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Oncoming tailwinds for the industry to benefit the company

The welding industry plays an essential role in many industries such as the automotive industry, the construction industry, the aviation industry and many more. It plays a critical role in all manufacturing, construction and fabrication activities that involve metals. The global welding industry’s size was pegged to be USD 20.23 Billion in 2020 and is projected to grow from USD 20.99 Billion in 2021 to USD 28.66 Billion in 2028. ESAB is one of the largest manufacturers of Welding Equipment and Consumables in the world. The company has an extensive presence in India with over 200 distributors across the country. Their strong brands offer a variety of products aimed at diverse applications across industries. The outlook for the Steel Industry in India presents ESAB an opportunity to grow as the welding consumables industry is expected to grow at a CAGR of 11% over the next 5 years. The welding equipment industry is expected to grow at a CAGR of 7% over the next 5 years.

Strong fundamentals to drive valuation

ESAB India has a strong balance sheet with no debt, good asset base, ample cash reserves, short working capital cycle and a handsome dividend payout. The company’s operations are also similarly robust with consistent operating and free cash flows, healthy and improving margins and rising return ratios. Being a market leader with such strong performance and with a strong international parentage, the company commands a higher valuation than its peers.

OUTLOOK & VALUATION

We have forecasted a revenue growth of 16.4% CAGR over FY20-24E where we expect revenue for FY24E at Rs. 1,073.90 cr, EBITDA at Rs. 175.05 cr at an EBITDA margin of 16.3% and Net Income of Rs. 140.71 cr. We estimate FY24E EPS at Rs. 91.43 and assign a PE multiple of 40x to arrive at a target price of Rs. 3657, which is an upside of ~22% from today’s price of Rs.3,000. We initiate coverage on ESAB India Ltd. with a BUY rating, over an investment horizon of 18-24 months.

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