Call & Research Report by ICICI Direct Research
Report Date: 7 January 2021
CMP Rs. 158 TP Rs. 190 Period 12 Months
Strong international performance to aid growth…
Overall, Elgi’s strategy to expand in new geographies in Europe, continued
growth momentum in the US, Australia and expected rebound in South East
Asia & Gulf markets are expected to contribute significantly to incremental
growth in coming years. A rebound was visible in Q2FY21 performance with air compressor international sales (including exports from India)
contributing ~57% to total air compressor sales registering growth of ~39%
to Rs 253 crore YoY. It performed well in key international markets led by
Australia, US, Europe while South East Asia, and Gulf reported moderate
performances. Margins are expected to improve due to ramp-up in
international business, operating cost reduction initiatives to lead
incremental revenue, future growth and positive operating leverage.
Visible green shoots in India business amid economic recovery
Elgi is on track in its strategy to curtail employee cost and reduce fixed cost
by ~15-20% in FY21E primarily in the India business. Elgi has seen activities
across all major industries and expects a further revival in capacity building with smaller incremental investments by industries. Its disrupted AB series oil free compressor is gaining good traction in India as well as abroad. Aftermarket (~20-25% to India topline), continues to see strong traction acrossgeographies. Debt has reduced to | 100 crore in Q2FY21 and is expected to further reduce by Rs 30 crore in H2FY21 while working capital has also reduced, QoQ and cash position remains strong. The operational run rate is expected to continue over the next couple of years.
Valuation & Outlook
Going ahead, further traction in the international market, new products like
oil free compressors (AB series) would aid growth while green shoots of
revival visible in India business would further aid topline. Also, its strategy
on cost reduction, focus on cash business would help deal with working
capital, debt reduction and liquidity situation. We expect revenue, EBITDA
growth of 12.2%, 34.9%, CAGR, respectively, in FY20-23E backed by
international growth and positive operating leverage. We revise our target
price from Rs 140 to Rs 190 (32x FY23 EPS of Rs 6.0) and maintain our BUY
rating.
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