Buy Elecon Engineering; target of Rs 93: KRChoksey

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Buy Elecon Engineering; target of Rs 93: KRChoksey

KRChoksey is bullish on Elecon Engineering Company and has recommended buy rating on the stock with a target of Rs 93 in its July 4, 2011 research report.

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KRChoksey is bullish on Elecon Engineering Company and has recommended buy rating on the stock with a target of Rs 93 in its July 4, 2011 research report.

"Elecon Engineering Co Ltd (EEC) posted Q4FY11 results below our expectations but surprised us on the margins front. Net sales grew by 6.6% YoY to Rs 351 crore during Q4FY11 driven by 15% YoY growth in Gears segment, partially offset by ~5% YoY de-growth in MHE segment. EBITDA margins improved by 176 bps to 16.1% on the back of lower raw material cost and higher contribution from gears. Net profit stood at Rs 23.6 crore, lower by ~13% YoY on reported basis and up by 14% YoY on adjusted basis. Adjusted NPM improved by 44 bps YoY in line with better operating margins."

"Net sales registered 12.5% YoY growth to Rs 1,177 crore during FY11 driven by robust 23% growth in gears business and moderate growth of 3% on MHE segment. Consequently EBITDA margins improved by 57 bps to 15.6% despite higher raw material cost (up by 109 bps) and other expenses (up by 127 bps). Net profit reported at Rs 87.9 crore vs Rs 66.2 crore, higher by 33%. However adjusted net profit stood at Rs 67.4 crore against Rs 55.6 crore in FY10, up by 21%. NPM increased by 114bps to 7.5% on reported basis and by 41 bps to 5.7% after adjusting for non-recurring items."

"Order book at the end of FY11 stood at Rs 1,384 crore excluding the Brahmani order of Rs 323 crore. MHE accounts for 76.5% (Rs 1,059 crore) of closing order backlog of FY11 while gears contribute 23.5% (Rs 325 crore). As on May 23, 2011, order book of EEC stood at Rs 1,577 crore, Rs 1,233 crore in MHE and Rs 344 crore in gears. 60% of total order book comes from power sector while cement accounts for 14% of the backlog. 20-25% of the backlog has pricevariable clause. Orders worth Rs 1,699 crore received during FY11 against Rs 748 cr of inflows in FY10, higher by 127%. Company expects fresh inflows of Rs 600 crore in next 3-4 months including Rs 280 cr on order from NTPC where EEC is L1."

"EEC continues to see strong traction in order inflows during FY11. We believe that the gears division will be able to sustain its margins while MHE could see some pressure due to increasing competition and higher project based inflows. NTPC is expected to come up with few of the large orders (6-7 projects) soon. The current order book provides revenue visibility for more than a year. Issues like fuel availability and SEB losses, however creates short term uncertainty in the power sector as far as the private participation is concerned. We believe that these issues are temporary in nature and will be soon addressed by the Government but could result into slight execution delay in the sector. Consequently we revise our target PE multiple to 10x (earlier 11x) for the standalone business with a positive bias. We arrive at a revised target price of Rs 93 with a BUY recommendation on the stock," says KRChoksey research report.

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