Multi Baggers
Eimco Elecon
BSE ID : 523708 NSE ID : EIMCOELECO
RECOMMENDED PRICE 530.00
PEAK FROM RECO 977.00 84.34%
CURRENT PRICE 2158.05 Resource id #12
EEIL commands a dictating 90% market share in domestic underground mining equipments market with majority of revenue coming from Coal India. We arrive at a target price of Rs. 780 and recommend a BUY for the shares of EEIL with long-term horizon of 18-24 months.
Eimco Elecon (India)
EEIL commands a dictating 90% market share in domestic underground mining equipments market with majority of revenue coming from Coal India (nearly 85% during the last fiscal). Over the last couple of years, the moderate growth in the domestic coal production, sluggish mining activities, preference for opencast coal mining over underground coal mining in particular and increase in coal imports led to denting top-line for the company. Nevertheless, the company in association with another group company, Emtici Engineering, commands an equally dominant share in the spares and after-sales market which has restricted the fall in turnover to some extent. Over the past few decades, the company has managed to expand a well knit touch-points in the interiors of mining areas which separates them from other players in this space.
Leadership position to get rewarded with anticipated increase in domestic coal production: Eimco Elecon commands a dominant, 90%, market share in the underground coal mining equipments industry. Last couple of years have been lull on account of lack of orders from Coal India, however, with massive target of 1,000 MT of production by 2020 would require them to increase efficiency through mechanization and usage of technologically upgraded equipments. Also, the Government’s thrust to increase underground mining will drive the demand for underground mining equipments.
Strong after-market service and sales channel drives profitability and improve visibility: The life of an equipment is usually 6-8 years and thus, requires continuous wear and tear. The company through, another group company, Emtici Engineering takes care of sales of spares & after-market services; makes significant contribution to the company’s business.
Robust financial position and backing from the strong foreign promoter provides comfort: The company sits debt-free on liquid investments worth Rs.113.9 crore which translates into a value of Rs.197.5 per share. The company has consistently been paying healthy dividend ever since 1996. The promoter holding stands above 74%; further, foreign promoter, Sandvik AB is a global leader in machining solutions, equipments supplier in mining, rock and materials technology with operations in over 150 countries; can prove to be a game changer for technical collaborations, technology acquisition, joint ventures, etc.
Diversification into different segments and new products to contribute to the top-line: The company has started working on new product developments for opencast mining which currently accounts for more than 90% of India’s coal production. In addition, the company has been working on new products development with the aim of de-risking its business model; for instance, the new chair lift man riding system presents good scalability potential.
Outlook and Valuations
Eimco Elecon (India) commands a dictating 90% share in the underground coal mining equipments market. The underground mining space has been quite lacklustre over the last few years on account of moderate growth in the domestic coal production, sluggish mining activities, preference for opencast coal mining over underground coal mining in particular and increase in coal imports. Nevertheless, with the steep targets set by the Government for the domestic coal production and focus on bringing in technology partners, alongwith new equipment procurement policy – the focus on underground coal mining is likely to see a revival which is also a more environment friendly method. At the CMP of Rs. 530, the stock is currently trading at ~11.8x FY19 earnings of Rs.43.3; assigning a multiple of 18.0x, we arrive at a target price of Rs.780 and recommend a BUY for the shares of EEIL with long-term horizon of 18-24 months.
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Disclosure:
Analyst Stock Ownership - Yes
Stock Recommended to Clients - Yes
Remuneration/Benefits received from company in 12 months - No
Merchant Banking Market Making activities / projects - No
Sushil Financial Services Pvt. Ltd and Group Companies Holding - Yes
Sushil Financial Services Pvt. Ltd and Group Directors Holding - Yes
Broking Relationship with the company covered - No
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