Elgi Equipment Ltd - Rs 50.00

Established in 1960, ELGI Equipment Ltd (EEL) is the market leader and Asia's largest manufacturer of air compressors and automobile service station equipment. As air compressors are used in a wide range of applications, company caters to almost all sectors of industry ranging from mining, defence, transport, pharmaceuticals, power, oil, railways, chemicals, textiles, printing to ship building, paper, electronics, telecommunications, medical, food & beverages and plastics. Of late company has closed down its loss making diesel engine business, hence presently EEL has following three business segment:

I. Compressor: This division constitutes nearly 75% of total sales and is involved with the design, development and manufacture of exhaustive range of electric and diesel powered screw air compressor (oil free, portable, world’s smallest etc), centrifugal air compressor, airends, reciprocating air compressors, borewell compressors, bare compressor pumps etc. Besides it also manufactures railway compressors and a variety of equipment solutions for railway applications. Recently company has developed new generation compressors which are small, light strong, portable and designed for special, customized applications.

II. Automotive Equipment: With around 20% contribution to sales this segment provides total service station solutions through the supply of a range of equipment and tools for two, three & four wheelers. The broad categories of equipments include engine/gas analyzer, head light aligner, AC system service, wheel balancer/aligner, hydraulic lift, collision repair system, painting/denting equipment, auto car washer system, pneumatic tools, lubricating pumps and various other diagnostic equipment. Due to its product quality and commitment, EEL has been approved as a 100% supplier to Toyota and Honda car dealership in India. A full-fledged garage has nearly 128 equipment, and EEL either deals with most of them or manufacturers all of them. Incredibly, EEL is also India’s pioneer and leading manufacturer of mobile service units which are specially designed and equipped with all the facilities for repair / lube, arranged on the platform of a vehicle for easy operation. Mobile workshops are a vital ancillary for repairing and lubricating immovable machineries at construction and mining sites, desert regions and other far-flung work places.

III. Manufacturng and Engineering Solutions: This is a new business segment started by the company recently and presently constitutes hardly 5% of total revenue. Because of rich experience of four decades and state-of-the-art infrastructure, EEL has the advantage of offering end to end mechanical engineering solutions and contract manufacturing services of precision engineered part to clients who are looking for cost-effective, subcontracting solution. The division’s core strength lie in managing long term contracts with large OE clients. It also offer total air solutions for clean and dry air such as moisture separator, refrigerated air drier, air receiver, airmate drains, demand side controller etc.

Presently, EEL has two production facilities in Coimbatore which can manufacture all these types of compressors covering a range from 0.75HP to 1500HP for volumes from 1.8 cfm (cubic feet per minute) to 80000 cfm. Apart from India, company has a presence in more than 50 cr countries across the world covering Europe, North America, Latin America, Africa, Australia, Middle East, South East Asia, West Asia and the Far East. Interestingly, it is setting up a manufacturing facility in China which is expected to commence production from this calendar year. It is also forming a subsidiary in Sharjah and Brazil for trading and warehousing. To concentrate on each business segment company is hiving off its automotive equipment business into a separate wholly owned subsidiary called ATS-Elgi Ltd.

Fundamentally company has recorded very encouraging performance for nine months ending Dec 2007. Sales grew by 20% to Rs 325 cr but net profit shot up 70% to 29 cr on back of better efficiency. Accordingly it is expected to clock a turnover of Rs 450 cr and PAT of Rs 35 for entire FY08. This works out to an EPS of more than Rs 5.50 on equity of Rs 6.30 cr having a face value as Rs 1/-. Notably, due to strong economic and industrial growth EEL is expected to grow at a CAGR of 20~25% for coming three years. Hence it can report an EPS of Rs 7 for FY09, which means scrip is currently discounted by merely 7x times against its FY09 earnings. Apart from being a debt free company, EEL has been consistently paying dividend for over decades. Considering all the factors investors are recommended to buy at current levels with a price target of Rs 80 in 9~12 months.

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