Elecon Engineering Company: What Should Investors Do

Capex cycle is expected to resume, after a brief hiatus in H1 FY25, with hints of recovery already seen in Q4 FY25. And manufacturing industrial gear and material handling equipment (MHE), Elecon Engineering Company (Elecon) stands as a key beneficiary offering a proxy play in this space.

In-house R&D, design and manufacturing capabilities have helped Elecon with its market leadership in the industrial gear market in India (39 per cent market share in FY24). The company caters to around 95 countries overseas across Asia-Pacific, West Asia, Europe, Americas and Africa. While the manufacturing facilities are only located in India, the company has assembly and repair centres in the US, Sweden, Netherlands, the UK and South Africa.

While its closest peer – Shanthi Gears, which is also an industrial gear manufacturer, part of the Murugappa Group, though smaller in size (around one-third of Elecon’s revenue from gear) is trading at an expensive 38 times its FY25 earnings, Elecon is currently valued at a relatively-cheaper 31 times its FY25 earnings and 29 times its FY26 earnings (Bloomberg consensus).

Elecon’s strong market position in industrial gear, high-growth phase of the MHE segment, profit margin sustenance, earnings and order inflow consistency add to the positives.

While the last one-year return has been flat for the stock, the counter saw a 50 per cent rally in the last two months from its 52-week low in March 2025, both on account of a broader market rebound and a buoyant Q4 FY25. Given the recent strong rally, investors can look to accumulating the stock in small quantities on dips of 10 per cent or more. Given the high cyclicality in business and global uncertainties, investors must have a minimum five-year perspective and be willing to look past volatility in the stock.

Operating segments

Elecon has two operating segments – industrial gear andMHE contributing the rest.

A slow start to FY25 owing to the election and slowdown in capex investments resulted in revenue from the industrial gear segment being down 3.6 per cent until 9M FY25. Industrial gears are employed as mechanical power transmission units and find applications in machineries ranging from large mills and turbines to marine vessels. But a strong comeback in Q4 FY25, revenue growth of 29 per cent year on year, led by increased demand from domestic steel, cement and power industries, helped the segment clock in a growth of 7.2 per cent year on year for FY25. The replacement business was 34 per cent of the total gear business in FY25. This segment has remained the company’s mainstay and raked in four-fifths of the total revenue in FY25.

The MHE division, however, continued its rapid growth trajectory with revenue growing 58 per cent annually in FY25. This division entails a portfolio of material handling equipment such as stackers, reclaimers, bagging and weighing machines and crushers. Since FY22, the company shifted its focus to product-based businesses and aftermarket offerings, moving away from project-based orders which were earlier a drag due to delays and uncertainties in project completions. And the segment staged a turnaround with revenue growing at a CAGR of 51 per cent during FY22-25, increasing its contribution to the consolidated revenue from 11 per cent to 21 per cent during this period. From loss at operating levels in FY22, EBIT stood at ₹132 crore, also clocking the segment’s highest-ever EBIT margin of 28.4 per cent for FY25.

End-user industry-wise revenue segregation is not provided by the company consistently for all years. But in FY24, the steel sector contributed around 17 per cent of the revenue. Steel mills are major consumers of Elecon’s custom-built gearboxes. Cement and power are the other prominent end-user industries, while sugar, mining, ports and fertilisers contribute to a diversified order-book.

Domestic to overseas business ratio stood at 77:23 for FY25, against 76:24 for FY24. The company is planning on increasing the contribution of overseas business to 50 per cent of the total revenue by FY30. Country-wise overseas revenue break-up is also not made available.

Financial metrics

Revenue/ EBITDA/ PAT grew at a strong CAGR of 23 per cent/ 30 per cent/ 42 per cent during FY22-25 for the company. The year-on-year growth figures for FY25 stood at 15 per cent/ 14 per cent/ 17 per cent respectively.

Healthy order intake was observed throughout FY25, up 19.4 per cent. Order- book also closed up, at ₹948 crore, up 19.1 per cent.

A net-cash position of ₹590 crore, despite the recent capacity expansion, indicates a strong financial position.

What works

Focus on the high-margin aftermarket offerings is expected to help sustain profitability. While the gear segment is expected to continue growing at a rate of low-to-mid teens in FY26, the MHE segment could grow at around 35-40 per cent. The product mix will be key to sustaining profit margins. Elecon, through partnership with OEMs for supplying industrial gear, is also looking to establish a consistent revenue stream.

The company met its guidance for FY25 – revenue growth of 15 per cent (though it was revised downwards to 12 per cent in Q3 FY24) and EBITDA margin of 24 per cent, which is a positive soft signal. For FY26, the management has guided for a 19 per cent revenue growth with EBITDA margin sustaining at 24 per cent.

Monitorables

The company is planning for geographical diversification through set-ups in Latin America, Canada and Mexico, which are key markets for Elecon. Announcements pertaining to the same are expected in the mid of FY26. Pertaining to the tariff scenario, broad-based tariffs are expected to nullify the impact, but considering the to-and-fro, it will be a key monitorable.

Levered to the capex cycle, the end-user industries – primarily steel, cement and power will dictate the pace of growth. Though revenue growth has been consistent since FY22, it was flat during the previous 10 years, hinting at the possible impact cyclicality can have on the business.

Revenue contribution from the steel sector to the gear segment dipped 6 per cent year on year in FY25, which was offset by continuing demand from cement and power sectors for Elecon. Power, particularly thermal, with focus on capacity addition, is expected to lead growth in FY26.

Published on May 3, 2025