Buy Elgi Equipments Ltd For Target Rs.260 - ICICI Direct
Healthy growth, margins impacted amid challenges…
*About the stock: Elgi Equipments (Elgi) manufactures a wide range of air compressors (~90% of revenue) and automotive equipment (~10%).
* Elgi is the second largest player in the Indian air compressor market (~22% market share) and among the top eight players globally
* Expansion in new international markets to drive long term incremental growth (rest of the world contributed ~40% in FY21).
Q1FY22 Results: Elgi reported decent Q1FY22 results amid challenges.
* Consolidated revenues came in at | 489.4 crore, up 71% YoY on a low base
* EBITDA margins came in at 6.6% in Q1FY22 (below our estimates of 8.2%) primarily due higher commodity prices and supply chain disruptions
* Consequently, PAT at | 12.4 crore (vs. net loss of | 8.7 crore in Q1FY21)
What should investors do?
Elgi’s share price has grown by ~2.2x over the past five years (from ~| 65 in March 2016 to ~| 205 levels in March 2021).
* Considering strong growth outlook, better margins, we maintain BUY rating
Target Price and Valuation: We value Elgi at | 260 i.e. 42x P/E on FY23E EPS
Key triggers for future price performance:
* Going forward, accelerated growth in International markets, new products like disrupted AB series compressors, traction in India business drive long term incremental growth
* We expect revenue, EBITDA to grow at CAGR of 18.6%, 28.7% respectively in FY21-FY23E owing to various cost control initiatives improving margins
* Net debt free b/s, double-digit return ratios & strong cash generation
Alternate Stock Idea: We also like Grindwell Norton in our coverage.
* High margin value added products and solutions oriented approach to drive margin expansion (from ~16.7% in FY20 to 20.6% in FY23E)
* BUY with target price of | 1510
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