity

shares of `2 each. As a result, the share holding of the promoter group increased

from 46% to 58%.

Post restructuring format is as follows -

Standalone Business - The Power Transmission business of EECL, is the largest

gear manufacturing company in Asia. Its market share currently stands at ~30%

with customer presence across India and countries like Australia, Africa, South East

Asia, Middle East, and Europe. As on FY2014, the standalone revenues accounted

for ~39% of its overall sales.

Elecon EPC Projects Ltd - Elecon EPC Projects became a 60.48% subsidiary of

the company with the balance held by the Promoter family. It was formed to

manage the core MHE business of the company and today it is the third largest

MHE company in India with products and solutions for various industrial sectors in

India. Its FY2014 revenues accounted for ~39% of EECL’s overall sales.

March 19, 2015

Initiating coverage | Elecon Engineering

Exhibit 15: Business Structure

Elecon Engineering

Co. Ltd

Elecon Transmission

Elecon EPC Projects

Standalone (PTE)

Inernational Ltd (PTE)

(MHE)

100%

60.48%

AB Benzlers

Radicon UK

Radicon US

Source: Company, Angel Research

Benzler-Radicon Group - EECL acquired Benzler-Radicon in October 2010

from the UK based engineering company David Brown. Benzler-Radicon have over

60 years of experience and have a reputation for being market leaders in the

design and manufacture of screw jacks, shaft mounted gearboxes and industrial

reducers.

The main motive behind the restructuring was to create separate entities and to

enhance operational efficiency of the businesses by consolidating the MHE and PTE

businesses domestically. Both Prayas and EMTICI manufactured equipments and

parts for the both the PTE as well as the MHE business. The business was relatively

small in nature mainly comprising of smaller job work.

Products

Its Power Transmission division involves design and manufacturing of the

following:

Power Transmission Solutions

Helical and Bevel Helical Gear boxes

Wind Mill Gear boxes

Planetary Gear boxes

Elevator Traction

Worm Gear boxes

Marine Gear boxes

Geared & Flexible Couplings

Loose Gear boxes

High Speed Gear boxes

Special Gear boxes

Its product range in the MHE segment includes design, engineering, manufacture,

supply, erection and commissioning of the following -

March 19, 2015

Initiating coverage | Elecon Engineering

Profit and loss statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Total operating income

1,527

1,293

1,241

1,372

1,521

% chg

(5.4)

(15.3)

(4.0)

10.5

10.9

Net Raw Materials

807

624

584

645

693

% chg

(14.1)

(22.6)

(6.5)

10.5

7.4

Mfg. Exp. & Erection Charges

131

142

112

123

137

% chg

35.9

8.4

(21.1)

10.5

10.9

Personnel

185

174

181

197

216

% chg

27.9

(5.8)

4.0

9.0

9.5

Other

196

203

211

230

252

% chg

(12.4)

3.6

4.0

9.0

9.5

Total Expenditure

1,319

1,143

1,088

1,197

1,299

EBITDA

208

150

153

175

222

% chg

(0.2)

(28.1)

2.2

14.4

27.1

(% of Net Sales)

13.6

11.6

12.3

12.8

14.6

Depreciation& Amortisation

EBIT

151

111

157

% chg

(5.6)

(41.7)

2.2

23.1

41.6

(% of Net Sales)

9.9

6.8

7.3

8.1

10.3

Interest & other Charges

Other Income

(% of Net Sales)

0.5

1.2

0.6

Recurring PBT

104

% chg

(25.9)

(79.8)

114.6

78.3

92.8

Exceptional items

(27)

PBT (reported)

112

Tax

(% of PBT)

41.4

51.4

30.0

PAT (reported)

Minority Interest (after tax)

Profit/Loss of Associate Company

Net Profit after Minority Int.

& P/L Asso.Co.

Extraordinary Expense/(Inc.)

(14)

ADJ. PAT

% chg

(46.0)

(58.0)

49.6

66.0

94.5

(% of Net Sales)

2.1

1.1

1.6

2.5

4.3

Basic EPS (`)

3.5

1.2

1.9

3.1

6.0

Fully Diluted EPS (`)

3.5

1.2

1.9

3.1

6.0

% chg

(46.0)

(64.2)

49.6

66.0

94.5

Dividend

Retained Earning

March 19, 2015

Initiating coverage | Elecon Engineering

Balance sheet (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015E

FY2016E

FY2017E

SOURCES OF FUNDS

Equity Share Capital

Reserves& Surplus

516

510

525

554

611

Shareholders’ Funds

538

532

546

575

633

Minority Interest

Total Loans

697

633

545

534

523

Other Long Term Liabilities

128

139

Long Term Provisions

Deferred Tax Liability

Total Liabilities

1,446

1,386

1,311

1,330

1,376

APPLICATION OF FUNDS

Gross Block

904

908

928

946

965

Less: Acc. Depreciation

360

400

463

527

593

Less: Impairment

Net Block

544

508

465

419

372

Capital Work-in-Progress

Lease adjustment

Goodwill

Investments

Long Term Loans and advances

Other Non-current asset

Current Assets

1,425

1,357

1,246

1,371

1,522

Cash

Loans & Advances

155

115

110

122

135

Inventory

393

358

347

354

383

Debtors

838

853

748

827

917

Other current assets

Current liabilities

679

675

596

656

712

Net Current Assets

746

682

649

715

811

Misc. Exp. not written off

Deferred Tax Assets

Total Assets

1,446

1,386

1,311

1,330

1,376

March 19, 2015

Initiating coverage | Elecon Engineering

Cash flow statement (Consolidated)

Y/E March (` cr)

FY2013

FY2014

FY2015E FY2016E FY2017E

Profit before tax

112

Depreciation

Change in Working Capital

(171)

(37)

(77)

Direct taxes paid

(21)

(15)

(11)

(19)

(34)

Others

260

(7)

(8)

(9)

Cash Flow from Operations

176

160

124

(Inc.)/Dec. in Fixed Assets

(120)

(1)

(21)

(17)

(16)

(Inc.)/Dec. in Investments

(2)

(Incr)/Decr In LT loans & adv.

(34)

Others

(11)

Cash Flow from Investing

(98)

(30)

(14)

(9)

(8)

Issue of Equity

Inc./(Dec.) in loans

(64)

(89)

(11)

Dividend Paid (Incl. Tax)

(14)

(12)

(14)

(21)

Others

(87)

(64)

Cash Flow from Financing

(65)

(140)

(101)

(25)

(32)

Inc./(Dec.) in Cash

(9)

Opening Cash balances

Closing Cash balances

March 19, 2015

Initiating coverage | Elecon Engineering

Key ratios (Consolidated)

Y/E March

FY2013

FY2014

FY2015E

FY2016E

FY2017E

Valuation Ratio (x)

P/E (on FDEPS)

23.0

54.8

36.6

22.1

11.3

P/CEPS

8.3

9.9

8.9

7.6

5.7

P/BV

1.4

1.3

1.2

EV/Net sales

0.9

1.0

0.9

0.7

EV/EBITDA

6.5

8.7

7.9

6.7

5.1

EV / Total Assets

0.9

0.8

Per Share Data (`)

EPS (Basic)

3.5

1.2

1.9

3.1

6.0

EPS (fully diluted)

3.5

1.2

0.0

0.1

Cash EPS

9.6

6.9

7.6

9.0

12.0

DPS

1.2

1.0

1.2

1.8

Book Value

57.9

48.8

50.2

52.8

58.1

DuPont Analysis

EBIT margin

9.9

6.8

7.3

8.1

10.3

Tax retention ratio

0.6

0.5

0.7

Asset turnover (x)

1.3

1.0

1.2

1.3

ROIC (Post-tax)

7.4

3.3

5.2

6.7

9.3

Cost of Debt (Post Tax)

7.0

5.4

7.1

7.4

7.1

Leverage (x)

1.2

1.1

0.9

0.8

0.7

Operating ROE

7.9

1.0

3.4

6.1

10.9

Returns (%)

ROCE (Pre-tax)

11.3

6.2

6.7

8.4

11.6

Angel ROIC (Pre-tax)

12.7

6.9

7.4

9.5

13.3

ROE

6.5

2.5

3.8

6.0

10.9

Turnover ratios (x)

Asset TO (Gross Block)

1.8

1.4

1.5

1.6

Inventory / Net sales (days)

106

104

Receivables (days)

194

239

220

Payables (days)

189

216

200

WC cycle (ex-cash) (days)

150

194

188

169

166

Solvency ratios (x)

Net debt to equity

1.2

1.1

0.9

0.8

0.7

Net debt to EBITDA

3.1

4.0

3.3

2.6

1.9

Int. Coverage (EBIT/ Int.)

1.9

1.2

1.5

1.9

2.9

March 19, 2015

Initiating coverage | Elecon Engineering

Research Team Tel: 022 - 39357800

E-mail: [email protected]

Website: www.angelbroking.com

DISCLAIMER

Angel Broking Private Limited (hereinafter referred to as “Angel”) is a registered Member of National Stock Exchange of India Limited,

Bombay Stock Exchange Limited and MCX Stock Exchange Limited. It is also registered as a Depository Participant with CDSL and

Portfolio Manager with SEBI. It also has registration with AMFI as a Mutual Fund Distributor. Angel has received in-principal approval

from SEBI for registering as a Research Entity in terms of SEBI (Research Analyst) Regulations, 2014. Angel or its associates has not

been debarred/ suspended by SEBI or any other regulatory authority for accessing /dealing in securities Market. Angel or its associates

including its relatives/analyst do not hold any financial interest/beneficial ownership of more than 1% in the company covered by

Analyst. Angel or its associates/analyst has not received any compensation / managed or co-managed public offering of securities of

the company covered by Analyst during the past twelve months. Angel/analyst has not served as an officer, director or employee of

company covered by Analyst and has not been engaged in market making activity of the company covered by Analyst.

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should

make such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the

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the merits and risks of such an investment.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

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sources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as this

document is for general guidance only. Angel Broking Pvt. Limited or any of its affiliates/ group companies 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 this report.

Angel Broking Pvt. Limited has not independently verified all the information contained within this document. Accordingly, we cannot

testify, nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document.

While Angel Broking Pvt. Limited endeavors to update on a reasonable basis the information discussed in this material, there may be

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Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section). Also, please refer to the

latest update on respective stocks for the disclosure status in respect of those stocks. Angel Broking Pvt. Limited and its affiliates may

have investment positions in the stocks recommended in this report.

Disclosure of Interest Statement

Elecon Engineering

1. Analyst ownership of the stock

2. Angel and its Group companies ownership of the stock

3. Angel and its Group companies' Directors ownership of the stock

4. Broking relationship with company covered

Note: We have not considered any Exposure below ` 1 lakh for Angel, its Group companies and Directors

Ratings (Based on expected returns

Buy (> 15%)

Accumulate (5% to 15%)

Neutral (-5 to 5%)

over 12 months investment period):

Reduce (-5% to -15%)

Sell (< -15

March 19, 2015