Buy Elecon Engineering Ltd For Target Rs. 750 By Emkay Global Financial Services Ltd
Strong order momentum offsets mixed Q2 performance
We maintain BUY on Elecon Engineering Company (EECL), with TP of Rs750. EECL reported a mixed set of results for Q2FY26, with consolidated revenue/EBITDA/PAT growing 14%/12%/flat YoY. EBITDA margin was lower by 37bps YoY, on account of unfavorable mix in the gear business. The flat PAT growth was owing to increase in depreciation on new capacity commissioning and higher tax rate. On a positive note, order inflow jumped up 28% YoY to Rs6.9bn, taking the order backlog to Rs12.3bn, up 27% YoY. The management indicated a strong enquiry pipeline across the business and exuded confidence in achieving Rs26.5bn revenue for FY26 as against 1HFY26 reported revenue of Rs11bn. Besides the strong domestic demand, we expect exports to see a meaningful recovery on the back of increased focus on key geographies, such as Europe, Middle East, Americas, Nordic countries, and Russia. We estimate revenue and PAT CAGR at 21% and 24%, respectively, over FY25-28.
Q2FY26 results, a mixed bag
The company saw an overall mixed set of results, with revenue coming in line with and EBITDA margin lower than estimates. Revenue was up 14% YoY at Rs5.8bn, led by Gear business growth of 11% YoY, and a strong 32% YoY growth in MHE. EBITDA margin declined by 37bps YoY to 21.7%, mainly due to weakness in the Gear business on account of an unfavorable mix and higher staff cost due to commissioning of new capacity. However, MHE margins expanded by 137bps YoY which partially restricted the impact. We expect margin on full-year basis to log at around 25%.
Order inflow going strong
EECL witnessed 28% YoY growth in order inflow at Rs6.9bn, mainly led by MHE up 84% YoY and Gear business up 15% YoY. The growth has mainly come from domestic markets – from key segments like Power, Steel, and Cement. The strong order book resulted in 27% YoY jump in the order backlog at Rs12.3 bn.
Middle East geopolitical issues impact exports
Q2FY26 exports were flat at Rs1.2bn (21% of sales as against 24% in Q2FY25). The management highlighted that geopolitical tensions in the Middle East impacted exports, which are likely to see a recovery in Q3 given the strong enquiry pipeline. We believe EECL’s geographical diversification mitigates risks associated with the cyclical nature of the domestic market. It targets increasing exports’ contribution to 50% by FY30.
View and valuation
EECL’s leadership in gears, strong export momentum, and robust recovery in the MHE segment position it to be a key beneficiary of India’s industrial and infrastructure cycle as well as global opportunities. At the CMP, the stock trades at ~18.4 P/E of Sep-27E EPS, which appears attractive.
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