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Decent numbers amid challenges…

About the stock: Elgi Equipments (Elgi) manufactures 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)

Q3FY22 Results: Elgi reported decent Q3FY22 results amid challenges

* Consolidated revenues came in at | 655.6 crore, up 19.8% YoY ? EBITDA margins came in at 11.3% in Q3FY22 (below our estimates of 12.7%) impacted by higher commodity prices and supply chain disruptions

* Consequently, PAT at | 41.7 crore, up 34.6% YoY

What should investors do? Elgi’s share price has grown by ~4.5x over the past six years (from ~| 65 in March 2016 to ~| 370 levels in February 2022).

* We changed the rating on the stock from BUY to HOLD

Target Price and Valuation: We value Elgi at | 410 i.e. 50x P/E on FY24E EPS

Key triggers for future price performance:

* Going forward, accelerated growth in international markets, new products like disrupted AB series compressors, good traction in India business to drive long term incremental growth

* We expect revenue, EBITDA to grow at CAGR of 20.5%, 36.1% respectively, in FY22-24E 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 Thermax in our coverage.

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