Add Elecon Engineering Ltd for the Target 550 by Emkay Global Financial Services Ltd
We assume coverage on Elecon Engineering Company (ELCN) and downgrade it to ADD from Buy. ELCN’s 1QFY27 operational performance was broadly in line with our estimates, with revenue/EBITDA/PAT registering 12%/4%/1% yoy growth, respectively. However, despite the healthy revenue growth, ELCN delivered muted profitability growth, impacted by adverse revenue mix and input cost pressure in the quarter. The demand environment remains healthy, with ELCN reporting robust order inflow of Rs7.6bn (+23% yoy) leading to a strong order backlog of Rs15.2bn (+37% yoy). However, given the softness in project execution on account of the prevailing macro headwind, the management has provided low double-digit revenue growth guidance for FY27 despite its healthy order book position and stable margins yoy. To factor in the near-term softness in order backlog execution, we cut our FY27/28/29 estimates by 10%/9%/6%, respectively. We revise down our TP by 8.3% to Rs550 from Rs600, valuing the stock at 25x its FY28E EPS.
Management gives a moderate FY27 guidance, despite healthy order backlog
ELCN management provided low double-digit revenue growth guidance with stable operating margins. This is despite the healthy, all-time-high order backlog, which the company has developed, given near-term softness in project execution from the clients’ end. ELCN, however, believes medium-term growth prospects in both segments are strong and targets reaching Rs50bn revenue by FY30
Transmission Equipment - Healthy start to FY27
ELCN’s Transmission Equipment division delivered strong performance, with revenue at Rs4.2bn (+16% yoy) and EBIT of Rs745mn (+15% yoy). Revenue growth was supported by improved execution and healthy demand across domestic and international markets, while EBIT margin declined by 30bps yoy to 17.9% on account of elevated input costs prevailing during the quarter. ELCN reported healthy order inflow growth of 19% yoy to Rs5.7bn, leading to a robust order backlog position of Rs10.4bn (+47% yoy) granting strong near-term revenue visibility. Given the strong order backlog and improved business enquiries across key end-markets, we expect the transmission equipment division to revert to the double-digit growth trajectory in FY27, after a muted FY25/26.
MHE - Project delays, cost pressure play spoilsport
The MHE division reported a marginal revenue decline of 1.5% YoY, at Rs1.1bn, with EBIT margin of 25.6% (vs 33.5% for 1QFY26). The margin decline was attributed to the adverse sale mix, increased input cost pressure, and low throughput during the quarter. The management indicated business enquiries remaining strong from the power, steel, and cement industries; this, along with the strong order backlog (Rs4.8bn), grants us confidence about this division’s growth prospects scaling-up in FY28.
View and valuation
To factor in the near-term softness in order backlog execution, we cut our FY27/28/29 estimates by 10%/9%/6%, respectively. We downgrade the stock to ADD from Buy, while revising down our TP by 8.3% to Rs550 from Rs600, valuing ELCN at 25x its FY28E EPS.
For More Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354
