Detailed Rationale

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

 

The ratings continue to reflect the healthy business risk profile of Elgi supported by its established market position sizeable distribution network both in domestic and export markets and adequate operating efficiencies. The established business position of Elgi is supported by strong brand recall for Elgi brand and its sizeable product profile serving diverse set of end user industries. Besides, the rating is also supported by Elgi’s healthy financial risk profile. These strengths are partially offset by susceptibility to volatility in raw material prices and intense competition both in domestic and export market, moderately working capital intensive operations, modest albeit improving performance in European subsidiaries and  cyclical demand from certain end-user industries.

 

Elgi registered a strong revenue growth of 20% in fiscal 2023 driven by healthy 21% growth in air compressor segment (92% of total revenues). The auto component, which accounts for ~8% of revenue, also witnessed steady growth of 16%. While the air compressor demand benefitted by healthy offtake across key export markets, auto component segment benefitted from pent up demand. Revenues registered a growth of ~7% during the first half of fiscal 2024 on-year basis. Revenue is expected to grow at 9-10% over the near to medium term supported by steady demand from key export markets such as the US and Europe and continued domestic growth momentum across diverse sectors including auto, pharma, power, mining, construction, FMCG, and healthcare.

 

Operating profitability improved to 15.5% in fiscal 2023, from 12.8% in fiscal 2022 supported by moderation in raw material cost, sustained sales price realisation, stabilization in employee costs, improving operating performance and favorable mix. Operating profitability improved by 180 bps on-year to 15.1% in the first half of fiscal 2024, with stable input cost. Operating profitability is expected to sustain at 13.5-14% in near to medium term with better operating leverage, and continued cost rationalisation measures, ensuring strong cash generation.

 

The financial risk profile was healthy supported by comfortable debt metrics. Gearing was at similar levels of 0.45 time as on March 31, 2023 despite increase in debt levels to Rs.506 crore from Rs.370 crore (at March 31, 2022), aided by steady cash accrual. Net worth was sizeable at Rs 1134 crore as on March 31, 2023 and is expected to exceed Rs.1300 crores by end March 2024. Steady annual cash accrual of Rs 300-400 crore, moderate annual capital expenditure (capex) plans of ~Rs.100-115 crore and prudent working capital management will gradually lower the reliance on external debt over the medium term, further strengthening the financial risk profile.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of Elgi and its subsidiaries and joint-ventures due to operational and financial linkages. Together, these are known as Elgi Group

 

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 over 20%, Elgi is the one of the largest manufacturer of compressors in India. Its product profile includes reciprocating, 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 Indian railway compressor segments. Its geographical presence is strengthened through subsidiaries in Europe, USA, Brazil, UAE, Australia and Indonesia.

 

Subsidiaries are also expected to continue their performance trajectory as the company strives to consolidate its position in each of the markets. The company is also using its growth plans in inorganic opportunities and has acquired distribution companies in key markets in the past decade, strengthening their position across various markets.

 

• Efficiently run operations: The company has well-run manufacturing and assembly lines with focus on its core competence. Over the last decade company has been consistently   investing in capex in order to integrate backward to manufacture critical parts such as pressure vessels, castings, motors and key production machines indigenously which has given the company better control over the quality, efficiency , inventory and overall cost. Operations also benefit from in-house research and development (R&D) capabilities. Operating margin steadily improved to 15.5% from 12.8% in fiscal 2022 with increase in volumes and proactive cost control measures. Operating margins are expected to sustain between 13.5-14% over the medium term with better operating leverage , increasing proportion of higher margin product such as oil free compressors, after market revenue and continued cost rationalisation measures.

 

• Healthy financial risk profile: The financial risk profile is supported by modest debt, sizeable net worth of Rs.1100 crore as on March 31, 2023 and healthy cash generating ability, translating into healthy return on capital employed (RoCE, 31 % in fiscal 2023), and debt protection metrics. The company’s net profits also benefitted from the sale of non-core assets both in India and in overseas subsidiaries in fiscal 2023, which added to cash accruals. Gearing & Debt/EBIDTA has remained at similar levels of 0.45 times and 1.07 times respectively in fiscal 2023 despite increase in debt levels to Rs.506 crore at March 31, 2023, from Rs.370 crore on March 31, 2022 for working capital requirement of the subsidiaries. Interest coverage and net cash accrual to total debt ratios were healthy at 21 times and 0.81 time, respectively, in fiscal 2023. The company is expected to undertake annual capex of ~Rs.100crores, which along with incremental working capital needs can be comfortaby serviced from annual accruals of over Rs.300 crores. Hence, debt protection metrics will continue to remain at comfortable levels over the medium term.

 

 Weaknesses:

• Exposure to risks relating to fluctuations in demand: The group also caters to capital-intensive industries such as infrastructure, automotive and heavy engineering, and hence, depends on the overall economic growth in the domestic market. Product sales are dependent on capacity expansion/upgrades in end-user industry capacities and green field projects. A potential slowdown in industrial activity can lead to stagnation in revenue as witnessed between fiscals 2012,2015,2020 and 2021 due to covid related disruptions.

 

• 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.

 

• Moderate albeit improving operations of subsidiairies: Operating profitability of Elgi’s subsidiairies is gradually improving (7.4% in fiscal 2023 compared with 4.4% in fiscal 2022), but remains lower than the company’s standalone operating profitability. The improvement in operating profitability was driven by better operating leverage, with revenues benefitting from strong demand for the company’s products in Europe and USA in fiscal 2023. Losses at the European subsidiary have reduced, and  break-even is expected over the near to medium term. However, given sluggish economic growth outlook in Europe and USA, and high inflationary conditions, business performance of key subsidiairies operating in these subsidiairies will remain a monitorable.

 

• Moderately working capital intensive operations: Elgi’s operations are moderately working capital intensive. Owing to high revenue generation from international markets (~ 53% of revenue in fiscal 2023) and diverse product offerings, large inventory of 3 months is maintained; this is expected to continue at similar levels, given rising scale of operations and expansion into newer markets. Average gross current assets were at 176 days in the five fiscals ended March 31, 2023, and are expected at similar levels over the medium term. 

Liquidity: Strong

Elgi has strong liquidity, driven by expected annual cash accrual of Rs. 300-400 crore over the medium term which is expected to be sufficient against term debt obligations of Rs.12 crore each fiscal 2024 and fiscal 2025 along with nominal capex and incremental working capital requirements. Further the company has a liquid surplus of over Rs 350 crore as of March 31, 2023. Besides, the company has additional cushion in the form of working capital lines of Rs. 482 crore which are also moderately utilized at 47% through 12 months ended Aug 2023

 

ESG Profile of Elgi

CRISIL Ratings believes that Elgi Equipment Limited’s (Elgi) Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

Key ESG highlights:

• Energy conservation initiatives have resulted in a 12% decrease in company’s Energy intensity from  6.32 G Joule/Million of sale (fiscal 2021) to 5.66 G joule (fiscal 2022) and  to 5.43 g Joule (fiscal 2023)
• Increase in Specific Energy consumption(MwH/revenue) from 13.49 (fiscal 2022) to 7.31 (fiscal 2023)
• Increase in share of renewable energy from 5.51% (fiscal 2022) to 11.05% (fiscal 2023)
• Reduction in Specific water consumption (KL/Revenue) from 16.54 (fiscal 2022) to 12.04 (fiscal 2023)
• Increase in recycling rate from 50% (fiscal 2022) to 53.94% (fiscal 2023)
• Reduction in Hazardous waste generated (Tonnes/ Revenue) from 0.16 (fiscal 2022) to 0.04 (fiscal 2023)
• Reduction in Scope 1(tCo2e/revenue) from 6.44(tco2e/million of sale) to 5.35 in Fiscal 2023 and overall emission intensity reduced from 0.93 (fiscal 2022) to 0.87 (fiscal 2023)
• LTIFR has improved from 0.69 (fiscal 2022) to 0.44 (fiscal 2023)
• % of local suppliers by value increasing from 89.9% (fiscal 2022) to 91.6% (fiscal 2023)
• CSR as % of net profit has come down from 0.91% to 0.33%
• Attrition rate has increased from 13.5 to 15%
• All shareholders have equitable access to information and there is no evidence of insider trading in the past
• Over 50% of the board is of independent directors; There are nil independent directors with tenor greater than 10 years
• Company has 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

CRISIL Ratings believes the Elgi group's credit risk will continue to benefit from its established presence in the air compressors segment, improving revenue and customer diversity and its adequate operating profitability. Strong cash generation and prudent working capital management along with moderate capital spend, will ensure sustenance of healthy debt metrics 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 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, based in Coimbatore, Tamil Nadu, was set up in 1960 and is one of India's prominent air compressor manufacturers. On a consolidated basis, EEL derives around 50% of its revenue from the domestic market and the rest from the overseas market. 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 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 recent acquisition of Michigan Air in December 2019 further strengthens its market position in the key North American market.

 

Elgi reported net profit of Rs. 152 crore on operating income of Rs.1530 crore in the first half of fiscal 2024, compared with net profit of Rs. 121 crore on operating income of Rs. 1432 crore in the corresponding period of fiscal 2023.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue size (Rs.Crore)	Complexity Level	Rating assigned with outlook
NA	Cash credit	NA	NA	NA	33	NA	CRISIL AA/Stable
NA	Packing credit	NA	NA	NA	150	NA	CRISIL A1+
NA	Short Term Bank Facility@	NA	NA	NA	20.5	NA	CRISIL A1+
NA	Short Term Bank Facility	NA	NA	NA	197.5	NA	CRISIL A1+
NA	Letter of credit & Bank Guarantee^	NA	NA	NA	30	NA	CRISIL A1+
NA	Bank guarantee	NA	NA	NA	25	NA	CRISIL A1+

^Interchangeable with bill discounting

@Interchangeable between letter of credit and bank guarantee