For 3QFY2016, Elecon Engineering reported a disappointing set of numbers on
both the standalone and consolidated basis. The standalone top-line grew by
6.0% yoy to `120cr while the EBITDA margin declined by 891bp yoy mainly on
account of unfavorable revenue mix involving bulk of the shipments of low
margins. The consolidated top-line grew by 10.6% on a yoy basis to `330cr
mainly led by the overseas business and growth in the Material Handling Business
(MHE) business. But the EBITDA margin deteriorated sharply by 872bp yoy to
2.8%, mainly owing to a spike in raw material cost and other expenses. The
company has reported higher other income on its standalone business related to
profits from sale of land amounting to ~`22cr, adjusting for which, the
standalone bottom-line declined by 66.3% yoy to `2cr. On the consolidated basis,
the bottom-line after adjusting for the above mentioned exceptional gains and
minority interest reported a loss of `11cr.
Recovery in capex taking longer than expected, long term prospects intact: The
performance of the MHE business of the company has remained under pressure
on account of delay in capex in the core sectors and due to slower execution at
customer level. On the other hand, the PTE business which had been holding its
ground has faced some pressure in the current year. Although the recovery in
capex in core sectors has been slower than expected, the long term prospects for
the MHE business remain intact. Additionally, the underperforming European
subsidiary is undergoing restructuring and it has been PAT positive for the past
three quarters (PAT of `7cr in 9MFY2016). We expect the subsidiary to contribute
more meaningfully in the longer run.
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. However, owing to
near term issues like slow pace of execution at customers ends and delay in capex
in core sectors have been impacting the overall business of the company. We are
accounting for a modest 5.6% revenue CAGR over FY2015-17E to `1,482cr and
we expect net profit after minority interest to be at `42cr in FY2017E. At the
current market price, the stock is trading at 15.7 its FY2017E earnings. We have
a Neutral view on the stock.

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