ELGI EQUIPMENTS LTD. (ELGI)
Initiating Coverage - BUY
AnalystAnalystAnalystAnalyst Rajiv BharatiRajiv BharatiRajiv BharatiRajiv Bharati
May 26, 2011
2
ELGI – BUY with a target upside of 20% BUY TARGET : `99
CMP : `82
Source: Company, Bloomberg, Destimoney Research
Promoters 33%
MF/UTI/FIs 7%
FIIs 4%
Individuals 39%
Bodies Corporate
14%
Others 3%
Shareholding Pattern (as on 31 Mar 2011)
Key Data
Ticker (Bloomberg) ELEQ
NSE Code ELGIEQUIP
BSE Code 522074
Sector Capital Goods
Industry
Face Value (`) 1
Book Value per share (`) 17
Dividend Yield (%) 1.1%
52 Week Range (`)
Market Cap. (` mn.) 13,025
Compressor / Pumps
50-106.6
(In ` mn)(In ` mn)(In ` mn)(In ` mn) FY10 FY11 FY12E FY13E
Net Sales 6,770 9,410 10,303 12,626
EBITDA 1037 1404 1463 1856
EBITDA Margin 15.3% 14.9% 14.2% 14.7%
EPS (`) 3.7 5.6 6.0 7.7
EV/Sales 1.7 1.2 1.1 0.9
EV/EBITDA 11.3 8.4 8.0 6.3
P/E (x) (` 82.2) 22.5 14.6 13.6 10.7
Price Performance CY08 CY09 CY10 YTD
Absolute -64.5% 206.8% 114.2% -10.4%
Relative -12.7% 131.0% 96.3% 1.4%
65
100
135
170
205
240
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Relative Stock Performance (May'10=100)
Elgi Equipments NIFTY
3
“Multi-local” strategy to ride over strong domestic presence
� Elgi is India’s market leader in air compressor with 26% market share. It is also one of the large pneumatic player in Asia.
� Strong foothold in domestic market, with limited market to address locally at present, makes Elgi a suitable case for multi-local expansion overseas.
� Foray in China, Brazil, Middle East and recently in France is a step towards leveraging the domestic leadership to expand footprint.
� Indigenization of remaining products will help improve margins for Elgi. Company is test marketing and validating its indigenously made oil-free compressors in Chinese market. The product is already available in India and is doing well. Soon it will be tested in Brazilian market as well.
� Management is aiming to bring high margin After-Market business in sync with the global trend. Globally After-Market contributes 40% to the topline. Elgi currently generates ~20% of its revenue from this segment.
� Operating margins are expected to hover in the healthy band of 14%-15% despite the expectation of some subsidiaries remaining drag on Elgi’s books for some more time.
� We initiate coverage on ELGI EQUIPMENTS LTD with a BUY rating and a target price of `̀̀̀99 per share.
4
ELGI operates in three broad segments with primary focus on air compressor manufacturing and marketing…
Elgi Equipments Product Profile
Elgi Equipments Product Profile
Air Compressors
(84.6%, 91.1%)*
Air Compressors
(84.6%, 91.1%)*
Automotive Equipments
(12.1%,10.5%)
Automotive Equipments
(12.1%,10.5%)
Others
(3.3%, -1.6%)
Others
(3.3%, -1.6%)
Air compressor – for blast hole and drilling in mining & construction
Rig compressor – Water Well boring
On Industrial side – air supply, air for instrumentation, for operating pneumatic / hydraulic instrument.
Service stations – tyre inflation, spray painting.
In railways – air braking, pantograph lifting, water lifting for AC coaches.
Vehicle washing, vehicle lifting, lubrication, cleaning, wheel balancing, alignment, AC recovery, painting.
Automotive Equipments consists of – lubrication equipment, 2 wheeler and 4 wheeler hoists, paint booths, crash repair systems.,
This is primarily a spare part and after sales service segment. Being highly substitutable, management intends to maintain the business at minimalistic levels.
*Ordered Pair = FY 11 (Revenue Contribution, PBIT Contribution)
5
..which commands~26% market share in India
Air Compressors
Air Compressors
Positive Displacement
Positive Displacement
Rotary Screw
Air Compressors
Rotary Screw
Air Compressors Reciprocating
Air Compressors Reciprocating
Air Compressors
Dynamic or Turbo
Dynamic or Turbo
Centrifugal Centrifugal Axial Axial
� Elgi screw airends have been designed in collaboration with City University, London. 40% of the Screw Air Compressors are being exported to quality conscious clients in the USA, Australia, the European Union, South Africa, S.E. Asia, Middle East & Far Eastern countries.
� Elgi primarily manufactures rotary screw and reciprocating air compressors. For centrifugal compressors the company has a tie-up with Samsung Techwin, whose compressor Elgi markets in India.
� Elgi is in process of validating indegenously made oil-free compressors. Currently, Elgi sells Hitachi’s oil free compressors in India.
Global Market Size = `300 bn Indian Market Size = `30 bn
Elgi’s FY11 Air Compressor Revenue = `7.75bn
Elgi’s zone of operation
6
The company has built its technical know how by fostering strategic tie-ups across geographies
Source: Company
Tieup with Hitachi for Oil Free Compressors
Tieup with Samsung Techwin. Elgi markets Samsung’s centrifugal compressors in India.
Tieup with MAHA Germany to make Screw Auto Lifts
Tieup with Cellette of France to sell their Crash (Collision) Repair Systems.
Tieup with SP Air of Japan to offer entire range of Pneumatic tools for auto repair, industrial maintenance, ship building, fabrication, foundry.
Tieup with Farrymann Diesel Gmbh of Germany for Diesel Engines
JV with J.P. Sauer & Sohn, Gmbh, Germany
Tieup with Snap-On International of USA. World's largest manufacturing and marketing company in Automotive Service Equipment.
7
Revenue and Profits are highly dependent on the success of air compressor segment, which contributes ~85% of Elgi’s revenue and 91% of Pre-tax margins
At a consolidated level, in the last 6 years
� Compressor segment has grown at a CAGR of 23%, while Automotive equipments segment has grown at healthy 15% CAGR
Source: Company, Destimoney Research
Segment-wise Revenue Contribution
0%
25%
50%
75%
100%
FY05 FY06 FY07 FY08 FY09 FY10 FY11
Compressor Automotive Equipments Others
8
Rs. 300 bn
Compressors – Smartly growing domestically but needs to make further inroads into global market
Global Market Size. Market is growing at 4% annually
� Current Capacity = 32,000 units at Singanallur, Coimbatore, Tamil Nadu.
� Compressor segments:
� Bore well drilling – Poor monsoon bodes well for the company. Typically a 4 year cycle observed in southern states.
� Industrial Side – Order from Textile mills, Automobile majors
� Railways – Govt budgetary allocation remains a big driver
� After-Market segment another key area of growth which is growing; currently contributing 20% of the company’s revenue.
� High import content in oil-free screw compressor and centrifugal compressor leads to fall in margins
� Sharp rise in steel and casting prices is difficult to pass through to the customer.
India’s market share=10% Elgi’s market share (in India)
= 26%, 2nd position
Source: Company, Destimoney Research
0%
25%
50%
75%
100%
0
2,500
5,000
7,500
10,000
2006 2007 2008 2009 2010 2011
Sales from Compressors (Rs mn-LHS) Growth Rate (RHS)
Revenue Contribution (RHS)
9
After-market segment for compressors has been cushioning companies globally to provide stable cash flows
� Globally companies have 40:60 split between After market & Rental: Equipment, for Elgi the ratio is 20:80. After-market demand being relatively stable the management is working towards improving the proportion.
Source: Company, Destimoney Research
Equipments After Market & Rentals
Atlas Copco Global (FY10)
Equipments After Market & Rentals
Elgi Equipments (FY11)
10
Automotive Equipments – Replacement of older product suite with newer products has helped Elgi to improve the asset-turnover for this segment
� Current Capacity = 22,000 units at Kurichy, Coimbatore, Tamil Nadu.
� Automotive Equipments
� Automotive – Bulk of the business comes from sale of additional equipments to existing dealers.
� Tyres – Wheel aligner
� Oil – Electronic tyre inflator, Integrated lube management service
� Projects
� Indigenization of products – Primary driver is growth of dealership network
� Managing cost is a major challenge as most of the raw material is imported from Europe. It also entails considerable forex risk for the division.
� Undercutting by smaller players is a major issue. Elgi tries to differentiate in terms of quality of service, support and training.
0
900000
1800000
2700000
3600000
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
Passenger Vehicles
Passenger vehicles have grown at 16% CAGR in last 15 years. The same is expected to reach at 5.1m n vehicles by
2015 and 9.2 mn vehicles by 2020.
Source: Company, Destimoney Research, SIAM and E&Y Study
-15%
0%
15%
30%
45%
0
350
700
1,050
1,400
2006 2007 2008 2009 2010 2011
Sales from Compressors (Rs mn-LHS) Growth Rate (RHS)
Revenue Contribution (RHS)
11
Others – While this business is more commoditized and contributes marginally to topline, it is maintained as a hygiene factor
Others include a host of things:
� This segment mainly involve manufacturing and marketing of high value and low variety components and supplying it to high cost countries.
� Additionally customer is very price sensitive in this segment hence not sticky. Management has indicated to keep this segment low key and to be used to complete the offering to the air-compressor segment client base.
� Currently, revenue from Belair France is considered as others as they primarily deal in piping systems and not compressor.
12
Company has set an ambitious plan to achieve $1 bn topline by 2016
Currently, Elgi’s sale is highly focused towards Indian customers, but the five fold leap in revenue the company intends to achieve is possible only through higher overseas sales.
� Elgi bought SA Belair, France, for €700,000. This unit primarily produces piping system. Belair is engaged in assembly, sales & service of industrial compressors, piping, fittings & accessories for more than 25 years. Elgi plans to leverage Belair’s customer base to sell its compressors in Europe.
� With 3% market share in France, Belair contributed ~`400 mn to Elgi’s consolidated revenue, 31% of international business, in FY11.
� Losses in company’s China subsidiary, Elgi Equipment Zhejiang Ltd, are reducing with rationalization of operations.
� Elgi is setting-up office in Brazil to garner South-American markets.
Domestic International Business Domestic International Business
Current Proportion Vision 2016
13
Growth Drivers
� Textile Sector: Air jet weaving looms � Textile Sector: Air jet weaving looms
� Drip and sprinkler irrigation systems � Drip and sprinkler irrigation systems
� Railway infrastructure in passenger as well as cargo will be a pull for pneumatic systems � Railway infrastructure in passenger as well as cargo will be a pull for pneumatic systems
� Development of road and infrastructure projects will require heavy drillers and rigs � Development of road and infrastructure projects will require heavy drillers and rigs
� Laying of optical cables to increase the penetration of internet in rural parts � Laying of optical cables to increase the penetration of internet in rural parts
� Entry of newer auto makers in the country will increase the dealership footprint in the country � Entry of newer auto makers in the country will increase the dealership footprint in the country
� With the growth of Automobile sector demand for garage equipments will grow � With the growth of Automobile sector demand for garage equipments will grow
14
Growth in construction, mining and industrial segment are the key areas in equipment space for Elgi
� Demand for water well drilling compressors is cyclical in nature and repeats itself after every 4 - 5 years. Impact of the demand could be seen in the revenue growth of compressor segment over the years.
� Elgi’s business, excluding the water well drilling segment, is growing at a healthy rate led by Industrial segment and ably supported by Automotive and After-Market segments.
� Margins across the segments are close to the pre-recession levels.
Source: Company, Destimoney Research
Segment-wise revenue growth over the years
3%
26%
39%
12%
24% 37% 34%
12% 8% -8%
21%
28%
FY06 FY07 FY08 FY09 FY10 FY11
Compressors Automotive Equipments
Segment-wise PBIT margins over the years
17% 15% 18%
13%
15%
15% 15% 14%
11%
4% 11%
12%
FY06 FY07 FY08 FY09 FY10 FY11
Compressors Automotive Equipments
15
Though the business at large remains susceptible to steel prices
� With steel prices constantly rising, margins are constantly under pressure as it is difficult to pass on the prices to customer on regular basis
30000
33000
36000
39000
42000
45000
Jun-0
9
Aug
-09
Nov-
09
Jan
-10
Apr-
10
Jul-1
0
Sep
-10
Dec-
10
Mar-
11
May-
11
Hot Rollled Steel Prices (Rs. per tonne)
16
Q4FY11 Performance
Elgi should maintain the margins at 14% - 15% levels attributing to cost rationalization measures
� Fall in net margin in Q4FY11 is attributed to extraordinary items comprising of provision for golden jubilee celebration cost and bad debt of `16 mn.
� Drop in EBITDA margin is also attributed to change in product mix and encashment of leave due to manpower constraint (a one time item).
Source: Company
Part icula rs (` mn)Part icula rs (` mn)Part icula rs (` mn)Part icula rs (` mn) Q4FY11 Q4FY10 % Change Q3FY11 % Change FY11
Total Income 2,434.9 2,037.9 19.5% 2,398.1 1.5% 9,410.4
Total Expenditure 2,143.1 1,754.1 22.2% 2,029.5 5.6% 8,006.6
Operating Profit 291.8 283.8 2.8% 368.7 -20.9% 1,403.8
Other Income 35.3 20.3 73.3% 30.0 17.5% 113.7
EBITDA 327.0 304.1 7.5% 398.7 -18.0% 1,517.5
Depreciation 31.4 25.9 21.2% 25.4 23.4% 107.1
EBIT 295.6 278.2 6.3% 373.2 -20.8% 1,410.3
Interest - (16.8) - -
EBT 295.6 295.0 0.2% 373.2 -20.8% 1,410.3
Tax 112.3 91.1 23.4% 112.7 -0.3% 471.5
PAT 183.3 203.9 -10.1% 260.6 -29.7% 938.8
Extraordinary Items (47.4) (81.1) - (47.4)
Net Profit (incl. Extraordinary Items) 135.9 122.9 10.6% 260.6 -47.8% 891.4
Margins(%)
OPM 12.0% 13.9% 15.4% 14.9%
NPM (incl. Extraordinaty Items) 7.5% 10.0% 10.9% 10.0%
NPM (excl. Extraordinaty Items) 5.6% 6.0% 10.9% 9.5%
-30%
0%
30%
60%
90%
0
700
1400
2100
2800
Sep
-07
Dec-
07
Mar-
08
Jun-0
8
Sep
-08
Dec-
08
Mar-
09
Jun-0
9
Sep
-09
Dec-
09
Mar-
10
Jun-1
0
Sep
-10
Dec-
10
Mar-
11
Net Sales (Rs. mn) Sales Growth EBITDA Margin
17
Less than 15% revenue concentration from any single sector helps Elgi diversify well
18
We don’t forsee margin expansion organically as most capacities are already running
above 80% utilization and raw material costs are
climbing up
Hence, we see Elgi rightly poised to realize its billion dollar revenue vision by 2020
� The company is expanding its domestic facility to build stronger foundation for catering global demand. The company is developing new facility by spending `1,500 mn over the next two years. This new facility would be three times the size of the existing facility.
� Elgi’s topline is expected to grow at CAGR of 21% in the following two years organically. Meanwhile the company is actively looking to acquire companies abroad to make further inroads in overseas markets.
� Though the management is aiming to improve the working capital cycle by 10% in FY12, we expect securing raw material at lower price by giving favourable terms to raw material suppliers might take priority.
-20%
0%
20%
40%
60%
0
3200
6400
9600
12800
16000
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12E
20
13E
Net Sales (Rs. mn) (LHS) Sales Growth (RHS)
EBITDA Margin (RHS)
Source: Company, Destimoney Research
19
Peer valuation
Year End TTM
Revenue (in `̀̀̀ mn)
EBITDA Margin
TTM EV / EBITDA
TTM P/E ROCE ROE
Atlas Copco (India) Ltd.*
200912 17,258 15.4% 22.4 34.8 25.2% 19.5%
Ingersoll-Rand (India) Ltd.
201003 4,830 12.7% 8.2 20.5 10.0% 6.2%
Kirloskar Pneumatic Company Ltd.
201003 4,917 13.0% 6.7 11.9 41.2% 32.9%
Elgi Equipments Ltd. 201103 9,410 14.9% 8.4 14.6 37.8% 27.5%
Source: Ace Equity, Destimoney Research
* delisted
20
We initiate coverage with BUY rating and a target price of `̀̀̀99 per share
� Organically, we expect the company to reach $1 bn by 2020
� Being debt free and with `1400 mn cash on the books, we expect an acquisition abroad is around the corner which is also inline with company’s vision to achieve billion dollar topline by 2015-16 i.e. 4.5 times FY11 sales. This is similar to the strategy of some of its global peers to expand into other geographies inorganically.
� The stock is trading at 13.6 and 10.7 times its FY12E and FY13E earnings.
� We initiate coverage on ELGI EQUIPMENTS LTD with a BUY rating and a target price of `̀̀̀99 per share.
Source: Destimoney Research, Bloomberg
( Fully Diluted Equity) FY10 FY11 FY12E FY13E
EPS (`) 3.7 5.6 6.0 7.7
CEPS (`) 4.8 6.6 7.0 8.9
P/E (x) 22.5 14.6 13.6 10.7
P/B (x) 4.9 3.8 3.1 2.5
ROE 25.1% 27.5% 22.8% 23.3%
ROCE 35.1% 37.8% 31.0% 31.8%
EV/EBIDTA (x) 11.3 8.4 8.0 6.3
65
100
135
170
205
240
May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11
Relative Stock Performance (May'10=100)
Elgi Equipments NIFTY
21
Financial Summary
Source: Company, Destimoney Research
(In ` mn)(In ` mn)(In ` mn)(In ` mn) FY10 FY11 FY12E FY13E
Net Sales 6,770 9,410 10,303 12,626
Operating expense 5,733 8,007 8,840 10,770
EBIDTA 1,037 1,404 1,463 1,856
Depreciation 97 107 159 193
EBIT 939 1,297 1,304 1,663
Interest - - - -
EBT 939 1,297 1,304 1,663
Other Income 82 114 124 152
PBT 1,022 1,410 1,427 1,815
Tax 361 472 471 599
PAT 660 939 956 1,216
Margins
Sales Growth % 22.4% 39.0% 9.5% 22.5%
Operating Margin % 15.3% 14.9% 14.2% 14.7%
Net Margin % 9.8% 10.0% 9.3% 9.6%
(In ` mn)(In ` mn)(In ` mn)(In ` mn) FY10 FY11 FY12E FY13E
Liabilities
Equity Share Capital 78 156 156 156
Reserves & Surplus 2,553 3,259 4,030 5,061
Loans 28 - - -
Deferred Tax Liability 17 17 17 17
Current Liabilities (CL) 1,366 1,882 2,061 2,525
Provisions 1,131 1,506 1,648 2,020
Total 5,173 6,821 7,913 9,780
Assets
Gross Block + CWIP 1,767 2,245 2,845 3,445
Accumulated Depreciation 1,038 1,145 1,304 1,497
Fixed Assets 729 1,100 1,541 1,948
Investments 143 143 143 143
Misc 32 32 32 32
Current Assets (CA) 4,270 5,546 6,197 7,657
Total 5,174 6,821 7,913 9,780
22
Key risks
� Foreign exchange fluctuation risk for the products with higher import content.
� Capex deferment by customers leads to severe competition for Elgi, resulting in the risk of margin erosion.
� Validation of equipments norms in different countries is a time consuming process, resulting in potential loss of business opportunity.
23
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