Key Rating Drivers & Detailed Description

Strengths

Established market position and strong brand: With a market share of around 22%, 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 an entrenched channel, comprising dealers, direct sales, and spare parts/after-sales segments. The group has exclusive dealerships across India and overseas, and also enjoys a dominant market presence in railway compressor segments. Geographic presence is strengthened through subsidiaries in Europe, USA, Brazil, UAE, Australia, and Indonesia. The recent acquisition of Michigan Air in December 2019 further strengthens its market position in key North American markets.

Efficiently run operations: Operating efficiencies are marked by well-run assembly lines and focus on core competence. Furthermore, the group outsources manufacturing of major part of its components. Critical parts, such as air-end, top-block, castings and motors are manufactured in house. This allows the group to benefit from an asset-light model on one hand and ensure product quality for critical parts. Operations also benefit from in-house research and development (R&D) capabilities. Operating margins recovered to ~12% from 7.8% in fiscal 2020 with proactive cost control measures.

Healthy financial risk profile: Financial risk profile is healthy. Modest capital expenditure, proactive cost control measures and prudent working capital management, strengthens financial risk profile. Company has gearing of 0.63 times in fiscal 2021, likely to be comfortable over the medium term as well. Interest coverage and net cash accrual to total debt ratios were healthy at 16 times and about 0.44 time, respectively, in fiscal 2021, and expected to be comfortable over the medium term as well. Debt/EBITDA which was 2.84 times in fiscal 2020 have reduced in fiscal 2021 to 1.70 times. Expected to be less than 2.0 times over the medium term.

Weaknesses

Exposure to risks relating to fluctuations in demand: The group mainly caters to capital-intensive industries such as infrastructure, automotive, and heavy engineering, and hence, depends on the overall economic performance of the country. Product sales are dependent on steady capacity expansion and upgrades in end user industries. A potential slowdown in industrial activity can lead to stagnation in revenue as witnessed between fiscals 2012 and 2015.

 High competitive intensity: While capital cost for setting up a compressor manufacturing unit is not high due to the assembly nature of operations, technology plays a major role and acts as an entry barrier. Most large domestic players are subsidiaries of established international companies or have technical collaborations with global players. While the Elgi group, with its indigenous technology, has been able to retain a comfortable market share in the screw compressor segment, it faces stiff competition in the centrifugal segment, which is dominated by multi-national corporations.

Key Financial Indicators

Annexure - List of Entities Consolidated

This Annexure has been updated on 31-Aug-2021 in line with the lender-wise facility details as on 23-Aug-2021 received from the rated entity.

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