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.
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