Fundamental Analysis of Elgi Equipments

Fundamental Analysis of Elgi Equipments - Cover Image

Fundamental Analysis of Elgi Equipments: After taking a hit on the stock price in April 2020, the stock of Elgi Equipments Limited has rallied more than 930% to this current day which makes it a multi-bagger stock. What makes this stock more interesting is, it is held by an Ace investor, Nemish S Shah. The investor hold this stock since Dec 2015 without any changes. His current holding in the stock amount to Rs 291.4 Crores.

Let us conduct a Fundamental Analysis of Elgi Equipments and attempt to find out the reason for the performance of the company.

We’ll begin our Fundamental Analysis of Elgi Equipments by becoming acquainted with the company’s operations and products. Following that, we’ll go into the stock’s financials. The article concludes with a highlight of future plans and a summary.

Company Overview

Elgi Equipments Limited was founded in 1960 by L.G. Varadarajulu and is headquartered in Coimbatore. The company is engaged in the business of manufacturing air compressors. Over the years, the company has grown to become one of the global leaders in the air compressor industry. The company employs more than 2,000 people from around the world.

Geographic Presence

As of FY22, it has business in more than 120 countries with a direct presence in 28 countries. Elgi equipments have also established their manufacturing presence in Italy and USA apart from its presence in India.

Product Offerings

The company’s products have several uses in mining, pharmaceuticals, shipbuilding, power, oil, chemicals, textiles, printing, paper, transportation, electronics, telecommunications, military, medical, railways, food & drinks, and plastics.

The product category of the company includes oil-lubricated compressors, oil-free compressors, rotary screw compressors, reciprocating compressors, portable compressors, railway compressors, heat recovery systems, air accessories and medical air compressors.

Industry Overview

Elgi Equipements manufactures air compressors for different industries. The growth of the air compressor industry is directly correlated to the growth of industries it conducts its business in. For this particular reason, we shall look at use of the air compressors for each of these industries and the growth rate of these industries:

Manufacturing Industry: Air compressor systems for manufacturing are vital for industrial buildings, pumping systems, material handling, primary processing, and the maintenance and repair of various machinery and equipment. During the projection period (2023-2028), India’s Manufacturing Sector Market is expected to grow at a CAGR of more than 4%.

Textile Industry: Compressed air has significant use in the textile industry. A few of the places where it is used include Spinning and Ginning Mills, Air-jet spinning & weaving, Winding and dying of non-woven materials and Treatment of Wastewater. The Indian textile and apparel industry is predicted to grow at 10% CAGR from 2019-20 to reach US$ 190 billion by 2025-26.

Pharmaceutical Industry: The use of compressed air in the pharmaceutical industry range is categorised into process air application and Direct contact application. Process air application employs compressed air for a specific kinetic activity. It also plays a prominent role in the conveyance process. During the period 2014-22, the Indian pharmaceutical business has grown by 103%, from $11.6 billion to $24.6 billion.

Agricultural Industry: Many machines and day-to-day operations in the agricultural business rely on air compressors for a continuous or intermittent supply of clean, pressurised air. This industry is in desperate requirement of on-demand compressed air and long-lasting compressors, which ELGi’s rotary screw compressors can provide. This sector has continued to grow 4.6% annually over the past six years.

Mining Industry: For the Mining industry, Industrial air compressors provide high-quality performance and reliability, as well as a reliable source of power for drilling and piling machinery, pneumatic tools, material conveyors, and ventilation systems. While the industry has witnessed inconsistent growth, it has managed to grow by 18.2% in FY22.

Healthcare Industry: Hospitals rely on air compressor systems for everything from facility operations to patient care. To prevent water buildup in the facility’s pipeline, air compressors for hospitals must be devoid of pollution and particles, have no oil or odours, and be dry. By the end of 2030, this industry is expected to reach a market size of 50 billion dollars.

Automotive Industry: Compressed air has become an essential component of the automotive industry since it ensures worker safety and increases the overall efficiency of the manufacturing plant. The compressed air technology in this industry is used for Tyre Inflation Plasma cutting, Air-operated robots, Automobile Finishing and Air Tools. By the end of 2024, India is aiming to double its auto industry market size to ₹15 lakh crores.

Construction Industry: Heavy-duty portable air compressors are ideal for the specialised requirements of road construction, restoration work, civil engineering, and a variety of other construction applications. It is also utilised on the job site to power tools such as power hammers, drills, saws, wrenches, nail guns, and a variety of other pneumatic tools.

By the end of 2024, the construction industry is expected to reach the market size to $1.4 trillion which the give the air compressor industry a massive boost.

Elgi Equipments – Financials

Using the annual reports declared by the company, we will now conduct a fundamental analysis of Elgi Equipments Limited.

Revenue & Net Profit Growth

The Income statement of the company indicates that the revenues of the company have increased from Rs. 1873.1 Crores to Rs. 3107.9 from FY18-19 to FY22-23 respectively. This gives the company a 5-year CAGR of 10.66% on its revenue.

During the same duration, the net profits of the company have increased from Rs. 103 Crores to 371 Crores at a CAGR of 29.17%.

This indicates that the company has managed its costs effectively which has resulted in a significant growth in profits compared to its sales.

Year	Total income (Rs in Cr)	Profit after tax (Rs in Cr)
2023	3,107.9	371
2022	2,579.7	178
2021	1,947.5	102
2020	1,842.6	43
2019	1,873.1	103

Margin Analysis

With the exception of FY20, the company has consistently increased its operating profit margins and net profit margins. For FY23, the company reported margins of 13.88% and 12%, respectively.

An increase in operating profit margin indicates that the company has been able to grow its business while managing its operational expenses. An increase in net profit margin indicates that the company also managed its financial obligations and taxes efficiently.

Year	Operating Profit Margin (%)	Net Profit Margin (%)
2023	13.88	12
2022	10.80	6.92
2021	8.56	5.26
2020	4.58	2.31
2019	8.06	5.5

Return Ratios: RoCE & RoE

The company’s return ratios are also indicating a positive outlook on the performance of the company.

If we take a look at the return on equity of the company, we can see that it has consistently increased year-on-year with the exception of the year 2020 during which the pandemic struck the world. This means that the company has been consistently generating higher returns on the capital invested by the shareholders.

The five-year Roce of the company is also following a similar trajectory. For FY23, the company has reported a return on capital employed of 28.52% which indicates that the company is effectively utilized its resources to generate a strong return.

Year	ROE (%)	ROCE (%)
2023	27.04	28.52
2022	20.17	26.28
2021	12.51	16.7
2020	5.53	8.89
2019	14.12	17.61

Debt & Interest Coverage Ratio

If we take a look at the leverage situation of the company, we can notice that the company has maintained its debt-to-ratio to less than 0.51 in the last five years. This indicates that the company has less financial burden as they are relying less on borrowed funds to finance its operations and growth.

This also means that the company can retain more of its revenue as it does not have a huge obligation towards the repayment of debt and the interest towards it.

Talking about interest, the company has also maintained a good interest coverage ratio over the past five years and has reported the ratio to be 25.29 for FY23. This tells us that, the company has earned enough gross profits to meet its interest expenses 25 times.

This also suggests that the company is in a situation where they are able to borrow additional funds for the purpose of expansion and growth.

Year	Debt to Equity	Interest Coverage Ratios
2023	0.37	25.29
2022	0.36	31.26
2021	0.42	12.22
2020	0.51	5.39
2019	0.25	16.73

Future Plans Of Elgi Equipments

So far we looked at the previous fiscals’ data for our fundamental analysis of Elgi Equipments. In this section, we’ll try to make sense of what lies ahead for the company and its investors.

As per the report mentioned by the company in the year 2021, they were putting forth plans to achieve a revenue target of $400 million by the end of FY25-26. The company expects 50-60% of this revenue to come from the international market.
Along with the revenue target of $ 400 million, the company also had set a strategic business plan to increase its EBIT to 16% which has already been achieved and also increase the ROCE to 30%.
The company had also rolled out plans to leverage the investment made in several global markets such as North America, Europe and Australia in order to increase its global market share.