Elecon Engineering Company Ltd
19/03/2015 Initiating Coverage
Elecon Engineering Company (EECL) is one of the largest Power Transmission Equipment (PTE) and Material Handling Equipment (MHE) manufacturing company in India. It has a leadership position in the PTE business with a market share of ~30%. Its MHE business is through its 60.48% subsidiary - Elecon EPC Projects (promoters of EECL hold the balance share in the company). EECL acquired the Benzlers-Radicon group in 2010 from David Brown, thereby getting a firm footing in the European and American markets. The Benzlers-Radicon group accounted for ~24.3% of the overall sales of the company in FY2014 with the rest being equally split between the standalone PTE business and the MHE business. Better times ahead for both MHE and PTE businesses: Owing to disappointing operating environment over the past three years, the company, like many other players in the industry, saw disappointing or even negative growth rate. We expect the MHE business to benefit from the revival in capex in several core sectors in the economy, which it caters to. As far as the standalone PTE business is concerned, it has managed to weather the storm, and has been able to maintain a steady performance, largely due to its leadership position and diverse user base. The PTE business currently operates at utilization levels of 40-45% and is in a sweet spot in terms of capitalizing on the imminent improvement in demand. Working capital situation to improve: The working capital cycle (excluding cash) witnessed a sharp jump in FY2014 to 194 days from 150 days in FY2013. EECL’s working capital cycle days are expected to come down to 166 days in FY2017E, broadly in-line with its prior average, on account of revenue growth along with lower inventory and lower expenditure. Additionally, there is no requirement of additional capex, which will result in a better asset turnover ratio. Outlook and Valuation: We expect ELCL’s consolidated revenues to post a CAGR of 10.7% over FY2105E-17E to Rs1,521cr. Recovery in the MHE business margins will result in EBITDA margins expanding by 230bp over FY2015E-17E to 14.6%. Consequently, the net profit is expected to improve to Rs66cr in FY2017E. At the current market price, the stock is trading at 11.3x its FY2017E earnings. We believe that these valuations are attractive considering its 5-year and 3-year median P/E of 16.7x and 17.9x respectively. We initiate coverage on the company with a Buy rating and with a target price of Rs84 based on a target PE of 14.0x.
   Action Construction Equipments Ltd
18/03/2015 Initiating Coverage
Action Construction Equipment (ACE) is among the leading crane manufacturers in the Indian construction equipment (CE) market with a share of 35% in the Pick and Carry crane market. ACE’s product portfolio comprises of a range of Cranes, Backhoe Loaders and Forklifts, Tractors, and Harvesters. Business set to turn-around: Recent announcements in the Union Budget 2015-16 strengthen our view that Cranes, CE, and Material Handling (MH) business segments are up for revival. Considering ACE’s strong market positioning, wide pan-India dealership network, long-standing relationship with customers who give repeat business, and wide range of product portfolio, we expect segment volumes and blended realization to catch-up from here-on. We expect ACE to post an18.8% top-line CAGR during FY2015-17E to Rs838.5cr. Demand recovery, coupled with cost cutting initiatives at the floor level, higher localization initiatives, focus on lowering imports, and expected decline in Mild Steel (forms biggest raw material component) prices, strengthens our view that ACE is well positioned to absorb fixed costs and experience margin expansion. Accordingly, EBITDA margins of the company would expand from 3.0% in FY2015E to 8.2% in FY2017E. Since its last round of capex in FY2011-12, with the onset of infra capex down-cycle, poor demand led Cranes, CE and MH division plants to run at sub-50% capacity utilization levels. ACE’s Management highlighted that there is no need for the company to pursue any major capex, until their revenues cross Rs1,200cr. In absence of any major capex, we expect entire benefits of EBITDA margin expansion to trickle down to PAT level (PAT margins to expand from 0.9% in FY2015E to 4.6% in FY2017E). In-line with strong growth in profitability and improved cash flow generating potential, RoEs would improve from 1.7% in FY2015E to 11.3% in FY2017E. Compelling valuations at current levels: We are optimistic that ACE would be able to maintain its numero uno position in the domestic Pick and Carry cranes segment. Further, the company’s wide range of product offerings, wide pan-India distribution network, and recent cost cutting initiatives, put ACE in a strong position. Given the backdrop of strong earnings growth and RoE expansion, we assign a P/E multiple of 14.0x to our FY2017E EPS of Rs3.9 and arrive at a price target of Rs54 for the stock. Being a turnaround story, we alternatively checked ACE’s stock on EV/sales multiple. At target P/E multiple of 14.0x, the implied FY2017E EV/sales multiple comes in at 0.75x, which is comforting. Given the 28.4% upside from the current market price of the stock, we initiate coverage on ACE with a BUY recommendation.
   Siyaram Silk Mills Ltd
17/03/2015 Company Updates
Siyaram Silk Mills (SSML) has reported lower-than-estimated numbers for 3QFY2015. Its net sales increased by 7.2% yoy to Rs330cr, lower than our estimate of Rs367cr. The OPM improved on a yoy basis to 10.5%, however lower than our estimate of 10.7%. The net profit declined by 7.8% yoy to Rs13cr, lower than our estimates of Rs19cr, led by higher interest cost, depreciation and tax rate. Sales growth to moderate: In FY2014, SSML reported a strong 25.2% growth in its net sales due to introduction of new brands and segments. SSML had launched two new premium cotton brands – Zenesis and Moretti, ventured into women’s segment, and penetrated further into new growth areas like cotton shirting, linen fabrics etc. However, in 9MFY2015, the sales growth has moderated due to dampened sentiments in rural areas as is evident from the lower growth recorded by the agricultural sector. We expect SSML to post modest revenue CAGR of 12.5% over FY2014-17E to Rs1,855cr. Falling raw material cost and better product mix to result in margin expansion: SSML’s margins are expected to improve on back of falling raw material cost. Further, the company is aiming to increase the share of readymade garments segment in its product mix, which has higher margins. The revenue share of readymade garments is expected to increase to 17.4% in FY2017E from 15.1% in FY2014 which will lead to higher EBIDTA margin of 11.9% in FY2017E. Strong balance sheet profile with improving cash flow: The net debt/equity is expected to improve from 0.7x in FY2014 to 0.3x in FY2017E. This would be on account of higher cash on books as there are no major capex plans in the next two years; and repayment of debt, starting FY2016. Hence, we expect the profit to grow at a CAGR of 21.8% over FY2014-17E to Rs115cr. Valuation: SSML is trading at a PE multiple of 7.4x on FY2017E earnings, which is inexpensive considering its strong fundamentals. We reiterate our Buy rating on the stock with an upgraded target price of Rs1,102, valuing the stock at a higher PE multiple of 9x FY2017E earnings.
   Inox Wind Ltd
17/03/2015 IPO/FPO note
Company background: Inox Wind Ltd (IWL), incorporated in 2009 and a part of the Inox Group, is one of the leading manufacturers of wind turbine generators (WTG’s) in India. The company also provides turnkey solutions, and operation and maintenance services for wind power projects. Currently, IWL has an installed capacity of 550 nacelles and hubs, 256 rotor blade sets and a capacity of 150 towers. The company is setting up a new integrated capacity which would take the total nacelles and hubs capacity to 950 units, rotor blades capacity to 800 sets and tower capacity to 600 units. Strong order book: IWL has shown a strong growth during FY2014 and 9MFY2015 periods, wherein it sold 330MW and 380MW of WTGs during the period; plus, it also has a strong order book (as of December 2014). Currently IWL has an order book of 1,136MW, as against Suzlon’s order book of 1,148MW, and Gamesa India Pvt Ltd’s order inflow of 850MW (as of December 2014). These provide strong revenue visibility for FY2016. IWL has access to wind project sites which have been acquired or are under the acquisition process by its group companies - GFL and IRL - and its subsidiary IWISL. Currently the wind sites acquired have an aggregate power project capacity of 2,130MW, while the wind sites which are under the acquisition process have a power project capacity of 1,922MW. Thus, it provides healthy revenue visibility for IWL in the medium term. Government focus on renewable energy: The government has set a target of installed wind power capacity of 60,000MW till FY2022 from the current capacity of 21,150MW. This will create a huge opportunity for the company in the upcoming period. Hence we expect order inflow to increase at a faster pace during the next few years. We expect industry order flow to come in at the run rate of 5,000-6,000MW per annum as against the current run rate of 2,000MW per annum. The government has provided various incentives and framed several rules and regulations to increase demand for renewable energy. Outlook and Valuation: On EV/sales, the company is valued at 3.3x (at the upper end of the price band) on the basis of 9MFY2015 annualized numbers. Looking at the strong order book of the company and government focus on the sector, we recommend a Subscribe on the issue.
   
16/03/2015 Disclosure
The list includes the stock position of Angel Broking and its Affiliates and/or its Analysts as on March 15, 2015. The stock holding position is pertaining to companies under the coverage of Analysts employed by Angel Broking and its Affiliates.
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