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Decent performance amid challenges...

Esab India reported a decent set of Q4FY21 numbers on the revenue front at | 207 crore, up 18.3% YoY, 12.5% QoQ owing to a gradual revival in infrastructure, automotive, engineering and metals sectors. EBITDA came in at | 28.8 crore, up 15.3% YoY while EBITDA margins came in at 13.9%, declining 40 bps YoY while improving 320 bps QoQ. Gross margins declined 300 bps to 36.4% YoY while they improved 160 bps QoQ, primarily due to higher raw material cost impacting gross margins. PAT came in at | 19.7 crore, up 9.1% YoY, partly impacted by lower other income at | 1.5 crore, down 61.1% YoY.

Welding consumable segment to sustain superior returns…

Esab’s consumable segment (70% of revenue) has grown at a CAGR of 9.3% in FY15-20 while it is expected to grow at 8.8% CAGR in FY20-23E factoring in the Covid-19 impact and expected demand revival in high performance products like electrodes, wires and fluxes led by a gradual economic recovery. Consumable EBIT margin has expanded more than ~450 bps to ~17% in FY16-20 and is expected to sustain at similar levels in the coming years. Consequently, consumable segment RoCE has been at 35-40% over the last few years and is expected to sustain, aided by a mix of cost & operating efficiencies, product mix, technological innovation and growing investments in infrastructure and manufacturing sectors.

New launches, automation, robotics to aid equipment business

Esab is focusing on R&D to develop and introduce new advanced technology based products to improve capacity utilisation, which will subsequently help improve EBIT margins in the long run from current levels of 6.5-7.5%. The expected recovery in manufacturing, railways, auto and other infrastructure and heavy engineering sectors would further aid the segment performance. Esab’s welding equipment (~30% to revenue) has grown at a decent CAGR of 11.5% in FY15-20. However, it is expected to rebound with CAGR estimated at 7.4% in FY20-23E.

Valuation & Outlook

Overall, the company is expected to further strengthen its leadership position through value added new product offerings, penetrating automation and robotics products in the welding industry, which will drive growth. Esab’s debt free status is expected to further enhance its return ratios, operating cash flows and superior margins in the long run led by cost efficiencies, product mix and global capabilities. We value Esab at | 2230/share (earlier | 2230), implying multiple of 33x on FY23E EPS and maintain BUY rating.

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