Elgi Equipments ENAM Securities Direct 17 th January 2011 ENAM DIRECT EQUITY RESEARCH C OMPANY R EPORT For private circulation only Proxy to Industrial capex Company Background Elgi is a leading manufacturer of compressors catering to industries like construction and mining, water well, railways, power, engineering, transport and textiles. It is also engaged in manufacturing of automobile service station equipments and provides manufacturing and engineering solutions for compressors and automotive equipments. Investment Argument An oligopoly industry with high industry barrier: The domestic industry is an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand. Furthermore, the industry has high entry barriers in the form of technology. Strong product portfolio coupled with steady domestic demand: Elgi manufactures a wide range of compressors catering to large number of industries thus insulating it from downturn in a single industry. Elgi is a key beneficiary of higher industrial capex. With domestic demand on an up-tick, we have estimated revenue and PAT (consol.) to increase at a CAGR of ~32% and ~36%, respectively, through FY10-FY12E. Increasing International presence: Elgi is focusing on increasing its international presence by the way of organic and inorganic route. It has presence in large number of countries and is further expanding. As a result, Elgi’s exports have also got a fillip and management expects the international business to contribute meaningfully to its business, going ahead. Elgi has established subsidiary in China to produce large screw compressors and also acquired Belair (which has 3% market share in France). It has also established a company in Brazil to enter S.American market. An Asset light business model with improving ROCE: A virtually debt free company with steadily increasing revenue and profit. It has maintained average ROCE and ROE of 37% and 25% over the last four years. It has a strong balance sheet with cash of Rs.139 cr. as on Sep’10. It has been able to manage its working capital efficiently with working capital to sales reducing to 8.6% in FY10 from 22% in FY06. The business has high asset turn at nearly 4x. Factors to monitor Slowdown in industrial capex: Lack of fresh investments across all market segments could dampen the growth of the company. Valuation We believe that with India’s GDP on a high growth trajectory, Elgi should continue its strong performance. Elgi has a scalable business model with strong balance sheet, stable ROCE and has generated FCF of Rs. 89 crores as on FY10. We initiate BUY on the company with a target price of Rs. 124 (based on 16x FY12E consol. EPS of Rs. 7.8). CMP (Rs) 84 Target price (Rs) 124 Potential upside 48% Stock data No. of shares (cr) 15.7 FV (Rs) 1 Market cap (Rs cr) 1,320 52 week high/low (Rs) 107/ 39 Avg. daily vol.* (shares) 101,338 BSE Code 522074 NSE Code ELGIEQUIP Bloomberg code ELEQ IN Reuters Code ELGE.BO * BSE & NSE 6 monthly Shareholding (%) Dec-10 QoQ Chg Promoter 33.33 0.40 FIIs 3.12 0.20 MFs / UTI 7.26 0.14 Banks / FIs .15 (0.01) Others 56.14 (0.73) Price performance 0 5000 10000 15000 20000 25000 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 0 20 40 60 80 100 120 BSE_SENSEX Elgi Equipments Source: Cline, ENAM Direct Research Financial summary (Consolidated) Y/E March Sales (Rs cr) Adj. PAT (Rs cr) EPS* (Rs.) Change (YoY %) P/E (x) RoE (%) RoCE (%) EV/EBITDA (x) DPS (Rs) 2009 551 38 2.4 (12) - 20.8 34.4 3.5 1.3 2010 677 66 4.2 74 - 28.9 44.4 5.6 1.8 2011E 954 100 6.4 52 13.2 33.2 49.1 7.3 0.9 2012E 1,185 122 7.8 22 10.8 30.7 45.5 5.6 0.9 Source: * Adj. for bonus for FY09 & FY10; Company and ENAM estimates BUY
13
Embed
EQUITY RESEARCH Elgi Equipmentsbreport.myiris.com/ENAMSDPL/ELGEQUIP_20110117.pdfElgi is a leading manufacturer of compressors catering to industries like construction and mining, water
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
Elgi Equipments
ENAM Securities Direct 17th January 2011
ENAM DIRECT EQUITY RESEARCH
CO
MP
AN
Y R
EP
OR
T
For private circulation only
Proxy to Industrial capex Company Background Elgi is a leading manufacturer of compressors catering to industries like construction and mining, water well, railways, power, engineering, transport and textiles. It is also engaged in manufacturing of automobile service station equipments and provides manufacturing and engineering solutions for compressors and automotive equipments. Investment Argument
An oligopoly industry with high industry barrier: The domestic industry is an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand. Furthermore, the industry has high entry barriers in the form of technology.
Strong product portfolio coupled with steady domestic demand: Elgi manufactures a wide range of compressors catering to large number of industries thus insulating it from downturn in a single industry. Elgi is a key beneficiary of higher industrial capex. With domestic demand on an up-tick, we have estimated revenue and PAT (consol.) to increase at a CAGR of ~32% and ~36%, respectively, through FY10-FY12E.
Increasing International presence: Elgi is focusing on increasing its international presence by the way of organic and inorganic route. It has presence in large number of countries and is further expanding. As a result, Elgi’s exports have also got a fillip and management expects the international business to contribute meaningfully to its business, going ahead. Elgi has established subsidiary in China to produce large screw compressors and also acquired Belair (which has 3% market share in France). It has also established a company in Brazil to enter S.American market.
An Asset light business model with improving ROCE: A virtually debt free company with steadily increasing revenue and profit. It has maintained average ROCE and ROE of 37% and 25% over the last four years. It has a strong balance sheet with cash of Rs.139 cr. as on Sep’10. It has been able to manage its working capital efficiently with working capital to sales reducing to 8.6% in FY10 from 22% in FY06. The business has high asset turn at nearly 4x.
Factors to monitor Slowdown in industrial capex: Lack of fresh investments across all
market segments could dampen the growth of the company. Valuation We believe that with India’s GDP on a high growth trajectory, Elgi should continue its strong performance. Elgi has a scalable business model with strong balance sheet, stable ROCE and has generated FCF of Rs. 89 crores as on FY10. We initiate BUY on the company with a target price of Rs. 124 (based on 16x FY12E consol. EPS of Rs. 7.8).
Source: * Adj. for bonus for FY09 & FY10; Company and ENAM estimates
BUY
17th January 2011 ENAM Securities Direct 2
Elgi Equipments
COMPANY BACKGROUND
Elgi is a leading manufacturer of air compressors and automobile service station
equipment. ELGI's products are used in a wide range of applications in areas ranging from
mining, transport, pharmaceuticals, power, oil, railways, chemicals, textiles, printing to
ship building, paper, electronics, telecommunications, medical, food & beverages and
plastics. No sector contributes more than 10% to the topline of the company thereby
hedging it from downturn in a single industry. Hence, it is a play on India’s GDP growth
which would in-turn fuel the growth in industrial capex.
Compressor Technology can be classified as reciprocating compressors, screw
compressors, centrifugal compressors and oil-free compressors. Elgi is largely into rotary
screw and reciprocating compressors. The Automotive Service Equipment Division
manufactures lubrication equipment, two-wheeler and four-wheeler hoists, paint booths,
AC recovery units, crash repair systems, wheel balancers etc.
Elgi has a vision of becoming a $1 bn. company in terms of topline by 2015 by resorting to
organic and inorganic growth routes.
Product profile
Source: Company, ENAM Research.
17th January 2011 ENAM Securities Direct 3
Elgi Equipments
Company Structure
Elgi includes Elgi equipment Standalone Company and its subsidiaries. ATS Elgi, is yet, in the growth phase as auto sales have picked up over the last few years and are growing strong. This, inturn, is leading to investment in new and existing garages. The compressor subsidiaries are still in their nascent stage of growth. However, they hold an area of promise since the management’s vision is to touch $1 bn topline which would entail increasing international exposure through the subsidiaries- organically or inorganically.
Subsidiaries
Holding as on Mar-10
Total Assets (Rs cr)
FY10 Revenue
(Rs cr)
FY10 PAT
(Rs cr)
ATS ELGI Limited 100% 27.2 89.2 5.1
Adisons Precision Instruments Manufacturing Company Limited 100% 1.1 0.0 0.0
The size of domestic industry is around Rs. 3,000 cr. Furthermore, the domestic industry is
an oligopoly industry with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and
Ingersoll-Rand. The industry has huge entry barriers in the form of technology. Compressor Technology can be classified as reciprocating compressors, screw
compressors, centrifugal compressors and oil-free compressors. Amongst these, Kirloskar
is mainly into gas based compressors. Demand for spares constitutes for a large part of
demand for compressors. This ensures a minimum level of demand even in downturn.
17th January 2011 ENAM Securities Direct 5
Elgi Equipments
Elgi is focusing on increasing its international presence by the way of organic and
inorganic route. ELGI has a presence in all the major markets across the world including
Europe, North America, Latin America, Africa, Australia, Middle East, South East Asia,
West Asia and the Far East. It has more than 50 dealers overseas. As a result Elgi’s exports
have also got a fillip and management expects the international business to contribute
more than 50% to its business, going ahead.
Elgi’s major focus is on European and Chinese market. The Chinese market is more than
double the size of Indian market. Elgi has established subsidiary in China to produce large
screw compressors which faces little competition from domestic Chinese market. It is also
looking at multiple acquisitions in China to capture small size rotary screw compressor
market. In March 2010, Elgi acquired Belair of France. Belair is a leading supplier of
industrial compressors with 3% market share in France. It has also established a company
in Brazil to enter S.American market.
The compressor business contributes 86% to the total consol. revenue. The compressor
segment revenue (consol.) has increased at a CAGR of 25% over FY06-10. The EBIT margin
has averaged 16% over the last five years. The segment ROCE has averaged over 50%
during the last five years. We have estimated revenue in compressor segment to increase
at 35% CAGR over FY10-12E.
Compressor segment Revenue and EBIT Margin Compressor segment ROCE (%)
0
200
400
600
800
FY06 FY07 FY08 FY09 FY10
(Rs
Cr)
048121620
Compressors Revenue EBIT(%)
0%
20%
40%
60%
80%
FY06 FY07 FY08 FY09 FY10
ROCE(%)
Source: Company and ENAM Direct Research; All nos. are on consolidated basis
17th January 2011 ENAM Securities Direct 6
Elgi Equipments
ATS- Elgi
The Automotive Equipment Division manufactures lubrication equipment, two-wheeler and four-wheeler hoists, paint booths, AC recovery units, crash repair systems, wheel balancers etc. This segment is expected to perform in line with auto sales and investment in new and existing garages. It accounts for 13% of sales (consol.) and 10% of the profits of the company.
Key Customers
Source: Company and ENAM Direct Research ATS- Elgi, is yet, in the growth phase as auto sales have picked up over the last few years and are growing strong. This, inturn, is leading to investment in new and existing garages. We have estimated revenue to increase at 21% CAGR for FY10-12E.
Automotive Equipment Revenue and EBIT Margin ATS segment ROCE (%)
020406080
100
FY06 FY07 FY08 FY09 FY10
(Rs
Cr)
0%
5%
10%
15%
20%
Automotive Equipment RevenueEBIT(%)
0%10%20%30%40%50%60%
FY06 FY07 FY08 FY09 FY10
ROCE(%)
Source: Company and ENAM Direct Research
17th January 2011 ENAM Securities Direct 7
Elgi Equipments
INVESTMENT ARGUMENT
Strong product portfolio coupled with steady demand domestically: Elgi
manufactures a wide range of air compressors of both rotary and reciprocating
technology in various powers and capacity. It caters to large number of industries
like construction, mining, railways, power etc. This insulates it from downturn in a
single industry as no industry contributes more than 10% to its sales. Elgi is a key
beneficiary of higher domestic industrial capex. The size of domestic industry is
around Rs. 3,000 cr. Furthermore, the domestic industry is an oligopoly industry
with only 4 players- Elgi, Kirloskar Pneumatic, Atlas Copco and Ingersoll-Rand.
Additionally, the industry has huge entry barriers in the form of technology.
Demonstrated growth in sales and EBITDA margin: Elgi has been able to increase
sales at a CAGR of 21% over FY06-10. In the same period EBITDA has grown from
Rs. 39 cr. in FY06 to Rs. 108cr. in FY10 (CAGR of 29%). Ebitda margin has
improved largely due to favourable product mix. We have estimated revenue to
increase at a CAGR of 32% and PAT to increase at CAGR of 36% over FY10-12E.
Increasing Net Sales and sustainable EBITDA margin
We, at ENAM, are committed to providing the most honest and transparent advice to our clients. However, given thenature of the capital markets, from time to time we are faced with situations that could give rise to potential conflict ofinterest. In order to provide complete transparency to our clients, before we make any recommendations, we arecommitted to making a disclosure of our interest and any potential conflict IN ADVANCE so that the interests of ourclients are safe- guarded at all times. In light of this policy, we have instituted what we believe to be the mostcomprehensive disclosure policy among leading investment banks/brokerages in the world so that our clients may make an informed judgment about our recommendations. Thefollowing disclosures are intended to keep you informed before you make any decision- in addition, we will be happyto provide information in response to specific queries that our clients may seek from us. Disclosure of interest statement (As of 14th December 2010) 1. Analyst ownership of the stock No 2. Firm ownership of the stock No 3. Directors ownership of the stock Yes 4. MBD Relationship No 5. Broking relationship No We are committed to providing completely independent and transparent recommendations to help our clients reach a better decision.
This document has been prepared by Enam Securities Direct Private Limited – Privileged Client Group. Affiliates of Enam Securities Direct Private Limited focused on Institutional Equities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating and target price of the Affiliates research report. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent. This report and information herein is solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgement by any recipient. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. Certain transactions -including those involving futures, options and other derivatives as well as non investment grade securities - involve substantial risk and are not suitable for all investors. Enam Securities Direct Private Limited has not independently verified all the information given in this document. Accordingly, no representation or warranty, express or implied, is made as to the accuracy, completeness or fairness of the information and opinions contained in this document. The Disclosures of Interest Statement incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alternations to this statement as may be required from time to time without any prior approval. Enam Securities Direct Private Limited, its affiliates, their directors and the employees may from time to time, effect or have effected an own account transaction in, or deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit investment banking or other business from, any company referred to in this report. Each of these entities functions as a separate, distinct and independent of each other. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information that is already available in publicly accessible media or developed through analysis of ENAM Securities Direct Private Limited. The views expressed are those of the analyst and the Company may or may not subscribe to all the views expressed therein. This document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published, copied, in whole or in part, for any purpose. Neither this document nor any copy of it may be taken or transmitted into the United State (to U.S. Persons), Canada, or Japan or distributed, directly or indirectly, in the United States or Canada or distributed or redistributed in Japan or to any resident thereof. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Enam Securities Direct Private Limited to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. Neither the Firm, not its directors, employees, agents or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.
Copyright in this document vests exclusively with ENAM Securities Direct Private Limited.