august 17, 2018 elgi equipments (elgequ) - icici...

August 17, 2018

Initiating Coverage

ICICI Securities Ltd | Retail Equity Research

Air compressors leader set to march ahead…

Elgi Equipments (Elgi) manufactures a complete range of compressed air

solutions including a wide range of air compressors. It is the second

largest Indian player (~22%) only behind global market leader Atlas

Copco. Globally, it is the eighth largest player commanding ~1.3%

market share. Its manufacturing facilities are spread across India, Europe

& America. Air compressors, automotive equipment contributed 88.1%,

11.9%, respectively in FY18. With a profitable turnaround of foreign

subsidiaries like Rotair in Italy, Patton’s in US, coupled with signs of

growth revival in Indian operations, Elgi is in a sweet spot for solid

business performance in the next couple of years. We expect Elgi to

report revenue CAGR of 18.0% and PAT CAGR of 28.7% in FY18-20E.

Indian manufacturing cycle uptick to strongly benefit Elgi

India’s compressor market is pegged at ~| 4,000 crore, implying a 4%

share of the global air compressor market. Elgi has a domestic market

share of 22.3%, second to Atlas Copco India (~33%). India & exports

contributed | 894.5 crore (~55.7%) to the total consolidated topline

reporting steady growth of 12.6% YoY. Elgi’s domestic operations have a

direct correlation with the pace of manufacturing and industrial activity in

India. Going forward, we expect the correlation trend to continue. An

uptick in industrial activity is expected to lead the India business to grow

at 15% CAGR from | 894.5 crore to | 1182.9 crore in FY18-20E.

Sustained turnaround in foreign subsidiaries remains key

Elgi, through acquisitions, has several foreign subsidiaries in key markets

like the US and Europe i.e. Patton’s in US and Rotair in Europe. Faced

with stiff competition and continued losses, Elgi scaled down its

operations and rationalised costs in markets like China. Revenues from

foreign subsidiaries were at | 519 crore, up 26% in FY18 contributing to

32.3% consolidated revenue. Going ahead, the company continues to

fortify the marketing and distribution of its foreign arm. We believe the

sustained profitability of the US and Europe along with the turnaround of

its Brazil division will help Elgi to drive the next leg of profitable growth.

We expect strong sales CAGR of 25.7% in FY18-20E.

Aspiring market leader with solid fundamentals; initiate with BUY

Elgi aims to fortify its frontend i.e. strengthen marketing & distribution to

leverage its strong product profile. We believe its leadership position,

superior product profile, profitable growth in foreign subsidiaries, lower

debt and efficient working capital cycle place it in a sweet spot. We expect

Elgi to clock revenue, EBITDA and PAT CAGR of 18.0%, 22.0% and

28.7%, respectively, in F18-20E. We initiate coverage on Elgi with a BUY

rating and target price of | 350/share assigning 35x FY20E EPS of | 10.

Exhibit 1: Valuation Metrics

(| crore) FY16 FY17 FY18 FY19E FY20E

Revenue 1,400.8 1,370.1 1,605.3 1,894.3 2,235.2

EBITDA 125.1 139.2 176.1 207.1 262.2

Net Profit 50.9 74.0 95.3 118.0 157.9

EPS (|) 3.2 4.7 6.0 7.5 10.0

P/E (x) 83.5 60.8 46.3 38.1 28.5

Price / Book (x) 8.2 7.4 6.5 5.9 5.0

EV/EBITDA (x) 37.4 33.1 26.2 22.1 17.2

RoCE (%) 9.9 11.7 14.3 16.8 19.7

RoE (%) 9.9 12.2 14.1 15.4 17.5

Source: Company, ICICI Direct Research

Elgi Equipments (ELGEQU) | 284

| 1200

Rating Matrix

Rating Matrix

Rating : Buy

Target : | 350

Target Period : 12 - 15 months

Potential Upside : 23%

Key Financials

| Crore FY17 FY18 FY19E FY20E

Revenues 1,370 1,605 1,894 2,235

EBITDA 139 176 207 262

EBITDA (%) 10.2 11.0 10.9 11.7

Net Profit 74 95 118 158

EPS (|) 4.7 6.0 7.5 10.0

Valuation Summary

(x) FY17 FY18 FY19E FY20E

P/E 60.8 47.2 38.1 28.5

Target P/E 74.9 57.0 46.9 35.1

EV / EBITDA 33.1 26.2 22.1 17.2

P/BV 7.4 6.5 5.9 5.0

RoNW (%) 12.2 14.1 15.4 17.5

RoCE (%) 11.7 14.3 16.8 19.7

Stock Data

Particular Amount

Market Capitalization | 4500.1 Crore

Total Debt (FY18) | 222.8 Crore

Cash and Investments (FY18) | 108.9 Crore

EV (FY18) | 4614 Crore

52 week H/L (|) 350 / 210

Equity capital | 15.8 Crore

Face value | 1

MF Holding (%) 11.3

FII Holding (%) 16.4

Price Movement

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Aug-18Nov-17Mar-17Jun-16Sep-15

Elgi Equipments (R.H.S) Nifty (L.H.S)

Research Analyst

Chirag J Shah

[email protected]

Rohan Pinto

[email protected]


Company background

Among India’s leading domestic air compressor manufacturers with

22.3% market share, Elgi Equipments (Elgi) commenced its operations in

1960. It is also a dominant leader with market share of ~40-45% in the

garage equipment space for automotive equipment through its subsidiary

ATS Elgi. Elgi provides a wide range of compressed air solutions from

(oil-free, oil-flooded) reciprocating compressors, rotary screw air

compressors, centrifugal compressors, portable compressors to dryers,

filters and downstream accessories. The company’s portfolio of over 400

products finds wide application across industries. The company’s

products find application in industries like oil & gas, food processing,

automobiles, textiles, pharma, plastics and packaging, mining, bore well

drilling and general purpose engineering. Air-ends, a critical component

of an air compressor, are manufactured in-house by the company in its

Coimbatore plant. The fully backward integrated facility produces high-

precision grey and SG iron castings, with a yearly capacity of 9,000 metric

tonnes. The factory has the best-in-class machine tools to produce 38,000

parts per year with high accuracy levels of less than 2 microns.

Exhibit 2: Elgi’s Infrastructure

Source: Company Presentation, ICICI Direct Research

On the international front, Elgi has foreign subsidiaries that cater to

compressed air solutions worldwide. The company has two prominent

subsidiaries Rotair Spa (| 180.6 crore in FY18) that operates out of Europe

while Patton’s & Patton’s medical operates out of US (| 253.1 crore in

FY18), both exporting their products worldwide.

Exhibit 3: Elgi’s subsidiaries & JV es

Company Subsidiary/ Associate % Ownership

Elgi Equipments (Zhejiang) Ltd Subsidiary 100

Elgi Compressors Trading (Shanghai) Co. Ltd Subsidiary 100

Elgi Gulf (FZE) Subsidiary 100

Elgi Compressores Do Brazil Imp. E. Exp. LTDA Subsidiary 100

Elgi Australia PTY Ltd Subsidiary 100

Elgi Compressors Italy S.R.L Subsidiary 100

Rotair SPA (Elgi Compressors Italy) Step down Subsidiary 100

Elgi Compressors USA Inc. Subsidiary 100

Pattons Inc (Elgi Compressors USA) Step down Subsidiary 100

Pattons Medical LLC (Elgi Compressors USA) Step down Subsidiary 100

PT Elgi Equipments Indonesia Subsidiary 100

ATS Elgi Ltd Subsidiary 100

Adisons Precision Instruments Subsidiary 100

Ergo Design private Ltd Subsidiary 100

Elgi Sauer Compressors Ltd Subsidiary 26


Shareholding pattern (Q1FY19)

Shareholder Holding (%)

Promoter 31.9

Institutional investors 27.7

General pubic 40.4


The India business & direct exports for air compressors contributed

| 894.5 crore (~56% of consolidated revenue) while foreign subsidiaries

contributed | 519 crore (~32% of consolidated revenue) in FY18. The

company has a relatively higher market share in smaller rated

compressors. ATS Elgi is a wholly owned subsidiary and provides garage

equipment solutions generating | 191.7 crore i.e. ~12% of consolidated

revenues.

Brief history of Elgi Equipments

Elgi commenced its operations in Coimbatore, Tamil Nadu in 1960. It

started out as a service station equipment and reciprocating compressor

manufacturing company. It began making piston compressors by entering

into a technical collaboration with a German company. This soon led the

company to design and manufacture its own air compressors and

develop an automotive equipment division (through subsidiary ATS Elgi).

By 1988, Elgi possessed the technology to manufacture rotary screw

compressors indigenously. By 1990, it had developed (for the first time in

India) the rotary screw type vacuum-exhausters, followed by high

pressure compressors for naval applications, MKB high pressure

compressors for defence warships and compressors for drawing water

from bore-wells. It obtained the ISO 9001 certification by TUV, the world’s

most admired quality improvement standard (it also holds the ISO

14001:2004 and BS OHSAS 18001:2007 certifications). Its focus on

innovating and developing new products, resulted in the world’s smallest

screw air compressor in 2002. The company indigenously manufactured

its first oil-free screw air compressor in 2011. Today, Elgi’s product range

has expanded beyond reciprocating and rotary screw compressors to

include centrifugal compressors, filters, dryers and lubricants.

It designs and manufactures air end (the core of the compressor) and

brands them under ‘Axis’ and compressor packages. It has an advantage

because it has its own foundry with a capacity of 9,000 tonnes for

manufacturing castings, its own milling machines for grinding & milling,

and its own motors for manufacturing compressors. In 2012, Elgi acquired

Italy based, Rotair Spa and US based Patton’s Inc. In FY18, both US and

Europe operations contributed ~83% of revenue earned from

international operations. Today, Elgi has a local presence with three

manufacturing locations and over 100 exclusive dealerships across India

and overseas. The company’s state-of-the-art manufacturing facilities are

located in India, Italy and the US. Elgi has over 1602 employees and 200

distributors worldwide. It exports its products to 70 countries with a direct

presence across 18 countries.


Exhibit 4: Elgi Equipment key milestone timeline

1960-80

• Elgi Equipments began its

operations in 1960 to

manufacture air

compressor, garage

equipments etc.

• Elgi enters into a

technical collaboration

with Pumpenfabrik Uraca,

Germany for

manufacturing air

compressors.

• In 1975, Elgi Equipment

became a public limited

company

1981-2000

• Indigenises the

manufacture of rotary

screw compressors

• Develops high-pressure

compressors for naval

applications

• Develops MKB high

pressure compressors for

defence war-ships

• Develops compressors for

raising water from bore

wells

2001-11

• Develops the world's

smallest screw air

compressor

• Spins off ATS Elgi Ltd

(dedicated unit for

manufacturing

automotive service

equipment ) in 2007

• In 2010, Elgi acquires

Belair SA of France

• Elgi succeeds in

launching the first oil-free

screw air compressor

2011-18

• Elgi acquires Italy based

Rotair Spa, US based

Patton's Inc and opens its

subsidiary and country

offices in Australia and

Thailand, respectively.

• Elgi expands its

manufacturing facility by

opening up air centre

plant and foundry in India

• In 2015, launched

portbale screw air

compressors



Business overview & product offerings

Business overview

The company’s business operations can be broadly classified into two

main segments, air compressor and automotive equipment. The

company offers a wide variety of product offerings under each of its

business segments. It is considered a market leader in quite a few

verticals, including food processing, automobiles, textiles and plastics &

packaging.

Exhibit 5: Key business segments

es

Air compressors (88%)

ElgI’s business overview

Automotive equipment

(12%)


1. Air compressors

An air compressor is a machine that converts power (using an electric

motor, diesel or gasoline engine, etc) into potential energy stored in

pressurised air (i.e. compressed air). Generally, there are three main parts

involved in working of the air compressor.

inlet valve – helps filter air flow

actual compression chamber – through air ends

air compressor tank – which stores compressed air

The air compressor division of Elgi offers a complete range of

compressed air solutions from oil-lubricated and oil-free rotary screw

compressors, reciprocating compressors and centrifugal compressors, to

dryers, filters and downstream accessories.

Screw air compressor: Screw air compressors are a type of positive

displacement air compressor. The actual compression of air occurs in an

‘air end’. A rotating spiral screw of gradually diminishing volume is used

to compress the air, reducing the volume of air inflow resulting in

compressed air. Elgi’s indigenously designed eta-V rotor is encapsulated

in an air end, which includes all major functional systems such as intake

system, compression system and separation system within a common

frame. Considering the critical role of an air end (core of a compressor),

Elgi manufactures an air end for captive use and for individual sale while

the remaining components of compressor are outsourced.

EN (2.2-75 kW), EG (11-160 kW) screw compressors find application in

textile, paper, food processing, automotive, etc. Single stage horizon (90-

250 kW) screw compressors are used in cement, machine tool, steel, etc.

Oil-free air is required when there is absolute intolerance to presence of

oil vapour in the entire manufacturing process. Rotary oil-free screw air

compressor (90-450 kW) uses oil-free air end. Both rotor and housing are

coated with Teflon (PTFE) based food grade coating to resist corrosion &

endure high temperature ~2500 C. These compressors find application in

the food and beverage, pharma and textile industry.

Exhibit 6: Oil-free airends sesssssves


Elgi designs and manufactures oil-free air end and air

compressors. Special PTFE-PFA coating is used for

compression without lubricant or cooling agent. The coating

used is of food grade nature

Air compressor revenues grew at 8% CAGR in FY11-18.

Going forward, growth is expected to accelerate to ~19%

over the next two years


Reciprocating compressor: Reciprocating compressors use a piston in a

cylinder to squeeze the air. Here also, Elgi provides both oil-free as well as

oil-flooded compressors. Both single and two stage oil-free piston

compressors are available. The 1-5 HP single stage oil-free piston

compressors are for customers who require small quantities of oil-free air

at work such as dental chairs, laboratory equipment. The 5-15 HP two

stage oil-free piston compressors are used in industries that need air

quality without contamination. Applications include research facilities,

ozone generation, printing equipment, food processing and packaging.

Oil-lubricated piston compressors are used for industrial purposes such

as automotive garages, pneumatic tools, etc. In addition, Elgi also

provides compressors that have high pressure requirement for

applications like thermal power plants, PET blowing. Traditionally, piston

compressors have been most widely used due to price and availability.

However, generally rotary screws work faster, operate at 100% duty cycle

i.e. work longer and have less maintenance.

Railway compressor: Elgi provides a comprehensive product line catering

to Railways. It provides compressors for electric locomotive, diesel

locomotive and electric multiple unit (EMU).

Exhibit 7: Overview of industry application of compressed air es

Industry Typical applications of compressed air

Automobile Power tools, castings for sand blasting, removing paint & dust, inflating tires

Chemicals Filter pres, Spray driers, Material transfer

Food & Beverage Dehydration, spraying coatings, cleaning, vacuum packing

Power Generation Gas turbines, emission controls

Pharmaceuticals Manufacturing pills, aeration tanks, packaging pharmaceuticals

Railways Tap changers, contactors, brakes



Exhibit 8: Summary of product offerings by Elgi es

Air Compressors

• Oil-lubricated screw air compressor

(EN, EG & Single-Two stage Horizon

series - 2.2-250 kW)

• Oil-free screw air compressor (two

staged water cooled - 90-450 kW)

• Portable screw air compressor

• Industrial applications such as Textiles,

automotive, paper, food processing.

Rotary Screw Air Compressor Railway CompressorReciprocating/ Piston Air Compressor

• Oil-lubricated piston air compressor

(single & two stage compressor- 3-40

HP)

• High pressure compressor for

Navy/Defence application (3-20 HP)

(upto 30 bar)

• Oil-free piston compressor (Single

stage & Two stage - 5-15 HP)

• Borewell compressor

• Applications such as Automotive

garages, pneumatic tools, pharma .

• Compressor for Electric locomotives

• Compressor for diesel locomotives

• Compressors for electric multiple unit

(EMUs & MEMUs)

• Water raising apparatus


Exhibit 9: Elgi’s air compressor product profile at a glance



Services offered by Elgi

The company offers services in the form of coolants and lubricants, air

audit, service agreements, energy saving products & customer care.

Coolants & lubricants

To cater to their product line of oil-lubricated air compressors, Elgi has

developed a special compressor oil ‘Elgi Airlube’ that helps compressors

maintain maximum efficiency in lubrication and cooling thereby providing

a high performance.

Air audit

Elgi offers air auditing systems and control systems. It carries out regular

energy audits for its customers. Energy audit is a specialised process

wherein an expert team of mechanical, electrical and instrumentation

engineers offer a multi-dimensional view of energy usage of a

compressor. This information is useful to control energy costs i.e. since

~70-75% costs involved in lifecycle of an air compressor is due to its

energy usage. Post audit, the company follows up by providing

assistance in implementation and carrying out performance monitoring of

these compressors.

Service agreements in India

The company provides different annual maintenance contracts (AMC)

according to the requirement of clients. Under this contract, it provides

AMC customers annual maintenance reports, special discount on spare

parts, service support on Sundays and holidays, and standby spare parts

on priority in the event of a major breakdown. Thus, maintenance

contracts help reduce production losses and benefits customers from not

having to maintain an inventory of spares.

Energy saving products

While operating air compressors, a significant lifecycle cost incurred is

electricity costs i.e. energy usage. Situations that do not require

compressors to run on full load or in cases where the performance needs

to be monitored can be carried out using a variable frequency drive (VFD).

These VFDs dramatically improve the effectiveness of air storage to

handle demand fluctuations. Payback periods involved using these VFDs

can be as low as seven months.

Exhibit 10: Air accessories offered by Elgi esssssves


Exhibit 11: Life-cycle cost benefits by using a VFD

94%

3% 3%

Compressor without VFD

Electricity cost

Equipment cost

Maintenance cost

es

59%

3%

34%

4%

Compressor using VFD

Electricity cost

Equipment cost

VFD Saving

Maintenance cost

eses


Accessories

Air Receivers

Air Dryers

Air Filters

Drain valves

Variable Frequency Drive (VFD)


Automotive equipment

Elgi commands a leadership position (~40-45%) in the manufacture and

distribution of garage equipment for automotive segments through its

wholly owned subsidiary ATS Elgi.

The company remains a preferred supplier to authorised OEM

workshops. Their facility in Coimbatore is equipped with world class

capabilities in press, weld, machining, paint and assembly processes.

Some key products under this segment include automatic car washer,

lifting equipment, wheel service equipment, power tools, body shop

(welding machines, repair systems). The company has a pan-India

presence – 12 branch offices with over 24 service engineers and 40

technicians and is supported by 200+ dealer technicians. Elgi grew its

revenues at 7.8% CAGR in FY11-18. Its growth has been entirely funded

through internal accruals. It boasts of a debt free balance sheet. Improved

working capital days from 55 days in FY11 to 42 days in FY18 have led to

a significant improvement in operating cash flows for the company.

Exhibit 12: ATS Elgi offerings


ATS Elgi grew their revenues at 7.8% CAGR in FY11-

18. It is expected to report steady growth of 10%

over the next two years


Revenue segmentation

Elgi derived 88.1% of its revenues from air compressors while ATS Elgi, a

wholly-owned subsidiary of Elgi and a manufacturer of garage equipment,

contributed 11.9% in FY18.

Exhibit 13: Revenue segmentation (| crore)

ELGI's revenue breakup FY16 FY17 FY18 FY19E FY20E

1 Air Compressors 1,252.9 1,206.0 1,413.6 1,683.4 2,003.3

% of total 89.4 88.0 88.1 88.9 89.6

a. India & exports 764.2 794.4 894.5 1,028.6 1,182.9

% of air compressors 61.0 65.9 63.3 61.1 59.1

% of total 54.6 58.0 55.7 54.3 52.9

b. ROW 488.7 411.6 519.1 654.7 820.3

% of air compressors 39.0 34.1 36.7 38.9 40.9

% of total 34.9 30.0 32.3 34.6 36.7

2 Automotive Equipments 147.9 164.1 191.7 210.9 232.0

% of total 10.6 12.0 11.9 11.1 10.4

Total Operating Revenue 1,400.8 1,370.1 1,605.3 1,894.3 2,235.2


As seen in the above exhibit, within air compressor segment, Elgi’s

foreign subsidiaries contributed ~36.7% of its air compressor revenues in

FY18. while India & exports segment contributed ~63.3% during the same

period.

Elgi’s comprehensive client profile

Elgi’s clientele includes marquee names from both India as well as

globally. In India, Elgi serves a wide range of industries such as auto,

textile, pharma, cement, iron & steel, power, FMCG plastics & leather, etc.

The Indian client list includes Hero MotoCorp, JCB, Arvind, ACC, Bharat

Heavy Electricals (Bhel) ABB, ITC, etc. Elgi’s globally renowned clients

include the likes of ABB, Allen Bradley, Danfoss, Kubota, Elring Klinger,

Hoerbiger, Siemens, SKF, etc.

Exhibit 14: India customer list

Sector India Client List

Auto

Cummins India, Hero MotoCorp, Honda, Hyundai, JCB, Maruti Suzuki, Renault, Tata

Motors, TVS Motors

Textile Arvind, Dollar, Indo Count Industries, KG Denim, LMW, Nahar, Raymond

Pharma Medreich, Ariston Pharma, Dr. Reddy's, IPCA, Mankind, Jubiliant Pharma, Wockhardt

Cement

ACC, Chettinad Cement, Dalmia Bharat, Lafarge, Orient Cement, Ramco Cement,

Ultratech

Iron and Steel Jindal Steel and Power, JSW, Kalyani, SAIL, Tata Metaliks, Uttam Galva

Power Adani, BHEL, NTPC, L&T Power, Reliance Power, Tata Power, Suzlon

FMCG Haldirams, Hatsun, HUL, Marico, Mother Dairy, ITC, Tata Global Beverages

Plastics & Leather Astral Pipes, Action, Lakhani Shoes, Mirza, Polycab, Sintex, Relaxo, Supreme

Other

ABB, Air India, Bosch, Hindustan Aeronautics Ltd, ISRO, Indian Oil, ONGC, Thermax,

United Spirits

Exhibit 15: Global customer list

Sector Global Client Lust

Others Apac Inti Corpora, ACCO, ADM, Aramark, Armstrong, Blue Star, Bodycote, BSN,

Diamond Plastics, Dixie Aerospace, Dorsey Trailers, Duke Energy, Gildan, Haeco, Hutchnson,

Lee Industrial Contracting, McCall Farms, Ner Horizons, Pepsi, Presto, Prysmian Group,

Trinity Plastics, Tyson Foods, Valspar, Veolia, Vidalia Valley, Wistnr

Jabil, Johnson Control, Revlon, Rockwell Medical, Claxton Chicken, Detyens Shipyards




Investment Rationale

Robust industrial activity in India to drive local air compressor segment

Air compressors are primarily used for manufacturing various goods and

services. The demand for air compressors is generally dependent on

overall industrial activity in the region. Elgi provides air compressors to

key user industries from the food & agro products, textile, machinery,

pharma, chemicals industry, etc. These form the backbone of

manufacturing activity in India. Thus, an uptick in India’s manufacturing

operations would translate to direct benefits percolating to capital

equipment players like Elgi who provide products like air compressor that

play an integral role in an industrial plant.

A good proxy to assess the health of manufacturing operations in India is

by tracking tenders that take place in that industry. As seen in exhibit

below, in FY12-15, there was a lull in tenders in manufacturing segment.

Tendering declined 37% over the same period. This also impacted Elgi’s

domestic business wherein their revenues witnessed a 13% decline.

Since then, however, there has been a significant uptick in tenders floated

in the manufacturing industry. The run rate for tenders has improved from

| 1458 crore in FY15 to | 6848 crore in FY18. Elgi has also benefited and

grew its domestic revenue at ~10% CAGR in FY15-18. Going forward, we

expect tendering to gather pace and accelerate further, resulting in

conversion of these tenders into active order awards. With considerable

unutilised capacities at its disposal, Elgi is in a sweet spot to ride the

upcoming demand tailwind. Thus, we expect the company to grow at a

faster clip of 15.0% CAGR in FY18-20E.

Another criterion used to measure quantum changes in industrial

production in an economy and capture the general level of industrial

activity in a country is through the index of industrial production (IIP).

Elgi’s domestic revenues conform to this trend. Over the past 15 years,

domestic growth of Elgi has mimicked the growth of India’s IIP.

Exhibit 16: Tenders for manufacturing segment on the rise

2,330

7211,406 1,458

7,495

4,067

6,848

780770

753

676

764

794

872

600

650

700

750

800

850

900

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY12 FY13 FY14 FY15 FY16 FY17 FY18

Manufacturing Elgi domestic & exports

| crore

| crore



Phase 1: 2003-08 – High growth phase – India’s economy was performing

well and headed towards a higher growth trajectory during this period

wherein the IIP growth rate clocked ~11% CAGR in FY03-08. Elgi grew at

a faster clip than overall industrial growth in India and recorded growth of

18% during the same period, implying a multiplier growth of 1.6x.

Phase 2: 2008-16 – Consolidation – The global financial crisis in 2008

impacted India’s economy also. IIP growth slumped from 15% in FY08 to

2.5% in FY09. Industrial activity witnessed several headwinds and even

recorded negative growth of 0.1% in FY14. Overall, IIP growth averaged

3% during this period of consolidation. For Elgi, this period saw it struggle

in domestic operations. Looking for growth overseas, the company

undertook several acquisitions. Elgi’s problems were compounded by its

foreign subsidiaries making losses and lack of demand in domestic

markets that impacted sales. Thus, the company only managed to grow

its domestic growth at 5.3% during this period of consolidation. It

outperformed IIP by 1.7x.

Phase 3: 2016-2020E – Steady growth – Over the past couple of years,

India has witnessed a steady pick up in its rate of industrial growth, IIP

growth has improved from 2.4% in FY16 to 4.4% FY18. With expectations

of a pick-up in demand over the next two years, IIP is expected to grow at

6.5% and, consequently, at 8.0% in FY19E and FY20E. FY03-18 has seen

IIP grow at ~6% CAGR while Elgi’s domestic operation grew at 9.6%

during the same period implying a multiplier rate of ~1.6x. As seen in

Exhibit 17, Elgi’s India domestic and exports growth numbers loosely

correlate with IIP growth in India. Considering a multiplier effect of 2.1x,

with IIP slated to grow at ~7.3% over the next couple of years, we expect

the company to grow its revenue by 15% annually. The India business is

expected to grow its revenue from | 894.5 crore to | 1182.9 crore over

FY18-20E. India and exports business is expected to contribute ~59.1%

of revenue from the air compressor segment in FY20E.

Exhibit 17: Elgi domestic growth vs. IIP growth in India

7.0

11.7

8.6

12.9

15.5

2.5

5.3

8.2

2.9

1.1

-0.1

2.82.4

4.6 4.4

6.5

8.0

31.2

-1.8

9.4

21.3

33.1

-7.1

24.5

36.7

-2.1 -1.2 -2.2

-10.3

13.1

4.0

9.7

15.0

15.0

-20

-10

0

10

20

30

40

-2

0

2

4

6

8

10

12

14

16

18

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E

ELGI's domestic operations correlated to Industrial activity in India

IIP growth ELGI's domestic growth (RHS)

%%



Aspirational goal to generate billion dollar sales by 2027

As per Elgi’s management, the global air compressor industry is expected

to grow at 4-5% CAGR and is valued at $16 billion. US & European

markets are estimated to be worth $4.0 billion each, India at $600 million

while others are valued at $7.4 billion. Swedish player Atlas Copco, the

industry leader, commands a market share of 26.9% while US based

Ingersoll Rand has 9.4% share. Elgi is ranks eighth largest globally (1.3%)

and has ambitions to generate $1 billion in revenue by 2027.

India’s compressor market is pegged at ~| 4,000 crore, implying a 4%

market share of the total global air compressor market. The Indian air

compressor market is expected to grow at ~7-9% annually, going

forward. Elgi has a domestic market share of 22.3%, second to Atlas

Copco India (at ~33%). Elgi’s domestic and exports business contributed

| 894.5 crore (~55.7%) to the total consolidated topline reporting solid

growth of 12.6% YoY.

Exhibit 19: Elgi among top domestic players in India

Atlas Copco

33.1%

Ingersoll Rand

16.8%Elgi Equipments

22.3%

Kirloskar

Pneumatic

14.0%

Others

13.9%

Domestic market share (%)


Over the coming decade, the company will look to achieve its ambitious

goal through a mix of organic growth and seek timely M&As for inorganic

growth. The management expects the growth mix to be 30% organic and

70% through acquisitions. Elgi also plans to come out with newer, better

products in the market like oil-free compressors that are as equally

efficient as oil lubricated ones and priced similar to oil lubricated ones.

While looking at a suitable acquisition, the company is aware of not

overleveraging itself and aims to maintain a debt to equity ratio of 1. We

believe this aspiration of achieving a challenging goal will ensure long

term commitment and focus from the management and bodes well for

the company’s future as well.

Exhibit 18: Global market size and share

Americas,

$4.0

Europe, $4.0

India, $0.6

Others, $7.4

Global compressor market size - $16 bn

Atlas Copco

26.9%

Ingersoll Rand

9.4%

Elgi

Equipments

1.3%

Others

62.4%

Market share of key global players (%)



Foreign subsidiaries to provide next leg of profitable growth

Over the past decade, Elgi has made several forays into the international

markets through foreign acquisitions. Until recently, the company faced

several headwinds in operating its overseas subsidiaries. This impacted

the revenue and profitability of the company. Problems like high cost

structures, lack of distribution muscle due to a relatively unknown brand

name, sudden key employee attrition, legacy problem and razor thin

profitability slowed down the company’s foreign growth foray. Faced with

stiff competition and continuing losses, Elgi scaled down its operations

and rationalised costs. In China, post continued losses over the years, the

company limited its operations and only has a nominal presence there.

Overall, revenues from foreign subsidiaries came in at | 519 crore, up

~26% in FY18 contributing to ~32.3% overall revenues. Elgi has made

sustained turnaround efforts in all geographies.

Exhibit 20: Improved profitability profile of foreign subsidiaries

471

505489

412

519

5.4

8.0

9.1

5.3

7.5

-5.9

-1.6

-0.3

3.7

3.9

-8

-4

0

4

8

12

200

300

400

500

600

FY14 FY15 FY16 FY17 FY18

Foreign Subsidiaries EBITDA margin - EU EBITDA margin - US

| crore

(

%

Source: Company, -ICICI Direct Research

The same is reflected in the performance of Patton’s & Patton’s Medical.

Their holding company, Elgi Compressors US, reported improved EBITDA

margins of 3.9% in FY18 vs. losses in FY14. Elgi set up manufacturing

operations in the US and European markets. Rotair procures compressors

manufactured in India and markets them across Europe. Even in India, the

company markets Rotair products. Thus, both subsidiaries benefit from

each other’s distribution reach and generate sales. It also employed

global consulting firm BCG to help improve its overall operations. The

company has identified areas of improvement in its frontend i.e. to fortify

marketing and distribution of its foreign arm. Going forward, sustained

profitability from the US & Europe and a turnaround in the Brazil division

will help Elgi drive the next leg of profitable growth. Hence, we expect

revenues to grow at 25.7% CAGR from | 519 crore in FY18 to | 820.3

crore in FY20E, thus improving the share of foreign subsidiaries in

consolidated revenue from 32.3% to 36.7% during the same period.

EBITDA margins of foreign subsidiaries are expected to improve from

7.7% in FY18 to 11.9% in FY20E. The share of EBITDA from foreign

subsidiaries improved from 17% to 30.4% during the same period.

SAS Belair, France: Weeded out of portfolio

In 2010, Elgi decided to acquire Belair, a company with over 25 years of

experience engaged in assembly, sales and service of industrial

compressors, piping, fittings and accessories. The company would

provide Elgi access to the European market. It was acquired for a

consideration of ~| 4.2 crore. However, the cost structure of Belair

remained a challenge. The management struggled to scale up the

business. The company made several attempts to bring the subsidiary

back towards profitability.

In FY18, the Chinese subsidiary was the only one making

losses among its 14 subsidiaries


With losses piling up, Belair found it difficult to service its debts

obligations. Thus, the company had to file for protective action with the

court in France. It ceased to be a subsidiary of Elgi from FY16. While past

investments may not be fully recoverable, the company does not expect

any future liabilities.

Elgi Compressors US – (Patton’s & Patton’s Medical): Turnaround to gain

traction

When Elgi entered the US by setting up Elgi Compressors US, it had

difficulty in setting up its distribution network since its brand was little

known and distributors were sceptical about its long-term strategy. This

led Elgi to acquire Patton’s in November 2012 (a large southern US based

distributor) for an undisclosed sum. Thus, both Patton’s and Patton’s

Medical became step down subsidiaries of Elgi Compressors US.

Patton’s Inc is an industrial air compressor distributor, fabricator &

supplier and has been in operation since 1945. In the US, Patton’s is an

exclusive distributor for Elgi series air compressors, which come with a

standard lifetime air-end warranty. Custom medical & industrial air

compressor and vacuum systems are fabricated in its facility in Charlotte.

Patton’s also provides complete design and implementation of air

solutions at the customer’s site. It has a team of 14 field sales system

specialists, 60 service technicians available 24/7, energy audit team,

replacement parts, design and fabrication. Through its seven main

Exhibit 21: Belair continued to report losses over the years

41

50

45

58

64

48

0-9 -9

-20

-4 -5

-20

0

20

40

60

80

FY11 FY12 FY13 FY14 FY15 FY16

Revenue PAT

| crore


Rotair in Italy and Patton’s in the US contributed ~39% of

Elgi’s air compressor revenue in FY18

Exhibit 22: Elgi US profitability impacted by high cost pressures

178 182

226

-9

7

-6-20

30

80

130

180

230

280

FY14 FY15 FY16

Revenue PAT

| crore



southeast locations and additional remote service satellite locations, it

provides comprehensive client coverage. Though the company managed

to improve its new product sales, it suffered greatly in the aftermarket

segment due to loss of service staff to key local competitor (Quincy),

which was the bridge between customers and company for parts, service

agreement and services. The company took legal recourse against the

actions of Quincy and was paid a consideration amount of | 22 crore.

However, while stabilising operations, the company lost crucial time as

well as opportunity cost. Thus, the profitability of step down subsidiaries

Patton’s & Patton’s Medical remained muted during this period.

US operations in FY18 witnessed operational stability and another year of

marginal profitability. In addition, the company has seen a pickup in

industrial activity and demand over the past couple of years in both

incremental sales as well as aftermarket segment. We expect this trend to

continue to help US operations to post robust growth in FY18-20E.

European Operations - Rotair SPA, Italy

Rotair is a European manufacturer of a wide range of products like

portable compressors, electric compressors and multi-functional

dumpers, hydraulic breakers and cutters.

Exhibit 23: US operations scripting turnaround

220

253

299

352

24

20 24

-20

30

80

130

180

230

280

330

380

FY17 FY18 FY19E FY20E

Revenue PAT| crore


Exhibit 24: Performance of European operations – Elgi’s key European subsidiary

146154

118111

181

217

260

0 6 6 19 10 13

-20

30

80

130

180

230

280

FY14 FY15 FY16 FY17 FY18 FY19E FY20E

Revenue PAT

| crore



Some of the key customers of Rotair are oil producing countries. It was

acquired in August 2012 when it had a turnover of €15 million. Its rotary

screw air compressor comes with Rotair screw sets that are patented and

manufactured in-house and designed to meet stringent client

requirements. Rotair products are sold worldwide. In addition, Rotair also

provides a platform for Elgi branded products to be sold in Europe

through Rotair. The company specialises in manufacturing emission

compliant engines. In general, they are very expensive. These generally

find demand in the Fareast, Australia, US and the Middle East where there

is a higher level of acceptability for emission compliance machines. The

company lost a major Algerian client who contributed ~20% of Rotair’s

revenue impacting the company in FY16. Overall, Rotair’s products sell

primarily in Europe. Also, ~90% of its electric & industrial machines and

~30% of its portable compressors were sold in Italy. For Rampicar and

breakers sales volumes, Europe contributed (~80%). In FY18, the

company saw some traction in recovering sales impacted by the loss of

their client and grew 33%. Backed by a demand uptick, we expect,

Rotair’s business to remain fairly robust and record solid growth in FY18-

20E.


Strength in automotive volumes to aid ATS Elgi’s growth further

ATS Elgi is a leading manufacturer and distributor of automotive service

equipment in India. It offers the widest range of garage equipment in the

country, thereby earning the tag of a one-stop-shop solution for

customers. In FY18, ATS Elgi reported revenue of | 191.7 crore

registering growth of 16.8% YoY. The fortunes of ATS Elgi are closely

linked to the performance of the automotive sector. While auto sales

volumes have grown at 6.6% CAGR, the garage equipment manufacturer

has grown its revenue at 10.9% CAGR in FY09-18. Thus, the present

tailwinds in India’s automotive sector are expected to aid its revenue &

profitability growth. Overall, we expect revenues to grow 10% annually to

| 232 crore in FY18-20E. On a consolidated basis, we expect its revenue

share to remain at ~10.4% of its consolidated revenue.

Exhibit 25: Correlated auto sales volumes & ATS Elgi revenue

1.7

2.1

2.6

2.8

2.7

2.52.6

2.7

2.92.9

1.2

1.5

1.8

2.1

2.4

2.7

3.0

3.3

40

80

120

160

200

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

ATS ELGI Revenue Passenger Vehicle sales volume (RHS)

| crore

nos

millio

n


Exhibit 26: ATS Elgi financials

148

164

192

211

232

-

50

100

150

200

250

FY16 FY17 FY18 FY19E FY20E

| cro

re

Revenue

7.9

5.5

7.7

5.0 5.0

5.7

4.7 4.6 4.7 4.8

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0


%

EBITDA margins PAT margins


ATS Elgi contributes ~11-12% of Elgi’s consolidated

revenue


Connected compressors via IIoT; enabling improved after-sales services

Today, air compressors can connect and communicate over the internet

through industrial internet of things (IIoT) technology. This intelligent

asset management system through a controller enables plant managers

to keep track of their compressors via internet. These controllers aka

‘brain’ of compressors collect data via built-in sensors, process them and

then provide an overview of how their compressed air system is

performing. Key features provided by this technology are remote

monitoring, improved reporting, data analytics, anomaly detection and

improved safety. Globally, air compressor manufacturers have increased

their focus towards providing intelligent solution to customer’s problems.

Predictive & preventive maintenance service

Elgi Equipments has provided its IIoT technology as a standard feature to

its customers. Their new initiative involves its ‘air alert’ system, a SIM

card based IoT service that facilitates communication such as compressor

performance data to the company’s servers.

Exhibit 27: Elgi’s ‘Air Alert’ system working


Under predictive maintenance service, the device talks to the compressor

and sends critical information of the operational, analytical and strategic

kind to dedicated Elgi servers allowing the company to prevent

equipment failure. One of the key features is the ability to predict

equipment failure with high accuracy, thus bringing down any accidental

downtime. For any compressor, electricity costs comprise ~70-75% of

total energy cost involved. It is here that the company by using its ‘air

alert’ system was able to save ~40% energy savings, a huge chunk on an

overall basis.

However, air alert services are provided to customers free of cost. The

bigger picture involves generating long term sustainable after-market

sales service and gaining valuable insights to make better products in

future.


Ample scope for revenue improvement from after-market sales & services

Across India, Elgi has team of more than 500 sales and service personnel.

The company has a response time of a maximum eight hours. In addition,

they offer a six-year warranty in India. Elgi even offers a lifetime warranty

on its ‘air end’ in US. Consider that Elgi has been selling compressors in

the US for about three years and sold over 1,000 screw compressors and

has had only had one failure during this period. It has service agreements

in India that cater to various annual maintenance contracts (AMC)

according to the client’s requirement. In the overall pie, this forms only

4% of the overall company revenue. Considering the high installed base

of Elgi compressors, there is an increased scope for these services related

revenue to improve further.

Exhibit 28: Atlas Copco derives ~44% of revenue through services

56%

63%

83%

44%

37%

17%

0% 20% 40% 60% 80% 100%

Atlas Copco

Ingersoll Rand

Elgi Equipment

Scope for 'Services' revenue to rise for ELGI

Sale of Products Sale of Services


Despite favourable terms provided by Elgi, it lags peers such as Atlas

Copco (~44%) & Ingersoll Rand (~37%) in terms of revenue generated

from aftermarket sales and services. According to details shared by the

management, Elgi makes blended ~17% of revenue from aftermarket

sales & services and aims to generate ~35% over the long run (domestic

aftermarket revenue contributes ~25%). Driven by a robust aftermarket

sales and services network, global market leader, Atlas Copco sports

superior EBITDA margin of ~23.1% while peers Ingersoll Rand & Elgi’s

consolidated margins are ~11-12%. This leaves considerable scope for

the company to tap into and increase their sales from services, thus

helping improve margins further.


Financials

Revenues to grow at 18.0% CAGR in FY18-20E

We expect revenues to increase from | 1605 crore in FY18 to | 2235 crore

in FY20E at a CAGR of 18.0% in FY18-20E, mainly on the back of

accelerated growth in the air compressor segment. Over FY11-18, Elgi

registered muted revenue CAGR of 8.0% on the back of increased

revenue share of the foreign subsidiaries. Contribution to revenue from

the garage equipment segment declined slightly from 12.1% in FY11 to

11.9% in FY18. Accordingly, revenues from the garage equipment

segment grew at 7.8% CAGR in FY11-18.

Exhibit 29: Revenue trend

1,401 1,370

1,605

1,894

2,235

-

500

1,000

1,500

2,000

2,500


| cro

re


However, going ahead, we expect revenues from air compressors under

the India business and exports to grow at an accelerated rate of 15% in

FY18-20E. This is on the back of momentum in overall industrial activity in

domestic operations. Foreign subsidiaries are expected to grow at 25.7%

CAGR during the same period due to a sustained turnaround in key

subsidiaries such as Europe and the US. Share of overseas revenue may

move from 32.3% to 36.7% driving overall consolidated revenue at 18%

CAGR in FY18-20E. In the garage equipment segment, we expect steady

growth of 10.0% in FY18-20E based on existing tailwinds in the auto-

servicing sector. Accordingly, in FY18-20E, we expect revenue

contribution from the India & exports (air compressor) to decline from

55.7% to 52.9%, revenue share of foreign subsidiaries to increase to

36.7% with automotive equipment share declining to 10.4% by FY20E.

Exhibit 30: Revenue segmentation (%)

54.6 58.0 55.7 54.3 52.9

34.9 30.0 32.3 34.6 36.7

10.6 12.0 11.9 11.1 10.4

-5

10

25

40

55

70

85

100

FY16 FY17 FY18E FY19E FY20E

Air comp - India & exports Air comp - Foreign Subs Automotive Equipments

%


We expect Elgi to report revenue growth of 18.0% CAGR in

FY18-20E on the back of accelerated growth in the air

compressor segment. We expect this segment to grow at

19.0% CAGR in FY18-20E


EBITDA to grow at 22.0% CAGR in FY18-20E; margins to expand further

Operating income grew at a subdued rate of 4.4% CAGR in FY11-18

despite growth of 8.0% in revenue over the same period. Operating profit

margins remained under pressure due to challenges faced by the

company in stabilising their foreign subsidiaries. Elgi has successfully

managed to arrest their losses at their major subsidiaries level and also

curtailed their operations in countries like China where it now only has a

nominal operation. In general, contribution to revenue from the air

compressor segment is ~88% while the automotive segment contributes

~12%. EBITDA margins for the air compressors potentially are far higher.

The management expects them to reach ~13-14%. In contrast,

automotive segment is a 5-9% EBITDA margins business. On a

consolidated basis, Elgi has managed to clock 11% EBITDA margin in

FY18 due to increased contribution from the air compressor segment.

Going ahead, we expect this trend to continue primarily due to increasing

contribution of the air compressors segment. We expect the air

compressor segment to grow at 19.0% CAGR in FY18-20E and contribute

90.0% to the total topline by FY20E. This is likely to lead to an increase in

the operating margin from 11.0% in FY18 to 11.7% in FY20E. Rising trend

of employee expenses, however, is likely to put pressure on margins,

going forward. We estimate a 18.9% increase in employee expenses in

FY18-20E. Buoyed by an operating margin expansion, we expect absolute

EBITDA to grow at 22.0% CAGR in FY18-20E vs. 4.4% in FY11-18. Thus,

we expect Elgi to report absolute EBITDA of | 262 crore in FY20E.

Exhibit 31: EBITDA and EBITDA margin trend

125.1 139.2

176.1

207.1

262.2

8.9

10.2

11.0 10.9

11.7

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

-

50.0

100.0

150.0

200.0

250.0

300.0


%

| cro

re


We expect Elgi to expand their EBITDA margins, going

forward. This will be primarily driven by improved profitability

in their overseas subsidiary. We expect EBITDA margins to

increase from 11.0% in FY18 to 11.7% in FY20E


PAT to grow at 28.7% CAGR over FY18-20E

Net profit growth remained flat at 1.1% CAGR in FY11-18. This was lower

than revenue growth during the same period (8.0% CAGR in FY11-18)

primarily due to losses in foreign subsidiaries. This was due to a

sustained turnaround in foreign subsidiaries and optimum capacity

utilisation in domestic markets to improve operating profit margins

further. Consequently, we expect PAT to grow at a CAGR of 28.7% from

| 95.3 crore in FY18 to | 157.9 crore in FY20E.

Exhibit 32: PAT and PAT margin trend

50.9

74.0

95.3

118.0

157.9

3.9

5.4

6.1 6.2

7.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

-

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0


%

| cro

re

Net Profit Margins


Return ratios to improve substantially

Over FY11-18, the RoE, RoCE declined from 26.3%, 36.5% in FY11 to

14.1%, 14.3%, respectively, in FY18. This was due to moderation in the

overall efficiency of manufacturing plants. However, going forward, we

expect return ratios (RoEs & RoCEs) to increase to 17.5% and 19.7%,

respectively, in FY20E due to improved operating margins, increased

efficiency and hence asset turns (1.6x to 1.8x in FY18-20E). The company

has earned average RoCE of 18.6% over the past 10 years.

Exhibit 33: Return ratios to improve

9.9

11.7

14.3

16.8

19.7

9.9

12.2

14.1

15.4

17.5

9.9

11.8

14.7

17.0

21.3

-

5.0

10.0

15.0

20.0

25.0


%

RoCE (%) RoE (%) RoIC (%)


We expect PAT to grow at a CAGR of 28.7% from | 95.3

crore in FY18 to | 157.9 crore in FY20E

Driven by an improved margin profile, Elgi is expected to

deliver superior returns on capital employed. We believe

Elgi will be able to earn an RoIC of 21.3% in FY20E


Cash flows set to improve; CFO/PAT healthy at 0.9x

The company is expected to generate healthy cash flows with cash flow

from operations (CFO) at | 133.1 crore in FY20E. The CFO/PAT ratio is

likely to remain healthy at ~0.9x in FY20E.

Exhibit 34: CFO/PAT trend

116.8

125.8

64.5

111.5

134.2

53.9

74.0

97.2

118.0

157.9

2.2

1.7

0.7

0.9 0.9

-

0.5

1.0

1.5

2.0

2.5

-

20

40

60

80

100

120

140

160

180


%

| cro

re

CFO PAT CFO/PAT (RHS)


Free cash flow (FCF) generation likely to remain robust: We expect Elgi to

report free cash flows of | 102.7 crore in FY20E. Moderate capex spends

are further likely to enhance free cash reserves of the company. The

company has an ambitious aim of becoming the No. 2 player in global air

compressors market. This would also entail growth through inorganic

means (acquisitions). Also, for organic growth, the capex required for this

would be front ended i.e. from FY21E onwards. However, Elgi’s ability to

generate operating cash flows provides a source of comfort on meeting

the capex needs via internal accruals or having the ability to service debt

obligations.

Elgi’s working capital is likely to remain slightly elevated at 81-92 days in

FY18-20E. This is mostly on account of longer receivable cycle extended

by its foreign subsidiaries and slightly higher inventory days. Despite

higher working capital intensity, going forward, Elgi is expected to make a

steady dividend payout of ~15% of earnings in FY18-20E backed by a

strong recovery in cash flows.

Exhibit 35: Working capital to remain slightly elevated

59

60 62

62

626

6

65

78

78

78

44

46 49

49

49

81 79

9292 92

70

75

80

85

90

95

0

10

20

30

40

50

60

70

80

90


NW

C d

ays

Days

Inventory Days Debtor Days

Creditor Days Net Working Capital Days (RHS)


We expect Elgi to report healthy CFO/PAT of ~0.9x in

FY20E


Risks & concerns

Competition from larger global players across product profile

Atlas Copco & Ingersoll Rand are globally the two largest compressor

manufacturers with a comprehensive product profile. Further, both these

players maintain a strong relationship with their clients, helping maintain

lean marketing & distribution costs aiding margins. Atlas Copco is the

largest player with revenue from compressors at ~$4.3 billion, EBITDA

margins 23.1% and superlative RoCEs of 80%. Ingersoll Rand is the

second largest global player with revenue from compressors of ~$1.6

billion, EBITDA margins 13%. By the same comparison, Elgi is a smaller

player with revenue from compressors ~$0.2 billion.

In addition, these entrenched global players also have their listed Indian

subsidiaries through which companies can introduce technologically

superior global product lines via their Indian subsidiaries. Also, market

leader, Atlas Copco, has a strong direct to customer relationship and far

superior aftersales service that would make it difficult to gain market

share from such leaders. These factors may impact Elgi’s domestic and

global competitiveness and could hamper future growth of the firm.

Inability to profitably scale up overseas subsidiary operations

To establish its footprint globally, Elgi acquired two subsidiary Patton’s

Inc (US) and Rotair (Europe) in 2012. The company currently derives

32.3% of its revenues from international operations. US and Europe

operations alone contribute 27% to total consolidated revenues. Even

until past years, subsidiaries operations have had subpar profitability.

Through additional focus and cost control, the management has now

managed profitability in its key subsidiaries. Going forward, the aim of the

management is to achieve the same level of profitability that Elgi enjoyed

(~13-14%) in its domestic operations. The next leg of profitability will

depend on a sustained turnaround of its European, US and Brazilian

operations.

Likely threat from energy efficient sources

Air compressors operate at ~15% energy efficiency. The rest of the

energy gets dissipated in the form of heat energy and gets wasted. The

relevance of air compressors will be challenged by efficient energy

sources. There has been a shift from pneumatic and air-powered tool to

electric tools. Electric tools consume less energy, are lighter and more

flexible. Over the long run, air compressor manufacturers need to not

only consider manufacturing costs but also take into account the overall

lifecycle cost of a compressor and seek to minimise the same.

Slowdown in domestic industrial activity

The demand cycle for compressors is a factor of overall economic activity

mainly mining, hydrocarbon, transport, power, oil, railways etc, i.e.

demand for company’s products are driven by industrial capex

programme. An overall slowdown in industrial activity could have an

adverse impact on the demand growth of the company.

Intensified competition from global peers through

introduction of newer products via their Indian subsidiaries

is a key factor that may impact Elgi, going forward


Valuation

Elgi Equipments has over the past decade strengthened its domestic

operation and successfully managed a turnaround of key foreign

subsidiaries in its air compressor segment. Further, it continues to

dominate its leadership position in automotive equipment through ATS

Elgi. Going ahead, renewed capital expenditure, sustained profitability in

key foreign subsidiaries, robust India business performance and better

aftermarket sales performance are expected to drive this aspiring leader

in the global air compressor market. Elgi looks set to reap rewards of a

multiyear effort to strengthen its marketing and distribution segments.

Elgi’s launch of an efficient oil-free compressor and other new products

are green shoots that are likely to provide a significant leg up to the

company in this space.

On the exports front, Elgi has positioned India as its local manufacturing

hub for exports to foreign subsidiaries in various regions like Europe and

the US as part of its global strategy. This is likely to increase the export

revenue share from | 519 crore in FY18 to | 820 crore in FY20E.

Overall, we expect the air compressor segment to grow at a CAGR of

19% over FY18-20E primarily led by growth in Rotair & Patton, its foreign

subsidiaries (18%) and robust domestic demand (15%). Further,

supported by strong demand in automobiles sales, we expect garage

equipment manufacturers to do well. We believe these tailwinds will help

clock 10% compounded growth over the next couple of years.

Accordingly, we expect Elgi to deliver overall revenue growth of 18%

CAGR in FY18-20E. We also estimate some margin expansion (+70 bps)

due to improved profitability of the company’s subsidiaries, going

forward. EBITDA margins are likely to improve from 11% in FY18 to

11.7% in FY20E. EBITDA and PAT are, thus, expected to post CAGR

growth of 22.0% and 28.7%, respectively, in FY18-20E.

Elgi is one of the few companies that offers a six-year warranty on its air

compressor in India. Additionally, it also provides a lifetime warranty on

air end, which forms the heart of air compressor in the US. The idea is to

create a strong, consistent brand in the minds of customers. This will

enable the company achieve its long term plan to grow faster than the

industry average and gain market share. Overall, Elgi has delivered a

revenue, EBITDA CAGR of 9.3%, 4.4%, respectively, in the past six years

(FY12-18). It has also clocked average RoE, RoCE of 12.2%, 10.7%,

respectively, in FY12-18. Thus, we believe Elgi is an excellent combination

of a market leader, robust balance sheet, efficient working capital

management, consistent dividends and able management. Accordingly,

we ascribe a P/E multiple of 35x on FY20E EPS of | 10.0 to arrive at a fair

value of | 350/ share. We have a BUY recommendation on the company.

Elgi Equipments led by Dr Jairam Varadaraj has over the

past decade strengthened its domestic operations and

successfully managed to turn around key foreign

subsidiaries in its air compressor segment. Further, it

continues to dominate its leadership position in automotive

equipment through ATS Elgi

We believe Elgi is an excellent combination of market leader,

robust balance sheet, efficient working capital management,

healthy dividends and an able management


Exhibit 36: Price/earnings trend, two year forward

es

0

50

100

150

200

250

300

350

400

Mar-08

Aug-08

Jan-09

Jun-09

Nov-09

Apr-10

Sep-1

0

Feb-11

Jul-11

Dec-11

May-12

Oct-12

Mar-13

Aug-13

Jan-14

Jun-14

Nov-14

Apr-15

Sep-1

5

Feb-16

Jul-16

Dec-16

May-17

Oct-17

Mar-18

(|)

Price 35x 30x 25x 20x 15x


Exhibit 37: Price/book trend, two year forward

0

50

100

150

200

250

300

350

400

Mar-08

Aug-08

Jan-09

Jun-09

Nov-09

Apr-10

Sep-1

0

Feb-11

Jul-11

Dec-11

May-12

Oct-12

Mar-13

Aug-13

Jan-14

Jun-14

Nov-14

Apr-15

Sep-1

5

Feb-16

Jul-16

Dec-16

May-17

Oct-17

Mar-18

(|)

Price 5.5x 4.5x 3.5x 2.5x


Elgi has traded at an average P/E of ~24x and average

P/BV of ~3.0x over the last 10 years. Going forward, we

believe Elgi will command higher multiple of 35x as it is

likely to deliver superior topline and bottomline growth of

18% and 28.7%, respectively, in FY18-20E


Indian Peers

Introduction of major players in air compressor space

The air compressor segment in India is estimated at | 4,000 crore. Atlas

Copco India (33%), Ingersoll Rand India (17%), Elgi Equipments (22%)

and Kirloskar Pneumatic (14%) are major players in domestic market.

Atlas Copco India

Atlas Copco India began its operations in 1960. It operates as a subsidiary

of Atlas Copco AB, Sweden. The Atlas Copco Group is a world leader in

manufacturing compressors, mining equipment, pneumatic tools and

construction equipment. The company has a presence across India with

four manufacturing locations and sales offices across all major cities in

India. The air compressor segment is estimated to have contributed

~| 1,300 crore to firms overall revenues in FY17. It is a market leader in

India (33%) that has technological access to its parent Atlas Copco,

Sweden. It has comprehensive product lines across reciprocating, screw

and centrifugal compressors.

Atlas Copco India delisted from Indian bourses during May 2011. The

delisted exit price | 2,750, translated to a market capitalisation of ~| 6,200

crore (EV/EBITDA - 25x; P/E 38x).

Ingersoll Rand India

Ingersoll Rand India was incorporated in 1921 as a subsidiary (74%) of

Ingersoll Rand. The company manufactures air compressors of various

capacities for the domestic and export markets. The company derives

revenue from the sale of reciprocating, rotary and centrifugal

compressors and spares in the domestic market and from exports to its

parent and affiliates. The company has a manufacturing facility in

Ahmedabad (Gujarat) and branch offices in most metros in India. The

company has a dominant market share in the centrifugal compressor

segment. Its presence in the domestic market is small as most of its

production capacity is dedicated to exports to various countries. Exports

(predominantly sales to affiliates) account for ~18% of firm’s revenue.

Kirloskar Pneumatic

Kirloskar Pneumatic, founded in 1958, is part of the Kirloskar group. Air

compressors, air refrigeration & gas compressors and transmission

products. The manufacturing facilities are located in Pune. The company

has an established position in each product segment (air compressors,

refrigeration & gas compressors and transmission products) through

technological collaboration and strong after-sales support services.

Customers for the company include the oil & gas, steel, power, railways,

and defence sectors.

Exhibit 38: Elgi Equipments vs. Indian peers

(| crore) Market Cap Sales EBITDA EBITDAM (%) PAT RoNW (%) EV/EBITDA (x) P/E (x)

Atlas Copco India* NA 3,386 413 12.2 345 31 25 38

Elgi Equipments 4,500 1,605 176 11.0 95 14 26 47

Ingersoll Rand 1,773 615 71 11.5 89 8 14 20

Kirloskar Pneumatic 1,085 601 74 12.3 50 11 12 22

Source: Company, ICICI Direct Research *numbers for FY17; valuation at delisting in FY11

Atlas Copco India delisted from Indian bourses during May

2011. Delisted market capitalisation was to the tune of

~| 6,200 crore (EV/EBITDA - 25x; P/E 38x)


Global peers

According to the management, the air compressor market segment is

worth $16 billion globally. This market is expanding 4-5% annually and is

projected to reach ~$24 billion over the next decade.

Atlas Copco AG

Atlas Copco is the global leader manufacturer of air compressor in the

world. It clocked overall revenue of $12 billion in CY17. Air compressors

accounted for $4.3 billion (~35%) of revenue. EBITDA margins were at

23.1% with RoCE of 80%. Services contributed 44% to its revenues from

air compressor segment.

Ingersoll Rand

Ingersoll Rand is among top leader manufacturer of air compressor in the

world. Its air compressor segment generated revenue of ~$ 1.5 billion

from its compressor business in CY17. EBITDA margins for the

compressor segment is ~13%.

Garden Denver

Gardner Denver, established in 1859, provides industrial equipment,

technologies and related parts and services to a broad and diverse

customer base worldwide. The Industrials group manufactures & markets

a wide range of products including rotary screw, reciprocating and sliding

vane compressors, multistage and positive displacement, centrifugal and

side-channel blowers, vacuum technology as well as mobile transport

products. The end customers served by this group are primarily from the

industrial manufacturing, transportation, energy, mining & construction,

environmental and food and beverage industry. Air compressors

accounted for revenue of ~$1.1 billion and adjusted EBITDA margin of

21.5% in CY17.

Exhibit 39: Elgi Equipments vs. listed global peers

(US$ million)

CY18E CY19E CY18E CY19E CY18E CY19E CY18E CY19E CY18E CY19E CY18E CY19E

Atlas Copco 10,593.0 11,077.0 2,816.0 2,959.0 26.6 26.7 1,793.0 1,958.0 3.1 3.0 11.7 11.1

Ingersoll Rand 15,200.0 15,900.0 2,300.0 2,500.0 15.1 15.7 1,320.0 1,470.0 1.7 1.6 11.2 10.4

Gardner Denver 2,700.0 2,900.0 691.0 750.0 25.6 25.9 384.0 424.0 2.7 2.5 10.5 9.7

Elgi Equipments 291.4 343.9 31.9 40.3 10.9 11.7 18.2 24.3 2.4 2.0 22.1 17.2

Source: Bloomberg, Company, ICICI Direct Research * numbers for Elgi Equipments is FY

EBITDA margin EV/EBITDAEV/SalesPATEBITDARevenue

Exhibit 40: Other select global competitors

Company Country Revenue ($ million) EBITDAM (%)

Kaeser Germany 116 NA

Sullair (Delisted - sold to Hitachi) US 390 16

Fusheng China NA NA

Kaishan China 275 NA

J.P. Sauer & Sohn GmbH Germany 113 NA



Tables and ratios:

Exhibit 41: Profit & loss account

(| Crore) FY16 FY17 FY18 FY19E FY20E

Net Sales 1,394.0 1,370.1 1,605.3 1,894.3 2,235.2

Other Operating Income 6.8 - - - -

Total Operating Income 1,400.8 1,370.1 1,605.3 1,894.3 2,235.2

% Growth (2.2) 17.2 18.0 18.0

Other Income 9.1 12.1 12.3 18.2 18.3

Total Revenue 1,409.9 1,382.2 1,617.6 1,912.4 2,253.5

Growth (%) (2.0) 17.0 18.2 17.8

Total Raw Material Costs 779.8 753.9 904.9 1,067.8 1,260.0

Employee Expenses 256.7 253.8 281.3 335.3 397.9

Other expenses 27.1 18.3 8.7 18.9 22.4

Total Operating Expenditure 1,275.7 1,230.9 1,429.2 1,687.2 1,973.0

Operating Profit (EBITDA) 125.1 139.2 176.1 207.1 262.2

Growth (%) 11.2 26.6 17.6 26.6

Interest 12.2 7.8 6.0 7.1 6.3

PBDT 122.0 143.5 182.4 218.2 274.2

Depreciation 43.6 44.6 44.7 43.6 40.2

PBT before Exceptional Items 78.4 98.8 137.7 174.6 234.0

Total Tax 24.4 26.4 41.3 58.1 77.7

PAT before MI 50.9 74.0 95.3 118.0 157.9

Minority Interest - - - - -

PAT 50.9 74.0 95.3 118.0 157.9

Growth (%) 45.2 28.8 23.9 33.7

EPS 3.2 4.7 6.0 7.5 10.0


Exhibit 42: Balance sheet


Equity Capital 15.8 15.8 15.8 15.8 15.8

Reserve and Surplus 530.4 591.0 673.1 749.9 883.9

Total Shareholders funds 546.2 606.9 689.0 765.7 899.8

Minority Interest - - - - -

Other Non Current Liabilities 6.3 5.9 4.5 4.5 4.5

Total Debt 261.7 211.1 222.8 202.5 179.1

Total Liabilities 832.0 837.7 929.7 986.2 1,096.9

Gross Block 514.5 529.4 579.8 611.8 641.8

Acc: Depreciation 43.7 83.4 128.1 171.7 211.9

Net Block 470.8 446.0 451.7 440.1 429.9

Capital WIP 2.0 3.6 2.1 - -

Total Fixed Assets 472.8 449.5 453.7 440.1 429.9

Non Current Assets 19.9 21.1 25.5 25.5 25.5

Inventory 225.6 226.0 273.7 322.9 381.1

Debtors 253.1 242.3 343.4 405.2 478.2

Loans and Advances 4.9 7.7 9.3 11.0 13.0

Other Current Assets 55.6 53.5 40.7 48.0 56.7

Cash 72.7 81.9 65.4 78.2 129.0

Total Current Assets 611.9 611.5 732.5 865.4 1,057.9

Current Liabilities 169.6 171.3 213.4 251.8 297.1

Provisions 19.0 15.3 17.9 22.7 26.7

Net Current Assets 323.1 332.9 397.8 467.8 588.8

Total Assets 832.0 837.7 929.7 986.2 1,096.9



Exhibit 43: Cash flow statement


Profit after Tax 50.9 74.0 95.3 118.0 157.9

Depreciation 43.6 44.6 44.7 43.6 40.2

Interest 12.2 7.8 6.0 7.1 6.3

Cash Flow before WC changes 106.7 126.4 145.9 168.7 204.4

Changes in inventory 40.6 (0.4) (47.6) (49.3) (58.1)

Changes in debtors (9.0) 10.8 (101.1) (61.8) (72.9)

Changes in loans & Advances 89.3 (2.8) (1.6) (1.7) (2.0)

Changes in other current assets (53.8) 2.1 12.8 (7.3) (8.6)

Net Increase in Current Assets 67.1 9.7 (137.6) (120.1) (141.7)

Changes in creditors (4.8) 1.7 42.1 38.4 45.3

Changes in provisions (50.0) (3.8) 2.6 4.8 4.1

Net Increase in Current Liabilities (57.1) (10.3) 56.1 62.9 71.6

Net CF from Operating activities 116.8 125.8 64.5 111.5 134.2

Changes in deferred tax assets (3.8) (1.5) (3.1) - -

(Purchase)/Sale of Fixed Assets (52.1) (21.4) (48.9) (30.0) (30.0)

Net CF from Investing activities (53.0) (44.9) (73.6) (30.0) (30.0)

Dividend and Dividend Tax (19.0) (19.0) (19.0) (19.0) (23.8)

Net CF from Financing Activities (69.5) (71.7) (7.4) (68.7) (53.4)

Net Cash flow (5.7) 9.2 (16.5) 12.8 50.8

Opening Cash/Cash Equivalent 78.3 72.7 81.9 65.4 78.2

Closing Cash/ Cash Equivalent 72.7 81.9 65.4 78.2 129.0


Exhibit 44: Ratio analysis

(Year-end March) FY16 FY17 FY18 FY19E FY20E

Per Share Data

EPS 3.2 4.7 6.0 7.5 10.0

Cash per Share 5.2 6.7 6.9 7.7 10.9

BV 34.5 38.3 43.5 48.3 56.8

Dividend per share 1.0 1.0 1.2 1.2 1.5

Dvidend payout ratio 31.0 21.4 20.0 16.1 15.1

Operating Ratios

EBITDA Margin 8.9 10.2 11.0 10.9 11.7

PAT Margin 3.6 5.4 5.9 6.2 7.1

Return Ratios

RoE 9.9 12.2 14.1 15.4 17.5

RoCE 9.9 11.7 14.3 16.8 19.7

RoIC 9.9 11.8 14.7 17.0 21.3

Valuation Ratios

EV / EBITDA 37.4 33.1 26.2 22.1 17.2

P/E 83.5 60.8 46.3 38.1 28.5

EV / Net Sales 3.4 3.4 2.9 2.4 2.0

Sales / Equity 2.6 2.3 2.3 2.5 2.5

Market Cap / Sales 3.2 3.3 2.8 2.4 2.0

Price to Book Value 8.2 7.4 6.5 5.9 5.0

Turnover Ratios

Asset turnover 1.5 1.5 1.6 1.7 1.8

Debtors Turnover Ratio 5.6 5.5 5.5 5.1 5.1

Creditors Turnover Ratio 8.1 8.0 8.3 8.1 8.1

Solvency Ratios

Debt / Equity 0.5 0.3 0.3 0.3 0.2

Current Ratio 2.9 2.8 2.9 2.9 2.9

Quick Ratio 1.7 1.6 1.7 1.7 1.7



RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong

Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is

defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction;

Buy: >10%/15% for large caps/midcaps, respectively;

Hold: Up to +/-10%;

Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]


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august 17, 2018 elgi equipments (elgequ) - icici...

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