Published on 11/04/2019 10:25:41 AM | Source: Religare Securities Ltd

Buy ELGI Equipments Ltd For Target Rs.316 - Religare Securities


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Leveraging leadership for growth

Elgi Equipments Ltd. is a leading air compressor manufacturer offering a complete range of oil-lubricated and oil-free rotary screw compressors, reciprocating compressors, centrifugal compressors as well as dryers, filters and downstream accessories. Its products are used in different industries such as auto, textile, cement, power, mining, construction, FMCG; etc. Elgi also caters to the automotive segment through its fully owned subsidiary ATS Elgi. Compressors comprise 89% of sales, while Auto equipments contribute ~11% to the sales. In compressors, 45% of the sales come from overseas markets. In 9MFY19, domestic business contributed 60% to consolidated sales, while overseas operations comprised of 40% of sales.


Investment Rationale

* Demand revival to strengthen leadership in domestic market:

Elgi is the second largest player in Indian air compressor market having 30%+ market share on the back of a) wide range of air compressors from 1hp piston to 2,000 hp centrifugal machines backed by in-house technology b) strong brand equity in medium range compressors leading to strong clientele c) robust distribution network with pan India presence and after sales service d) cost controls providing price advantage to the customers. Going forward, we believe pick up in the domestic infrastructure spending viz. hydrocarbons, mining, construction and water well segments will drive domestic sales. Further, traction in new products with lower energy and maintenance costs such as oil free compressors shall also aid growth.

* Stronghold in global markets through acquisitions/subsidiaries:

Elgi is the seventh largest player in the global market with a small share of less than 2%. However, the company has a stronghold in Europe and US markets. Elgi aims to be the second largest player in the global air compressor market by 2027 by acquiring overseas distributors with strong market presence and setting up assembly lines overseas in order to increase its market share. Moreover, as a part of strengthening its global presence, the company acquired its erstwhile distributor of industrial compressors – Australia based F R Pulford and Son for Rs 56cr in August 2018. Acquisition of Pulford is expected to contribute ~Rs 60 cr to revenue going forward. We believe these initiatives will help the company gain more share in US, Europe, Middle East, Brazil as well as North America region.

* Profitability to improve on the back of increased efficiency and value added products:

We believe increase in domestic capacity utilization and value added products will help the company improve operating margins. Also, Elgi’s efficient assembly lines as well as outsourcing of non-critical components help it keep cost under check and maintain an asset-light model which also helps earn healthy margins. In the overseas business, improving performance of subsidiaries-Pulford and Rotair Elgi compressors, Italy will aid profitability. Further, streamlining of processes and improving efficiency through one-time capex will lead to cost saving and result in better margins going forward. Hence, we expect Elgi’s EBITDA to grow by 21% and margin to expand by 90 bps to 11.9% over FY18-21E. 


Outlook & Valuation:

Elgi’s leadership in the domestic market makes it a formidable player to leverage on capacity expansion in various industries such as hydrocarbons, mining, construction and water segments. Moreover, increasing contribution from overseas subsidiaries bodes well for the company’s growth. Elgi also has a strong balance sheet, high asset turnover, healthy operating and free cash flows. We expect the company’s sales and PAT to grow at a CAGR of 17.7% and 22.2% respectively (FY18-21E). We value the company at 28xFY21E EPS and recommend a Buy with a target price of Rs 316. 


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