Detailed Rationale

Crisil Ratings has reaffirmed its 'Crisil AA/Stable/Crisil A1+' ratings on the bank loan facilities of Elgi Equipments Ltd (Elgi).

 

The ratings continue to reflect the strong business risk profile of Elgi. supported by its established market position, large distribution network in the domestic and overseas markets, and healthy operating efficiency. The market position is supported by the strong brand recall for the Elgi brand and vast product profile, catering to various end-user industries. The ratings also factor in the healthy financial risk profile and strong liquidity position of Elgi.

 

These strengths are partially offset by susceptibility to volatility in raw material prices and intense competition in the domestic and export markets, the moderately working capital-intensive operations, modest albeit improving performance in European subsidiaries, and  cyclicality in demand from certain end-user industries.

 

Elgi is the second largest player in the domestic compressor industry and the sixth largest player, globally. Revenue has grown by 7.1% during the first nine months of fiscal 2025, driven by growth in both air compressor and auto segments (contributing to 92% and 8% of total revenue, respectively). While demand for air compressor products has been healthy in the domestic market, markets such as USA, Australia and South-East Asia had lower revenues due to moderation in demand from end-user industries, intense competition and inflationary pressures. Besides, demand for certain products is linked to infrastructure development, which tends to be cyclical in nature. Share of revenue from subsidiaries dropped to 40.4% in the first nine months of fiscal 2025, as compared to 44.6% during the corresponding period of the previous fiscal. Revenue is likely to grow at a healthy pace, supported by improving demand from key markets such as the US and Europe, and continued momentum in the domestic market, across diverse sectors including auto, pharma, power, mining, construction, fast-moving consumer goods (FMCG) and healthcare.

 

Operating margin was healthy at 14.9% in the first nine months of fiscal 2025, though lower compared to 15.3% in the corresponding period of the previous fiscal, in spite of investment towards go to market strategy and higher freight costs. Over the medium term, operating margins are expected to sustain at similar levels as in the current fiscal, driven by stable raw material cost, sustained sales price realisations, stabilisation in employee cost, favorable product mix and continued cost rationalisation measures, aiding strong cash generation.

 

Elgi’s financial risk profile remains strong, supported by comfortable debt metrics. Gearing was low around 0.3 time as on December 31, 2024, as debt levels came down to Rs 410 crore, aided by steady cash accrual and initiatives undertaken by the company. Networth has improved to around Rs 1,627 crore as on the same date, led by healthy profitability and is likely to exceed Rs 1,800 crore by the next fiscal. The company had announced a capex of Rs. 250 core for enhancing its capacity in DPSAC (Diesel Powered Screw Air Compressor) and GSC (Global Support Center) division over 2 years. Till nine months of fiscal 2025, the company has incurred capital expenditure (capex) of nearly Rs 70 crore. Steady annual cash accrual of Rs 300-400 crore should suffice to fund the annual capex. Also, prudent working capital management will gradually lower reliance on external debt, further strengthening the financial metrics of the company.

Analytical Approach

Crisil Ratings has combined the business and financial risk profiles of Elgi and its subsidiaries and joint ventures, given the operational and financial linkages.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position and strong brand: With an estimated market share of around 20%, Elgi is the second largest  manufacturer of compressors in India. Its product profile includes portable, reciprocating and screw compressors, sold under the Elgi brand, through an entrenched channel, comprising dealers, direct sales and spare parts/after-sales segments. The group has dealerships across India and overseas markets and enjoys a dominant market presence in the Indian railway compressor segment. Its geographical reach is strengthened through subsidiaries in Europe, USA, Brazil, UAE, Australia and Indonesia. The company is also the sixth largest compressor manufacturer globally, improving its position from eight in fiscal 2021.

 

Subsidiaries should improve or sustain their performance as the company strives to consolidate its position in each of the markets, albeit witnessing demand moderation in few markets, as end-user segments cope with cyclicality. The company has also acquired distribution companies in key markets in the past decade, strengthening its position across various markets through the inorganic route.

 

• Efficiently run operations: The company has well-run manufacturing and assembly lines, with focus on core competence. Over the last decade, the company has been consistently incurring capex to integrate backwards and manufacture critical parts such as pressure vessels, castings, motors and key production machines indigenously. This has improved its control over quality, efficiency, inventory and overall cost. Operations also benefit from in-house research and development (R&D) capabilities.

 

Operating margin remained healthy at 15.3% in fiscal 2024 as compared to 15.5% in fiscal 2023, aided by steady volume and proactive cost-control measures. The margin should sustain at 14-15% over the medium term, with healthy operating leverage, increasing proportion of higher-margin products such as oil-free compressors, aftermarket revenue and continued cost rationalisation strategic measures.

 

• Healthy financial risk profile: The financial risk profile is supported by modest debt, sizeable networth of Rs 1,378 crore as on March 31, 2024, and healthy cash generating ability, translating into healthy return on capital employed (RoCE, 26.7% in fiscal 2024) and comfortable debt protection metrics. Cash accrual stood at Rs 325 crore in fiscal 2024, as compared to Rs 412 crore in fiscal 2023, owing to sale of some non-core assets in India and in overseas subsidiaries. Gearing and debt/earnings before interest, depreciation, tax and amortisation (Ebitda) were steady at 0.41 time and 1.13 times, respectively, in fiscal 2024, despite increase in debt levels to Rs 561 crore at March 31, 2024, from Rs 506 crore on March 31, 2023, to cover working capital expenses in subsidiaries.

 

Interest coverage and net cash accrual to total debt ratios were healthy at 16.2 times and 0.58 time, respectively, in fiscal 2024. The company plans to incur capex of nearly Rs 100-120 crore in fiscal 2025 and around ~Rs 200 crore in next one to two years, towards setting up a capability centre. This, along with incremental working capital expenses, can be comfortably serviced from expected cash accrual of Rs 300-400 crore per fiscal. Hence, debt protection metrics will remain comfortable over the medium term. Any sizeable acquisitions, necessitating raising of large debt, will be a monitorable.

 

• Strong liquidity: The company held cash surplus of over Rs 772 crore as on December 31, 2024, largely generated from Indian operations. Bank limit of 415 crore was utilised moderately, at an average 22% over the 12 months ended November 30, 2024, which further enhances the financial flexibility. While part of the cash surplus could be used for capex, the company is still likely to maintain strong liquid surplus, given its healthy cash generating ability.

 

Weaknesses:

• Susceptibility to intense competition and fluctuations in demand: The group caters to capital-intensive industries such as infrastructure, automotive and heavy engineering, and hence, its performance depends on the overall economic growth in the domestic market. Product sales are dependent on capacity expansion/upgradation in end-user industries and greenfield projects. A potential slowdown in industrial activity can lead to stagnation in revenue, as witnessed in fiscals 2012 and 2015 and in 2020 and 2021, due to Covid related disruptions.

 

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.  However, the Elgi group, with its indigenous technology, has been able to retain a comfortable market share in the screw compressor and portable compressor segments.

 

• Moderate albeit improving operations of subsidiaries: Operating margin of subsidiaries has fallen to 6.2% in fiscal 2024, from 9.7% in fiscal 2023, and remains lower than the company’s standalone operating margin of 22.2% in fiscal 2024, compared to 19.7% in fiscal 2023. The fall in operating margin of overseas subsidiaries was on account of weak demand in US and strong competition in Australia. Operating margin for Gulf entities have improved to 8.1% in fiscal 2024, from 7.1% in fiscal 2023. Also, company had posted a breakeven in margin at its European subsidiaries, at 0.6% in fiscal 2024 as compared to (0.5%) in fiscal 2023. However, owing to high inflationary conditions and sluggish demand in overseas markets, business performance of key subsidiaries operating in these territories will remain monitorable.

 

• Moderately working capital intensive operations: With high revenue generation from international markets (around 51% year-to-date in fiscal 2025) and diverse product offerings, the company maintains a large inventory of around 90 days. Inventory is likely to remain sizeable at these levels, given the rising scale of operations and expansion into newer markets. Gross current assets averaged 191 days in the five fiscals ended March 31, 2024, and are expected to remain high over the medium term. 

Liquidity: Strong

Expected annual cash accrual of Rs 300-400 crore should suffice to cover the minimal term debt obligation of Rs 5-9 crore and incremental working capital requirement over the next two fiscals. The company’s capex plans in the next fiscal will be funded through internal cash accrual. It also held liquid surplus of over Rs 772 crore as on December 31, 2024. Bank limit of Rs 415 crore was moderately utilised at 22% on an average through 11 months ended November 30, 2024.

 

Environment, social and governance (ESG) profile

Crisil Ratings believes that Elgi’s ESG profile supports its already strong credit risk profile.

 

Key highlights:

• Energy conservation initiatives have led to decline in energy intensity from 5.43 g Joule (fiscal 2023) to 2.34 g Joule (fiscal 2024)
• Increase in share of renewable energy from 11.05% (fiscal 2023) to 32% (fiscal 2024)
• Reduction in specific water consumption (KL/revenue) from 12.04 (fiscal 2023) to 11.9 (fiscal 2024)
• Reduction in scope 1(tCo2e/revenue) from 6.44(tco2e/million of sale) to 5.35 in fiscal 2023 to 4.47(tco2e/million of sale) and overall emission intensity from 0.87 (fiscal 2023) to 0.41 (fiscal 2024).
• Lost-time injury frequency rate (LTIFR) has fallen from 0.44 (fiscal 2023) to 1.28 (fiscal 2024)
• CSR as percentage of net profit has moderately increased from 0.33% (fiscal 2023) to 0.48% (fiscal 2024)
• All shareholders have equitable access to information with no evidence of insider trading.
• Over 60% of the board comprises independent directors.
• Strong internal control systems and processes.

 

There is growing importance of ESG among investors and lenders. Elgi’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign investors/companies.

Outlook: Stable

The credit risk profile of Elgi will continue to benefit from its established presence in the air compressor segment, the improving revenue and customer diversity, and adequate operating profitability. Strong cash generation and prudent working capital management, along with moderate capital spends, will help healthy debt metrics sustain over the medium term.

Rating sensitivity factors

Upward factors:

• Stronger than expected  revenue growth, also benefitting market share, and sustenance of operating profitability at above 15% resulting in better than anticipated cash generation.
• Sustenance of healthy financial risk profile and debt metrics; debt/Ebitda of less than 0.7-0.8 times, and build-up of cash surpluses

 

Downward factors:

• Sluggish business performance, or high pricing pressure or material costs incurred for market expansion in new geographies, impacting operating profitability
• Higher than expected debt funded capex or acquisitions, or stretch in working capital cycle thereby weakening the key debt protection metrics (Debt/Ebitda of over 2-2.5 times)

About the Company

Elgi, which was set up at Coimbatore, Tamil Nadu in 1960, is one of India's prominent air compressor manufacturers. On a consolidated basis, the company derives around 50% of its revenue from the domestic market and the rest from overseas markets. The company manufactures a range of reciprocating compressors, screw compressors and centrifugal compressors, and garage equipment for the automotive segment through its subsidiary, ATS Elgi Ltd.

 

The group has trading and marketing arms in the US, Europe, Gulf, Brazil, Indonesia, Malaysia, Thailand and Australia. On August 30, 2012, it acquired the entire stake in Caraglio-based Rotair, which designs, manufactures and distributes a variety of compressors and allied products to the construction and industrial sectors. On November 28, 2012, the group acquired the entire stake in Charlotte (US)-based Pattons, which distributes and assembles industrial compressors and air products. It also has a captive foundry that commenced operations in 2013. In August 2018, the group acquired 100% stake in Sydney-headquartered F R Pulford and Son Pty Ltd which is engaged in distribution of industrial compressors. The acquisition of Michigan Air in December 2019 further strengthened its market position in the North America.

 

Elgi reported net profit of Rs 248 crore on operating income of Rs 2,518 crore in the first nine months of fiscal 2025, compared with net profit of Rs 236 crore on operating income of Rs 2,352 crore in the corresponding period of fiscal 2024.

Key Financial Indicators

As on/for the period ended March 31*	Unit	2024	2023
Revenue	Rs crore	3220	3053
Profit after tax (PAT)	Rs crore	312	371
PAT margin	%	9.6	12.1
Adjusted debt/adjusted networth	Times	0.41	0.45
Interest coverage	Times	16.20	21.12

*Crisil Ratings-adjusted numbers

Any other information: Not Applicable