CAPITA TELE RECOMMENDATION DT:25.7.07

CAPITA TELE RECOMMENDATION



Eimco Elecon (India)

Treasure mine

With investments in coal mining gathering steam the company will enter a new growth orbit

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Eimco Elecon (India)

BSE Code
523708

NSE Code
EIMCOELECO

Bloomberg
EEI@IN

Reuter
EIMC.BO

52-week High/Low
Rs 417 / Rs 222

Current Price
Rs 385 (as on 25th July 2007)


Eimco Elecon (India) (EEIL) is a manufacturer of mining machines. The company manufactures and supplies machines to sectors such as coal, copper, lead & zinc, gold, rock, phosphate, etc. for underground and opencast mining, construction, and tunneling projects.

Tamrock OY, Finland holds 25% equity stake in the company, while Elecon Engineering Company, India, and its associates hold 48%. Thus total promoter’s stake is 73% out of the tiny equity capital of Rs 5.77 crore.

Very wide range of underground mining machinery products

EEIL produces a very wide range of underground mining machinery Viz. Air Powered Rocker Shovels, Electro hydraulic Side Dump Loaders and Electro Hydraulic and Air Powered Load Gaul Dumpers used as loading machines in both the underground Coal mines and Metalliferous mines. It also manufactures Air Motors for captive consumption and other OEM manufacturers, company also manufactures hydraulic Drilling and Roof bolting jumbos and Auger-cum-Drills and Tugger Hoists. Side Dump Loaders, Load Haul Dumpers and Auger-cum-Drills forms backbone of the mechanization system of underground coal mines.

Subsidiary of a strong foreign parent

Eimco Group of Companies (subsidiaries of Environtech USA) are the world leaders in production of underground mining machinery having plants in U.K., USA, Canada, France and Australia. EEIL and Eimco Group of Companies entered into collaboration under which EEIL received necessary technical know-how from Eimco Group of Companies for production of underground mining machineries.

In 1989, Eimco Group of companies were acquired by Tamrock OY., a world leader in technology and manufacturing of rock excavation and breaking equipments for surface and underground mines and civil engineering construction with production and assembly facilities in various parts of the world backed by world wide sales and distribution net work.

Internationally, Tamrock holdes close to 40% market share in the mining machinery business. It is a leading supplier of drilling and loading equipments for hard rock applications.

Usage and demand of coal in India is huge

The Indian coal mining industry is a gigantic operation and occupies the third place in the world in terms of output.

Coal accounts for 55% of the country's energy need. The country's industrial heritage is built upon indigenous coal. The current per capita commercial primary energy consumption in India is about 350 kgoe/year. Driven by the rising population, expanding economy and a quest for improved quality of life, energy usage in India is expected to rise around 450 kgoe/year in 2010. Considering the limited reserve potentiality of petroleum & natural gas, eco-conservation restriction on hydel project and geo-political perception of nuclear power, coal will continue to occupy centre-stage of India's energy scenario.

The annual production of coal in the country has reached at a level of 430 MT, indicating an increase of 8% over the previous year. However, the share of production from the non Public Sector coal mines has remained small.

Coal has been recognized as most important fuel source for thermal power generation in India. About 80% of domestic production is being used for power generation. In addition other industries like steel, cement, fertilizers, chemicals, paper & thousands of medium and small-scale industries are also dependent on coal for their process and energy requirements.

From various government reports it is amply clear that the next 2 years will be years of pronounced coal shortage in India as the delayed Xth plan power projects get commissioned along side the XIth plan projects already under construction. It is expected that in 2007-08, coal requirement for the country would reach a level of 530 MT out of which 424 MT will be consumed for power generation.

The projected demand for coal is expected to reach 730.10 MT by 2011-2012 the last year of the XIth five year plan. However, the production is likely to fall short of demand at 680MT, registering a compound annual growth of 9.47%, according to official data.

The incremental production of coal during this period is estimated to be 247.5 MT against 104.04 MT in the Xth five year plan. Coal India Limited (CIL) is likely to produce 525.50 MT while Singarheni Collieries Company Limited (SCCL) would produce 40 MT and others, including private sector, 118.70 MT during 2011-2012.

Infrastructure status for the coal sector

The government is considering the possibilities of granting infrastructure status to the coal sector it the XIth plan. To give a boost in investment in coal mining, the sector is also likely to get tax holidays and duty exemptions.

The financials of Coal India (CIL), the company’s largest customer has also improved over the years which is reflected in their payments of Rupees 1500 crore to Govt. of India as dividend in 2006-2007. The four profit making subsidiaries have also been conferred with Mini Ratna, which will reduce the dependency of these subsidiaries on Government of India for budgetary allocation of fund.

CIL has also announced an ‘Emergency Coal Production Plan’. Under this plan, 16 opencast mines have been identified, where the production from existing mines will be enhanced to a higher level yielding an additional 71.3 MT of coal annually after attaining full production potential in an eight year period.

Underground mining for coal production will take the company to a new growth orbit

On an all India basis, about 80% coal production comes from opencast mines. But underground mining have advantages of making mass production possible and it is possible to induct proven international technology for underground mining.

Thus, it is believed that, given the growing gap between production and demand for coal, there is an urgent need to plan and execute large underground coal mining projects.

For underground mining, at present intermediate technology of SDLs / LHDs is being used but they have reached their peek productivity level. The alternative mining methods such as continuous mining equipment, which return higher productivity, are being explored for future. CIL has launched a drive to revive its underground mining division and scale up output from underground mines using new technology.

EEIL being pioneer in underground mining equipment, is also a first to introduce intermediate technology in Indian mines long back, with established market for present range of products, is also poised to commission its first continuous miner technology.

The company is adding various state-of-the- art mining equipments such as continuous miners, face & roof drills, coal haulers, 160mm & 250mm self propelled crawler mounted blast hole drills to enhance production of coal to meet demand of future. It is expected that the new products would result in increased business commensurate with the growth of related segment.

In FY 2008, the company’s first continuous miner model ACM 10 operations are expected to stabilize. This will open up a new range of applications for the company’s products. The 160mm drill is likely to get approval for regular use in opencast coal mines. The field trial of Face & Roof drills and new Models 621 & 635 Side Discharge Loaders is also likely to be completed soon. This will further add to the growth of the company.

The implementation of the company’s Welding Robot and Lesser Cutting machines and most modern manufacturing processes have reduced the company’s throughput time, generated additional machining capacity. Along with this, the alternate source of procurement for brought-out items has resulted in optimizing manufacturing cost of some of the company’s products.

De-risking the business model

Eimco Elecon's major clients are the subsidiaries of Coal India Limited Viz. Bharat Cooking Coal Limited. Eastern Coalfield Limited etc. Other clients include Singanery Collieries Co. Ltd., Uranium Corporation of India. Bharat Gold Mines, Hindustan Copper Limited, Hindustan Zinc Limited, Larsen & Toubro Ltd., Ferro Alloys Corporation Limited etc.

With private players also entering coal mining, the company’s client-profile will widen and reduce its dependence on Coal India as iys major client.

In a bid to further derisk its business model, the company has already entered into a collaboration agreement with Ahlmann, Germany to manufacture wheel loaders, who are among world leaders, to diversify in construction equipment business. This will add a new product range and open a new revenue stream for the company.

After consolidating for many years, financials are all set to soar to new heights

Eimco Elecon has managed to increase its sales every year since FY 9803 till FY 2007, except in FY 2006. It has also kept its profit after tax at the Rs 8-crore levels till FY2002. It, however, dropped to Rs 4.97 crore in FY 2003, but bounced back to Rs 7.43 crore in FY 2004, Rs 8.75 crore in FY 2005, Rs 8.24 crore in FY 2006 and Rs 8.68 crore in FY 2007. The consistent performance was despite no major improvement in the coal mining industry.

However, with investments in coal mining gathering steam financials will enter a new growth orbit.

During the quarter ended June 2007, the company registered huge sales growth of 58% to Rs 33.13 crore. PAT grew 43% to Rs 4.09 crore.

Will benefit from rupee appreciation

About 50% of the company’s raw material is imported. The recent strengthening of Indian Rupee against the dollar, will thus be beneficial to the company.

Outlook for the next many years is bright

With the all-round revival of coal companies, expected demand of coal in years to come and introduction of the new Products for mining sector as-well-as for construction sector, the management of the company expects to do better in the coming years.

The Ministry of Coal (MOC) has projected sharp increase in demand in 11th plan. This is primarily because all the delayed power projects of 10th plan will also get commissioned during this period apart from projects of 11th plan. In order to narrow the demand - supply gap and augment the coal production, MOC is awarding 138 Coal Blocks to various industries for their captive use. Apart from this CIL have also identified coal-mining blocks for private investments.

The management is confident that all these activities will provide the company’s business opportunities to cater to the requirements of private companies who will get involved in coal mining, and to enhance its customer base.

Valuation

In FY 2008, we expect the company to register sales and net profit of Rs 134.67 crore and Rs 13.89 crore. On a small equity of Rs 5.77 crore and face value of Rs 10 per share, EPS works out to Rs 24.1. Book value then is expected to touch Rs 185 per share. The share price trades at Rs 385, P/E works out to just 16. This is low considering that the huge growth in demand is expected from the coal sector for many years to come and the company is well-positioned to capitalize on it.

Eimco Elecon (India): Financials





0403 (3)
0503 (12)
0603 (12)
0703 (12)
0803 (12P)

Sales
83.85
97.22
91.17
95.93
134.67

OPM (%)
17.7
19.3
21.8
21.1
19.8

OP
14.88
18.74
19.86
20.25
26.72

Other inc.
3.11
3.60
2.00
3.04
4.05

PBIDT
17.99
22.34
21.86
23.29
30.77

Interest
1.25
2.42
2.74
2.73
1.84

PBDT
16.74
19.92
19.12
20.56
28.93

Dep.
4.65
5.93
6.70
7.65
8.22

PBT
12.09
13.99
12.42
12.91
20.72

Tax
4.48
5.24
4.18
4.23
6.83

PAT
7.61
8.75
8.24
8.68
13.89

EPS* (Rs)
13.2
15.2
14.3
15.0
24.1

* Annualised on current paid up equity of Rs 5.77 crore,
Face value of Rs 10
Figures in Rs crore
Source: Capitaline Corporate Databases




Eimco Elecon (India): Results





0706 (3)
0606 (3)
Var. (%)
0703 (12)
0603 (12)
Var. (%)

Sales
33.13
20.94
58
95.93
91.17
5

OPM (%)
22.3
25.9

21.1
21.8


OP
7.39
5.43
36
20.25
19.86
2

Other inc.
0.70
0.47
49
3.04
2.00
52

PBIDT
8.09
5.90
37
23.29
21.86
7

Interest
0.34
0.75
-55
2.73
2.74
0

PBDT
7.75
5.15
50
20.56
19.12
8

Dep.
1.88
1.89
-1
7.65
6.70
14

PBT
5.87
3.26
80
12.91
12.42
4

Tax
2.26
0.51
343
5.22
3.35
56

Deferred Tax
-0.48
-0.11
336
-0.99
0.83
-219

PAT
4.09
2.86
43
8.68
8.24
5

EPS* (Rs)
#
#

15.0
14.3


* Annualised on current paid up equity of Rs 5.77 crore,
Face value of Rs 10
# EPS is not annualised due to seasonality of business
Figures in Rs crore
Source: Capitaline Corporate Databases


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