Buy Elgi Equipments Ltd For Target Rs.663 by Prabhudas Liladhar Capital Ltd
Healthy Q2, GTM momentum fuels growth
Elgi Equipments (ELGI) reported a healthy performance for Q2FY27, with revenue growing 17% YoY, including ~4% contribution from forex, while EBITDA increased 28% YoY, reflecting healthy volume growth and operating leverage. India witnessed strong growth, supported by improved customer conversion for Demand-Match, higher inquiry levels following the implementation of its go-to-market (GTM) strategy and buoyant domestic demand. North America also sustained a strong growth trajectory, while Europe remained mixed, with industrials growing but the Italian portables business facing subdued demand. Management remains confident of achieving marginal profitability in Europe in FY27, with breakeven considered the worst-case scenario, while Australia is expected to recover in H2FY27 following ongoing restructuring. Increasing aftermarket contribution across the US and Europe is expected to support profitability, while the company is undertaking cost-reduction initiatives to mitigate commodity inflation and geopolitical cost pressures. The oil-free compressor segment offers incremental growth opportunities, supported by healthy demand from pharma and food processing, while the MK2 campus consolidation and automated global parts warehouse are expected to strengthen operational efficiency. Overall, improving demand, GTM-led market penetration and a rising aftermarket mix support ELGI’s growth outlook, although geopolitical uncertainty, commodity inflation and the pace of recovery in Europe and Australia remain key monitorables. The stock is currently trading at a PE of 29.6x/25.9x on FY28E/29E. We roll forward to Sep’28E and upgrade our rating from ‘Accumulate’ to ‘Buy’ on the stock given recent correction in the stock price valuing it at a PE of 33x Sep’28E (33x Mar’28E earlier) arriving at a TP of INR663 (INR638 earlier).
Long-term view:
Commodity price volatility and the pace of recovery in Europe remain key near-term monitorable, we remain constructive on ELGI’s long-term growth prospects driven by
(1) its strong positioning among the leading air-compressor players globally and in India
(2) increasing technology differentiation and backward integration
(3) a growing installed base supporting higher-margin aftermarket revenues
(4) continued new product introductions and market-share gains
(5) leadership in the automotive garage equipment segment.
Volume growth aided the performance:
Consol. revenue increased by 17.2% YoY to INR11.3bn (Ple: INR11bn) driven by ~18.0% YoY growth in Air Compressors sales to INR10.4bn and 8.3%YoY growth in Automotive equipment sales to INR897mn. Gross margin contracted by 106bps YoY to 50.8%. (Ple: 51%). EBITDA increased by 32.2% YoY to INR1.9bn (Ple: INR1.7bn). EBITDA margin expanded by 186bps YoY to 16.3% (Ple: 15.2%) primarily led by better operating leverage despite decline in gross margin. PBT (ex. Extra ordinaries) increased by 32.2% YoY to INR1.7bn (Ple: INR1.6bn) aided by lower interest cost (-30% YoY to INR49mn). Adj. PAT increased by 32.6% YoY to INR1.3bn (Ple: INR1.2bn) supported by lower effective tax rate (-153bps YoY to 26.3%). Company reported one-time expenses of INR37mn an account of restructuring cost arising from organizational realignment.
Regional performance:
Growth momentum continued in the Indian (+25% YoY) and American markets (+14% YoY). Performance in Europe (+13% YoY) and Australia (+8% YoY) remained subdued amid prevailing economic headwinds. ELEQ’s compressor mix stood at 52%/48% from India/RoW in Q2FY27.
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SEBI Registration number is INH000000933
