Stock Review: Elecon Engineering

 

Elecon Engineering, a leading manufacturer of material handling equipment, has underperformed the Sensex over the past one year. The company's stock performance, however, does not undermine the company's growth potential reflected by its performance for the year ended March 2011. Backed by a decent order backlog of about Rs 1,700 crore, which translates to about 1.4 times its standalone revenues for FY11, the company not only has revenue visibility over the near term, but is also well poised to meet its target of 25% growth in revenues in FY12.

   This order backlog, however, includes order worth Rs 323 crore relating to Brahmani Industries in the MHE segment which has been on hold for over two years now. Excluding Brahmani Industries, the company's order books aggregate Rs 1,377 crore that is about 1.2 times the company's standalone FY11 revenue.

FINANCIALS

Registering a 12% standalone revenue growth year-on-year to Rs 1,184 crore for FY11, Elecon Engineering's operating margins have improved by close to 60 basis points during the year. Its earnings per share, or EPS, will improve from Rs 7.13 to Rs 9.47 in 2010-11. The company's competence in keeping its material costs in check, despite a sharp rise in commodity prices last year, has helped in easing pressure on margins. The company's highly leveraged balance sheet is, however, a cause of concern, especially in terms of higher interest outgo in a rising interest rate regime and can squeeze margins in the near term.

   Going forward, the company is expected to benefit from its recent acquisition of UK-based Benzlers-Radicon group, both in terms of revenue growth and operating margins through cost optimisation. Benzlers and Radicon are highly recognized brands in the power transmission industry globally and the acquisition is thus expected to strengthen the Elecon's product development and engineering capabilities and widen its customer base across Europe and North America.

VALUATIONS

Elecon Engineering's stock has fallen by more than 13% during the past one year and currently trades around 67 per share. At this price, the stock commands a priceearning multiple (PE) of about 7.15, which is at a discount to its peers. While the company's stock has underperformed, the sensex over the past one year, it has, nevertheless, outperformed its peers which command a higher P/E. The current valuations appear reasonable given the revenue visibility that the company has through its existing order backlog. Moreover, the 12th Five Year Plan is expected to focus especially on sectors such as capital equipment, including those dealing with heavy electrical and earth moving equipment.

   This will benefit companies like Elecon Engineering, which are engaged in material handling business, and can expect a good share of the $ 1 trillion pie — the projected spending on infrastructure during 2012-17. We recommend a buy on the stock at current levels.