Detailed Rationale

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

 

Revenue rose 31% year-on-year in fiscal 2022, partly driven by pent-up demand across end user industries such as Auto, Textile, Pharma, Power, FMCG etc post abatement of covid induced disturbances and periodic price hikes in most product categories, to pass on input price increase to customers. Profitability increased ~90 basis points (bps) during fiscal 2022, driven by increase in volumes and various other cost rationalisation measures. Performance of overseas subsidiaries started to improve in the second half of the year.

 

Given the diversified client base across various industries, and economic activity normalising from the fourth quarter of fiscal 2022 onwards, both in the domestic and global markets, EEL is expected to sustain its performance in the near to medium term as well. New products introduced in recent years, such as Waterwell and oil-free compressors, are gaining significant traction. 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 expected register a revenue growth of 8-10% over the medium term, Operating profitability is expected to be 12-13% with improving operating leverage, increasing proportion of higher value products and continued cost rationalisation measures. In the first quarter of fiscal 2023, the company reported revenue growth of 42% and a 470 basis points increase in operating margin to 11.3% compared to the corresponding period of the previous year.

 

The company's financial profile continues to remain healthy, supported by comfortable capital structure and healthy credit metrics. Liquidity also remains strong supported by steadily increasing cash accruals, consolidated unutilised bank lines of  Rs 412 crore and cash surplus of Rs 280 crore as on March 31, 2022.

 

The ratings continue to reflect the Elgi group's established market position and strong brand presence in the Indian air compressor industry, improving operating efficiencies, ability of the company largely to pass on the commodity price increase and healthy financial risk profile. Its market position is supported by its ability to provide a diverse range of compressors, allowing it to cater to a wide range of end-user industries, including steel, heavy engineering and automotive. These strengths are partially offset by exposure to competitive pressure, modest, albeit improving, performance of overseas subsidiaries, and cyclical demand from certain end-user industries.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of EEL and its wholly owned subsidiaries: ATS Elgi Ltd, Adisons Precision Instruments Mfg Co Ltd, Elgi Gulf (FZE), Elgi Compressors Do Brasil Imp E Exp Ltda, Elgi Australia Pty Ltd, Elgi Compressors Europe Srl and its subsidiaries, Rotair S.p.A (Rotair), Elgi Compressors USA, Pattons Inc, Patton's Medical LLC, Michigan Air LLC , PT Elgi Equipments Indonesia, ELGI Compressors (M) Sdn.Bhd and joint ventures have also been proportionately consolidated. All these entities are collectively referred to as the 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%, EEL is one of the largest manufacturers 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, and enjoys a dominant market presence in railway compressor segments. Its geographical presence is strengthened through subsidiaries in Europe, USA, Brazil, UAE, Australia and Indonesia. The last major acquisition of Michigan Air in December 2019 further strengthens its market position in key North American markets.

 

• Efficiently run operations: The company has well-run assembly lines with focus on its core competence.. 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 margin improved to 12.8% from 11.9% in fiscal 2021 with increase in volumes and proactive cost control measures.

 

• Healthy financial risk profile: Modest capital expenditure (capex), proactive cost control measures and prudent working capital management, strengthens the financial risk profile. The company has gearing of 0.46 time in fiscal 2022 (improved from 0.63 time in fiscal 2021), which is likely to be comfortable over the medium term as well. Interest coverage and net cash accrual to total debt ratios were healthy at  27 times and 0.61 time, respectively, in fiscal 2022, and are expected to be comfortable over the medium term as well. The debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio, which was 1.70 times in fiscal 2021, has improved in fiscal 2022 to 1.15 times. It is expected to be less than 1.0 time 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 , upgrades in end-user industries and green field projects. 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.

Liquidity: Strong

Liquidity is supported by consolidated cash surplus of over Rs 280 crore and unutilised working capital bank lines of over Rs 400 crore at consolidated level over the 12 months through July 2022. Cash accrual is expected to be over Rs 400 crore, over the medium term, on account of steady business performance which will be sufficient to meet modest capital spending and incremental working capital needs, as well as term debt repayment of Rs 24 crore in fiscal 2023.

Outlook: Stable

CRISIL Ratings believes the Elgi group's credit risk profile will continue to benefit from its established presence in the air compressor segment, improving business conditions and continuing healthy financial risk profile. The group is expected to benefit from sales growth in key markets that it has been investing in recent years.

Rating Sensitivity factors

Upward factors

• Better-than-anticipated revenue growth, supported by improved geographical diversity and sustenance of operating profitability resulting in sustained increase in cash accruals.
• Maintaining healthy financial risk profile and debt metrics with debt/EBITDA ratio of less than 1 time

 

Downward factors

• Steady decline in profitability due to pricing pressure or higher-than-expected costs for organic expansion in new markets
• Any large, debt-funded capex or acquisitions, or stretch in the working capital cycle thereby weakening the key debt protection metrics (debt/EBITDA ratio of 2.5-2.75 times)

About the Company

EEL, 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.

 

On a consolidated basis, net profit was Rs 49 crore in the first quarter of fiscal 2023, on revenue of Rs 694 crore, as against Rs 12 crore and Rs 489 crore, respectively, in the corresponding period of the previous year.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of 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