ENAM DIRECT EQUITY RESEARCH Elgi Equipments For private circulation only C OMPANY R EPORT Proxy to Industrial capex Company Background Elgi is a leading manufacturer of compressors catering to industries like construction and mining, water well, railways, power, engineering, transport and textiles. It is also engaged in manufacturing of automobile service station equipments and provides manufacturing and engineering solutions for compressors and automotive equipments. Investment Argument An oligopoly industry with high industry barrier: The domestic industry is an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand. Furthermore, the industry has high entry barriers in the form of technology. Strong product portfolio coupled with steady domestic demand: Elgi manufactures a wide range of compressors catering to large number of industries thus insulating it from downturn in a single industry. Elgi is a key beneficiary of higher industrial capex. With domestic demand on an up-tick, we have estimated revenue and PAT (consol.) to increase at a CAGR of ~32% and ~36%, respectively, through FY1-FY12E. Increasing International presence: Elgi is focusing on increasing its international presence by the way of organic and inorganic route. It has presence in large number of countries and is further expanding. As a result, Elgi s exports have also got a fillip and management expects the international business to contribute meaningfully to its business, going ahead. Elgi has established subsidiary in China to produce large screw compressors and also acquired Belair (which has 3% market share in France). It has also established a company in Brazil to enter S.American market. An Asset light business model with improving ROCE: A virtually debt free company with steadily increasing revenue and profit. It has maintained average ROCE and ROE of 37% and 25% over the last four years. It has a strong balance sheet with cash of Rs.139 cr. as on Sep 1. It has been able to manage its working capital efficiently with working capital to sales reducing to 8.6% in FY1 from 22% in FY6. The business has high asset turn at nearly 4x. Factors to monitor Slowdown in industrial capex: Lack of fresh investments across all market segments could dampen the growth of the company. Valuation We believe that with India s GDP on a high growth trajectory, Elgi should continue its strong performance. Elgi has a scalable business model with strong balance sheet, stable ROCE and has generated FCF of Rs. 89 crores as on FY1. We initiate BUY on the company with a target price of Rs. 124 (based on 16x FY12E consol. EPS of Rs. 7.8). Financial summary (Consolidated) CMP (Rs) 84 Target price (Rs) 124 Potential upside 48% Stock data No. of shares (cr) 15.7 FV (Rs) 1 Market cap (Rs cr) 1,32 52 week high/low (Rs) 17/ 39 Avg. daily vol.* (shares) 11,338 BSE Code 52274 NSE Code Bloomberg code Reuters Code * BSE & NSE 6 monthly Shareholding (%) ELGIEQUIP ELEQ IN ELGE.BO Dec-1 QoQ Chg Promoter 33.33.4 FIIs 3.12.2 MFs / UTI 7.26.14 Banks / FIs.15 (.1) Others 56.14 (.73) Price performance 25 2 15 1 5 BUY Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 BSE_SENSEX Elgi Equipments Source: Cline, ENAM Direct Research Y/E March Sales Adj. PAT EPS* Change P/E RoE RoCE EV/EBITDA DPS (Rs cr) (Rs cr) (Rs.) (YoY %) (x) (%) (%) (x) (Rs) 29 551 38 2.4 (12) - 2.8 34.4 3.5 1.3 21 677 66 4.2 74-28.9 44.4 5.6 1.8 211E 954 1 6.4 52 13.2 33.2 49.1 7.3.9 212E 1,185 122 7.8 22 1.8 3.7 45.5 5.6.9 Source: * Adj. for bonus for FY9 & FY1; Company and ENAM estimates 12 1 8 6 4 2 ENAM Securities Direct 17 th January 211
COMPANY BACKGROUND Elgi is a leading manufacturer of air compressors and automobile service station equipment. ELGI's products are used in a wide range of applications in areas ranging from mining, transport, pharmaceuticals, power, oil, railways, chemicals, textiles, printing to ship building, paper, electronics, telecommunications, medical, food & beverages and plastics. No sector contributes more than 1% to the topline of the company thereby hedging it from downturn in a single industry. Hence, it is a play on India s GDP growth which would in-turn fuel the growth in industrial capex. Compressor Technology can be classified as reciprocating compressors, screw compressors, centrifugal compressors and oil-free compressors. Elgi is largely into rotary screw and reciprocating compressors. The Automotive Service Equipment Division manufactures lubrication equipment, two-wheeler and four-wheeler hoists, paint booths, AC recovery units, crash repair systems, wheel balancers etc. Elgi has a vision of becoming a $1 bn. company in terms of topline by 215 by resorting to organic and inorganic growth routes. Product profile Source: Company, ENAM Research. 17 th January 211 ENAM Securities Direct 2
Company Structure Elgi includes Elgi equipment Standalone Company and its subsidiaries. ATS Elgi, is yet, in the growth phase as auto sales have picked up over the last few years and are growing strong. This, inturn, is leading to investment in new and existing garages. The compressor subsidiaries are still in their nascent stage of growth. However, they hold an area of promise since the management s vision is to touch $1 bn topline which would entail increasing international exposure through the subsidiaries- organically or inorganically. Subsidiaries Holding as on Mar-1 Total Assets (Rs cr) FY1 Revenue (Rs cr) FY1 PAT (Rs cr) ATS ELGI Limited 1% 27.2 89.2 5.1 Adisons Precision Instruments Manufacturing Company Limited 1% 1.1.. ELGI GULF (FZE) 1%.9 5.9.7 Elgi Equipments (ZHEJIANG) Limited 1% 2.8 2.1 (3.8) Elgi Compressor Trading (Shangai) Ltd. 1% 1.6 1.5 (.5) SA Belair-France* 1% 6.9 3.1. ; the revenue and PAT nos.are only for one month as Elgi acquired Belair in Mar 21 Business Mix Compressors contribute lion s share of revenue (86%) which stands at Rs. 582 cr. for FY1. It accounts for 92% of EBIT of the company. Automobile Equipments contribute 13% to revenue at Rs. 89 cr. It accounts for 1% of EBIT. Revenue Break-up EBIT Break-up 13% 1% 1. 9.1 8. 6. 4. 2. 9.8 86%. (2.) (2.1) Compressors Automotive Equipments Others Compressors Automotive Equipments Others ; All nos. are on consolidated basis 17 th January 211 ENAM Securities Direct 3
BUSINESS OVERVIEW Compressor Segment Elgi is Asia's largest manufacturer of air compressors. Elgi has a strong product portfolio. It manufactures a wide range of rotary and reciprocating compressors which cater to large number of industries like mining, transport, pharmaceuticals, power, oil, railways, chemicals, textiles etc. This diversifies its customer base and protects it from downturn in a single industry. Spares and services business accounts for nearly 2% of the compressor business. Elgi has a huge nationwide network of over 114 dealers with service team of over 25 engineers and technicians. Elgi manufactures airends in-house. It caters to large no. of esteemed customers. Rotary Compressor Customers Reciprocating Compressor Customers The size of domestic industry is around Rs. 3, cr. Furthermore, the domestic industry is an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand. The industry has huge entry barriers in the form of technology. Compressor Technology can be classified as reciprocating compressors, screw compressors, centrifugal compressors and oil-free compressors. Amongst these, Kirloskar is mainly into gas based compressors. Demand for spares constitutes for a large part of demand for compressors. This ensures a minimum level of demand even in downturn. 17 th January 211 ENAM Securities Direct 4
Elgi is focusing on increasing its international presence by the way of organic and inorganic route. ELGI has a presence in all the major markets across the world including Europe, North America, Latin America, Africa, Australia, Middle East, South East Asia, West Asia and the Far East. It has more than 5 dealers overseas. As a result Elgi s exports have also got a fillip and management expects the international business to contribute more than 5% to its business, going ahead. Elgi s major focus is on European and Chinese market. The Chinese market is more than double the size of Indian market. Elgi has established subsidiary in China to produce large screw compressors which faces little competition from domestic Chinese market. It is also looking at multiple acquisitions in China to capture small size rotary screw compressor market. In March 21, Elgi acquired Belair of France. Belair is a leading supplier of industrial compressors with 3% market share in France. It has also established a company in Brazil to enter S.American market. The compressor business contributes 86% to the total consol. revenue. The compressor segment revenue (consol.) has increased at a CAGR of 25% over FY6-1. The EBIT margin has averaged 16% over the last five years. The segment ROCE has averaged over 5% during the last five years. We have estimated revenue in compressor segment to increase at 35% CAGR over FY1-12E. Compressor segment Revenue and EBIT Margin Compressor segment ROCE (%) 8 6 4 2 2 16 12 8 4 8% 6% 4% 2% % FY6 FY7 FY8 FY9 FY1 FY6 FY7 FY8 FY9 FY1 Compressors Revenue EBIT(%) ROCE(%) ; All nos. are on consolidated basis 17 th January 211 ENAM Securities Direct 5
ATS- Elgi The Automotive Equipment Division manufactures lubrication equipment, two-wheeler and four-wheeler hoists, paint booths, AC recovery units, crash repair systems, wheel balancers etc. This segment is expected to perform in line with auto sales and investment in new and existing garages. It accounts for 13% of sales (consol.) and 1% of the profits of the company. Key Customers ATS- Elgi, is yet, in the growth phase as auto sales have picked up over the last few years and are growing strong. This, inturn, is leading to investment in new and existing garages. We have estimated revenue to increase at 21% CAGR for FY1-12E. Automotive Equipment Revenue and EBIT Margin ATS segment ROCE (%) 1 2% 6% 5% 8 6 4 2 FY6 FY7 FY8 FY9 FY1 15% 1% 5% % 4% 3% 2% 1% % FY6 FY7 FY8 FY9 FY1 Automotive Equipment Revenue EBIT(%) ROCE(%) 17 th January 211 ENAM Securities Direct 6
INVESTMENT ARGUMENT Strong product portfolio coupled with steady demand domestically: Elgi manufactures a wide range of air compressors of both rotary and reciprocating technology in various powers and capacity. It caters to large number of industries like construction, mining, railways, power etc. This insulates it from downturn in a single industry as no industry contributes more than 1% to its sales. Elgi is a key beneficiary of higher domestic industrial capex. The size of domestic industry is around Rs. 3, cr. Furthermore, the domestic industry is an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand. Additionally, the industry has huge entry barriers in the form of technology. Demonstrated growth in sales and EBITDA margin: Elgi has been able to increase sales at a CAGR of 21% over FY6-1. In the same period EBITDA has grown from Rs. 39 cr. in FY6 to Rs. 18cr. in FY1 (CAGR of 29%). Ebitda margin has improved largely due to favourable product mix. We have estimated revenue to increase at a CAGR of 32% and PAT to increase at CAGR of 36% over FY1-12E. Increasing Net Sales and sustainable EBITDA margin 14 12 1 8 6 4 2 FY26 FY27 FY28 FY29 FY21 FY211E FY212E 4% 35% 3% 25% 2% 15% 1% 5% % Net sales EBITDA Margin 17 th January 211 ENAM Securities Direct 7
A virtually debt free company with improving ROCE and ROE in the compressor business: A debt free company which has maintained average ROE of 25% and ROCE of 37% over the last four years. Cash flow from operation (CFO) has increased at a CAGR of 51% between FY7-FY1 (CFO increasing to Rs. 15 cr. in FY1 from Rs.31 cr. in FY7). Improving ROCE and ROE profile Multifold increase in Cash flow from operations 6% 12 5% 1 CAGR = 51% 4% 8 3% 2% 6 4 1% % FY26 FY27 FY28 FY29 FY21 FY211E FY212E 2 FY27 FY28 FY29 FY21 ROCE ROE CFO Working capital- A cash generator : Elgi has consistently been able to decrease its working requirement. Elgi has been able to reduce its working capital as percent of sales from 22% in FY6 to 9% in FY1. Working capital requirement falling with increasing sales 25% 14 2% 15% 1% 5% 12 1 8 6 4 2 % FY26 FY27 FY28 FY29 FY21 FY211E FY212E Sales Working Capital -to-net sales % 17 th January 211 ENAM Securities Direct 8
Quarterly sales trend is encouraging- Sales have been rising consistently from Mar 9 onwards. In the last three quarters the company has posted an average revenue growth of over 5% YoY. Consistently rising quarterly sales Growth of over 5% YoY over the last three quarters 3 7% 25 6% 5% 2 4% 3% 15 2% 1 1% % 5-1% -2% Jun-8 Sep-8 Dec-8 Mar-9 Jun-9 Sep-9 Dec-9 Mar-1 Jun-1 Sep-1 Net Sales Sales Growth Y-o-Y RISKS TO VALUATION Slowdown in industrial capex: Lack of fresh investments across all market segments could dampen the growth of the company. Hence, if GDP growth slows down for a sustained period of time it can hamper Elgi s growth. Adverse exchange rate movements- Around 15% of company s revenue (st.) comes from export, rupee appreciation could have a negative impact on revenue. Recovery of global economy- Elgi has exposure to international markets some of which are still under recessionary trends especially Europe. Recovery of Europe will be key to Elgi s growth. Rise in input costs- Sharp rise in commodity prices such as steel and copper and company s inability to pass on the increase in prices could hamper the margin of the company. 17 th January 211 ENAM Securities Direct 9
VALUATION Revenue growth of ~32% CAGR during FY1-FY12E EPS growth at ~36% CAGR over next two years Scalable business model and stable earnings growth Strong Corporate governance Asset light business with virtually no debt Our 1-yr. target price of Rs. 124 is based on 16x consol. EPS of Rs. 7.8 17 th January 211 ENAM Securities Direct 1
FINANCIALS Income statement Y/E March (Consol.) 29 21 211E 212E Net sales 551 677 954 1,185 Other operating income 2 3 3 3 Total income 553 68 957 1,188 Material Cost 344 49 576 717 Employee Cost 53 64 9 111 Other Manufacturing Cost 21 25 36 45 Contribution (%) 25 27 27 27 Advt/Sales/Distrn O/H 67 74 1 124 Operating Profit 69 18 156 19 Other income 2 5 8 8 PBIDT 71 113 163 198 Depreciation 8 11 13 16 Interest Other pretax Pre-tax profit 63 12 15 182 Tax provision 25 36 49 6 (-) Minority Interests Associates Adjusted PAT 38 66 1 122 E/o income / (Expense) 3 (8) () Reported PAT 4 58 1 122 Balance sheet (Rs. Cr) Y/E March (Consol.) 29 21 211E 212E Total assets 197 265 35 456 Gross block 158 173 23 243 Net fixed assets 66 69 86 11 CWIP 1 2 Investments 14 14 14 14 Wkg. cap. (excl cash) 91 58 66 72 Cash / Bank balance 25 119 183 259 Others/Def tax assets 2 2 2 Capital employed 197 265 35 456 Equity capital 6 8 16 16 Reserves 19 252 328 433 Borrowings 3 4 4 Others 2 3 4 17 th January 211 ENAM Securities Direct 11
Key ratios (%) Y/E March (Consol.) 29 21 211E 212E Sales growth 9.3 22.9 41. 24.2 OPM 12.6 15.9 16.3 16.1 Oper. profit growth 6.3 55.7 44.1 22.5 COGS / Net sales 75.4 73.3 73.3 73.5 Overheads/Net sales 12.1 1.9 1.4 1.4 Depreciation / G. block 5.2 6.2 6.5 6.5 Effective interest rate n.a. n.a. n.a. n.a. Net wkg.cap / Net sales (x).2.1.1.1 Net sales / Gr block (x) 3.7 4.1 5.1 5.3 RoCE 34.4 44.4 49.1 45.5 Debt / equity (x).... Effective tax rate 39.5 35.4 33. 33. RoE 2.8 28.9 33.2 3.7 Payout ratio (Div/NP) 2.1 25. 14.4 11.8 EPS (Rs.)* 2.4 4.2 6.4 7.8 EPS Growth (11.6) 74.1 52. 21.6 CEPS (Rs.) - - 7.2 8.8 DPS (Rs.) 1.3 1.8.9.9 * EPS adjusted for bonus in FY9 & FY1 Cash flow Y/E March (Consol.) 29 21 211E 212E Sources 6 75 118 146 Cash profit 55 69 17 131 (-) Dividends 4 15 17 17 Retained earnings 5 54 9 115 Issue of equity 23 Borrowings 3 1 Others 9 (5) 26 31 Applications 6 75 118 146 Capital expenditure 23 16 28 4 Investments () Net current assets 24 (36) 26 3 Change in cash 13 95 64 76 17 th January 211 ENAM Securities Direct 12
CONFLICT OF INTEREST DISCLOSURE We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given the nature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict of interest. In order to provide complete transparency to our clients, before we make any recommendations, we are committed to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of our clients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the most comprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. The following disclosures are intended to keep you informed before you make any decision- in addition, we will be happy to provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of 14 th December 21) 1. Analyst ownership of the stock No 2. Firm ownership of the stock No 3. Directors ownership of the stock Yes 4. MBD Relationship No 5. Broking relationship No We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision. This document has been prepared by Enam Securities Direct Private Limited Privileged Client Group. Affiliates of Enam Securities Direct Private Limited focused on Institutional Equities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating and target price of the Affiliates research report. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options and other derivatives as well as non investment grade securities - involve substantial risk and are not suitable for all investors. Enam Securities Direct Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Enam Securities Direct Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of ENAM Securities Direct Private Limited. The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Enam Securities Direct Private Limited to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information. Copyright in this document vests exclusively with ENAM Securities Direct Private Limited. ENAM Securities Direct Pvt. Ltd. 21, Laxmi Towers, 'A' Wing, Bandra-Kurla Complex, Bandra East, Mumbai - 4 51. Board: 668 36 Helpline: 668 ENAM Fax : 668 37 Website: www.enam.com / www.enamdirect.in Email: directresearch@enam.com 17 th January 211 ENAM Securities Direct 13