Accumulate Elecon Eng; target of Rs 55: KRChoksey

KRChoksey is bullish on Elecon Engineering Company and has recommended accumulate rating on the stock with a target of Rs 55 in its August 2, 2012 research report.

“Elecon Engineering Ltd (EEL) net sales declined by 7.3% YoY to Rs. 235.8 cr on account of delayed off take from customers. Operating margins declined by 332 bps to 13.4% on account of increase in raw material cost and as fixed overheads like employee cost increased as a percent of sales on account of decline in sales. Higher interest and depreciation cost further eroded profitability as PAT declined by 57.1% to Rs. 6.4 cr. Order backlog at the end of the Q4FY12 stands at Rs 1,629 cr as EEL registered strong orders worth Rs. 667 cr.”

“EEL net sales declined by 7.3% as MHE segment registered a 15% decline in sales. MHE’s sales declined to Rs. 121 cr vs Rs 142.4 cr in Q1FY12. Poor offtake from customers especially in the power sector lead to decline in sales. As of Q1FY13, EEL had Rs. 35 cr of finished goods, which were not picked up by industrial customers. Gear segment registered sales growth of 3.6%, below expectation. The management guided a sales growth guidance of 6% to 8% for FY13 and it expects execution to pick up in second half of FY13. Operating margins declined by 332 bps to 13.4% v/s 16.7% in Q1FY12. Higher raw material cost and fixed overheads contributed to decline in margins. Segment wise MHE division primarily contributed to decline in operating margins as its segmental margins declined sharply by 420 bps to 9.4%, while gear division registered 130 bps decline in margins.”

“Elecon Engineering registered results below expectations. Project delays in power sector are impacting offake by customers, which is not expected to improve in near term. Margins are expected to remain under pressure as order finalizations are getting delayed and have thereby increased competitive pressure. Management has proposed a restructuring and consolidation of business, which on FY12 basis was EPS dilutive and is expected to accretive to EPS from FY14 onwards. Considering issues wrt to offtake of deliveries and margin pressure we downgrade the stock to ACCUMULATE with a price target of Rs 55,” says KRChoksey research report. 

Institutional holding more than 40% in Indian cos   

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