Key takeaways of the call

The merger of Elecon EPC (60.49% subsidiary of the company) into Elecon Engineering was necessitated as some of the advantages that the company envisaged in the earlier demerger did not percolate down to both the divisions. While the transmission business did see some momentum, the material handling business was bogged down by tough industry and macroeconomic conditions. In these circumstances the management believes the merger of the EPC business back into the parent would deliver economies of scale and financial benefits that would benefit both the Company and the shareholders.

India's EPC Industry is facing a slow down due to various reasons including delay in governmental clearances, environmental approvals and land acquisitions etc. The Company's strategy on moving away from EPC projects and focusing solely on the equipment's business would further cement the consolidation with Elecon which is being envisaged.

Gear business continues its good traction. The company's product offering in gears ranges from standard catalogue products to engineered products (lead of upwards of 6 months) as well as to large marine gears.

Order book of the gear division stood at Rs 700 crore and this will add momentum to the business. It bagged 2 very large scale orders in naval defence.

Defence orders worth Rs 530 crore and the execution will commence by FY19 crore and the order execution will be completed by 2022.

The gear division of the company developed new products such as ‘Cooling tower gear boxes' for domestic power sector and international markets. For sugar industry it has developed ‘planetary gear boxes' range.

The company is increasingly sourcing the demand for international market from India and Thailand. The company expects the exports to growth to 15-20% from current about 7-10% in near future.

The company is also restructuring its overseas operations. Under the new structure the Swedish subsidiary will become 100% owned subsidiary of Radicon UK. Radicon USA will also be brought under the Radicon UK.

The company provides end to end solutions in Material Handling. Though orders are coming in for MH business, the execution is a concern area. Going forward the MH business will be more of a product business rather than EPC. Currently EPC accounts for about 25-30% of the top-line and balance 70-75% is from products and going-forward the share of EPC will go down further.

Order book of MH division is Rs 840 crore.

Sales of Elecon EPC in FY16 was Rs 480 crore and at EBITDA it is a profit of Rs 15 crore and at PAT level –is a loss of Rs 14.8 crore. If the products orders are executed as scheduled the company will turn in PAT positive otherwise it will register a nominal loss at PAT level.

Capacity Utilisation is about 40% in MH business division.

Receivables of the EPC division stood at Rs 650 crore and of which about Rs 270-300 crore is retention money. The company hopes to complete all the EPC projects on hand by FY19.

The company expects some losses in EPC project business in FY17 but not beyond that period.

Industry opportunity for MH comes from power, port, mining, cement and steel with the latter two having marginal share of the business.

Steel and cement continues to be sluggish. While cement shows some signs of activity steel will take some more time to come back to ordering.

Once mines allocated got into production and return of cement to capex mode will facilitate growth for the material handling sector. In next 2-5 years all the user industries of MH are expected to see heavy investment and that will percolate to the MH division.

Revenue outlook for 2016-19: The gear business revenue is expected to increase from Rs 518 crore to Rs 650 crore by 2019. The MH Division revenue is expected to about Rs 600 crore by 2019. Overseas subsidiaries together are expected to increase their revenue to Rs 400 crore by 2019. With improved capacity utilization the margin to growth substantially.

Slow moving projects out the total order book of the company are about Rs 300 crore