Material benefits

PENNY WISE

Material-handling equipment manufacturers like Elecon Engineering should gain from the uptake in infrastructure activity.

With infrastructure activities in India gathering steam and raising the levels of industrial capex, demand for coal, iron ore (steel), limestone (cement) and power will shoot up.

While demand for coal is likely to touch 630 million tonne by FY12, production of iron ore and limestone is expected to reach 220 million tonne and 215 million tonne, respectively, by FY10.

The mega prospects and capacity expansions in the power, metals and mining sectors have brought the mining and material-handling equipment companies into the limelight and will propel growth momentum in the equipment space for sure.

A host of engineering, capital goods and equipment companies put up a stunning show on the bourses, making the capital goods barometer a star performer in the broadbased market rally.

At the current price of of Rs 1,299, the Elecon Engineering stock has moved up a staggering 277 per cent from the level it stood at a year ago and has significantly outperformed the sectoral gains of 119.72 per cent in the same period.

Elecon is one of the leading manufacturers of material-handling equipment (MHE) and industrial gears in South East Asia. Of the total expected turnover of about Rs 445 crore in FY06, Rs 211 crore will come from the MHE division and the industrial gears segment will contribute Rs 234 crore.

At present, both the segments are equally important for the company's turnover, but in near future, this sales mix will tilt in favour of the material division.

Of Elecon's Rs 5,70,000 crore planned investments in the core sectors over 2006-15, Rs 47,500 crore will come under the material-handling package.

Backed by the renewed thrust and higher spending on the core sectors, the MHE division is poised to grow at a phenomenal pace of more than 50 per cent in the next three-five years and be the primary growth driver contributing as high as 60 per cent by FY08.

"With the MHE business growing, margins are expected to rise in future. Considering the pace of the country's economic growth and quantum of orders Elecon has in hand, the company management expects to achieve average growth of around 45-50 per cent in turnover in the next two years," says a company official.

The division caters to a variety of core sector industries such as steel, fertilisers, cement, coal, railways, iron ore mines, power stations and port trusts in India and abroad.

It manufactures wagon tipplers, stacker & reclaimers, crushers, feeders, conveyors, scrapers, cable reeling drums, ship & wagon loaders and roller screens.

In the MHE segment, Elecon has a key advantage over its peers "� Thyseen Krupp, TRF, L&T and Mcnally Bharat: It is the only Indian player capable of designing complete stacker reclaimer machines and design open cast mine conveyors of high capacity in the range from 11,000-20,000 tonne an hour.

The division's clientele boasts of names like BHEL, Maharashtra State Power Generation Corporation, National Thermal Power Corporation, Reliance Energy, Jindal Steel & Power, Jindal Vijaynagar Steel, Neyveli Lignite Corporation and Ahmedabad Electricity.

The gears division makes and supplies both standardised and customised gears to industries such as power, windmill, sugar, mining and also the Navy.

The segment is expected to grow at a stable rate of 25-30 per cent. Its competitors are majors like Shanti Gears, Crompton Greaves, New Allenberry Works and Flenders. The leading clients of the industrial gears division are Thyssen Krupp Pune, Bajaj Hindustan, L&T and Schindler India.

Elecon is also present in the windmill business, but in a limited way. The company is currently working to revive the division. It is targeting a range of 400-600kw for the segment. It is awaiting certain key approvals to make a foray into the commercial sale of windmills.

In April, the company was sitting on orders worth Rs 600 crore, 1.68 times the trailing 12-month turnover.

Of the orders, Rs 460 crore was for its MHE division and Rs 135 crore for the gears segment. The major contracts are from MSEB (Rs 54 crore), Tecpro Systems (Rs 24 crore), Torrent Power (Rs 58 crore), Singareni Collieries Company (Rs 11 crore) and NTPC (Rs 9 crore).

Exports will contribute about Rs 22 crore or 5 per cent to Elecon's FY06 turnover. But in FY07, the company expects to more than double its export revenues at Rs 50 crore.

To meet the increasing demand for both its segments, particularly MHE, the management has indicated spending close to around Rs 15-20 crore every year over the next two-three years.

Kalpesh Parikh, an analyst at ASK Raymond James, says, "Elecon can generate higher turnover without major capex requirements as it carries out a majority of 70-75 per cent of the assembling work at the clients' end."

In the trailing 12 months, the company's sales have grown 54.13 per cent year on year at Rs 357.9 crore. Its operating profit has shot up around 130 per cent at Rs 47.16 crore and margins have improved by 434 bps to 13.18 per cent. 
 

FINANCIALS                                     (Trailing 12 month)
Rs crore	Mcnally	TRF	Elecon	%Chg (y-o-y)
Net sales	290.01	216.60	357.90	54.00
PBDIT	14.60	17.20	55.30	125.00
Opm	5.03	7.94	15.45	487 bps
Net profit	4.10	7.10	23.00	382.00
Npm	1.41	3.28	6.43	439 bps
P/E	69.55	30.21	30.24	-

Similarly, the company's net profit has registered a spectacular rise of 385.35 per cent at Rs 22.96 crore and margins have improved by 437 bps to 6.42 per cent.

At the current market price of Rs 1,299.55, the Elecon Engineering stock trades at a trailing 12-month P/E of 32.31 times, and 18.5 times and 13 times its expected FY07 and FY08 earnings, respectively.

"The stock is expected to see a re-rating with increase in MHE orders and improving margins. Even after witnessing a sharp rally in the past one year, the stock still looks a good long-term bet," Parikh says with conviction.