Multibagger stock hits 52-week-high, Edelweiss remain bullish

Elecon Engineering Company Ltd. is an engineering-related small-cap company with a market valuation of Rs. 3,304 crores. Elecon ranks third in terms of the scale of a firm that provides material handling solutions and is the largest maker of industrial gears and reducers in Asia. In this market, Elecon principally designs and manufactures industrial gears and gearboxes. Domestic operations account for 62 per cent of sales, with an EBIT margin of 20 per cent, while its RoCE profile for domestic operations is 25 to 30 per cent. The shares of Elecon Engineering Company reached a 52-week high on Friday of ₹303.00 and ended the day at ₹294.00 with a 1.28 per cent downside gap on the NSE. After reaching its 52-week-high, the stock is currently trading 136 per cent higher than its 52-week low, which was reached on July 13, 2021, at a price of ₹124.10. The stock has risen from ₹131.85 on July 12, 2021, to the current market price during the last year, representing a multibagger return of 122.98 per cent. On a year-to-date basis, the stock has gained by 53.44 per cent so far in 2022. With a target price of INR 374, the brokerage company Edelweiss Wealth Research Ltd. has initiated a buy call on Elecon Engineering Co. Ltd. shares, indicating a possible gain of 27% over the stock's current market price.

Vinay Khattar, the Head Research analyst of Edelweiss has said “Elecon is among the market leaders in its area of operations and boasts of best-in-class manufacturing facilities. It is a play on the wide industrial capex cycle, with supplies to sectors such as steel, cement, power, textiles, tyre and sugar, among others. Strong industrial capex is likely to drive higher utilisation in the industrial gear segment. We envisage a particularly solid demand from the steel and cement sectors (around 25–30% of Elecon’s sales) based on announcements made by major players. Management expects overall sales to reach INR 2,100cr by FY24E from INR1,200cr in FY22.”

“Industrial gears accounted for 89% of the company’s FY22A sales with EBIT margin of around 20%. Due to higher share in the mix, this segment is now the major earnings driver unlike the past cycle when MHE (project based) also contributed meaningfully. The management expects standalone revenue to touch INR1,500cr by FY24E from INR884cr in FY22A, driven by growth in industrial gears. We expect the gears division, including international subsidiaries, to record a revenue CAGR of 21% over FY22-25E,” said Vinay Khattar.

“After a decade of juggling issues related to liquidity and legacy EPC projects, the MHE segment is finally turning around after the company revised its strategy. Unlike before, it no longer participates in EPC projects for MHE. All new orders are either product-based or aligned towards after-market sales. The company also freed up majority of the retention money and resultantly reduced debt. Resolution of the remaining INR100cr expected soon,” the analyst further added.

“Elecon offers strong growth visibility with improving balance sheet. We expect a CAGR of 22% and 26% in revenue and EPS, respectively, over FY22–25E, driven by robust demand, operating leverage and low interest expense. This will be accompanied by ROCE improvement from 15% currently to 21% by FY25E. We assign a TP of INR374/share, valuing the company at 18x FY24E PE,” said Khattar.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.