Elecon Engineering Company Limited — Q2 FY25 earnings call

Call held 21 Oct 2024

Management summary

Elecon Engineering reported a mixed Q2 FY25 with consolidated revenue growing 4.8% YoY to INR 508 crores, driven by strong performance in the MHE division which saw 77.8% revenue growth and 154% order inflow increase. However, the gear division's revenue declined 5.9% due to delayed order inflows and execution. Overall margins were impacted by one-time maintenance costs, higher freight expenses, and an unfavorable product mix towards catalogue products. Management remains confident in achieving its full-year revenue and margin guidance, expecting faster execution in H2.

Highlights

  • Consolidated revenue Q2 FY25: INR 508 crores, up 4.8% YoY.

  • Consolidated EBITDA margin Q2 FY25: 22.1%.

  • Consolidated PAT margin Q2 FY25: 17.3%, declined 100 bps YoY.

  • Gear division revenue Q2 FY25: INR 398 crores, down 5.9% YoY.

  • MHE division revenue Q2 FY25: INR 110 crores, up 77.8% YoY.

  • MHE division order inflow Q2 FY25: INR 104 crores, up 154% YoY.

  • Export contribution for H1 FY25: 28%.

  • Net free cash surplus: INR 500+ crores as on Sep 30, 2024.

Key financials

2 periods

Headline

  • Consolidated Revenue
    ₹508 Cr
    YoY +4.8%
  • Consolidated EBITDA
    ₹112 Cr
  • Consolidated EBITDA Margin
    22.1%
  • Consolidated PAT Margin
    17.3%
    YoY -1%
  • Net Free Cash Surplus
    ₹500 Cr
  • Interim Dividend
    ₹0.5

H1

  • Consolidated Revenue
    ₹901 Cr
    YoY +0.22%
  • Consolidated EBITDA
    ₹205 Cr
  • Consolidated EBITDA Margin
    22.7%
  • Cash Flow from Operations
    ₹175 Cr

What they filed

Q1 FY27: revenue up 6.1%, net profit down 60.0% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue508 529 798 491 578 +14%552 +4%746 −7%521 +6%
EBITDA112 143 195 130 126 +13%109 −24%158 −19%109 −16%
Net profit88 108 146 175 88 +0%72 −33%6 −96%70 −60%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue
₹508 Cr Total
  • Gear Division ₹398 Cr 78.3%
  • MHE Division ₹110 Cr 21.7%

Guidance & targets

Market Share

  • Overseas Business Contribution Market Share · FY30 · High confidence 50%
    With increasing references and OEM tie-ups, we are optimistic of increasing our overseas business and achieving revenue contribution to 50% by FY '30 from overseas business.

    — Prayasvin Patel, Chairman and Managing Director

Revenue

  • Annual Revenue Revenue · FY25 · High confidence INR 2,225 crores
    To conclude, we stick to our annual guidance of achieving revenue of INR 2,225 crores, an EBITDA margin of 24% for FY '25 and are very confident with the order book we have, that we will be able to execute the same in the balance part of FY '25.

    — Narasimhan Raghunathan, CFO

  • OEM Revenue Revenue · FY25 · High confidence INR 45 crores to INR 52 crores
    We are expecting that, revenue from OEM business to the tune of nearly INR 45 crores to INR 52 crores.

    — Kamlesh Shah, Group Chief Financial Officer

Margin

  • EBITDA Margin Margin · FY25 · High confidence 24%
    To conclude, we stick to our annual guidance of achieving revenue of INR 2,225 crores, an EBITDA margin of 24% for FY '25 and are very confident with the order book we have, that we will be able to execute the same in the balance part of FY '25.

    — Narasimhan Raghunathan, CFO

Growth

  • Annual Growth Growth · FY25 · Medium confidence 15%
    If I say about this, because of that, in the beginning of the year, for this year, we have given an annual guidance of 15% growth on this that we are going to sustain.

    — Kamlesh Shah, Group Chief Financial Officer

  • Next Year Growth Rate Growth · FY26 · Medium confidence even higher

    From 15% today

    But looking at all the indicators as of now, it looks like next year the growth would be even higher, okay, especially we see that kind of scenario, especially in material handling and also in the domestic market in gear plus with the trust that we have in export, I see a reasonably rosy picture.

    — Prayasvin Patel, Chairman and Managing Director

Capex

  • Capex Deployment Capex · H2 FY25 · High confidence most of INR 200 crores
    And we are expecting more machines to reach over here in H2 and I think most of them will get installed in this year itself.

    — Kamlesh Shah, Group Chief Financial Officer

Order Inflow

  • Marine Sector Orders Order Inflow · near future / Q3 · Medium confidence 1-2 orders
    However, we believe that we are reasonably well placed, and we should be expecting orders at least one or two in the near future. ... We believe that we should get a reasonable success in the third quarter, and which would be executed during the next financial year.

    — Prayasvin Patel, Chairman and Managing Director

Risks & concerns

  • Geopolitical tensions impacting freight costs

    medium

    Houthis intervention in Gulf of Aden and Red Sea crisis led to higher air freight costs, but clients have agreed to absorb these going forward.

    Management acknowledged

  • Delayed order inflow and execution in Gear division

    medium

    Q1 elections caused industrial sector standstill and delayed order inflows, pushing execution into Q3 FY25.

    Management acknowledged

  • Unfavorable product mix impacting margins

    low

    Higher proportion of lower-margin catalogue products in Q2 due to order inflow timing, compared to higher-margin engineered products last year.

    Management acknowledged

Areas of evasion (1)

  • exact split of after-sales revenue between divisions

Q&A highlights

3 direct
Margins and One-time Costs Direct
this particular quarter, because of the Houthis intervention in the Gulf of Aden, we had to pay extra freight to transport the products to Europe as well as to United States, which has also reduced our margins. Apart from that, there are one-time costs that we had to incur, which are for maintenance, which also brought in the variation. ... So, if you have -- in the last couple of years, we have not upgraded our facility, particularly some facilities which is required, more specifically on the fire kind of incident or on account of our other building facilities. So we upgraded to that also with total amount included INR7.32 crores for this Q2 which is having an impact on it. On account of the freight, because of this geopolitical tension, to deliver our goods, we have to opt for the air freight, which itself cost to me additional cost of INR1 crores for that all. ... So, over and above that we also have to incur some specific expenses for the material – packing material because of that different issues, so that has additionally costed me INR1.68 crores.

Clarifies the specific, largely temporary, factors impacting Q2 margins and quantifies their financial impact, providing a clearer picture of underlying profitability.

Asked by Ganeshram Rajagopalan

Order Inflow Delays and H2 Outlook Direct
The first quarter, because of the elections, the industrial sector came to a standstill. A lot of our clients were waiting for the elections to get over before they would decide whether to release the orders to go ahead with the projects, etcetera, etcetera or otherwise were just waiting for the elections to get over and then release, to be honest. So the inflow in the first quarter was extremely slow and which caught momentum in the second quarter. Now for me to execute the orders which were received in the second quarter, during the quarter have got tremendous limitations because only certain types of gears I could invoice it during that time. We have to also understand that we have a short cycle, okay, of execution and which was the reason why it could not happen in the second half of the H1. But the orders that we have received in the second half of H1, we will be able to execute in the third quarter.

Explains the reasons for the gear division's revenue slowdown, linking it to external factors and manufacturing cycles, and provides a clear roadmap for order execution in the coming quarter.

Asked by Ganeshram Rajagopalan

MHE Profitability and Product Mix Impact Direct
Can I give you an off-the-cuff answer I think in term of experience in the MHE business, which is leading to this, and we have burnt our fingers through thick and thin to realize that we need to change our model. And ultimately, we have seen to it that we only sell products whereby our liquidity has improved and so has the profit margins. ... In Q2 because our order inflow started from July, August onward. So, my execution was more of the catalogue product. That is called standard product, vis-a-vis engineer product. So, because of the change in the product mix that will have that impact on my gross margin as well as EBITDA margin. ... Yes. Correct. My product mix was not last year it was better. Last year we did the engineer product of nearly 55% and my catalogue product was 45%. This year it is a reverse for me.

Provides insight into the strategic shift driving MHE profitability and clarifies how an unfavorable product mix (more lower-margin catalogue products) specifically impacted overall Q2 margins.

Asked by Kartik Keyan / Mohit

3 min read 6 chapters

Detailed narrative

Q2 FY25 Performance Overview

Elecon Engineering reported a consolidated revenue of INR 508 crores for Q2 FY25, marking a 4.8% year-on-year growth. The consolidated EBITDA margin stood at 22.1%, while the PAT margin was 17.3%, a 100 basis point decline from the previous year. For H1 FY25, consolidated revenue was INR 901 crores, with an EBITDA margin of 22.7% and PAT of INR 161 crores. The company also declared an interim dividend of Re. 0.50 per equity share.

Segmental Performance - MHE Division Drives Growth

The Material Handling Equipment (MHE) division was a key growth driver, with revenue surging 77.8% year-on-year to INR 110 crores in Q2 FY25. This segment also saw a robust 154% increase in order inflows, reaching INR 104 crores, and its EBIT margin expanded by 549 basis points to 26.5%. Management attributed this strong performance to a strategic shift towards product sales and aftermarket services, leading to improved liquidity and profitability, which they deem 'sustainable.' The division also secured a $1.65 million overseas order in Q2 FY25.

Segmental Performance - Gear Division Faces Headwinds

The Gear division, contributing 78% of total revenue, experienced a 5.9% year-on-year decline in Q2 FY25 revenue to INR 398 crores. This was primarily due to delayed order inflows in Q1 (attributed to general elections) and subsequent execution delays into Q3 FY25. The segment's EBIT margin also compressed to 20.5% from 26% in Q2 FY24. Despite this, order intake for the gear division grew 15.2% to INR 432 crores, with an order book of INR 627 crores as of September 30, 2024.

Margin Pressures and Mitigation Strategies

Overall margins in Q2 FY25 were impacted by several factors. The company incurred one-time expenses totaling approximately INR 10 crores, including INR 7.32 crores for facility upgrades, INR 1 crore for air freight due to geopolitical tensions (Red Sea crisis), and INR 1.68 crores for packing materials. Additionally, an unfavorable product mix in the gear division, with a higher proportion of lower-margin catalogue products compared to engineered products, contributed to the margin compression. Management stated that clients have agreed to absorb increased freight costs going forward, and they are confident in recouping margins in H2 FY25.

Outlook and Guidance for FY25 and Beyond

Elecon reiterated its annual guidance for FY25, targeting a consolidated revenue of INR 2,225 crores and an EBITDA margin of 24%. The company aims to increase its overseas business contribution to 50% by FY30. For the current year, OEM revenue is expected to be between INR 45-52 crores. Management expressed strong confidence in executing the existing order book in H2 FY25 and anticipates even higher growth in the next financial year, driven by increasing inquiries in power, mining, steel, cement, and material handling sectors.

Capex and Cash Flow Position

The company is in the process of completing a three-year capex cycle, with approximately INR 40-45 crores added in H1 FY25. Most of the planned INR 200 crores capex for the year, primarily for capacity expansion, is expected to be installed in H2 FY25, with revenue benefits kicking in from next year. Elecon reported a healthy consolidated net free cash surplus of over INR 500 crores as of September 30, 2024, and cash flow from operations for H1 FY25 stood at INR 175 crores, with an EBITDA to CFO conversion of 117%.

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