Elecon Engineering

 ELECON ENGINEERING

OVERVIEW

Elecon Engineering is engaged in delivering power transmission solutions and material handling equipment. The company caters to the needs of various sectors like steel, fertilizers, cement, coal, lignite, iron ore mines, power station and port mechanization in India.

INVESTMENT RATIONALE

· The company is in planning for CAPEX of Rs 45-50 Cr in FY 13 and has completed CAPEX of Rs 87 Cr during FY12 out of total budget of Rs 111 Cr. While remaining CAPEX of 24 Cr will be completed as routine CAPEX. Higher CAPEX will benefit the company in coming periods.

· The company is planning to raise funds  to repay high cost debt, to provide for capex requirement for the next 2-3 years and to make available funds for any good opportunity of acquisition. The company is also planning for acquisitions.

· After continuously declining for past 3 quarters, Elecon’s order book increased to Rs1520 Cr (May’12) with order book cover at 1.2X FY12 revenues .

·  This was on the back of strong orders worth Rs550 Cr secured in Apr-May’12 period and after low order inflows in Jul-Dec’12 period.

SECTOR OUTLOOK

The Planning Commission has projected that investment in infrastructure would almost double at US$ 1,025 billion in the Twelfth Five Year Plan (2012-17), compared to US$ 514 billion in the Eleventh Plan. Of the US$ 1,025 billion, 50 per cent is expected to come from the private sector, whose investment has been 36 per cent in the Eleventh Plan.  The government is also making  fast execution of Eastern and Western corridor which costs almost Rs 90000 Cr which will create a great opportunity for infrastructure companies.

Smile :)

Indian Diesel Consumption !!!!!!!

Diesel consumption for April-May’12 jumped 14% over full year FY12 (up 8.5% YoY). Controlled prices are fuelling the strong demand for diesel led by dieselisation of cars and substitution of FO by diesel due to the continued substantial price advantage. 15% YoY decline in April-May’12 FO demand substantiates our point.

April-May’12 petrol demand declined 1% YoY as higher petrol prices impacted driving demand. The growth level is expected to remain low as long as petrol price remains high with huge difference in HSD  selling price, a derived benefit of de-control. Petrol demand growth peaked in FY10 at 14% and post decontrol in June 2010, demand growth has slowed down to 5.6% in FY12, lowest in six years.

With gap between diesel and petrol prices further widened post petrol price hikes in May'12, diesel usage is expected to be further boosted, leading to increased u/r for the sector.

Something About Quantitative Easing !!!

The impact of Quantitative Easing operations undertaken by Central Banks in the developed world is an intensely debated topic and has sharply polarised opinions across academia, financial markets and the popular media. However, as with the debate on austerity versus spending, the  discussion tends to get clouded by firmly held ideological biases rather than focusing on empirical based arguments. With that aim in mind, I summarise below a recent note by Roger Farmer, head of the economics department at UCLA, which argues why central banks should do a lot more to reduce unemployment and boost economic growth.

In a series of recent academic work , Professor Farmer has argued that there is a stable, and causal, relationship between the stock market and the unemployment rate.  And that the stock market crash of 2008, triggered by a collapse in housing prices, caused the Great Recession, and therefore the Fed can do a lot more to lower the unemployment rate by impacting the stock market..

-The chart below illustrates that in normal times the Fed’s balance sheet consists mainly of treasury securities, and that after the Lehman shock of 2008 and the ensuing freefall of the stock market, its balance sheet went from $800BN to over $2 trillion in the space of a month, as it engaged in a variety of lending programmes.

-As the chart also clearly shows, the stock market rally began in  March 2009 when the Fed began purchasing mortgage securities, and began to fall once the QE1 programme ended a year later. The market then began its ascent In  August 2010 when the Fed announced QE2 at its annual Jackson Hole conference.

-Fed policy not only influences markets, it has a big impact on the average citizen as all forms of wealth tend to move up and down together. A person’s wealth is tied-up in his future earnings,  and when the stock  market plummets the prospects of the average worker decline as well. His research has shown that when the stock market rises, unemployment falls and when the stock market crashes a recession ensues.

-Suppose an economist working in the 1970s was trying to predict the unemployment rate three months forward by looking just at the average unemployment rate and the real value of the stock market in the previous two quarters,  his predictions would have been very accurate in that era as well as the more recent era.

Market are moved by sentiment, but these movements have a big impact on our lives through the job market  - as plunges in  financial wealth can lead to devastating  job losses.  The Fed can do a lot more.

An interesting  empirical argument which  illustrates  that central bank actions to expand balance sheets  can positively impact the  stock market as well as the real economy. While an environment of deleveraging and zero short-term interest rates can limit the full impact of monetary policy, it is all the more necessary to take aggressive monetary action, particularly given that governments across the developed world are constrained by their  inability to do more on the fiscal front. Aggressive balance sheet expansion lowers  the real interest rate (by increasing inflationary expectations) which is a powerful tool to boost aggregate demand and increase investment spending.  It is therefore inevitable that the Fed and the ECB will have to do a lot more to buoy the stock markets and the economy, as the process of deleveraging and fiscal constraint continues.

Happy Guru Poornima !!!!

Even by the very sipping of the charanamruta (the water with which the feet of Yours-Gurudev are washed), we get blessed by the eternal wealth (of liberating knowledge), and which dries up the endless ocean of seeking & the subsequent sorrows. My Salutations to the lotus-feet of Yours Gurudev.

There is no higher truth than the Guru, no higher penance than (service to) the Guru, and there is nothing higher than Realisation of the Knowledge of the truth imparted by the Guru. My salutations to You - Gurudev, who is himself that very timeless truth (and who has taken up a form to bless his disciples like me with real knowledge).

The Gurudev is the beginning of the Universe, yet He himself is without a beginning, the Guru is the highest deity, and there is none higher than the Guru. My salutations at the lotus-feet of You - Gurudev.

Today on occasion of Guru Poornima...  
I have no words to express my happiness for providing me the place in your heart for learning.

Balance Of Payment Situation in India !!!!!!

Current Account Deficit (CAD) is now a days become a crucial matter for the Indian government. Due to heavy subsidy, higher import as compared to export has made problem more serious. Balance of payment (BOP) during January to March quarter has grown sharply. BoP, in Q4FY12, showed a deficit of USD5.7bn, as net capital inflows of USD16bn were insufficient to fund CAD that came at an elevated level of USD21.8bn (against expectation of USD20bn). The main reason for the increase in CAD is elevated levels of oil and gold imports (USD16bn in Q4 FY12 vs USD12.7bn in Q3FY12), along with weak external demand. Because of these reasons, trade deficit increased to USD52bn in Q4FY12 from USD49bn in Q3FY12. Ironically, in Q4, trade deficit tends to narrow, reflecting year‐end seasonality (as exporters tend to ramp up sales in Q4 to improve financial result). 

Highlights of BoP FY 2011-12

• In 2011-12, the CAD rose to US$ 78.2 billion (4.2 per cent of GDP) from US$ 46.0 billion (2.7 per cent of GDP) in 2010-11, largely reflecting higher trade deficit on account of subdued external demand and relatively inelastic imports of POL and gold & silver.
• Net inflows under Capital and Financial account (excluding changes in reserve assets) were higher at US$ 67.8 billion during 2011-12 as compared with US$ 62.0 billion during 2010-11. However, there was a drawdown of reserves to the extent of US$ 12.8 billion during the year as against an accretion of US$ 13.1 billion in 2010-11.
  
  
  
  
  
  
  There are a number of risks to the view that country’s external position is likely to improve. Anemic growth in the developed markets of the U.S. and Europe could be a barrier to export growth. Crude oil prices may gain, especially since European Union oil sanctions on Iran have kicked in from July 1. Also, Our government heavily subsidizes some fuel products for end-consumers, which keeps the demand for fuel artificially high. If it doesn’t cut back on fuel subsidies as it has committed to do, the pressure on the current account deficit may continue. The sharp fall in the Indian rupee against the dollar is likely to discourage imports, as companies will have to pay more rupees for goods priced in dollars. It also swells earnings from exports when converted into Indian rupees, which will encourage Indian companies to export more. These simultaneous developments could reduce the current account gap.
  
  
  

Solvency test by "Z- score" model on traded companies

      It is a big question for any investor at the time of investment, whether he is investing in solvent company or not? To ensure financial stability of the company investor may look at some financial ratios like profitability ratios, liquidity ratios etc. The trouble is, each ratio is unique and tells a different story about a firm's financial health. Here we have demonstrated a financial measure that checks the company’s financial solvency by just a one figure i.e. “Z-Score”.  It is a statistical measure that quantifies the distance of data point from the mean of a data set. In a more financial sense, Z-score is the output from a credit-strength test that measures the likelihood of bankruptcy. A Z-score of 0 is equal to a 50% probability of bankruptcy and the higher the number refers good financial condition and vice versa. All prices in these companies are as on 29th June, 2012 and amount are in crore unless otherwise stated.

Negative “Z Score” Companies

      Here below we have screened out list of the company which has Z-Score between zero to one. We can further look to the company’s financial and profitability condition before investing in this companies.

The Companies Which has “Z Score” Between 0 to 1

      Here, we are providing the list of the companies which are quite solvent and we can park our investment in these companies. For this purpose, we have also applied screening measure on out total list of companies, to find refined list. The measures we have applied are market cap greater than 500 Cr, having dividend yield of more than 3% and whose Net Block is greater than its Total Debt. So we belive, these companies have potential to be solvent in critical slow down of the economy situation.

The Companies Which has “Z Score” Above 1