Thread by @alphaspotcap

Elgi Equipments Ltd Analysis! 🇮🇳

A detailed thread🧵👇🏻
#investing #StocksToBuy

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About:

EEL is one of India's prominent air compressor manufacturers. On a Consolidated basis, it derives around -50% of revenue from the domestic market. It manufactures a range of compressors & garage equipment for the automotive segment through its subsidiary, ATS Elgi

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It’s air compressor segment generates 90% of the revenue whereas, the remaining 10% is contributed by automotive equipment.

In India it has a decent market share of 22% and comes in the top 10 players in the air compressor market globally.

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Acquisitions history:

• 2012 - Acquired Rotair which designs, manufactures & distributes a variety of compressors to the construction and industrial sectors.

• 2012 - Acquired US based Pattons which distributes & assembles industrial compressors and air products.

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• 2018 - Acquired Sydney based F R Pulford & Son Pty Ltd which is engaged in distribution of industrial compressors.

• 2019 - Acquired Michigan Air to strengthen North American market

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Financial Risk Profiling:

The company has a good capital structure. It’s gearing ratio comes around 0.63x. It’s interest Coverage Ratio is around 16 times which is considered healthy.

It’s Debt/EBITDA is below 1.5x in the last fiscal. This should continue to get better

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Key growth drivers:

Established Market position :

EEL is one of the largest manufacturers of compressors in India. Product profile includes reciprocating, screw and centrifugal compressors sold under the Elgi brand through a comprehensive channel across India

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Operational Efficiency:

Company has a highly efficient assembly lines and focus on core competence. The group outsources manufacturing of major part of its components. This helps them to keep an asset light model. However also it manufacturers critical parts on its own.

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Key weaknesses:

Susceptible to economic slowdown:

The company mainly caters to high capital intensive businesses. And since federal banks across the globe are planning to suck out liquidity. It doesn’t bode well for the capital intend company in the medium term atleast.

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Competition:

Manufacturing capability is not a barrier for new comers as it is mainly outsourced. Only technology is a barrier. However, big companies can set up subsidiaries and invest in R&D to overcome the barrier. This increasing competition threat.

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Positive factors to watch out for:

• Sustained trend in revenue growth. Coupled with healthy OPM can be positive, especially during highly current inflationary environment

• Continued improvement in Debt to EBITDA margin

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• Decline in profitability due to supple side constraints.

• Acquition funded through Debt or basically rising Debt to EBITDA above 2x

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• Strong growth in international market can help in sustaining long term growth prospect for the company.

• Company’s focus on improving margins through its cost control initiatives is a factor to look out for.

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Shareholding Pattern:

• Promoters : 31.9%

• FIIs : 24.9%

• DIIs : 6.8%

• Others : 36.4%

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Numbers:

• ROCE : 19.5%
• ROE : 18.7%
• PEG : 3.04
• Sales growth : 11%
• OPM margin : 15%
• Debtor Days : 68
• Working Capital Days : 44

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Do you think the macro headwind will be problematic for the company in the medium term?

@caniravkaria @AdityaD_Shah @kuttrapali26 @aparanjape