Rationale

 The ratings assigned factor in the leadership position of Elecon Engineering Company Limited (EECL) in the transmission products segment i.e. gears with a sizeable market share of around 38% in India, supported by significant manufacturing capacities, an expansive geographic presence and an established presence in the material handling equipment segment (MHE). Additionally, EECL has developed a reasonable global footprint in recent years and its revenue mix is fairly diversified across geographies with international sales accounting for 35% of the consolidated revenues in FY2022. The ratings consider the favourable medium-term demand outlook with increased demand from end-users such as the steel, cement, sugar and power (flue gas desulphurisation or FGD projects) sectors. The order book is also strong at Rs. 410 crore on a standalone basis and at Rs. 605 crore on a consolidated basis as on March 31, 2022. Further, an order inflow guidance of around Rs. 1,000 crore for FY2023 provides revenue visibility over the near term. The company has enhanced its focus on the replacement market which will support revenue growth. The ratings favourably factor in the steady improvement in the operating profit margin (OPM) to 21% in FY2022 from 11.6% in FY2019 as well as strengthening of the core ROCE to 20.5% in FY2022 (7.6% in FY2019). A favourable revenue mix with a higher share of the manufacturing business and scaling down of the EPC business under the MHE segment improved the working capital cycle and thus, the borrowings. The company's capital structure remained strong with a gearing of 0.1 times as on March 31, 2022, backed by a considerable reduction in debt levels and strong net worth. Expanding operating profits and cash accruals supported healthy debt coverage metrics and a favourable liquidity profile. The ratings are, however, constrained by the moderately high working capital intensity with NWC/OI at 28.1% as on March 31, 2022, though it improved from 32.9% as on March 31, 2021. This was primarily on account of high receivables from the MHE segment and high inventory levels in the gear division. The working capital cycle is expected to improve going forward with the release of retention money and receivables from the MHE division along with a shorter working capital cycle in the transmission division. Notwithstanding the scaled-down EPC business, any major write-offs in legacy projects would remain a key monitorable. The ratings are further constrained by the revenues being exposed to the cyclicality in the domestic capex cycle and any economic slowdown, though the company's presence across various industries as well as in the replacement market and its growing exports provides some comfort. The ratings further note the vulnerability of the company's profitability to the variations in the prices of raw materials, which majorly include steel and steel components. Steel prices have increased substantially over the past few months and are at a multi-year highs now amid some moderation seen recently. The Stable outlook on the long-term rating reflects ICRA's opinion that EECL's revenues and accruals will be supported by its comfortable order book along with expectations of a healthy order inflow in the near to medium term. Also, the company will continue to benefit from its established track record in the transmission and the MHE segments.