Stock Review: Elgi Equipments

 

Elgi Equipments' recent acquisitions are likely to help it grow at a faster pace in future

 

ELGI Equipments is India's market leader in air compressors with a share of over 10% and is also among the larger players in Asia. Its recent acquisitions and robust financial results show that the company is all set to grow at a fast pace in future.

BUSINESS:

Established in 1960 as service station equipment and reciprocating type of compressor-manufacturing company, Elgi now caters to various markets through multiple products. Its product lines broadly comprise compressors and automotive equipment, such as diesel engines, and engineering services. It manufactures compressors ranging from 0.75 to 1,500 HP for volumes from 1.8 to 80,000 cubic feet per minute.

   The company has two manufacturing plants in Coimbatore. Apart from selling individual products, the company also supplies customers with complete air compression solutions.

FINANCIALS:

Elgi Equipments' revenues have grown by a compounded annual growth rate of 21% over the past five years, while net profit rose 35%. For the fiscal so far, the company reported revenues of 696 crore, up 47% from the year-ago, while net profit grew 59% to 75.4 crore. At this level, the company's revenues and profits are already higher than that in earlier years.

   Consolidated operating margins have improved consistently from 9.8% in FY06 to 14.3% in FY10. For the nine-month ended December 2010, the company recorded an operating profit margin of 15.8%, which was 30 basis points lower compared to the corresponding period of last year due to high input prices. The margins could erode further as metal prices are rising. Compressors, which contribute almost 85% to its topline, has been the high growth-high margin segment. Revenues from this segment have grown by 48% year-on-year to 771.5 crore and margins have aver-aged 15.3% for the ninemonth period ended December. While the automotive segment grew by 27%, margins have increased by 170 basis points to 12.7% in the over the same period. The company has been largely remained debt free since FY08.

GROWTH PROSPECTS:

During 2010, the company acquired a couple of small overseas companies. Moreover, the company had increased its presence in other emerging economies such as China and Brazil during the meltdown. These strategies seem to have started paying off as revenues of its overseas subsidiaries increased five-fold and profits increased by 140% year-on-year in the December 2010 quarter. Higher contribution from these subsidiaries would help the company grow at a fast pace.Given the diverse application of its products, the company caters to the needs of various sectors such as mining, power, railways, plastics, oil, textiles, shipbuilding and electronics. This diversification reduces the risks posed by investment cycles of individual industries.

VALUATIONS:

The company's stock is trading at 15.7 times its trailing 12 months earnings. Its smaller peers such as Ingersoll-Rand and Kirloskar Pneumatic are trading at P/E of 19.9 and 11.1, respectively. Elgi Equipments has a good dividend paying history. The dividend yield for the last three years has averaged 2.4%. For fiscal so far, the company has paid an interim dividend of 1.25 per share.