Elecon Engineering’s strong margin trend continues. It is a ‘tactical BUY’ for target price of Rs 874: Nuvama

The strong margin trend continues

• ELCN delivered a strong operating performance in Q2FY24.

• The gear business clocked strong domestic demand, even as exports were subdued. The MHE division delivered a better margin, led by a better product mix, with a higher share of after-sales services.

• It left unchanged its revenue guidance of INR2,000cr for FY24. ELCN had guided at an EBITDA margin of 22%. However, having delivered 24.3% in H1, it feels that an EBITDA margin of over 23% is sustainable going forward.

• We reaffirm our ‘tactical BUY’ rating, but raise the TP to INR874 (from INR777), valuing the stock at 25x FY25E P/E (from 24x FY25E P/E). We have tweaked our FY24 and FY25 estimates to account for a better margin performance. The stock is trading at 26x/22x FY24E/FY25E P/E.

Strong operating performance

Strong execution in gears in the domestic segment (up 33% YoY) and continued turnaround in the MHE division (up 12%) drove robust earnings in Q2FY24. EBITDA grew 28% YoY to INR119cr (est. INR107cr), aided by operating leverage and a better product mix. PAT grew 37% YoY to INR89cr (est. INR74cr) led by a strong operating performance and higher other income of ~INR13cr (with ~INR6cr of one-time revenue).

Domestic gear segment in the driving seat; growth in subsidiaries muted

ELCN’s order book stood robust at INR738cr (down 7% QoQ). It comprises orders worth INR615cr/INR138cr (down 15%/11% QoQ) from the gears/MHE division. It won an INR51cr order in the MHE division in Q3, which will help achieve its revenue target of INR300cr for this division in FY24 (INR116cr in H1). Standalone revenue from the gears segment grew 33% YoY, while implied subsidiary sales growth was -6%, with a slower order booking due to an uncertain geopolitical environment. Revenue of ~INR20cr in the export segment spilled over into Q3FY24.

Maintains FY24 revenue guidance at INR2,000cr

The management maintained its consolidated revenue guidance of INR2,000cr for FY24 (INR1,700cr/INR300cr from the gears/MHE segment). ELCN has signed deals with six OEMs in Europe in H1 (likely annual business volume of ~EUR5.5mn). The prototype is under development and is to be supplied to OEMs by Q3FY24. Commercial production is expected to start from FY25. Scaling of revenue from subsidiaries is key to ELCN’s growth, and the management is focused on making inroads with OEMs.

Reaffirm ‘tactical BUY’ ELCN’s strong execution and delivery is in line with our thesis. In India, capex demand is robust, with the company riding the wave of sector tailwinds. However, scaling up of revenue from subsidiariesis a concern. ELCN needs its subsidiaries to fire to fuel its next leg of growth. We have tweaked our annual estimates to account for a better margin performance. We reaffirm our ‘tactical BUY’ rating with a revised TP of INR874 (from INR777), valuing the stock at 25x FY25E P/E (from 24x FY25E P/E).