Buy Elecon Engineering Ltd for the Target Rs 600 by Emkay Global Financial Services Ltd
Key takeaways from Elecon’s FY26 annual report:
i) Order backlog at ~Rs13bn is well-diversified, supported by strong long-term demand drivers across key end-user industries such as power, steel, cement, mining, and material handling equipment (MHE).
ii) The company maintains a strong financial position, with net cash increasing to Rs7bn in FY26 from Rs5.5bn in FY25, backed by healthy operating cash flow generation, averaging Rs3–3.5bn annually over the past two years. This robust balance sheet provides adequate flexibility to pursue future growth opportunities and strategic investments.
iii) During the year, Elecon recognized a one-time goodwill impairment charge of ~Rs1bn related to the acquisitions of Benzlers and Radicon undertaken in FY11, which impacted reported profitability.
iv) On the international front, Elecon further strengthened its global presence by incorporating a subsidiary in Mexico to expand its footprint and better serve customers in the Latin American market.
v) The management has also outlined a capex program of ~Rs4bn over FY26– 28, focused on capacity enhancement, modernization, and operational improvements, with ~Rs1bn already invested.
Gear division
The division (72% of consolidated revenue in FY26) reported revenue of ~Rs17bn (-3.6% YoY). EBIT margin moderated to 18.8% (vs 24.7% in FY25), primarily due to deferred customer deliveries, delays in order conversion across certain segments, and supply chain disruptions during the year. Despite these near-term challenges, underlying demand across the division’s key end-markets remains robust. Order inflows increased 11% YoY to Rs19.9bn, driving order backlog to Rs8.9bn – a strong 53% YoY increase. With defense-related orders expected to materialize in the near term and inquiry levels remaining healthy across industries, the division is well-positioned for recovery and growth, and we expect 16.3% revenue CAGR over FY26–29E.
MHE division
The division (28% of consolidated revenue in FY26) continued to demonstrate strong growth momentum, delivering revenue CAGR of 38% over FY22–26. In FY26, revenue (adjusted for arbitration income) rose 38% YoY to Rs6.4bn. The division maintained healthy profitability, with adjusted EBIT margin of 24.7%, supported by a balanced revenue mix between equipment sales and higher-margin aftermarket services. Order execution remained robust, while the division continued to secure new orders consistently in the domestic market. The management anticipates increased order inflows from international markets in the coming years. Order inflow for FY26 grew 14.2% YoY to Rs6.7bn, resulting in an order backlog of ~Rs4bn. Backed by strong execution capabilities, a healthy order pipeline, and expanding market opportunities, we expect the MHE division to deliver revenue CAGR of 26.5% over FY26–29E, while sustaining EBIT margin at 22–25%.
View and valuation
Looking ahead, Elecon's growth strategy is centered on expanding the contribution of international operations through
i) Deeper engagement with global OEMs
ii) Strengthening its product portfolio through sustained investments in research and development
iii) Increasing the share of recurring revenue by scaling its aftermarket and service business. These strategic initiatives, supported by the company's strong balance sheet and diversified order book, provide a solid foundation for long-term growth. Given the prevailing geopolitical uncertainties, the management has refrained from providing forward guidance. Nevertheless, supported by a healthy order backlog of ~Rs13bn and robust inquiry pipeline across key industries, we expect Elecon to deliver revenue/EPS CAGR of 19%/26%, respectively, over FY26–FY29E. Accordingly, we maintain BUY and TP of Rs600, based on 25x Mar-28E EPS.
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