elgi equipments_initiating coverage

ELGI EQUIPMENTS LTD. (ELGI)

Initiating Coverage - BUY

AnalystAnalystAnalystAnalyst Rajiv BharatiRajiv BharatiRajiv BharatiRajiv Bharati

[email protected]

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


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.


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.


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)


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



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%


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

Destimoney Securities Private Limited

6th Floor, " A" Wing , Tech-Web Centre, New Link Road, Oshiwara , Near Behram Baug, Jogeshwari (West), Mumbai - 400102

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elgi equipments_initiating coverage

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