Corporate Development

Published: Jun 15, 2022
Updated: Jun 15, 2022

Elecon Engineering Company (EECL) - ‘Aiming at global brand identity’

Highlighting the salient features of the company’s FY22 performance, Prayasvin Patel, Chairman and Managing Director of 70-year-old Elecon Engineering, says, “Gearboxes continued to witness traction amidst a strong demand environment. We have successfully completed one of the most complex and sophisticated defence gearboxes recently as part of the ‘Make in India’ initiative.”

Continuing, Mr Patel says, “Likewise, our performance has substantially improved in the material handling equipment (MHE) division, post the change in our business strategy. The company has made decent progress on recovery and also closure of a few legacy projects. We continue to focus on improving profitability and liquidity of the MHE division. We have received the balance payment from one of our old projects while expecting to clear two other projects also in FY23

Mr Patel adds, “We are planning to invest in marketing and business development as part of the strategic initiative towards establishing a global brand entity and identity to enhance business growth across our overseas companies. We are seeing a healthy ramp-up in order booking with orders worth Rs 212 crore in the gear business and Rs 114 crore in MHE during the fourth quarter of the concluded year. With this, the order book as of the year-end reached at Rs 410 crore for the gear business and Rs 127 crore for the MHE division, and Rs 605 crore at a consolidated level.” A majority of the orders in the gear division come from the steel industry, followed by cement and sugar.

Reacting to the proposed Rs 1 lakh crore investment by the steel industry for capacity expansion, Mr Patel says, “The steel industry in India is reasonably matured and with a large number of steel plants, we are expecting more orders from the steel sector, not only in our gear division but also in the material handling business.”

GEARS PIONEER

Established in 1951, EECL, based at Vallabh Vidyanagar, Gujarat is the pioneer in the manufacturing of industrial geared motors and reducers, material handling equipment, mining equipment, casting processes, etc., and is one of the largest manufacturers of MHE and industrial gears in Asia. Its acquisition of the Benzlers-Radicon group belonging to David Brown Gear Systems has added to its expertise in the manufacturing of custom-made gearboxes for steel mills, high-speed turbines, satellites for ISRO, naval aircraft and many other growth sectors.

Elaborating on Elecon’s overseas subsidiaries, Mr Patel says,”We continue to work towards gaining a strong foothold in the US, Canada and Latin America, where we are witnessing positive momentum in order intake and revenue. All our overseas entities have become profitable and we expect further improvement in profitability going forward.”

Speaking about the business outlook, Mr Patel says, “The demand environment continues to improve and in line with our growth aspirations, the company has set a revenue target of Rs 1,500 crore by FY24 and an outline capex plan of Rs 100 crore over a period of 2 years. We have formulated strategies to improve exports with a target to reach 50% of our revenues by FY30. Despite temporary headwinds in external environments, EECL is well poised for growth going forward and we remain confident of further improvement in performance in the coming quarters as well.”

Dividing capex into three parts, Mr Patel explains, “One is a large amount on alternative energy, i.e., green energy – installation of a solar plant as well as windmills to compensate for the electricity that we consume. The second is for replacing machine tools which have become extremely old with new machines and new technology. The third is towards a slight enhancement of capacity if we find certain areas where the capacities are required to be balanced.”

In reply to a question, Mr Patel says with optimism that “we might reach a revenue target of Rs 1,500 crore in FY23 itself instead of FY24. There is a possibility that we might exceed that. We remain cautious while giving numbers.”

AFTER-SALES FOCUS

Revealing the new strategy being adopted for the MHE division, Mr Patel says, “With the changed strategy, a majority of our business is coming from after-sales, which is revamping or modernizing material handling plants as well as giving services and manufacturing spares and delivering to customers. Now, these are highly profitable businesses and therefore the margins are quite healthy. In new product orders, we tend to have better margins and favourable payment terms because the point is to get all our payments by the time we supply or deliver the unit, so there is no question of retention of money.”

He continues, “We have the widest range of products in the material handling business which are consumed by a lot of our competitors, as many of them are contracting companies whereas some others might not be manufacturing complete range of products. Therefore, we also sell to our competitors. Business prospects would certainly brighten if the power sector or the coal handling business improves because it has good potential.”

Explaining the non-material handling equipment area, Mr Patel says, “We are trying to enhance our product portfolio by bringing in new products which are mechanically engineered products and not material handling. This would increase the capacity utilization of our MHE division and give us a higher turnover. Measuring through different parameters, I believe that this division will definitely do a turnover in the range of Rs 300-500 crore.”

Giving a further insight, Mr Patel says,”We are expecting 30% growth in the gear business with improved operating margins. The existing orders on hand with healthy margins will consume about five months of production. Similarly, through the navy business is going to reduce this year but will not become zero. Debt reduction, which is the savings in interest cost, is also going to add to the bottomline. Considering these factors, we expect higher profitability in the current financial year than in FY22 in absolute terms. Moreover, due to strong exports hereon, we would prefer credit facilities in foreign currency or may be with interest subvention. This would overall help to substantially reduce our interest cost, which we expect to be nearly Rs 12 crore this year against Rs 37 crore in the previous year.”

EXPORTS THRUST

In order to have sustainable growth all around and with a view to keep the pace least disturbed, Mr Patel says, “If demand continues the way it is, we are sure that the results will keep on improving further. Whereas on the other hand, exports has become our thrust area; hence it would be like an automatic hedge against a recession in the domestic market. As the recession cycles are different, it will make us de-risk.”

Commenting on debt and cost, Mr Patel says, “Our continuous focus on debt reduction has led to a significant decline in interest cost over the quarters. Similarly, some other cost reduction, optimum utilisation of the existing capacity and enhancing operational efficiencies are our focused areas. We are working towards strengthening our balance sheet by reducing debt and other liabilities so as to become net debt-free by 2023.”

EECL has reduced its debt from Rs 286.19 crore in FY21 to Rs 100 crore as of March this year. As a result, its finance cost, which was Rs 59.81 crore in FY21, has been brought down to Rs 37.34 crore in FY22 and the management expects this to get further reduced to about Rs 12 crore in the current FY23. The equity capital is Rs 22.44 crore and reserves are Rs 1,028 crore. The promoter group holds a 59.26% stake in the company.