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Long-Term Bank Loans / Facilities Short-Term Bank Loans / Facilities CP / STD CARE AAPR1+ PR1+

Rating CARE has assigned 'CARE AA-' (double A minus) rating to the long-term bank loans / facilities and 'PR 1+' (PR one plus) rating to the short-term bank loans / facilities of Elecon Engineering Company Ltd. (EECL) for an aggregate amount of Rs 980 cr, including sanctioned/ outstanding term loan (as on Dec.24, 2007) of Rs 120 cr, fund-based working capital sanctioned limits of Rs 275.00 cr and non-fund based sanctioned limits of Rs 585 cr. Also, CARE assigned 'PR1+' (PR one plus) rating to short-term debt (including commercial paper) for an amount up to Rs 80 cr, which would be carved out of the sanctioned working capital limits. The ratings take into account EECL's long and established track record in engineering industry with well diversified product range both in MHE (material handling equipment) business and gear business, its leadership position in industrial gear business, strong order book position in MHE business, comfortable financial plus liquidity position and positive industry outlook. The long-term rating is, however, constrained by its operations in a working capital intensive industry and the planned capex which is largely debt funded. Background EECL is the flagship company of Elecon Group, established in 1951 by Late Shri Bhanubhai I. Patel, father of the present Chairman & Managing Director, Shri Prayasvin B. Patel. EECL was incorporated in 1960 and started its operation with design and manufacturing of elevators and conveyors. Presently, it manufactures a wide range of MHE alongwith industrial gears and gears for WTGs up to 600 kw. Further, it has re-entered the wind farm business (alternative energy) in current year after a span of six

years. The company is an industry leader in transmission gears with almost 27% market share and is one of the largest manufacturers of MHE. Operation of the Company EECL operates in three business areas namely material handling equipments, transmission gears and alternative energy contributing 52.5%, 47.3% and 0.2% of sales in FY07. In MHE business, EECL designs and manufactures a wide range of material handling equipments catering to the need of core sectors such as steel, fertilizer, cement, coal, lignite and iron ore mines, power and ports. EECL executes turnkey projects for material handling with its own equipment supply viz. wagon tipplers & loader, stackers & reclaimers, crushers, scrapers, feeders, conveyors, ship loader, cable reeling drum, etc. EECL has advanced manufacturing facilities spread over 1,17,000 sq. mtrs. and the company is equipped with a wide range of computer numerical controlled machines, quality control and testing equipments etc. The transmission gear division of the company manufactures helical gears, worm gears, high speed gears, couplings, special gears and geared motors. The manufacturing facility is spread over 1,73,098 sq. mtrs, with more than 90% of the machines being computer controlled, ensuring a high degree of precision in manufacturing. EECL manufactures a wide range of industrial gears of all size and also customized ones as per the requirements. It is the only domestic player manufacturing large-sized gears, which are import substitutes. EECL is the leader in gear industry with around 27% market share followed by Shanti Gears and Crompton Greaves. The products find application in almost all manufacturing industries including cement, steel, sugar, material



handling equipments, elevators, fertilizer, plastic, rubber etc. EECL is also diversifying its product portfolio in gear business by introducing high speed plus capacity lift gears and vertical roller mill gear boxes. EECL is also putting thrust to supply gears for specific applications of Indian navy. The company has re-entered the alternate energy business viz. wind farms, with a target to install wind mills with installed capacity of 25 mw in the first phase. It has already acquired land for the project and plans to outsource parts of the wind mill, while WTG gear boxes will be manufactured in-house. Its key customers are NTPC, BHEL, SAIL, Indian Navy, Indian Railways, ACC, Neyveli Lignite, Reliance Energy, Torrent Power, JSW Steel, etc. As on Nov.30, 2007, EECL had strong order book backlog position of Rs. 1127 crore including Rs. 912 crore for MHE division and Rs. 215 crore for gear division. Over 70% orders of MHE division are of comprehensive turnkey contract having price escalation clause, where as balance are fixed price equipment supply contracts. Ongoing Projects Looking at the increasing demand from the user industry, both in MHE and gear business, EECL has envisaged a total capex of Rs 87 crore for expansion of its manufacturing facilities of MHE division and introduction of new products under gear division. The company has already incurred Rs 28 crore towards the above capex (as at Dec.18, 2007). EECL is also setting up separate facilities for manufacturing wind mill gear boxes with total investment of Rs 80 crore. It has planned to enter into a licence agreement for technology transfer for the gearbox of WTG of 1-2 mw with a renowned global manufacturer. The company has already incurred Rs 49 crore towards the project (as at Dec.18, 2007) and the same is expected to commence operations in H1FY09. During FY07, the total income increased by 64% due to 119% growth in income of MHE division and 36% growth in income of gear division. The income growth was a result of surge in demand due to investment in

Financial Results (Rs crore) For the period ended / as at Mar.31, Working Results Total Income PBILDT Depreciation Interest and Finance charges Profit from operations (PBT) PAT Net Cash Accruals Financial Position Equity Capital Net Worth Total Capital Employed Key Ratios Profitability (%) PBILDT / Total Income PAT / Total Income ROCE Solvency Long Term Debt Equity Ratio Overall Gearing Ratio Interest Coverage (times) Current Ratio* Turnover Avg. Inventory (days) Avg. Collection Period (days) Working Capital Turnover Ratio Capital Turnover Ratio 183 128 2.81 1.74 150 151 2.70 1.78 110 166 2.53 1.79 0.50 1.59 2.55 1.11 0.59 2.17 3.59 1.12 0.32 1.60 5.14 1.21 11.67 3.68 15.69 13.56 6.33 21.30 15.52 7.63 25.63 5.65 68.29 176.75 5.71 100.37 318.20 6.18 187.47 487.90 272.76 31.83 8.23 9.26 14.35 10.03 19.01 439.82 59.66 9.43 13.98 36.25 27.86 33.59 720.23 111.76 12.22 19.36 80.17 54.92 66.38 2005 (12 m) 2006 (12 m) 2007 (12 m)

* includes current portion of long- term debt. core infrastructure sector and capex plan of user industries. PBILDT margin improved from 13.56%, in FY06 to 15.43%, in FY07 on account of increase in level of operations and better realisation in MHE, as well as the gear division. Improvement in PBILDT margin led to improvement in PAT margin from 6.33%, in FY06 to 7.63%, in FY07. ROCE and RONW also increased gradually over the last three years and were 25.63% and 38.16% respectively, during FY07 on account of improved profitability.



The long term debt equity ratio improved from 0.59 as on Mar. 31, 2006 to 0.32 times, as on Mar.31, 2007 on account of conversion of FCCB of Rs 36 crore and accretion of profit in the form of increase in networth. The overall gearing also improved to 1.60 times, as on Mar.31, 2007 due to increase in networth, despite increase in bank borrowing by Rs 101 crore. Interest coverage improved from 3.59 times, in FY06 to 5.14 times, in FY07 due to improvement in PBILT. Looking at the working capital intensive nature of the industry, current ratio and quick ratio were satisfactory at 1.21 and 0.90 times, respectively as on Mar.31, 2007. Industry Review

replacement and maintenance demand for installed manufacturing facilities. Increasing investment in manufacturing and infrastructure sector coupled with modernization of manufacturing plants would benefit the gear industry, as its products form an essential part of most of the manufacturing facilities. The gear industry in India has been growing at a rate of 12-15 per cent annually for the last few years buoyed by India's GDP growth of 7-8 per cent and the growth in India's manufacturing sector.

Wind Mill and WTG gear box:
India with a wind power generation capacity of 6,270 mw, is the fourth largest wind power producer in the world after Germany, USA and Spain and has huge potential of about 45,000 mw. The government policies are also conducive for investment into wind mills.

Material Handling Equipments (MHE):
MHE are heavy duty machines mainly used for transporting goods, handling other equipments, etc. and are used in applications like coal handling systems, conveyer systems, trippers, wagon tipplers, ship loaders, etc. The products are mainly used by coal, steel, fertilizers, power and cement industries. The demand for MHE is driven by capacity expansion in user industries which are influenced by growth in overall economy. Backed by capacity building in both core sector and infrastructure sector, the Indian bulk material handling industry is expected to post strong growth. Going forward, the demand for MHE is more likely to sustain, given the quantum of investment under pipeline, especially in the manufacturing sector with sizeable amounting of it translating to MHE industry. TRF Ltd., Mcnally Bharat Engineering Co. Ltd., L&T and EECL are the major players in the domestic market.

Increasing investments in the core sector mainly thermal power projects, steel, cement, mining and port sector would increase the prospects of MHE business, where EECL is one of the leading and established players having a wide range of product portfolio focusing on turnkey projects. EECL being the industry leader with almost 27% market share and having presence in all segments of industrial gear especially in large gear boxes where its is the sole domestic player would directly benefit from the surge in demand from the increased investment in industrial and infrastructure sector. Further, its shift to higher size/high value gears and introduction of new products will not only increase its competitiveness in the domestic industry where it is the industry leader, but also increase the opportunities in the export market. Increasing rush for non conventional energy generation by the industries, supported by government, following awareness of global warming, is expected to increase the demand of wind mills in India and in turn, gear boxes for WTGs, where EECL plans to diversify in near future. December 2007

Transmission Gears:
Transmission gears like helical, worm, planetary and composite gears find application in coal, steel, fertilizers, power, cement and other industries. The demand for transmission gears is mainly driven by capacity additions in the manufacturing sector and is sustained by



For Further details please contact at :

CREDIT ANALYSIS & RESEARCH LIMITED 4th floor, Godrej Coliseum, Somaiya Hospital Road, Off Eastern Express Highway, Sion (E), Mumbai - 400 022. Tel.: (022) 6754 3456 Fax : (022) 6754 3457 E-mail : [email protected]
Disclaimer CARE's ratings are opinions on credit quality and are not recommendations to buy, sell or hold any security. CARE has based its ratings on information obtained from sources believed by it to be accurate and reliable. CARE does not, however, guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Most issuers of securities rated by CARE have paid a credit rating fee, based on the amount and type of securities issued.



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