Stock Pick From The Engineering Sector

Here Is Why:

• The expected revival in the global capex cycle will benefit the company.
• It is considerably well-positioned in domestic as well as international markets.
• The weakened rupee will continue to boost its profitably over the next one year.

Elgi Equipments (EEL) is a pure manufacturing company which is poised to benefit from the global market revival. With the acquisition of a few companies in the US and Europe, it has positioned itself well in strategic markets across the globe and has received validation of its products across these markets. The American and European markets showing signs of recovery gives us confidence for EEL's growth potential in future.

EEL is one of the world’s leading manufacturers of air compressors and automotive equipments, and has a wide product offering of innovative and technologically superior equipments. The company is known for its superior design equipments and over the years, has achieved productivity goals with optimal costing. In its compressor division, the company offers a complete range of compressed air solutions from oil-lubricated and oil-free rotary screw compressors, oil-lubricated and oil-free reciprocating compressors and centrifugal compressors, to dryers, filters and downstream accessories. It has state-of-the-art manufacturing facilities in India, China, Italy and France, and warehouse facilities in Australia, Brazil, the Middle-East and the US.

In a challenging economic environment in the last couple of years, EEL was facing sluggish domestic and global business growth. As the demand for compressors is directly related to industrial, mining and infrastructural development, the slowdown across these sectors saw considerably lower demand for the products in the economy. However, there has been modest growth in demand for its products seen across its international subsidiaries. Due to revival in economy, the construction and infrastructure industry have started to show signs of recovery in US and Europe. Further, it is expected to pick up in mining sector too in recent future. Apart from US and Europe, Middle East market has been growing at a strong pace for the company in recent past. 

EEL's margins had also been taking some beating on the profitability front. However, we expect that raw material prices will remain soft for the next one year. Further, employee expenses are expected to stabilise at the current levels. The acquisition process of most of the subsidiaries has almost been completed, and these subsidiaries will start contributing to the company's financials soon. The rupee is expected to remain at the current levels before appreciating against foreign currencies, and this weakness will continue to contribute to the company's margins.

On the financial front, EEL posted a total consolidated income of Rs 670 crore in the first half of FY14 against Rs 490 crore for the same period last year. The encouraging topline figures are because of the inorganic growth by the company. However, the company's consolidated PAT decreased to Rs 26 crore during the said half year period against Rs 28 crore in H1FY13 on account of lower Other Income, higher finance costs and higher Income Tax. Though the company recently raised debt, which was used mostly for acquisition of businesses in US and Europe, its promoters have not pledged a single share from their holdings.

Over the recent past, the company has increased its market share in other sectors such as cement, power and transport, which are also expected to look up soon. This will augur well for its market share and the growth in its domestic and international business. In the wake of better operating leverage in both domestic and international markets, EEL's Return on Capital Employed (ROCE) is expected to improve in the near future, as are its margins. Hence, we recommend buying this stock, with a target of Rs 95 over the next one year.