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ELECON ENGINEERING COMPANY LTD.

Long-Term Bank Loans / Facilities CARE AA-


Short-Term Bank Loans / Facilities PR1+
CP / STD PR1+

Rating years. The company is an industry leader in


transmission gears with almost 27% market share and
CARE has assigned 'CARE AA-' (double A minus) rating
is one of the largest manufacturers of MHE.
to the long-term bank loans / facilities and 'PR 1+' (PR
one plus) rating to the short-term bank loans / facilities Operation of the Company
of Elecon Engineering Company Ltd. (EECL) for an
EECL operates in three business areas namely
aggregate amount of Rs 980 cr, including sanctioned/
material handling equipments, transmission gears
outstanding term loan (as on Dec.24, 2007) of Rs 120
and alternative energy contributing 52.5%, 47.3% and
cr, fund-based working capital sanctioned limits of Rs
0.2% of sales in FY07.
275.00 cr and non-fund based sanctioned limits of Rs
585 cr. In MHE business, EECL designs and manufactures a
wide range of material handling equipments catering
Also, CARE assigned 'PR1+' (PR one plus) rating to
to the need of core sectors such as steel, fertilizer,
short-term debt (including commercial paper) for an
cement, coal, lignite and iron ore mines, power and
amount up to Rs 80 cr, which would be carved out of
ports. EECL executes turnkey projects for material
the sanctioned working capital limits.
handling with its own equipment supply viz. wagon
The ratings take into account EECL's long and tipplers & loader, stackers & reclaimers, crushers,
established track record in engineering industry with scrapers, feeders, conveyors, ship loader, cable
well diversified product range both in MHE (material reeling drum, etc.
handling equipment) business and gear business,
EECL has advanced manufacturing facilities spread
its leadership position in industrial gear business,
over 1,17,000 sq. mtrs. and the company is equipped
strong order book position in MHE business,
with a wide range of computer numerical controlled
comfortable financial plus liquidity position and
machines, quality control and testing equipments etc.
positive industry outlook. The long-term rating is,
however, constrained by its operations in a working The transmission gear division of the company
capital intensive industry and the planned capex which manufactures helical gears, worm gears, high speed
is largely debt funded. gears, couplings, special gears and geared motors.
The manufacturing facility is spread over 1,73,098 sq.
Background
mtrs, with more than 90% of the machines being
EECL is the flagship company of Elecon Group, computer controlled, ensuring a high degree of
established in 1951 by Late Shri Bhanubhai I. Patel, precision in manufacturing. EECL manufactures a
father of the present Chairman & Managing Director, wide range of industrial gears of all size and also
Shri Prayasvin B. Patel. EECL was incorporated in 1960 customized ones as per the requirements. It is the
and started its operation with design and only domestic player manufacturing large-sized
manufacturing of elevators and conveyors. Presently, gears, which are import substitutes. EECL is the
it manufactures a wide range of MHE alongwith leader in gear industry with around 27% market share
industrial gears and gears for WTGs up to 600 kw. followed by Shanti Gears and Crompton Greaves. The
Further, it has re-entered the wind farm business products find application in almost all manufacturing
(alternative energy) in current year after a span of six industries including cement, steel, sugar, material

CREDIT ANALYSIS & RESEARCH LIMITED 1


handling equipments, elevators, fertilizer, plastic, Financial Results
rubber etc. (Rs crore)

EECL is also diversifying its product portfolio in gear For the period ended / 2005 2006 2007
business by introducing high speed plus capacity lift as at Mar.31, (12 m) (12 m) (12 m)
gears and vertical roller mill gear boxes. EECL is also Working Results
putting thrust to supply gears for specific applications Total Income 272.76 439.82 720.23
of Indian navy. PBILDT 31.83 59.66 111.76
The company has re-entered the alternate energy Depreciation 8.23 9.43 12.22
business viz. wind farms, with a target to install wind Interest and Finance charges 9.26 13.98 19.36
mills with installed capacity of 25 mw in the first phase. Profit from operations (PBT) 14.35 36.25 80.17
PAT 10.03 27.86 54.92
It has already acquired land for the project and plans
Net Cash Accruals 19.01 33.59 66.38
to outsource parts of the wind mill, while WTG gear
boxes will be manufactured in-house. Financial Position
Equity Capital 5.65 5.71 6.18
Its key customers are NTPC, BHEL, SAIL, Indian Navy,
Net Worth 68.29 100.37 187.47
Indian Railways, ACC, Neyveli Lignite, Reliance
Total Capital Employed 176.75 318.20 487.90
Energy, Torrent Power, JSW Steel, etc.
Key Ratios
As on Nov.30, 2007, EECL had strong order book
Profitability (%)
backlog position of Rs. 1127 crore including Rs. 912
PBILDT / Total Income 11.67 13.56 15.52
crore for MHE division and Rs. 215 crore for gear
PAT / Total Income 3.68 6.33 7.63
division. Over 70% orders of MHE division are of
ROCE 15.69 21.30 25.63
comprehensive turnkey contract having price
escalation clause, where as balance are fixed price Solvency
equipment supply contracts. Long Term Debt Equity Ratio 0.50 0.59 0.32
Overall Gearing Ratio 1.59 2.17 1.60
Interest Coverage (times) 2.55 3.59 5.14
Ongoing Projects
Current Ratio* 1.11 1.12 1.21
Looking at the increasing demand from the user
Turnover
industry, both in MHE and gear business, EECL has
Avg. Inventory (days) 183 150 110
envisaged a total capex of Rs 87 crore for expansion
Avg. Collection Period (days) 128 151 166
of its manufacturing facilities of MHE division and
Working Capital Turnover Ratio 2.81 2.70 2.53
introduction of new products under gear division. The
Capital Turnover Ratio 1.74 1.78 1.79
company has already incurred Rs 28 crore towards
* includes current portion of long- term debt.
the above capex (as at Dec.18, 2007).

EECL is also setting up separate facilities for core infrastructure sector and capex plan of user
manufacturing wind mill gear boxes with total investment industries.
of Rs 80 crore. It has planned to enter into a licence
agreement for technology transfer for the gearbox of WTG PBILDT margin improved from 13.56%, in FY06 to
of 1-2 mw with a renowned global manufacturer. The 15.43%, in FY07 on account of increase in level of
company has already incurred Rs 49 crore towards the operations and better realisation in MHE, as well as
project (as at Dec.18, 2007) and the same is expected to the gear division. Improvement in PBILDT margin led
commence operations in H1FY09. to improvement in PAT margin from 6.33%, in FY06 to
7.63%, in FY07.
During FY07, the total income increased by 64% due
to 119% growth in income of MHE division and 36% ROCE and RONW also increased gradually over the last
growth in income of gear division. The income growth three years and were 25.63% and 38.16% respectively,
was a result of surge in demand due to investment in during FY07 on account of improved profitability.

2 CAREVIEW
The long term debt equity ratio improved from 0.59 as on replacement and maintenance demand for installed
Mar. 31, 2006 to 0.32 times, as on Mar.31, 2007 on account manufacturing facilities.
of conversion of FCCB of Rs 36 crore and accretion of Increasing investment in manufacturing and infrastructure
profit in the form of increase in networth. The overall sector coupled with modernization of manufacturing plants
gearing also improved to 1.60 times, as on Mar.31, 2007 would benefit the gear industry, as its products form an
due to increase in networth, despite increase in bank essential part of most of the manufacturing facilities. The
borrowing by Rs 101 crore. gear industry in India has been growing at a rate of 12-15
Interest coverage improved from 3.59 times, in FY06 to per cent annually for the last few years buoyed by India's
5.14 times, in FY07 due to improvement in PBILT. GDP growth of 7-8 per cent and the growth in India's
manufacturing sector.
Looking at the working capital intensive nature of the
industry, current ratio and quick ratio were satisfactory at Wind Mill and WTG gear box:
1.21 and 0.90 times, respectively as on Mar.31, 2007. India with a wind power generation capacity of 6,270 mw,
Industry Review is the fourth largest wind power producer in the world
after Germany, USA and Spain and has huge potential of
Material Handling Equipments (MHE): about 45,000 mw. The government policies are also
MHE are heavy duty machines mainly used for conducive for investment into wind mills.
transporting goods, handling other equipments, etc. and
Prospects:
are used in applications like coal handling systems,
conveyer systems, trippers, wagon tipplers, ship loaders, Increasing investments in the core sector mainly thermal
etc. The products are mainly used by coal, steel, fertilizers, power projects, steel, cement, mining and port sector would
power and cement industries. increase the prospects of MHE business, where EECL is
The demand for MHE is driven by capacity expansion in one of the leading and established players having a wide
user industries which are influenced by growth in overall range of product portfolio focusing on turnkey projects.
economy. Backed by capacity building in both core sector EECL being the industry leader with almost 27% market
and infrastructure sector, the Indian bulk material handling share and having presence in all segments of industrial
industry is expected to post strong growth. Going forward, gear especially in large gear boxes where its is the sole
the demand for MHE is more likely to sustain, given the domestic player would directly benefit from the surge in
quantum of investment under pipeline, especially in the demand from the increased investment in industrial and
manufacturing sector with sizeable amounting of it infrastructure sector. Further, its shift to higher size/high
translating to MHE industry. TRF Ltd., Mcnally Bharat value gears and introduction of new products will not only
Engineering Co. Ltd., L&T and EECL are the major players increase its competitiveness in the domestic industry
in the domestic market. where it is the industry leader, but also increase the
Transmission Gears: opportunities in the export market.

Transmission gears like helical, worm, planetary and Increasing rush for non conventional energy generation
composite gears find application in coal, steel, fertilizers, by the industries, supported by government, following
power, cement and other industries. The demand for awareness of global warming, is expected to increase
transmission gears is mainly driven by capacity additions the demand of wind mills in India and in turn, gear boxes
in the manufacturing sector and is sustained by for WTGs, where EECL plans to diversify in near future.

December 2007

CREDIT ANALYSIS & RESEARCH LIMITED 3


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CREDIT ANALYSIS & RESEARCH LIMITED
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based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not,
however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors
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4 CAREVIEW