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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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