Elecon Engineering Company (Elecon) is one of the leading lights in industrial gears and material handling equipment in India. The company registered 57% fall in its net profit for the quarter ended June 2012 to Rs 6.40 due to shrinkage of margins and 7% fall in sales to Rs 235.77 crore.

Sharp fall in bottom-line is firstly on account of weak operating performance where the operating profit was lower by 26% (to Rs 31.55 crore hurt by lower sales and 330 bps contraction in operating margin. Secondly the profits were also impacted due to higher interest, depreciation and tax incidence. But for higher other income the fall in net profit would have been much steeper.

• Not only was the operating income lower by 8% to Rs 232.15 crore, but even the value of production was lower by 8% to Rs 243.63 crore.
• The fall in revenues were largely on account of weak performance by the Material handling equipment (MHE) segment, which recorded 15% fall in revenues to Rs 121.05 crore on the back of subdued power, mining sector. Also, the industrial investment down-cycle too affected demand / lead to delay in order execution. On the other hand the segment revenue of transmission equipment (TE) was up by modest 4% to Rs 125.24 crore.
• Share of MHE to topline fell to 49% for the quarter from 54% in the corresponding previous period. But that of TE increased to 51% from 46% in the corresponding previous period. Similarly at EBIT level the share of MHE declined to 40% compared to 51% in the corresponding previous period. That of TE was higher at 60% compared to 49% in the corresponding previous period.
• Contraction in operating margin to the extent of 330 bps is largely on account of higher material cost as well as staff cost. While segment margin of MHE was lower by 420 bps to 9.4% that of TE was lower by 130 bps to 13.9%. On basis of cost overhead as proportion to net of stocks, the material and staff cost were higher by 250 bps and 180 bps respectively even while other expenses were lower by 120 bps leading sharp compression in operating margin.
• On EBIT level, the segment profit of MHE, hit by lower sales and sharp contraction in EBIT margin, was down by 41% to Rs 11.40 crore. That of TE was lower by 5% to Rs 17.45 crore hurt by lower margin.
• Other income was up by 42% to Rs 4.21 crore. The interest and depreciation cost was higher by 10% (to Rs 14.93 crore) and 13% (to Rs 11.41 crore) respectively. As result the PBT (before EO) was lower by 57% to Rs 9.42 crore.
• EO income for the quarter and corresponding previous period was nil. Provision for taxation was lower by 56% to Rs 3.03 crore. Thus the growth at net profit stood restricted to 57% to Rs 6.40 crore.

Standalone annual results

Sales for fiscal ended Mar '12 was up by 13% to Rs 1331.67 crore and the operating profit was up by 12% to Rs 202.75 crore. On an inflated based on account of profit on sale of investment of Rs 20.7 crore, the PAT was eventually lower by 21% to Rs 69.60 crore.

Other Developments

Elecon Engineering proposes to hive off MHE business to Aakaaish, a 100% subsidiary on slump sales basis. After this, power transmission will be the only business of the stand alone entity Elecon Engineering.

In addition, Prayas, a promoter group company which largely caters to PT & MHE business of Elecon Engineering will get its business split into two business groups with PT consisting of foundry, coupling & machining shops and MHE business that consists of fabrication of MHE products such as idler, pulley, baggaging machines etc. merged into Elecon Engg and Aakaaish respectively. Prayas has registered revenue of Rs 276 crore in FY12 of which about 53% being MHE and 47% is power transmission products revenue. The average 3 year EBITDA margin of the company is about 18%.

Similarly another promoter group company i.e. EMTICI's sales, marketing and services business, pertaining to PT and MHE business will be demerged into Elecon and Aakaaish respectively. In FY12 EMTICI Engineering has registered a sales of Rs 71 crore of which share of MHE business was 56% and that of PT was 44%.

Both Elecon Engg and Aakaaish to issue fresh equity shares to the promoters as consideration for the PT & MHE business of Prayas and EMTICI.

On completion of restructuring, the Promoters stake will be 53.96% in Elecon Engineering. And Elecon Engineering will have hold 60.49% stake in Aakaaish with balance 39.51% being held by Elecon Promoters. Elecon Engineering will issue 49 shares and 39 shares for every shares and every four share held in Prayas and EMTICI respectively. Similarly Aakaaish will issue 14 shares and 3 shares for every 143 shares and 19 shares held in Prayas and EMTICI respectively.

The stock hovers around Rs 52.45.