Government Initiatives and Growth Strategies Should Lend Support to El... Government Initiatives and Growth Strategies Should Lend Support to Elecon Engineering Company Ltd. Read more

Summary

Favourable industrial dynamics and strong order book should act as principal growth enablers of Elecon Engineering Company Ltd. Favourable outlook of power sector is likely to lend support. PLI scheme by Government should provide support to domestic manufacturing output and growth opportunities to engineering industry.

Overview of Elecon Engineering Company Ltd.

Established in 1951, Elecon Engineering Company Ltd. is counted as pioneers in manufacturing of industrial geared motors and reducers, material handling equipment etc. In Asia, the company is categorised as one of biggest manufacturers of material handling equipments and industrial gears.  The company’s acquisition of Benzlers- Radicon Group that belongs to David Brown Gear Systems should add to expertise for manufacture of custom-made gearboxes specially for steel mills, high-speed turbines, satellites for ISRO and for naval aircraft carries and several other growth sector industries successfully. It has a first-mover advantage in India as it manufactures sophisticated equipment for bulk Material Handling and has products catering to almost every industrial sector in India. Product solutions consist of designing, manufacturing, supplying, erecting and commissioning of the company’s products. 

Growth Enablers of Elecon Engineering Company Ltd.

• Strong Order Book Should Stem Growth: On a consolidated basis, total operating income saw 31% growth on year-over-year basis to INR350 crores for 4Q21 in comparison to income of INR268 crores in 4Q20. Strong growth of 164% was seen in EBITDA as it was INR74 crores in comparison to INR28 crores in 4Q20. Profit before tax saw an increase of 3 times to INR81 crores for FY21 in comparison to INR20 crores in FY20. Strong performance in FY21 stemmed from healthy performance in gear division, despite external environment being challenging. 

  After some hiccups during 1Q21 because of nationwide lockdown to control spread of COVID-19, the company saw improved performance in domestic and international business. Healthy order book was maintained, stemming from periodic order inflows from end segments such as power, steel, sugar, mining and cement sector. Efforts were channelized for reducing debt, inventory and receivables. This resulted in strengthening of balance sheet. 

• Gears Business Led Show in FY21: Net sales in gear division was INR6,489 million in FY21, exhibiting a rise from INR5,979 million in FY20. Financial performance of gear business saw an improvement as focus was on exports, profitability decisions while taking orders, improved receivables management and temporary and sustainable cost mitigation. Growth enablers for this business involve products such as marine gears for naval warships, sugar mill planetary drives etc. The company has been aiming to critical gearbox applications to prove capability. Sophisticated layer of business should enable the company attain its leading position in gearbox industry along with dependable financials. It is seen that India’s power sector is undergoing a transformational and positive change. Indian government introduced some important reforms in this sector, having a clear aim to maximise power generation capacity and to improve distribution and promote investment. Recent announcement of INR3.05 trillion scheme focused on reviving power distribution companies and enhancing efficiency in power distribution sector should act as main growth enabler. Focus of government to replace conventional energy meters by prepaid smart meters should strengthen efficiency of T&D infrastructure, reduce AT&C losses, which should lead to improvement in financial health of DISCOMS.

• Solid FY22 Results as Core Numbers Saw Significant Growth: The company has reported sales of INR1,203.6 crores in FY22 in comparison to INR1,044.3 crores in FY21. It saw EBITDA of INR246.4 crores against INR185.3 crores in FY21. In Gear business, it successfully completed one of most complex & sophisticated defence gear box, as a part of “Made in India” program. In this business, the company had INR410 crores of orders on hand. Orders inflow for month of Apr 22 was INR134 crores.

• Capitalising on Industrial Dynamics: Indian engineering sector has been playing an important role in economic growth of India as it stems growth of core sectors of economy. Historically, country’s engineering export portfolio was focused on low and medium technology intensive engineering goods. Better adoption of digital tools in manufacturing should alter landscape of engineering exports. Engineering exports of India which was concentrated more on USA and EU is now fast shifting and favouring emerging economies like SAARC, ASEAN, Africa, CIS, and Latin America. Export potential of India is immense and huge doors of opportunity are likely to open to attain leadership across product categories. 

   

  Even though this sector was adversely impacted because of Covid-19, recent tax reforms focused on reviving domestic capex cycle and introduction of production linked incentive schemes should help the companies in this industry through raising global competitive advantage. It should help India become manufacturing hub as it might result in new investments into manufacturing sector. Global industrial gearbox market should see significant growth stemming from higher level of automation across industries and increased adoption of energy-efficient and high-performance gearboxes. Investments by government and private organizations in end-user industries including material handling, power, and metal and mining sectors should propel growth in industrial gearbox market.  Indian economy should rebound and attain healthy growth as improvements have been seen in trade and manufacturing principally due to widespread vaccination campaigns. The company should be able to capitalise on future growth prospects, with growth likely to come from revival in core sectors including power, steel, cement, and mining.

• Recovery Expected in Material Handling Equipment Business: Net sales in MHE division was INR1,387 million in FY21, exhibiting a decrease of 37.38% from FY20. Performance in MHE business saw negative impacts as there were losses from previous projects. Significant revival in profitability should be seen as a result of past restructuring measures targeted at taking profitable product business. Revival in economy should significantly improve performance of MHE business. Diversification of the company’s business by entering in new areas gave the company opportunity to new material handling requirements. Focus is on operation & maintenance of operating plants and efforts are being put to improve business through customer contacts. Investing in R&D results in high market participation by the company and such R&D can result in creation of new market.

• Healthy Environment Should Result in Increased Future Growth: The company plans to optimise processes so that time and cost reduction can be seen. FY21 saw average performance principally because of Covid-19 pandemic. Material Handling business acted as a drag in challenging environment. Reduction of debt was principal focus of the company. Considerable efforts were focused on improving existing operation. Emphasis was laid on cost rationalization so that problems by slowing economy can be addressed. 

Conclusion

The company continues to strengthen its balance sheet by reducing its debt and other liabilities and continues to work on becoming a net debt free company by 2023. The company focuses on expanding footprints like Latin America, Africa and other countries by pursuing global branding and other marketing and business development initiatives.

Announcements of lower corporate tax for new energy companies should result in new investments flowing in and support India in becoming a power surplus country. These developments should stem growth in the company’s business in power generation, distribution, transmission and equipment. Government extended INR111 lakh crores national infrastructure pipeline so that investment in energy, road transport, civil aviation, shipping etc. can be made and economic revival can be seen. Government approved capital infusion of INR6,000 crore in national investment and infrastructure fund to meet spending needs in infrastructure projects. Its infrastructure investment plan should be able to create increased demand for sector.

Currently, India is being counted as world’s second largest producer of crude steel. If Ministry of Steel is to be believed, steel industry makes a contribution of ~2% to country’s GDP. Fresh investment by government in highways, ports, airports, railways, and power development and focus on automobile sector should support growth of sector. Significant scope for growth is being offered by country’s comparatively low per capita steel consumption and higher demand for affordable housing. The companies operating in steel industry should continue to spend for capacity expansion. The company took some specific steps by negotiating favourable payment terms for new orders and cost rationalization initiatives so that management of cash flows and liquidity position can be done.

Stock of Elecon Engineering Company Ltd. has shown multi-bagger returns in one year. Precisely, stock of the company has risen by 104.0% between May 24, 2021- May 20, 2022. This clearly shows that any company with clear and focused growth strategy can actually help investors to see capital appreciation. 

Growth in stock price should be supported by demand environment which continues to improve. The company continues to focus on strategies to create long-term value for shareholders. It has set a revenue target of INR1,500 Crores by FY24.