Elgi Equipments Ltd - Unable to Tame the Dragon; Result Update Q3FY15 ::Edelweiss, report

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Buy Elgi Equipments Ltd (EEL) “core sector play”::LKP

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Investment Rationale
 Elgi Equipments Ltd (EEL) financial risk profile characterised by its strong balance sheet provides ability to weather downturns in business as well as supports its inorganic growth strategies.
 Although 80% of consolidated revenues come from domestic business, we believe that over the next couple of years the company can attain a sales mix of 60:40 between domestic and export business on the back of its growing presence in major international markets through its six subsidiaries in China, France and Brazil.
 Notwithstanding intense competition from large MNC players in the centrifugal compressor space, EEL has been able to carve a niche for itself primarily due to its ability to offer tailor-made solutions as per customer specific needs. Further in our view the company‟s after sales service infrastructure is one of the best in the industry.
 Despite muted growth in the automotive business and steep decline in the performance of water well business, the operating performance during 9MFY12 was sustained on the back of recovery in the other compressor segments which grew by 14% while exports also clocked y-o-y growth of 20% during the same period. While profitability was impacted on account of increase in raw material costs and one-time expenses related to consolidation of overseas subsidiaries, domestic demand has shown signs of recovery and this we believe would augur well for the company in FY‟13.
 The gradual revival in demand coupled with the company‟s initiatives of growing its after sales service, new product launches and consolidation of overseas businesses is expected to drive the fortunes of EEL going forward.
Valuation
EEL is one of India‟s leading manufacturers of air compressors with an estimated market share of over 30% in the domestic market and catering to a wide range of end user industries including steel, heavy engineering and automotive.
EEL generates a healthy ROCE in a technology driven business and any uptick in the water well and automotive business can provide upside to our forecasts. We recommend a BUY on EEL with a one year price target of `125.

52-week Blockbuster: Elgi Equipments - Business Line

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Even as mid- and small-cap stocks received a beating in the correction beginning 2011, a few such as Elgi Equipments managed to contain declines, backed by sound financial performance. The stock in fact gained 20 per cent, in the last month and a half alone, as consolidated earnings for the quarter ended December 2010 expanded 38 per cent to Rs 26 crore.

Elgi equipments 38% Upside ENAM 2011 TOP Pick

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Elgi equipments 38% Upside ENAM 2011 TOP Pick 

A proxy to Industrial capex
● Elgi is a leading manufacturer of compressors catering to industries like mining, power, transport and
textiles. It is also engaged in manufacturing of automobile service station equipments. The compressor
industry is an oligopoly industry with only four players‐Elgi, Kirloskar Pneumatic, Atlas Copco and
Ingersoll‐Rand. The industry has huge entry barriers in the form of technology.