ELECON ENGINEERING COMPANY LTD.

Initiating Coverage BUY

RESEARCH Sector Engineering I CMP Rs 43 I Target Rs 60

Established in 1951, Elecon Engineering Company Ltd. (EEC) is a leading

STOCK DATA manufacturer of material handling equipment and industrial gears. The
company operating through its facility in Vallabh Vidya Nagar, Gujarat
Market Capitalisation Rs4.0bn
Book Value per share Rs25.5 with 801 employees, has a pan India presence with service network
Eq Shares O/S (F.V. Rs.2) 93mn spread across 13 locations and 90 dealers.
Median Vol. 1,63,657 (BSE+NSE)
52 Week High / Low Rs330/30 It serves core sectors like power, steel, cement and mining by executing
BSE Scrip Code 505700 turnkey projects and manufacturing equipments like stacker reclaimers,
NSE Scrip Code ELECON conveyor systems, wagon tipplers, crushers, bag handling systems, etc.
Bloomberg Code ELCN.IN EEC is a market leader in industrial gears and gear boxes which are
Reuters Code ELCN.BO
used across many industries. The company has diversified into wind
mill farms.
SHAREHOLDING PATTERN (%)
With a robust order book of Rs18.4bn and a pipeline of Rs30bn, EEC
Qtr. Ended Mar-08 Jun-08 Sep-08 aims to grow at a CAGR of ~23% over the next two years. Being a major
Promoters 42.2 42.3 42.4 player in mechanical BoP segment of thermal power plant, EEC is
MFs/UTI/FIs 19.5 20.0 22.2 prequalified for the upcoming projects in which bulk of plants are
FIIs/NRIs/OCBs 8.5 6.0 3.9
expected to come from the Government agencies. Thus, any slowdown is
PCBs 5.9 6.7 6.4
Indian Public 24.0 25.0 25.1 not going to have a significant impact on the new capacity additions.
Hence we initiate coverage with a 'BUY' recommendation with a 15 month
price target of Rs60.
STOCK PERFORMANCE (%)
INVESTMENT RATIONALE
1M 3M 12M
Absolute 44.6 (5.7) (44.5) ! Revenue visibility with a robust order book of Rs18.4bn to be executed
Relative 25.4 (11.2) (36.7) over next three years and an order pipeline worth Rs30bn.

! The company is prequalified in coal handling plant business in power

STOCK PRICE PERFORMANCE sector, which is relatively unaffected by the slowdown as Govt. projects
Elecon BSE (Rebased) form 80% of the upcoming projects of XI Five Year Plan.
355
! EEC is one of the 5 companies which manufacture their own
271 equipment for the coal handling plants (CHP) of thermal power plants.
The planned investments in power sector combined with a limited
188 number of solution providers augurs well for the company.
104 ! With ~26% share in Industrial gear market, EEC is a market leader
20
in this technology intensive business. As this product is critical for
Jan-08 Apr-08 Jul-08 Sep-08 Jan-09 multiple industries, it provides a natural diversification, thus providing
a stable growth platform.

KEY FINANCIALS (CONSOLIDATED) (Rs Mn) KEY RATIOS

Yr Ended Net YoY Gr Op Op Marg Net Eq Yr Ended Dil. EPS ROCE RONW P/E EV/Sales EV/EBDIT
(Mar) Sales (%) Profits (%) Profits Capital (Mar) (Rs.) (%) (%) (x) (x) (x)

2006 4,425 175.1 597 13.5 279 57 2006 3.0 26.4 33.2 0.9 0.5 3.4
2007 7,206 62.9 1101 15.3 549 62 2007 5.9 26.7 37.8 2.4 0.5 3.7
2008 8,264 14.7 1305 15.8 672 186 2008 7.2 22.3 31.7 6.0 1.0 6.2
2009E 9,904 19.8 1661 16.8 720 186 2009E 7.8 22.3 26.7 5.6 0.9 5.2
2010E 12,548 26.7 2092 16.7 968 186 2010E 10.4 23.0 27.7 4.2 0.8 4.6

Analyst - Vedang V. Bakshi I [email protected] I Tel: +91-22-6618 6394 06 January 2009 1

PINC Research reports are also available on Reuters, Thomson Publishers and Bloomberg PINV <GO> 1
 Background

Background
Established in 1951, Mumbai- based EEC began with design and manufacture of two
products – ‘ELE’vators and ‘CON’veyors. In 1962 the company shifted to Vallabh Vidya
Nagar, Gujarat and also ventured into manufacture of reduction gears. It set up a separate
EEC began with design and gear manufacturing facility in 1976 and has manufacturing facilities spread over an
manufacture of two area spanning ~30k sq. m. From a two product company, now EEC has moved up the
products – ‘ELE’vators and value chain to emerge as a complete bulk material handling system provider and market
‘CON’veyors... leader in the domestic industrial gear industry. It became the first Indian company to
design, build and erect a stacker reclaimer at Santaldih power station, West Bengal, in
1967 and a barrel reclaimer at Bokaro steel plant, Jharkhand, in 1967.
EEC’s most notable project has been the shiftable conveying systems for lignite and
overburden for Neyveli Lignite Corporation in 1964. EEC designed, manufactured and
erected the system to handle overburden at the rate of 20k mt/hr. This was the largest
conveying system in the world outside Germany.

Promoter Group Companies

Group Company Promoter Product Customer
VVN Manufacturing Mr. Prayasvin Patel Idler rollers, pulleys, frames & brackets Elecon
Elecon IT Ltd. Mr. Prayasvin Patel IT support Elecon
Aakaaish Machatronics Mr. Prayasvin Patel Provides maintenance service Elecon
Prayas Castings Mr. Prayasvin Patel Ferrous, non ferrous castings Elecon
Power Build Limited (PBL) Mr. Prayasvin Patel geared motors, wiegh feeders, electric hoists Others
Power Build Elecon Gears Ltd. JV between EEC & PBL Inline reducers, geared motors Elecon & others
Emtici Engineering Ltd. Mr. Prayasvin Patel Sole Marketing agency for Elecon and PBL Others
Source: Company, PINC Research

Business model
The company’s business comprises material handling equipment (MHE) and
transmission equipment (TRE) divisions. MHE business comprises of bidding for turnkey
projects as well as supply of equipments to other players who are competitors for winning
the turnkey contracts. TRE business is a product driven business in which gears and
gear boxes are supplied on a ‘made-to-order’ basis.

Segment-wise comparison
MHE TRE
Share in total ROCE PBIT Share in ROCE PBIT
Period
sales(%) (%) Margin (%) total sales(%) (%) Margin (%)
H1FY09 57.5 30.5 11.9 45.1 40.8 15.7
H1FY08 58.2 52.3 12.6 46.0 44.5 16.0
FY08 56.9 42.4 13.3 47.1 77.1 20.4
FY07 62.0 24.5 12.3 43.3 25.2 20.6
FY06 51.1 19.6 9.2 52.4 22.5 20.0
FY05 28.4 2.6 1.9 72.6 33.1 18.8
FY04 28.6 (6.5) (7.3) 72.5 26.6 45.1

Source: Annual report

2
 Business Model

Material Handling Equipment (MHE)

The company has established itself as a major player in integrated CHPs, product
handling systems in cement and fertilizer industries and conveyor systems for coal
mining.

Revenue breakup of MHE (FY08)

Steel Mines
15% 9%
Wind mill
4%
Others
2%

Cement
21%

Power
49%

Source: Annual report

Orders executed recently

Month of Customer Order Description Order value Month of
award (Rs mn) completion
Apr ’06 Torrent power Coal handling system 516 Oct’08
Jun’04 New Parli TPP Coal handling system 588 Under commissioning
Apr ’05 Paras TPP Coal handling system 945 Under commissioning
Source: Company

The MHE business is either through execution of turnkey projects or sale of equipment.
MHE’s revenue cycle varies The revenue cycle varies from ~9 months to 35 months depending on whether it is a
from ~9 months to 35 turnkey project or sale of equipment.
months... Turnkey project is a tender based business wherein EEC’s scope mainly includes
complete CHP for thermal power plant (TPP) projects and material handling equipment
for steel plants. Typically orders are received about 5 months after submitting quotations
for tenders which are fixed price contracts. On an average a project takes 24 to 35
months for implementation. Upon the receipt of the order, EEC and the customer
recognize the milestones along the project time line. Upon the completion of the project
10% of the order value is kept by the customer as a performance guarantee for another
12 months. This business though working capital intensive, it provides earning visibility
to EEC.

Revenue cycle of MHE

Receive Project start, erection, completion, Performance

Tender bid
order testing & commissioning guarantee

~5 mths M1 M2 M3 M4 ~12 mths

Cumulative order realization 10% advance 40% 90% 100%

Revenue cycle 24-35 mths

*M: Milestone

Source: Company, PINC Research

3
 Business Model

The equipments manufactured by the company are sold under its own brand name. A
part of the related handling equipment is supplied to the projects segment of EEC and
the remaining part is sold to other turnkey players who are basically competitors of EEC.
The lead time is comparatively low at 5-9 months as compared to projects business.
Hence EEC can cover itself against input cost hikes by taking pricing action unless
there is a sudden increase in raw material prices.

Equipments manufactured by MHE division

Equipment Description Industry
Stacker reclaimer Stacker for stacking and wheel on boom reclaimer Steel, Power,
for handling the bulk material such as coal, lignite, cement, ports
iron ore & limestone
MHE caters to the core
sectors... Wagon tippler Unloading broad gauge open rail wagons Mining, power,
cement, steel, ports

Wagon marshalling Charging and aligning wagon on the tippler table Mining, power,
equipment cement, steel, ports

Crushers & Crushing coal, coke, cinter, moderately hard rock, Power, cement,
impactors ore, chalk etc. steel, ports

Tripper Handling coal, iron ore and lignite upto 20k mt/hr Open cast mines

Apron, vibrating & To control the flow of bulk material in the conveying Mining, power,
paddle feeders and crushing system cement, steel, ports

Screens, pulley, For belt widths upto 2,400 mm, capable of handling Mining, power,
conveying system bulk upto 20k mt/hr cement, steel, ports

Long revenue cycle, Source: Company, PINC Research

technology knowhow and With a revenue cycle of ~24-35 months, the turnkey project business is working capital
prior experience are intensive. Apart from this, other intangibles like technical knowhow and prior experience
formidable entry barriers... are critical entry barriers. While there is a stiff competition between the existing players
for winning new orders, the capital requirement and prior experience present formidable
entry barriers for the new entrants.

Typical qualification criteria Vs EEC

Prior experience of design, supply, erection and Vast experience.
EEC is prequalified for the commissioning of certain capacity CHP
upcoming orders in power
sector... Experience in design, supply, erection and EEC is the pioneer in the field of stacker
commissioning of certain number of stacker and reclaimers.
reclaimer

Average turnover in prior two years to be roughly EEC is eligible to bid for almosty all
~2x the project cost planned projects in the XI& XII plans.

Source: PINC Research

Transmission Equipment (TRE)

EEC manufactures helical gears, worm gears, Lift gears and couplings. The company’s
products can be broadly classified as standard, catalogue and customized gear boxes.
Standard gear boxes are made in regular production line and sold through the wide
chain of dealers. Catalogue gear boxes are basically standard industry products, which
are made only on receipt of order. EEC has a range of 27 types of gear boxes in this
category. Customized gear boxes are manufactured especially for a particular customer
as per the customer’s design and specifications.

4
 Business Model

Types of gears manufactured by EEC

Helical Sugar industry, MHE (Stacker reclaimers), marine
application, cooling tower in Power plants, wind mills,
Tube mills (Steel)
Worm Rolling mills (Steel), MHE (Conveyor systems)
Lift gear Elevators (for capacity of upto 16 persons)
Couplings MHE (Conveyor systems)
Source: Company
This is a technology intensive business because failure of a gear box (GB) would lead to
a complete halt in a production line. Hence GB is a critical component of any
manufacturing plant/ mechanical system. Manufacture of a gear can be classified into
5 stages: Design of profile, Casting, rough machining, heat treatment and finish
machining. Designing of a gear profile is critical as it decides the actual power
transmission. Designing capabilities imply experienced design engineers and design
softwares. Heat treatment involves body hardening, case hardening and tempering.
The case profile on the gear tooth must be within very strict dimensional and hardness
tolerances; otherwise it would lead to mechanical failure during service. Since
dimensional tolerance is vital, finish machining is done after heat treatment. This
requires CNC machines for automated and precision control with expensive cutting
elements capable of profiling steel at high hardness.
In this business all orders pay an advance of atleast 10% of the order value depending
Relatively short Revenue cycle on the customer and the size of order. The order execution period is relatively low at ~ 6
provides margin stability... months . The short execution period, technological capability and the market leadership
position enable EEC to pass on any input price fluctuations to its customers. Thus the
margins are expected to be stable as compared to the MHE division.

Operations in TRE

Casting

Boring, Internal
Order facing, component
receipt drilling & Washing turning, Hardening Grinding Finishing Despatch
tapping cutting, etc.

Billet
CNC CNC CNC
machines machines machines

6 Months

Source: Company, PINC Research

MHE and TRE divisions are synergetic and give a unique advantage to EEC. The MHE
division of EEC undertakes turnkey contracts for CHPs and is also one of the only 5
players in India who can manufacture their own equipment. Barring EEC, gear boxes
are bought out items for all other turnkey players as well as equipment manufacturers
in the MHE business. Since EEC is one of the major players in the CHP segment, the
marketing team of TRE division has the advantage of knowing the prospective customers
for the gear boxes.

5
 Demand Drivers

Industry Scenario
Coal handling plant

CHP to contribute 80-85% of Coal is a raw material for steel industry as well as coal based thermal power plants. We
the MHE revenues... expect CHP to contribute ~80-85% of the MHE division revenues in FY09/10. CHP is the
bailiwick of EEC. In a thermal power plant, a CHP feeds the boiler while in a steel plant,
a CHP feeds the sintering plant or coke ovens. The function of a CHP is to receive and
store the coal so that it can be fed continuously to the production line. In both these
industries, the production is continuous and therefore the CHP operations must maintain
the flowrate of coal in the system.
Coal can be recovered either by underground mining or open cast mining. Once the
coal is received the size reduction operations at the power plant are confined to crushing.
Coal particle size degradation occurs in transport and handling and must be taken into
account for size specifications. For pulverized coal fired boilers there is a maximum
delivery size with no limitation on the percentage of fines. The CHP is used to store,
transport and distribute coal which comes from the mine. The coal is delivered either
through a conveyor belt system or by rail or road transport. The delivered coal is unloaded
into an unloading hopper. This coal is withdrawn by a primary crusher at a certain rate,
measured in tons per hour (tph). This coal is discharged into a chute which feeds a
secondary crusher at a matching rate. The coal is then discharged on to an unloading
conveyor, which discharges the coal on to an overland conveyor and to the coal plant.
From here, the coal can be sent to the stacking conveyor or to the crusher feed conveyor.
The coal sent by stacking conveyor is converted into an active pile by a Stacker rated at
a matching capacity as the flow rate of the system. The coal from these stockpiles is then
reclaimed using a Reclaimer. The reclaimer transports the coal using a conveyor to the
crusher feed conveyor which feeds the crusher tower. Here coal passes under a magnetic
separator before being discharged into the surge bin. Surge bins are provided with
isolation gates. Coal is discharged into crushers. Each crusher reduces the coal feed
size. From the crusher tower, coal is transferred via power block feed conveyors to the
silo bays. At the power block, a diverting gate is used to discharge coal to any one of the
silo feed conveyor. Each silo feed conveyor includes a travelling tripper, which is used to
discharge coal to the silos. The flow rate must be matched in the entire system. The bulk
storage of coal at the power station is important for the continuous supply of fuel. When
coals from different sources are used, blending is required to supply the boiler with a
uniform feed of coal.
The building blocks of this system are: Conveyor systems, Crushers, Stacker reclaimer,
Traveling Trippers, Magnetic separators, belt weighers, Electric motors, PLC system,
Dumper unloading system, Dust extraction & suppression system and Ventilation system.
The exact orientation of conveyors and the type of equipment changes from plant to
plant depending on several factors like distance, topography, type of coal, etc. Thus
every system is custom made. However, the principle remains the same.
Competitive scenario & critical equipment
The parts which directly determine the efficiency of a CHP include crushers, wagon
tipplers, stackers, reclaimers, handling equipment, screens, feeders, etc.

Critical equipments/ systems of a coal handling plant (CHP)

Critical Equipment Importance in the system Manuf. / supplied by EEC?

Manufacturer of critical Crushers The output size of coal affects the

performance of CHP Yes
equipment has a pricing
Wagon Tipplers Unloading of coal cars in CHP Yes
power...
Bunker -Feeding The objective is to maintain the Yes
Conveyors bunker coal level. Yes
Stacker-reclaimer Store and feed the coal stock Yes
Source: PINC Research

6
 Demand Drivers

Thus, capability to manufacture the same increases the ability to enhance margins.
Only 5 manufacturers have capability to manufacture entire CHPs, while others are
largely project developers. Recent trend to capitalise on the buoyant demand for
mechanical BoP systems is technology tie-ups. EEC and TRF are the market leaders in
the CHP segment and account for ~50-60% of the market.

Major players in CHP segment

Company Equipment manufacture?
Elecon Yes
TRF Yes
L&T Yes
Thyssenkrupp Yes
McNally Bharat Yes
Tecpro No
FL Smidth No
Emerging players
Bateman No
Promac No
HEC No
Source: Company, PINC Research

Power
Coal would remain a dominant source of power in India. With ~55,000 MW under
construction in XI Plan, we estimate ~8,500MW to still be awarded. Additionally new
projects have been announced towards which3,000MW is yet be be awarded. If these
projects are to be completed in XI Plan, BoP systems will need to be ordered in the next
12-15 months.
Around 77,080 MW capacity of coal based thermal power plant is to be added in XII plan
and the shortage of equipment suppliers has led to an increase in gestation periods for
execution. As a result, as against an average of ~40 months, execution periods for power
projects have lengthened to ~50 months. This has led developers to advance their
ordering schedules for projects. As a result, we believe that projects expected to be
commissioned in XII Plan would need to commence ordering by FY09/10.

Rs26bn worth of orders Rs162bn worth of orders in CHP segment

expected by FY10 in the CHP CHPs account for ~5-6% of project. Coal based capacity additions of ~77,080 MW in XII
segment... Plan imply investment of ~Rs162bn in CHPs (at capex of Rs45mn/MW). Similarly, pending
orders for ~11,500 MW in XI Plan implies mandate for ~Rs26bn by FY10. We assume
that EEC quotes for ~60% of total tenders floated and with a lower market share of 30%
should enable it to garner orders worth ~Rs5bn in FY10. We assume that 70% of planned
capacity additions will be achieved and ~50% projects will be back-ended in XII Plan.
Steel
Steel capacity in India is set to surpass 50mn mt in FY09. The Ministry of Steel expects
production to reach 120mn mt by 2020. The capital expenditure on material handling
equipment is about 5% of the total capex for new capacity addition.
The ongoing global scenario is having its impact on the steel prices. Major steel
producers all over the world are cutting down production. With the fall in steel prices,
Further capacity expansion
we expect a temporary lull in new capacity addition for some time to come and hence
unlikely in FY09...
we have assumed that there would be no fresh order inflow in FY09 and H1 of FY10. We
will review the situation when there is more clarity.

7
 Demand Drivers

Order book estimates for MHE (Rs bn)

FY07 FY08 FY09E FY10E
Opening order book 4.9 4.1 11.7 11.4
New orders 3.7 12.3 6.6 5.2
Sales 4.4 4.7 6.9 9.4
Closing order book 4.1 11.7 11.4 7.1
Source: PINC Research
Industrial gears
Gear industry can be classified into 4 segments viz: Automotive, industrial, marine and
EEC is the leader with 26% aerospace. The global industry is ~Rs2,500bn. Automotive sector is by far the biggest
share in the domestic segment with a share of 75%. Industrial gears segment is second largest and accounts
market... ~8-10%. The domestic industrial gear industry is ~7.5% of the global industry or Rs14bn.
EEC is a market leader with a share of 26% followed by Shanthi gears at 17%.

Domestic market share structure of gears (FY08)

Premium
NAW
17%
6%
Flender
10%

Others
24%

Shanthi
17%

EEC
26%
Source: Company

The growth of this industry is driven by industrial activity. In the present situation we
Bulk of new orders expected expect a temporary slowdown in capacity additions in steel, sugar and cement industries.
in MHE industry of power Thus the growth would be driven by the power sector investments of the MHE segment.
sector... In this sector, EEC is the biggest player followed by Flender. These two players combined
account for ~90% of this market. Addition of ~11,500MW under the XI plan implies an
investment of Rs26bn in CHP. This leads to a market opportunity of ~Rs7bn for gear
boxes in this segment. With a share of ~60% in this segment, we expect EEC to account
for orders worth ~Rs4bn over FY09-10 from power sector alone. The share of MHE
segment in the order book was 22% in H1FY09. We expect this to increase to ~34% for
FY09 and 50% in FY10 as the new orders from other sectors dry up.

Order book estimates for TRE (Rs bn)

FY08 FY09E FY10E
Opening order book 1 1.1 1.3
New orders 3.9 4.4 4.8
Sales 3.8 4.1 4.6
Closing order book 1.1 1.3 1.4
Source: PINC Research

There have been numerous developments in the areas of manufacturing process,

material, design and quality control. Some important developments are Hard Gear
Finishing using CNC machines, cold Rolling of gears, powder Metallurgy process, CAD
for optimization, minimum weight gears, acoustic intensity instruments for noise
measurement etc. EEC employs CNC machines for all the machining operations.
It is the first industrial gear manufacturing company in India to get ISO 9000 certification
in 1994.

8
 Industry Scenario

Wind mill
This business is based on two segments: wind mill farms (WMF) and wind turbine
generators (WTG). WMF involves development of windfarms with the entire necessary
infrastructure, including land, civil work, electrical work, wind turbines, transmission
lines, approach roads, etc. WTG segment involves assembling a wind mill at the site.
The investment outlay for a windfarm is ~Rs55-60mn/MW while the cost of WTG is
~Rs30-45mn. The cost of a WTG gear box varies between Rs4-6mn depending on the
Untapped potential of capacity rating. Out of the estimated wind power potential in India of 45,195 MW, only
Rs1,290bn in windmill 10,793 MW has been installed. The untapped potential of 34,402 MW corresponds to a
farms... market of Rs2,064bn for wind farms, Rs1,290bn for WTGs and Rs395bn for WTG gear
boxes.

Trend in Windpower Capacity addition

Annual addition (LHS, MW) Total capacity (LHS, MW) Annual inv estment (RHS, Rs bn)

11,750 685

9,400
515
7,050
345
4,700

175
2,350

- 5
FY03 FY04 FY05 FY06 FY07 FY08

Source: Indiastat, IWTMA, PINC Research

The growth drivers are tax benefits, short pay back period and low incremental cost per
unit. The most attractive benefits include upto 30% Govt. subsidy on the initial outlay
With pressure on bottom line and a depreciation benefit of 80% in the first year of operation. Nearly 95% of investments
and impending change in come from the private sector with most of the plants running at an efficiency of 10-15%.
Govt. policies, windmill This has led the Govt. to review the terms of the benefits and link them to the actual
demand could be under output. With the slowdown in growth and the user industry experiencing pressure on
pressure... bottom line, we expect wind mill market growth to slacken in FY09-10. The future growth
rate will depend on the Government policies for wind power. After the change in policies,
technological and quality superiority would be the biggest entry barriers. Thus, the
trend would be to have technical collaborations and quality certifications.
Suzlon is the biggest player in the domestic windmill industry with more than 60%
market share. While EEC has ISO certification for the TRE division, it is not yet certified
for the windfarm business. Approval fromthe Ministry of New and Renewable Energy
Sources (MNES) will enable it to enter in the domestic market where it has already
supplied 6 WTGs in Gujarat and Maharashtra. However ISO certification would be needed
for the global markets. EEC has technology tie up in 600KW category and is in talks with
a German company for 1-2 MW category.
Turbines and the gear box are critical components of the WTG assembly. EEC
manufactures the gear boxes in house, sources the turbine blades from L. M. Glass fibre,
Banglore and the assembly is done on site. We expect EEC to bid aggressively as it is a
re-entrant in the windfarm business. However, the weakened investment sentiment
globally may prevent any significant order flow. We have not considered any contribution
from this segment due to uncertainty in bagging orders for the same.

9
 Our View

MNES approved players in windmill industry

Indian Manufacturers Foreign Capacity Third Party
with Addresses Collaborators (KW) Certification (ISO - 9000)
M/s Vestas Wind Wholly owned 750 Yes
Technology India subsidiary of Vestas 950
Private Limited group, Denmark. 1,650
Elecon Engineering Turbowinds, n.v., 600 No
Company Ltd., Belgium.
Enercon (India) Ltd., Enercon GmbH, 600 Yes
Germany 800
GE Wind Energy INDIA, None 1,500 No
M/s Pioneer Wincon None 250 Yes
Private Ltd.
Suzlon Energy Ltd., Suzlon Energy Gmbh. 1,000 Yes
Germany
1,250
1,500
2,100
350
600
M/s Southern Wind None 225 Yes
Farms Limited
Source: IWTMA

INVESTMENT ARGUMENT
Strong order book
Robust order book imparts EEC has an unexecuted order book of ~Rs18.4bn with bulk of the orders executable over
confidence on future 24-30 months. The company has orders worth~Rs30bn in the pipeline. In the present
earnings... slow down situation, 60% share of Govt. contracts in the order book and order mobilization

Major orders with EEC

Month of Customer Order Description Order Exp. Month of
award value (Rs bn) completion
Jul-08 Brahmani Steel Supply of plant & equipment for 4 Jan-11
raw material handling system
Jul-07 Damodar Valley Design, supply, erection & 3.5 Sep-09
Corporation commissioning of CHP for Mejia
Power project
Apr-07 NTPC Design, supply, erection & 2.2 Jan-10
commissioning of CHP for Dadri
Power project
Source: Company

on all other major contracts including the order from Brahmani steel provides confidence
on the future earnings.
Raw materials
75% of EEC’s order book comprises of fixed price contracts with steel constituting ~70%
of the raw material cost. EEC sources most of the raw material from the domestic steel
companies, while that for the gear division is largely imported. In the last six months,
steel prices have fallen by ~35-40%. With an average inventory of ~180 days, the benefit
of lower raw material cost should be witnessed from Q3/Q4FY09 onwards.

10
 Valuations and Recommendation

RISKS & CONCERNS

High leverage eating into the net profit margin remains a major concern. We expect
high interest cost to continue till FY10. This is mainly due to the capex undertaken by
EEC in wind mill gearbox business. Once the company establishes its credentials in
wind mills, the NPM should expand. With the present high interest costs we expect the
company to defer the capex of Rs500mn on MHE and windmill gearboxes.
EEC’s performance is directly determined by the capex cycle in power and steel sectors.
While the current order book should enable it to sustain growth in FY09 and FY10, any
delays or deferment in financial closures and implementation of planned capex will
impact performance.
Windmill business
The company has a planned capex of Rs1bn by FY10 including ~Rs380mn, which it
invested in the new windmill gear box facility in Anand. While the present Government
policies give enough incentive to the private sector corporate to invest in the wind mills,
we have not incorporated this revenue in our conservative estimates.
Promoter group companies
EEC sources ~20-25% of components (incl sub-contracting exp.) from its promoter group
companies and has been doing so for the past many years on commercial terms. While
EEC has maintained OPM as compared to its peers, greater clarity into the group
structure and related party transactions is desired.
OUTLOOK
We expect MHE to grow by 49% during FY09 with sales of Rs6.9bn and TRE contributing
Rs4.5bn to the net sales of Rs9.9bn. A chunk of orders would be completed in FY10
leading to a 26% growth in net sales to Rs12.5bn. We expect OPM to expand in FY09 to
16.8% as a result of lower input costs. The ramp up in wind mills should help boost
revenues. While interest charges are expected to impact the bottom line, we estimate
consolidated net profits to grow by 7% in FY09 to Rs720mn and edge up 33% in FY10 to
Rs968mn.
VALUATIONS AND RECOMMENDATION
We initiate coverage with a The CMP of Rs43 discounts FY10E EPS of Rs10.4 by 4.2x. The stock trades at an EV/ Sales
‘BUY’ recommendation... of 0.8x and EV/ EBIDTA of 4.6x FY10 estimates. We value EEC at ~5.7x FY10E EPS and
initiate coverage with a ‘BUY’ recommendation with a 15-month price target of Rs60 as
it commences execution of its order book.

Peer Comparision
Mc Nally Bharat Elecon Engg TRF (Consolidated)
FY08 FY09E FY10E FY08 FY09E FY10E FY08 FY09E FY10E
Sales (Rs mn) 5,546 8,650 12,800 8,264 9,904 12,548 4,463 6,757 8,445
Growth (%) 7.4 56.0 48.0 14.7 19.8 26.7 28.5 51.4 25.0
OPM (%) 7.7 8.1 7.9 15.8 16.8 16.7 11.5 9.3 9.9
PAT (Rs mn) 225 276 487 672 720 968 297 362 530
Growth (%) 33.9 22.7 76.4 22.4 7.1 34.5 46.7 21.8 46.3
DER (x) 0.4 1.0 0.7 1.7 1.5 1.4 0.5 0.7 0.5
ROCE (%) 20.3 22.4 23.0 22.3 22.3 23.0 44.0 33.1 33.1
RONW (%) 17.6 14.2 20.0 31.7 26.7 27.7 40.1 33.6 36.3
Rec days 246 249 212 217 217 217 203 182 176
Inv days 19 30 23 167 172 168 92 77 66
P/Bv (x) 1.0 0.8 0.7 1.7 1.3 1.0 1.8 1.3 1.0
P/E (x) 6.9 6.1 3.5 6.0 5.6 4.2 5.5 4.5 3.1
EV/EBIDTA (x) 3.4 4.3 3.0 6.2 5.2 4.6 3.8 3.7 2.8
Source: PINC Research

11
 Financial results for the quarter & half year ended 30 September 2008
Quarter Ended Half Year Ended Year Ended
Particulars (Rs Mn)
30/09/08 30/09/07 Gr % 30/09/08 30/09/07 Gr % 31/03/08

Net Sales 2,522 1,837 37.3 4,209 3,133 (19.5) 8,264

Total Expenditure 2,139 1,531 39.7 3,538 2,618 35.2 6,959

(Inc)/Dec in stock (76) 219 (402) 49 (471)

Consumption of raw materials 1,778 984 80.6 3,210 1,998 60.6 5,991

Employee Cost 127 100 26.9 207 166 24.9 343

Other expenditure 310 228 36.1 524 404 29.6 1,097

Operating Profit 383 306 25.0 670 516 30.0 1,305

Other Income 26 32 (18.1) 35 58 (38.5) 98

EBDIT 409 338 21.0 706 573 23.1 1,403

Interest (Net) 114 56 105.7 184 101 81.7 274

Depreciation 51 36 43.2 95 70 36.8 142

PBT 244 247 (1.3) 427 402 6.0 987

Provision for current tax 59 65 102 109 293

Provision for deferred tax 24 9 43 16 16

Provision for FBT 1 - 2 1 5

PAT before extra items 160 172 (7.1) 280 276 1.2 672

Net Profits 160 172 (7.1) 280 276 1.2 120

Paid-up Eq. Cap (F.V of Rs 2 per share) 186 62 186 62 186

Reserves(excl rev res) - - - - 2,182

Basic EPS For the period (Rs) 1.7 5.6 3.0 8.9 7.2

Fully dil. EPS for the Period(Rs) 1.7 1.9 3.0 3.0 7.2

Book Value (Rs) 2 10 2 10 127

OPM(%) 15.2 16.7 (8.9) 15.9 16.46 (3.2) 15.8

NPM(%) 6 9.4 (32.3) 7 8.8 (24.6) 8.1

Expenditure As % of Net Sales

Raw material 67.5 65.5 3.1 66.7 65.3 2.1 66.8

Employee Cost 5.0 5.5 (7.5) 4.9 5.3 (7.0) 4.1

Other expenditure 12.3 12.4 (0.9) 12.4 12.9 (3.5) 13.3

Median PE v/s Daily PE PE Band

Daily PE Median PE 340
64

255
48

24x
32 170
19x
14x
16 85
9x
4x
0 0
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09

12
 Segmentwise results for the quarter & half year ended 30 September 2008
Quarter Ended Half Year Ended Year Ended
Particulars (Rs Mn)
30/09/08 30/09/07 Gr % 30/09/08 30/09/07 Gr % 31/03/08

Segment Revenues
MHE 1,430 983 46 2,419 1,622 49 4,705
Transmission equip 1,144 993 15 1,897 1,699 12 3,891
Gross Sales 2,574 1,975 30 4,316 3,321 30 8,596
Less: Inter segment revenue 52 138 107 188 332
Net Sales 2,522 1,837 12 4,209 3,133 34 8,264

Segment PBIT
MHE 173 119 46 289 193 50 627
Transmission equip 217 203 7 379 350 8 793
Total PBIT 390 322 21.2 667 543 23.0 1,420
Less: Interest 114 56 184 101 274
Total PBT after exc items 276 266 3.6 484 442 9.5 1,146
Less: Net other unallocable expenses 32 19 57 39 159
Exceptional Items - - - - -
PBT 244 247 (1.3) 427 402 6.0 987

Capital Employed
MHE 3,786 2,490 3,786 2,490 5,913
Transmission equip 3,716 3,065 3,716 3,065 4,114
Capital Employed in segmemnt 7,502 5,555 7,502 5,555 10,027

PBIT Margin (%)

MHE 12.1 12.1 11.9 11.9 13.3
Transmission equip 19.0 20.5 15.7 20.6 20.4
Total 15.2 16.3 15.5 16.3 16.5

ROCE (%)
MHE 18.3 19.1 15.3 31.0 42.4
Transmission equip 23.4 26.5 20.4 45.7 77.1
Total 20.8 23.2 35.6 39.1 56.7

Net Sales Mix (%)

MHE 57 53 57.5 51.8 56.9
Transmission equip 45 54 45.1 54.2 47.1
Inter segment 2 8 2.5 6.0 4.0
Total 100 100 100.0 100.0 100.0

PBIT Mix (%)

MHE 44 37 43.3 35.5 44.2
Transmission equip 56 63 56.7 64.5 55.8
Total 100 100 100.0 100.0 100.0

13
 Year Ended March (Figures in Rs mn)

Income Statement 2005 2006 2007 2008 2009E 2010E

Revenues 2,777 4,425 7,206 8,264 9,904 12,548

Growth (%) 72.7 175.1 62.9 14.7 19.8 26.7

Total Expenditure 2,398 3,828 6,106 6,959 8,243 10,456

Operating Profit 379 597 1,101 1,305 1,661 2,092

OPM (%) 13.6 13.5 15.3 15.8 16.8 16.7

Growth (%) 182.2 344.2 84.5 18.6 27.2 26.0

Other income 31 83 82 98 117 169

EBIDT 410 679 1,183 1,403 1,778 2,261

(-) Interest 93 140 194 274 541 608

(-) Depreciation 82 94 122 142 180 231

PBT & E/O items 174 410 844 987 1,057 1,421

(-) Tax provision 74 131 295 315 337 453

Net Profits 100 279 549 672 720 968

Growth (%) 362.7 177.8 96.9 22.4 7.1 34.5

Fully diluted Eq. sh. O/s (mn no) 5.6 5.7 30.9 92.9 92.9 92.9

Book Value (Rs) 7.9 11.1 20.2 25.5 32.7 42.5

Basic EPS (Rs) 17.8 48.9 17.8 7.2 7.8 10.4

Diluted EPS (Rs) 1.1 3.0 5.9 7.2 7.8 10.4

Balance Sheet 2005 2006 2007 2008 2009E 2010E

Equity Share Capital 56 57 62 186 186 186

Reserves & Surplus 677 970 1,817 2,182 2,848 3,762

Net worth 733 1,027 1,879 2,367 3,034 3,948

Total Debt 961 2,057 2,837 4,093 4,675 5,666

Net Deferred Tax 123 121 168 171 171 171

Capital Employed 1,818 3,205 4,883 6,631 7,879 9,786

Fixed Assets 621 952 1,267 1,931 2,241 2,660

Net current assets 1,094 2,167 3,531 4,596 5,534 7,021

Investments 56 63 80 95 95 95

Misc exp. 47 23 - - - -

Deferred expenditure - - 4 10 10 10

Total Assets 1,818 3,205 4,883 6,631 7,879 9,786

14
 Year Ended March (Figures in Rs mn)

Cash Flow Statement 2005 2006 2007 2008 2009E 2010E

PBT & Extraord. items 323 583 1,039 1,263 1,597 2,029
Depreciation 82 94 122 142 180 231

Interest & dividend inc. 7 13 25 17 117 169

Tax paid 16 152 252 324 337 453

(Inc)/Dec in working capital (259) (910) (1,500) (1,259) (964) (1,488)

Other Items (97) (8) (6) (8) - -

Cash from operations 26 (406) (622) (202) 359 150

Net Purchanse of fixed assets (243) (424) (416) (805) (491) (650)

Net Purchase of investments 1 (9) (18) (5) - -

Int/Div Received 7 16 25 17 117 169

Cash from investing activities (235) (417) (408) (793) (373) (481)

Issue of equity capital - 45 358 5 - -

Net Long term borrowing from bank 101 280 (168) 559 345 98

Net Short term borrowing 172 814 948 700 237 894

Dividend paid 6 16 34 54 53 53

Interest Paid - 138 193 267 541 608

Income tax paid on dividend - - - - 1 2

Cash from financing activities 266 985 910 943 (12) 330

Inc/Dec. in cash 58 162 (120) (52) (26) (1)

Key Ratios 2005 2006 2007 2008 2009E 2010E

OPM (%) 13.6 13.5 15.3 15.8 16.8 16.7

ROACE (%) 20.8 26.4 26.7 22.3 22.3 23.0

ROANW (%) 14.5 33.2 37.8 31.7 26.7 27.7

Sales/Total Assets (x) 1.7 1.4 1.6 1.3 1.3 1.3

Debt:Equity (x) 1.3 2.0 1.5 1.7 1.5 1.4

Current Ratio (x) 1.7 2.0 2.4 2.3 2.3 2.3

Debtors (days) 137.1 176.7 196.5 217.4 217.0 217.4

Inventory (days) 243.3 199.9 126.1 167.0 172.2 168.0

Net working capital (days) 68.2 117.7 170.4 202.5 201.6 202.4

EV/Sales (x) 0.4 0.5 0.5 1.0 0.9 0.8

EV/EBIDT (x) 3.0 3.4 3.7 6.2 5.2 4.6

P/E (x) 2.4 0.9 2.4 6.0 5.6 4.2

P/BV (x) 5.5 3.9 2.1 1.7 1.3 1.0

15
 T E A M

EQUITY DESK
Gealgeo V. Alankara Head - Institutional Sales [email protected] 91-22-6618 6466

Sailav Kaji Head Derivatives & Strategist [email protected] 91-22-6618 6344

SALES
Anil Chaurasia [email protected] 91-22-6618 6483

Alok Doshi [email protected] 91-22-6618 6484

Sundeep Bhat [email protected] 91-22-6618 6486

Gagan Borana [email protected] 91-22-6618 6485

DEALING
Chandrakant Ware [email protected] 91-22-6618 6327

Ashok Savla [email protected] 91-22-6618 6400

Raju Bhavsar [email protected] 91-22-6618 6301

Manoj Parmar [email protected] 91-22-6618 6326

Shivkumar R [email protected] 91-22-6618 6329

Hasmukh D. Prajapati [email protected] 91-22-6618 6325

Pratiksha Shah [email protected] 91-22-6618 6329

DIRECTORS
Gaurang Gandhi [email protected] 91-22-6618 6400

Hemang Gandhi [email protected] 91-22-6618 6400

Ketan Gandhi [email protected] 91-22-6618 6400

COMPLIANCE
Rakesh Bhatia Head Compliance [email protected] 91-22-6618 6400

16
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