20th May, 2010 Q4FY10

Q4 Result
and FY10 ResultUpdate
Update

ELECON
CMP : Rs. 78.35
TARGET : Rs. 108.00 RESEARCH
Recommendation BUY

Q4 and FY10 Result and Concall Highlights: COMPANY DETAILS

BSE Code 505700
! Net sales for the quarter stood at Rs. 329.09 crs compared to Rs. 288.53 crs last
NSE Symbol ELECON
year. For full year FY10, the net sales stood at Rs. 1046.37 crs, i.e 9.56% higher
Bloomberg ELCN IN
than Rs. 955.06 crs last year.
Market Cap. (Rs. Crs) 727
! EBIT for the quarter stood Rs. 37.52 crs, down from Rs. 43.02 crs last year. The Free Float 55%
increase in depreciation (Rs. 2.55 crs - Due to capacity addition), a rise in other 52 Week High 110.85
expenses to the tune of Rs. 3.32 crs., and huge draw down of the inventory lead 52 Week Low 60.05
to decrease in EBIT margin from 14.64% last year to 11.28% this year. For the Dividend Yield -% 1.9
full year EBIT was down from Rs. 135.74 crs to Rs. 124.37 crs, where margins
Beta 1.28
shrank from 14.08% last year to 11.8% in FY10.

! The management opines that last year saw drying up of orders for the sector
which lead to a lot of under-cutting in the margins leading to disturbed order SHARE HOLDING PATTERN (%)
flow and depressed margins. Promoter Group 45.71
FII 1.04
! Interest expense for the quarter was down from Rs. 15.8 crs last year to Rs. DII 13.8
11.73 crs. For the full year interest expense was up from Rs. 48.36 crs to Rs.
Others 39.45
50.88 crs.
Total 100
! Due to rise in other income in the fourth quarter as well as the full year, the
Q4FY10 PBT stood increased to Rs. 34.11 crs from Rs. 27.22 crs last year. A
similar impact was seen in full year results where PBT increased marginally by
Rs. 2 crs and stood at Rs. 90.31 crs.

! Net profit for the quarter stood at Rs. 27.07 crs, 60% greater than Q4FY09. For
the full year the growth was much less at 15%, where the PAT currently stood at
Rs. 66.17 crs.

! The board has recommended a dividend of Rs. 1.5 (i.e 75% for face value of Rs.
2) per share.
Share price graph (Rs)

Order Book Status

The outstanding order book for the company stood at Rs. 1313 crs till April 30th,
2010. The Company has received orders worth Rs. 398 crs till 18th May, 2010 from
the year end. Which is greater than the total order inflow for full year FY10.

ANALYST
Mohammad Riazuddin
Ankit Shah
Source: Company, Eureka Research riazuddin@eurekasecurities.com
09903062346 / 91-33-3918 0386 - 87
EUREKA RESEARCH www.eurekasecurities.com
ELECON
20th May, 2010

Order Bagged after March 2010

Client Date Division Value (Rs. Crs)
Jindal Steel & Power Ltd 04/07/2010 MHE(Product) 47.8
Larson & Turbo Limited 04/07/2010 GEAR 40.55
Sical Logistics Ltd 04/08/2010 MHE(Product) 49.9
GMR INFRA LTD 05/12/2010 MHE(Product) 94.8
Zubery Engineering 05/12/2010 MHE(Product) 39.27
Adhunik power & natural resources 05/12/2010 MHE(Product) 30.39
SAIL 05/12/2010 MHE(Product) 8.99
BGR Energy 05/12/2010 MHE(Product) 35.05
BGR Energy 05/18/2010 MHE(EPC) 51.92
TOTAL 398.67
Source: BSE, Eureka Research

Taking this incremental order flow, the order book outstanding would sum upto Rs. 1570 crs. This happens to be 1.47 times its FY10 sales
and 1.62 times its FY09 sales

BUSINESS DETAILS

Material Handling
Elecon is one of the renowned players in the Material Handling Equipment (MHE) industry with solutions for design, engineering,
manufacture, supply, erection and commissioning of the project.

It provides material handling solutions to sectors like

1) Mining
2) Cement
3) Port Mechanisation
4) Fertiliser
5) Coal based power generation units
Product Portfolio
INDUSTRY EQUIPMENT DESCRIPTION
Mining • Idlers (rollers on which conveyor belt rests)
• Pulley (used for moving conveyor belt)
• Shiftable Conveyors
• Conveyors
Broadly used in the movement of raw materials
Cement • Stacker-reclaimer (stacking the material invoiced through railway wagons
and reclaiming it for main production activity)
• Ship loaders
• Scrapers Impactor (stacking and storing materials)
• Twin Boom Stacker (type of scraper)
• Circular Stock Pile (type of scraper)
Used for storing (stacking) and reclaiming purpose
Port Mechanization • Ship loaders
• Rail Pusher Car Wagon (transportation and placement of wagons)
• Tipplers (designed for unloading broad-guage open rail wagons)
• Wagon Marshalling Equipment (charging and spotting of wagon)
Used for loading, unloading and movement of goods

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ELECON
20th May, 2010

Steel • Wagon Tipplers

• Stacker-reclaimer
• Barrel Type Reclaimer (Barrel Type Blender Reclaimer for handling coal,
iron ore, lime stone in a homogenisation stock yard)
Used for storing and handling raw material
Power • Scrapper Reclaimer
• Wagon loader (used for loading to railway wagons)
• Wagon tipplers
• Side arm chargers (for hauling rake of wagons, placement of wagons on tippler
table and evacuation of empty wagons from tippler table.
• Apron Feeder (designed to receive and control the flow of material from
bins(temporary usualy mobile storage container) and
hoppers(storage place within the plant).)
• Paddle Feeder (it is for reclaiming bulk material from bunkers and stockpiles)
• Single & Double Roll Crusher (it is for crushing of coal, coke, cinter, moderately hard rock,
ore, chalk, etc)
• Cable Reeling Drum (used for power supply)
• Stacker Reclaimer
• Idlers
• Roller Screen (Roller Screen is suitable for separating coarse,
wet, sticky and clay raw material.)
Used for storing and handling raw materials

Contribution to Revenue:

Contribution of MHE division to the revenue of the company has increased from 28.09 % in the year 2005 to 59.30%. In FY10 the division
has generated 54.77% of companies earnings (EBIT) which is an increase of 50% compared to 4% of total EBIT in 2005.
YEAR MHE Sales TOTAL % of MHE MHE EBIT Total(EBIT) % of MHE
2010 620.45 1046.37 59.30 83.08 151.7 54.77
2009 560.67 955.06 58.71 71.57 144.31 49.59
2008 437.34 826.44 52.92 62.74 142.01 44.18
2007 409.66 720.65 56.85 55.04 119.51 46.05
2006 225.96 457.82 49.36 20.71 67.16 30.84
2005 78.78 280.46 28.09 1.62 39.48 4.10

Company has been able to maintain high margin in MHE division due to its technical expertise and economies of scale, even during FY09 it
was able to hold its margin at 12.77%. The company takes two kinds of orders in the segment. First where it takes the orders for
equipment only. Here the EBIT margins are around 14-15% and the execution period is around 10-12 months. These kinds of orders give
greater margins as well as shorter execution time. Besides this, the company also accepts EPC orders where it sub-contracts other
construction activities. Here the execution period increases significantly with a decrease in margins. However, with more sub-
contracting, asset turnover and ROE improves. Currently the strategy was to capitalize on small projects (mainly product orders) with
high margins rather than going for huge EPC projects with low or no margins.

The company derives 73.7% of this segment's revenue from the power sector. The massive power generation capacity additions planned
can bolster demand for the Company's product. Besides power, port mechanization and mining activities will also keep the order flow of
the company ticking. Elecon Eng. will also be introducing new products like Pipe conveyors, High Speed conveyors and Curbed conveyors.
Hence, we do not see a possibility where the order flow dries down to an extent where revenues and profitability of the company gets
hampered in several quarters to follow.

EUREKA RESEARCH 3 www.eurekasecurities.com

ELECON
20th May, 2010

Source: Company

Growth in target industries

Power

The target of the current 11th plan is set ambitiously at 78700MW. According to CRISIL research estimate about Rs. 750000 crore would
be invested in power sector over the next five years by 2013-14. Of this Rs. 480000 crore would be invested in power generation space.
Approximately, 10 % of this investment would be directed towards material handling, providing a huge scope of business for Elecon.

Cement

The cement industry is expected to increase at 11.5 % annually during the 11th plan years. Accordingly, the targeted cement capacity by
the end of the XI plan is 298mn.t from 180 mn.t (apprx) which would require an investment of Rs. 52400 crores

Steel

The target capacity for next 4-5 years in the steel industry is 125 mn tons. With current capacity of 58 mn tons we expect an addition of
another 50 mn tons. This would involve a capex of Rs. 200000 crore (apprx). Considering about 5%-6% is spent towards material
handling, it works out to be an opportunity of about Rs 10000 cr- Rs 12000 cr.

Ports

The National Maritime Development Programme (NMDP) had earmarked an outlay of Rs 55800 cr to develop additional capacity of 434
million ton (mt) in five years, only Rs 5717 cr could be invested to create additional capacity in the first three years of the Plan. There is still
a lot of capex to be made in this sector out of which 5% would flow in to the material handling works.

Sr. No Industries Investment Investment Implementation Annual Anticipated

Total Related to MHE period Average Share by Elecon

1 Power 220000 30000 2006-15 3000 300-450

2 Steel 262000 12500 2006-20 900 100-150
3 Coal 27500 2000 2006-15 200 20-25
4 Ports 60000 3000 2006-15 300 30-45

Source: Company Presentation

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ELECON
20th May, 2010

Key customers
Power Reliance Energy, Maharashtra Electricity Board, Tamil Nadu Electricty Board, NTPC
Steel Steel Authority of India, Indian Iron & Steel
Ports Chennai Port Trust, Marmagaon Port Trust, Kandla Port
Cement J.K. Cement, Gujrat Ambuja Cement / ACC

MHE EBIT Margins:

FY10 FY09 FY08 FY07
13.39% 12.77% 14.35% 13.44%

Historically 50-60% of the orders in MHE division were EPC based and balance was equipment based. Going forward the company plans
to take more equipment orders, may be of smaller size which would have a shorter execution cycle (10-12 months) compared to EPC
orders where the cycle extends beyond 24 months. Hence, going forward we expect greater part of the Rs. 1021 crs outstanding as of
April 10' along with further inflow of Rs. 260 crs after that (out of which only Rs. 52 crs is EPC, rest equipment) of order backlog to be
booked in revenues in FY11 itself. As we have seen strong inflow in first two months, we continue to be bullish about the demand scenario
and hence order inflow for the company.

Performance of the MHE for FY 2010

FY09 FY10 Growth (%)
Turnover 561 620 10.52
EBIT 72 83 15.28

Taking into consideration the current order book, the expected execution cycle we estimate that the company will be able to clock a net
revenue of Rs. 793.86 crs for FY11 from this segment (up 21% from RS. 654.91 crs last year) . We remain optimistic about the margins in
the business as greater part of the fresh inflow of orders are on the equipment side (lesser on the EPC front). We conservatively take the
EBIT margins to be 12.5%, though in tough situations like last year also the company was able to get a margin better similar to this
number. We will see Rs. 99 crs contribution from the segment to EBIT (up from Rs. 83.08 crs last year). With commodities prices coming
down on China concern and greater order flow due to govt. thrust, the margins and order flow would remain buoyant.

Power transmission Solution

Elecon commenced manufacturing of reduction gears unit in 1962 and set up a separate gear division in 1976. The gear division of Elecon
is at Vallabh Vidyanagar, Gujarat, with the installed capacity of 55,000 units, which has increased with the CAGR of 13% during the last
four years.

Market Share - Elecon is the largest player in the gear industry with the current market share of 26% followed by Shanthi Gears and
Flender with the share of 17% and 10% respectively.

This division contributed 45% to the revenues in FY10.

Products manufactured by Elecon

! Worm Gear Boxes

! Couplings
! Helical & Bevel Helical Gear Box
! Wind Mill Gear Boxes
! Elevator Traction Machines
! Planetary Gear Boxes
! Marine Gear Boxes

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ELECON
20th May, 2010

! High Speed Gear Boxes

! Geared Motors
Growth in core sectors of the economy like construction, mining etc is likely to drive demand for gears. The demand for Gears and Gear
Boxes depends on the growth in the industrial machinery. The Indian economy has been growing at a scorching pace. Above all, the
manufacturing sector is also surging ahead.

Huge industrial capex is expected across Elecon's user segments such as Sugar, Cement, Chemical, Fertilizer, Steel, Plastic Extrusion and
Rubber. All capex in the afore-said sectors would create a robust demand for the industrial gears as it forms an important part of the
machine.

Source: Company
Key customers
Power NTPC, MSEB
Minning NMDC, Neyvely Lignite Corporation
Defence Indian Navy, Coast Guard
Steel SAIL, TISCO
Sponge Iron Jindal Steel & Power, Nova Iron & Steel
Chemical Rashtriya Chemicals & Fertilizer, Alembic
Windmill NEPC, Pioneer wincon
Sugar Bajaj Hindustan Ltd, Harinagar Sugar Ltd
Palm Oil Felda
Cement Gujrat Ambuja Cement / ACC

Order book Status

In the gear segment, the company had an order backlog Rs. 292 crs. The execution cycle for standard gears is 4-6 months, and for
complicated gears is 8-12 months. On average we take the execution cycle to be 8 months conservatively. Based on this we expect the
revenues for the year FY11 to be Rs. 498 crs, (compared to management expectations of Rs. 500 530 crs).

The EBIT margins in the segment has always been very healthy at 18-20%. With better capacity utilization and buoyant demand, we
expect the margins to be at the historic level and for our calculations factor in a conservative 18% EBIT margin. Going by this we will see an
EBIT contribution of close to Rs. 89.64 crs from the sector.

Alternative Energy

Elecon diversified in the wind turbine business in 2001 with the technical collaboration with TURBOWIND N.V. of Belgium. The company
manufactures and installs Wind Turbine Generators (WTG). Elecon has an installed capacity of the 50 WTGs per annum of up to 600 KW
capacity.

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ELECON
20th May, 2010

Elecon has also stepped in global markets with the successful commissioning of the first 600kw wind turbine at Newburyport, MA in
February 2009. Apart from wind turbine, Elecon also undertakes the development of wind farm contracts.

Elecon currently manufactures only the windmill gearbox and outsources the remaining components required for the wind mill i.e. it
manufactures only 10% and the rest 90% is outsourced.

The govt. is laying significant thrust on wind energy and mandating a certain percentage of the total electricity purchased by distribution
companies to come from renewable sources like wind. India's installed wind power capacity is 10,925 MW (as on 2009). The government
has set a wind capacity addition target of 10500MW for 11th plan period. Further, government estimates indicate that the total potential
for wind power in India is over 48.5 GW. Elecon has entered this sector at the most appropriate time; it can capitalize on the immense
growth potential of this sector. However, we have not factored in any revenue from this segment as they will be negligible in this financial
year and will only increase gradually over the years. All the capital expenditures relating to the planned production has already been
made, hence no capital outlay on this front is expected.

Capex Programme

Elecon has a capex programme of Rs 40 cr for the current financial year. This capex would be spent across segment and would be majorly
financed via internal accruals and the excess funds that still lie with the company from its recent debt issue. It has already capitalized
capex of Rs 128cr and Rs 95 cr for FY09 and FY10 respectively.

Risk and Concerns

! Increased competition - Tremendous growth opportunities in the MHE sector has attracted lot of new players in the segment leading
to fierce competition, taking a toll on the margins of the existing players. However, with financing being available along with potent
demand, we feel the pie will increase significantly to accommodate increased number of players.

! Delay in execution- Any deferrals from the client for execution of the project may affect the top line as well as the bottom line of the
company.

! Increase in Input Price- Iron and steel, forgings, bearings, belts are the main raw materials required for the manufacturing of the
company's products; hence any rise in the prices of these raw materials may impact the margins of the company. However, about 90%
of company's orders are of fixed price nature and any anticipated price rise has been factored in into the contract price. On the other
hand company stands to gain from the downward movement of input prices, which is the most likely situation.

Valuation and Recommendation

As discussed above, we expect the business fundamentals to improve significantly to the benefit of the company and the stock price. The
top line and bottom line is likely to expand without much addition in fixed or financing costs. However, we have factored in decent
increase in other fixed costs and interest expenses as the general interest rates in the economy is hardening. The biggest positive for the
company would be the uptick in order flow and improved execution which would result in better asset turnover, improved capacity
utilization and hence better sales and profit numbers.

At the current market price Rs. 78.35, the stock is trading at 11x its FY10 and only 8.66x its FY11E EPS of Rs. 9.04.Looking at the growth
opportunity in both its existing and upcoming businesses, we ascribe a conservative P/E of 12 to the stock. This gives us a one year target
price of Rs. 108, i.e 38% higher than the current market price of Rs. 78.4. Hence we are positive due to good growth in earnings as well as
improvement in valuation multiple for the stock. We recommend a Buy on the stock.

EUREKA RESEARCH 7 www.eurekasecurities.com

ELECON
20th May, 2010

Amount (Rs. Crs) FY10 FY11E

Sales
MHE 654.91 793
Gears 425.92 498
Total Sales 1080.83 1291
Less: Inter Segment Transfer 34.46 39.84
Net Sales 1046.37 1251.16

EBIT 151.7 181.70

Blended EBIT Margin (%) 14.5% 14.5%

Unallocable Exp. 10.49 12

Interest Expenses 50.89 55.2

PBT 90.32 114.50

Tax 24.14 30.60
PAT 66.18 83.90
EPS 7.13 9.04

Target P/E 12
Target Price 108

DISCLAIMER : The information in this report has been obtained from sources, which Eureka Research believes to be reliable, but
we do not hold ourselves responsible for its completeness in accuracy. All estimates and opinions in this report constitute our
judgement as of this date and are subject to change without notice. Eureka Research will not be responsible for the consequence
of reliance upon our opinion or statement contained herein or for any omission. Any feedback can be mailed to the following ID.

Analyst : Mohammad Riazuddin

Ankit Shah
Email : riazuddin@eurekasecurities.com
Phone : 9903062346 / 91-33-3918 0386 - 87

Registered Office : 7 Lyons Range, 2nd Floor, Room No. 1, Kolkata - 700001
Corporate Office : B3/4, Gillander House, 8 N S Road, 3rd Floor, Kolkata - 700001
Phone : 91-33-2210 7500 / 01 / 02, Fax: 91-33-2210 5184
e: helpdesk@eurekasecurities.com
Mumbai Office : 909 Raheja Chamber, 213 Nariman Point, Mumbai-400021
Phone : 91-22-2202 5941 / 5942
e: mumbai@eurekasecurities.com

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