DSIJ Mindshare

Recommendation From Compressor Sector



HERE IS WHY
Healthy debt-to-equity ratio
Strong financials with attractive valuations
Realignment of overseas subsidiaries 

Elgi Equipemts (EEL) offers a range of compressed air solutions from oil-lubricated and oil-free rotary screw compressors, oil-lubricated and oil-free reciprocating compressors, and centrifugal compressors, to dryers, filters and downstream accessories. Its portfolio of over 400 products has application across various industries, including food processing, pharmaceutical, automotive garages, wood working, textiles, paper, cement, steel making, electronics, air separation, water well drilling and quarry. EEL has indicated capex for FY17 will be much lesser than the previously announced amount of Rs.30 crore. Most of the company’s incremental capex would go towards meeting the technology needs to implement an effective front-end. Its management believes it has headroom to grow 25-30 per cent without incremental capex. 



EEL’s Brazilian subsidiary became profitable after conversion of local debt to Brazilian Real. After tuning down the company’s Chinese operations, it now operates through a 13-member team which is responsible for spares and services business and sourcing product demand that will be met with exports from India. EEL has recently reorganised its US operations after appointing a US head of operations (hailing from Siemens and Ingersoll Rand). On the financial front, EEL’s topline increased 2.9 per cent to Rs.665 crore in H1FY17 as compared to the same period in the previous fiscal year. The company’s EBITDA too rose 39.34 per cent to Rs.73.29 crore in H1FY17 on yearly basis. Its net profit soared more than two-fold to Rs.39.85 crore in H1FY17 on a year-onyear basis. EEL has around Rs.205 crore net debt in Q2FY17. 

The company has reduced debt by about Rs.13.5 crore in H1FY17 and expects to reduce it further by Rs.15 crore in H2FY17. Its debt-to-equity ratio stood at 0.56x in FY16. EEL plans to make itself completely debt-free by the middle of the year 2018. EEL’s revenue increased 7.46 per cent to Rs.1,412 crore in FY16 as compared to the previous financial year. The company’s EBITDA too rose 53.63 per cent to Rs.136 crore in FY16 on a yearly basis. Its EBITDA margin expanded by 288 basis points to 9.61 per cent in FY16 on year-on-year basis. EEL’s PAT also increased 31.7 per cent to Rs.63.35 crore in FY16 as compared to the previous fiscal. The company’s net profit margin expanded 83 basis points to 4.49 per cent in FY16 on a yearly basis. On the valuation front, EEL’s share price is trading at TTM PE multiple of 33.66x as compared to industry PE multiple of 35.19x which makes it quite attractive. The company’s PE valuation is available at a discount as compared to its peers such as Dynamatic Tech (53.09x), Shakti Pumps (219.69x), WPIL (333.62x).

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