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Weak FY21E expected amid dismal domestic business
Recently, Elgi Equipments (Elgi) hosted a conference call to discuss the impact of Covid-19 on its business performance, supply chain, working capital and demand disruption. The management mentioned that though the real magnitude of the outbreak is difficult to assess, in the short-term, all business variables will be negatively impacted in the near term. Hence, it has decided to conserve cash and remain financially strong. While the India lockdown has brought the business virtually to a halt and would impact 15 days of Q4FY20E. Q1FY21E is going to be a near washout except for a few global facilities in Italy, US, Indonesia, Brazil, Australia running at bare minimum levels. Accordingly, we factor in the likely impact and revise our earnings estimates for FY21E and FY22E.
Key conference call takeaways…
* Revenue and profits for 15 days Q4FY20E and Q1FY21E are likely to be a complete washout. However, a gradual revival is expected from July 2020 till April 2021 for business activities to return to January 2020 levels. EBITDA for FY20E is likely to get impacted by 15-20%
* Though it is difficult to assess, Elgi has guided at a scenario where revenue is expected to decline between 12% and 50% depending on various product lines and geographies. India revenue (~55% of total revenue) is likely to decline by 50% in FY21E
* As per the company strategy, Elgi is looking at people cost and fixed cost reduction of 12-30% depending on various geographies
* Working capital and debt position is likely to deteriorate as with time there will be challenges due to cash liquidity, increase in inventory and receivables. The near term goal is to manage business on a cash basis and remain financially strong
* Though Indian operation (~55% of consolidate revenue) of Elgi is completely locked down with only export orders getting fulfilled with permission (specially for pharma and food processing sector), the facilities at Italy, US, Australia, Indonesia, Brazil are still working and still getting orders but at bare minimum levels.
Valuation & Outlook
Going ahead, the overall business is likely to get impacted by a third (with India business likely to be halved) for FY21E. However, Elgi’s strategy to manage business on cash and remain financially strong would help them deal with challenges like significant downturn in manufacturing depend companies, stretched working capital, debt position and cash liquidity. On the whole, we expect revenue, EBITDA and PAT growth of -3.1%, 8.3% and 28.5% CAGR, respectively in FY20E-22E, aided by corporate tax cut benefit. We revise our target price to | 115 (25x on FY22EPS) and maintain HOLD.
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