Analyst Meet Update We attended the analyst meet organized by (ELEQ), a key manufacturer of air compressors with a market share of > 2% in India. Elgi s total revenues grew at a healthy CAGR of 2% in the past years, but witnessed muted growth in the domestic market over the past three years (2% CAGR in FY11-FY14) on the back of weak demand environment. EBITDA margin has been under strain due to increased competition, lack of operating leverage in domestic markets and losses in international subsidiaries. ELEQ is looking at increasing the contribution of after sales service (higher margins v/s products) and shift sourcing for its international operations to low cost destinations (India and China) to improve its overall operating margins. Increasing growth momentum primarily by increasing focus on international markets (>1% y-o-y growth expected), expanding product range and increasing sales traction in new products are the key focus areas. We expect growth in the domestic market to remain muted in FY16E as we don t see an improvement in the capex trend of their end-user industries which Elgi caters to. We expect international operations to stabilize gradually due to recovery in US operations while the losses in Chinese subsidiaries to continue. Key takeaways from the analyst meet Targeting international markets to drive growth ELEQ is targeting Australia, Brazil, China, EU and US as its key growth markets (covering ~7% of the global compressor market) and has strategically increased its presence in these regions through acquisitions and by setting up subsidiaries. ELEQ is targeting at becoming the 2 nd largest air compressor player globally and currently has a global market share of 1.8%. It is aiming at >1% y-o-y growth in the international markets. De-growth in Pattons impacts international growth and margins Sales in Pattons (US subsidiary) has contracted sharply from USD 4mn in FY14 to USD 3mn after key executives moved to a competitor (Atlas Copco). While the case against Atlas Copco has been awarded in favour of ELEQ by the US court, Patton s revenue decline has impacted the overall international growth (flat y-o-y in FY1E). EBITDA has been impacted by Rs. 246mn. Domestic markets yet to witness traction Revenue in the domestic market is expected to decline by % in FY1E on the back of prolonged weakness in the water-well segment and subdued industrial segment growth. Also, stiff competition from MNC players Atlas Copco and Ingersoll-Rand has impacted market share for ELEQ Focus on high margin after-sales service Revenue contribution from the high margin after sales services is currently 26% in the domestic business and ranges between ~% across various geographies. ELEQ is aiming at increasing this further (especially international markets) to improve overall margins. Major capex completed, sufficient capacity to accommodate growth in the medium term ELEQ has completed the set-up of the new air-end and foundry facilities which are currently operating at a capacity utilization of ~6-6%. The current facility with global standards can comfortably accommodate revenue growth over the next 2-3 years. Financial. summary (Consolidated) Date Feb 27, 21 Market Data SENSEX 298 Nifty 8767 Bloomberg Shares o/s Market Cap Stock performance (%) 1m 3m 12m ELEQ -6% -1% 71% Sensex -1% 2% 39% CG Index 2% 7% 71% Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) EV/EBITDA(x) FY12 9,916 1,12 76 4.8 31. 2. FY13 11,44 1,18 62 3.8 39. 2. FY14 13,4 1,13 4 2.9 2.2 26. ELEQ IN 18mn Rs. 23.8bn 2-wk High-Low Rs. 17-88 3m Avg. Daily Vol Index member Company Update Rs. 6mn Latest shareholding (%) Promoters 31.9 Institutions 2.6 Public 42. BSESMCAP VIJAYARAGHAVAN SWAMINATHAN raghavan@sparkcapital.in +91 44 4344 22 RAVI SWAMINATHAN ravi@sparkcapital.in +91 44 4344 8 Find Spark Research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Page 1
Company History Corporate Factsheet Company Background Presence Management depth Business Corporate Structure Revenue Model was established in 196 as a service station equipment and reciprocating compressor manufacturing company. Over the years Elgi has emerged as a leading manufacturer of diverse range of air compressors and automotive servicing equipments in India. Elgi has two manufacturing locations in Coimbatore, with 32, sq ft of built up factory area. It caters majorly to the Indian market and is actively expanding internationally to different countries including Australia, Brazil, China, countries in Europe and the US. Mr. Jairam Varadaraj (MD) Mr. Jairam joined Elgi in 1992 as the Deputy Managing Director and took over as Managing Director in 1994. Previously, he has worked in the US as a research assistant to study computerized marketing simulation as well as researched on euro-bond markets. He has also conducted detailed research studies on the international financial markets, euro currency markets, joint venture, corporate strategy and technology transfers in the US is engaged in the manufacturing of bore well, reciprocating, centrifugal and screw compressors. It also manufactures automotive garage equipment that includes lifting equipment, body shop equipment, wheel servicing equipment etc. As on March FY14, Elgi had two Indian, eleven foreign subsidiaries and one Joint Venture (JV) Compressors (87% of FY14 Revenue), Automotive equipments (9% of FY14 Revenue) and others (4% of FY14 Revenue) Capacity Key Clientele Key Success Factors It has 2 manufacturing plants in Coimbatore with a capacity of 32 compressors per annum Compressors Diverse client base across various industries including, water well, mining, textile, pharmaceuticals & railways Automotive equipments Automobile garage/ service stations Diverse product range and strong after sales service has led to Elgi secure a loyal customer base in the domestic market and expand internationally Credit Rating Long Term: AA, Short Term: A1+ Corporate Bankers Auditors State Bank of India, Central Bank of India M/s RJC Associates Page 2 2
Quarterly Financial Results Particulars 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY1 2QFY1 3QFY1 Net Sales 3,66 3,476 3,181 3,248 3,13 3,219 3,184 3,189 Raw material consumed 2,142 2,19 1,897 1,832 2,1 1,86 1,746 1,826 Employee Costs 46 87 9 69 73 613 64 6 Other Costs 67 42 31 91 721 87 66 88 Revenue growth has been muted over the past two years due to weak sales in both industrial and water well segments in the domestic market Cost of Goods Sold 3,38 3,148 2,987 3,32 3,34 3,6 2,916 3,63 EBITDA 298 328 194 216 169 213 268 126 % of Sales 8.2% 9.4% 6.1% 6.7% 4.8% 6.6% 8.4% 3.9% Depreciation 7 4 67 68 74 68 77 3 Other Income 73 32 9 38 48 4 23 277 EBITDA margin continues to remain weak due to muted margins/losses in the international subsidiaries EBIT 314 37 186 187 143 199 213 3 Interest 28 27 2 29 16 3 32 44 PBT 286 28 161 18 127 164 181 27 Total Tax 84 3 81 43 42 3 43 94 Other income of Rs. 277mn in 3QFY1 includes Rs. 22mn received from Atlas Copco related to a litigation in the US. PAT 22 177 79 11 84 13 138 163 PAT Margin.%.1% 2.% 3.% 2.4% 4.% 4.3%.1% ETR % 29.3% 36.8%.7% 26.9% 33.4% 21.1% 23.9% 36.% Earnings growth have also been subdued over the past two years EPS 1.3 1.1..7..8.9 1. Page 3 3
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Rs. mn FY7 FY8 FY9 FY FY11 FY12 FY13 FY14 Revenue (in Rs. bn) EBITDA margin (%) Business Overview Revenue profile Peer comparison EBITDA margin profile Peer comparison 3 2 26* 2 26 2 1 2 1 17 13 13 14 11 9 7 6 7 6 4 6 6 6 4 4 FY7 FY8 FY9 FY FY11 FY12 FY13 FY14 Atlas Copco Ingersoll Rand Source: Company, Spark Capital Research * - FY12 is 1 months Source: Company, Spark Capital Research Atlas Copco Ingersoll Rand Revenue growth, EBITDA and PAT trend (standalone) Revenue and margin profile* 4 3 2 Particulars Revenue (Rs. mn) Contribution margin (%) EBITDA Margin (%) India (FY14) 6,4 34.9 14.1 2 - International (FY14),674 34.8 2.7-2 India (FY1E),93 37.2 12.1 EBITDA PAT Revenue growth (yoy %, RHS) Source: Company, Spark Capital Research International (FY1E),72 36.7 3.1 Source: Company, Spark Capital Research, * - excluding ATS Elgi Page 4 4
Financial Summary Abridged Financial Statements (Consolidated) Key metrics Rs. mn FY11 FY12 FY13 FY14 FY11 FY12 FY13 FY14 Profit & Loss Grow th ratios Revenues 9,4 9,916 11,44 13,4 Sales 39.%.4% 1.4% 18.% EBITDA 1,378 1,12 1,18 1,13 EBITDA 41.3% -18.7% -9.1% -.% Other Income 117 147 162 91 PAT 3.6% -1.1% -2.4% -24.3% Depreciation 11 13 182 262 Margin ratios EBIT 1,381 1,132 999 842 EBITDA 14.6% 11.3% 8.9% 7.% Interest 19 26 68 117 PAT 9.% 7.6%.3% 3.4% PBT 1,361 1,6 931 72 Performance ratios PAT 89 76 62 4 RoE 29.6% 2.% 14.%.2% Balance Sheet RoCE 29.3% 2.4% 11.4% 6.7% Net Worth 3,383 3,976 4,336 4,636 RoA 22.% 16.8% 7.9% 4.4% Deferred Tax 31 4 38 (2) Fixed asset turnover (x) 4. 4.1 2. 2.3 Total debt 74 91 2,877 3,71 Total asset turnover (x) 1.6 1.6 1.1 1.1 Total Netw orth and liabilities 3,487 4,8 7,21 8,33 Financial stability ratios Gross Fixed assets 2,71 2,44 4,668,772 Net Debt to Equity (x) (.4) (.4)..6 Net fixed assets 87 1,87 2,971 3,911 Current ratio (x) 2.1 2.3 2. 2. CWIP 34 76 7 862 Inventory and debtor days 123 123 179 17 Investments 174 149 1 149 Creditor days 48 3 73 68 Inventories 1,148 1,27 2,332 2,27 Working capital days 7 7 89 Sundry Debtors 1,16 1,317 2,246 2,427 Interest cover (x) 72.3 43.2 14.7 7.2 Cash and bank balances 1,47 1,484 731 688 Valuation metrics Loans and advances 92 892 1,32 1,8 Fully Diluted Shares (mn) 18. 18. 18. 18. Current liabilities 2,26 2,4 3,28 3,38 Market cap (Rs.mn) 23,77 23,77 23,77 23,77 Net current assets 2,4 2,796 3,37 3,414 EPS (Rs.).6 4.8 3.8 2.9 Total assets 3,487 4,8 7,21 8,33 P/E (x) 26.7 31. 39. 2.2 Cash Flow s EV (Rs.mn) 22,442 22,382 2,921 26,788 Cash flow s from Operations 84 96 (498) 88 EV/ EBITDA (x) 16.3 2. 2. 26. Cash flow s from Investing (287) (3) (2,944) (1,29) BV/ share (Rs.) 21.3 2.1 27.4 29.3 Cash flow s from Financing (133) (17) 2, 41 Price to BV (x) 7. 6...1 Page
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Cont d Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency, Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report: Disclosure of interest statement Analyst financial interest in the company Group/directors ownership of the subject company covered Investment banking relationship with the company covered Spark Capital s ownership/any other financial interest in the company covered Associates of Spark Capital s ownership more than 1% in the company covered Any other material conflict of interest at the time of publishing the research report Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months: Managing/co-managing public offering of securities Investment banking/merchant banking/brokerage services products or services other than those above in connection with research report Whether Research Analyst has served as an officer, director or employee of the subject company covered Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; ELEQ Analyst Certification of Independence The views expressed in this research report accurately reflect the analyst s personal views about any and all of the subject securities or issuers; and no part of the research analyst s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report. Additional Disclaimer for US Institutional Investors This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 1a-6 under the Securities Exchange Act of 1934, as amended) only by Decker and Co, LLC, a broker-dealer registered in the US (registered under Section 1 of Securities Exchange Act of 1934, as amended). Decker and Co accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities discussed in the research material may do so through Decker and Co. All responsibility for the distribution of this report by Decker and Co, LLC in the US shall be borne by Decker and Co, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you if Spark Capital Advisors (India) Private Limited or Decker and Co, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that Decker and Co, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material concerning investment to you under relevant legislation and regulations; Page 7