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

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Elgi Equipments Ltd. (Elgi) has reported disappointing Q3FY15. Sales and EBITDA was 10%/50% below estimates. . The consolidated EBITDA margin in Q3FY15 was below our expectations and came in at 4.6%.The higher raw material cost brought the consolidated EBITDA margins down 260 bps YoY (7.2 % in Q3FY14). During the quarter, the domestic market witnessed contraction 5% YoY (revenues at INR 187 cr vs INR 196 cr in Q3FY14) while the international business increased marginally by 3%YoY. The China operations continue to be a cause of concern. As per the Elgi management, the domestic markets are not witnessing any momentum, with only the smaller industries showing some pick-up in demand while demand from larger industries like Power, Steel, Cement, etc is yet to revive.  In addition, the company had a lawsuit settlement with Quincy (Atlas Copco) in its ongoing litigation related to its US subsidiary Patton’s. The settlement brought in a onetime inflow of INR 22 cr.

Sales and EBITDA margins disappoint

The company’s consolidated net sales for Q3FY15 at INR 321 cr were below our estimates of INR 354 cr and declined 1.8% YoY(at INR 326.7 cr in Q3FY14) due to flattish growth in international businesses. EBITDA margins were down by 410 bps QoQ mainly led by losses in subsidiary business at EBITDA level. The management has guided that the higher raw material costs (at 56.7% of sales) was a transient event and in the long term, the raw material costs will be brought down to 54% levels. Standalone business remained flat with a 0.6% YoY growth, as the domestic demand environment witnessed hardly any traction. Elgi’s management has indicated that although they have been receiving a lot of customer enquiries but as on date the enquiries are not converting into any bulk orders for ELGI.

China operations hurt; US operations slowly falling back on track

The sales from International operations were up 3% YoY (INR 133 cr vs INR 129 cr in Q3FY14) and flattish on QoQ basis (INR 132 cr in Q2FY15). The re entry will require an additional time of 15 months. The US operations have faced a lot of problems (Sales force attrition and lawsuit with Quincy and Atlas). The management has indicated that a strong sales force is the most crucial factor that will help them recapture the market in the USA. Management has guided that it has been successful in training at least 80% of their targeted sales force and coupled with the increase in demand in the US market, things should improve going forward. . However, Europe markets are flat besides a few specific countries. The Middle East market is also facing a slow down because of the sharp fall in oil prices.

LINK
https://www.edelweiss.in/research/Elgi-Equipments-Ltd--Unable-to-Tame-the-Dragon;-Result-Update-Q3FY15/10005547.html