Buy Esab India Ltd For Target Rs.2,850 - ICICI Direct
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Strong performance across key segments…
About the stock: Esab India (EIL) is a leading player in welding consumables (~23% market share) and equipment (~30% market share in domestic equipment). Welding consumables contributes ~70% followed by welding equipment (30%).
* EIL has witnessed strong RoCE & positive free cash flows consistently in consumables over last few years irrespective of the macro environment
* It has consistently operated with 10-14% margins and better return ratios
Q2FY22 Results: EIL reported robust Q2FY22 results.
* Revenues came in at | 221.2 crore, up 33.3% YoY crossing pre-Covid levels
* EBITDA came in at | 32.2 crore, up 38.4% YoY while EBITDA margins at 14.5% expanding by 50bps on YoY aided by favourable product mix
* Consequently, PAT grew 33.7% to | 23.7 crore, YoY
What should investors do? Going forward, new technologically advanced new product launches along with services and exports to drive long term growth.
* Considering strong growth outlook, margins, we maintain BUY rating
Target Price and Valuation: We value EIL at | 2850 i.e. 40x P/E on FY23E EPS
Key triggers for future price performance:
* Consumable segment RoCE has been between 35% and 40% over the last few years and expected to sustain, aided by product mix & efficiencies
* Focus on R&D, new advanced technology based products to improve capacity utilisation, subsequently help margin expansion in coming years
* EIL to further strengthen its leadership position through value added new products, penetrating automation and robotics driving growth. Revenue, EBITDA to grow at CAGR of 16.8%, 30.2%, respectively, in FY21-23E
Alternate Stock Idea: Apart from EIL, in our coverage we also like Elgi Equipment.
* Among the leaders in the domestic compressor market with strong b/s and return ratios, gaining traction in international markets to drive growth
* BUY with a target price of | 260
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