Elecon Engineering: Buy

Investors can consider buying the stock of Elecon Engineering.

At the current market price of Rs 54, the stock trades at about 10 times its likely FY-10 per share earnings. Investors can accumulate the stock in lots on declines, as it may take a couple of more quarters for the order flow scenario to improve for Elecon.

The company’s order book at end-March 09 quarter stood at about Rs 1,600 crore, registering a growth of over 27 per cent year-on year. It has since added over Rs 300 crore worth orders from different companies. But even as the order book cover lends healthy visibility to its revenue, what remains a concern is that the order booking has been very weak. While most companies in the capital goods space have also reported weak order inflows, for Elecon, the concern arises from delay in execution of a Rs 500-crore order included in the current order book.

This order, bagged in June 2008 from Bramhani Industries, was put on hold by the latter. This issue, however, may be addressed soon as the management expects the order to take off in the next quarters.

The company’s industrial gears division, which owes its fortunes to the increasing spends by its user industries, reported a 32 per cent decline in revenues for the March-09 quarter as against the same quarter last year.

The facility also clocked lower utilisation levels of about 23-30 per cent. This was also partly due to the deferment of some orders last quarter, which will most likely get reflected in its current quarter revenues. The division currently has an outstanding order book of about Rs 230 crore only.

For the year ended March 09, Elecon managed a revenue growth of over 18 per cent, helped primarily by the strong growth in its MHE division.

The material handling business now has a share of about 70 per cent from 55 per cent last year, while the industrial gears division’s contribution has fallen to 50 per cent. On the margin front, Elecon improved its performance by 1.4 percentage points to 16 per cent, helped by lower raw material prices.

The company is likely to sustain profit margins once it exhausts its current raw material inventory. Net profits, however, fell by 14 per cent. Higher interest outgo and depreciation, besides lower revenues, led to the decline in profits.

There has not been any material progress in Elecon’s entry into the windmills and windmill gearboxes business.

While the company had earlier begun prototyping for windmill gearboxes of about 2 MW range for its customer and installed six wind turbine generators in Gujarat and supplied four in Maharashtra, the development so far has not been impressive. This scenario may, however, change in the next few quarters as the management indicated that the issue of certification for its windmills has been resolved recently. The management expects to make Rs 55 crore revenue contribution from the windmill segment this year.