Elecon Engineering Company (EECL) is one of the largest Power Transmission Equipment (PTE) and Material Handling Equipment (MHE) manufacturing company in India. It has a leadership position in the PTE business with a market share of ~30%. Its MHE business is through its 60.48% subsidiary – Elecon EPC Projects (promoters of EECL hold the balance share in the company). EECL acquired the Benzlers-Radicon group in 2010 from David Brown, thereby getting a firm footing in the European and American markets. The Benzlers-Radicon group accounted for ~24.3% of the overall sales of the company in FY2014 with the rest being equally split between the standalone PTE business and the MHE business.
Better times ahead for both MHE and PTE businesses: Owing to disappointing operating environment over the past three years, the company, like many other players in the industry, saw disappointing or even negative growth rate. We expect the MHE business to benefit from the revival in capex in several core 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 base. The PTE business currently operates at utilization levels of 40-45% and is in a sweet spot in terms of capitalizing on the imminent improvement in demand.
Working capital situation to improve: The working capital cycle (excluding cash) witnessed a sharp jump in FY2014 to 194 days from 150 days in FY2013. EECL’s 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 additional capex, which will result in a better asset turnover ratio.
Outlook and Valuation: We expect ELCL’s consolidated revenues to post a CAGR of 10.7% over FY2105E-17E to Rs1,521cr. Recovery in the MHE business margins will result in EBITDA margins expanding by 230bp over FY2015E-17E to 14.6%. Consequently, the net profit is expected to improve to Rs66cr 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 Rs84 based on a target PE of 14.0x.

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