Rating Rationale
April 27, 2018 | Mumbai
Elgi Equipments Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.525 Crore
Long Term Rating CRISIL AA/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.50 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISL has reaffirmed its ratings on the bank facilities and commercial paper of Elgi Equipments Ltd (Elgi; part of the Elgi group) at 'CRISIL AA/Stable/CRISIL A1+'.
 
Driven by improved standalone performance as well as turnaround in subsidiaries, revenue grew at a healthy 15% year-on-year to Rs 1143 crore in the first nine months of fiscal 2018, while operating margin improved by 800 basis points. During fiscal 2017, the group had taken restructuring initiatives in China and Brazil, and hived off its France unit to reduce losses which has led to this improvement in profitability.
 
Turnover is likely to grow by 12-15% over the medium term because of expected increase in sales to the industrial segment and increasing focus on the after-market segment. Performance of overseas subsidiaries is likely to remain steady. Margin is expected to sustain at a healthy 11-11.5% with ramp up in operations.
 
The ratings continue to reflect the Elgi group's established market position and strong brand presence in the domestic air compressors industry, improving operating efficiencies, and healthy and improving financial risk profile. These strengths are partially offset by exposure to competition, modest, albeit improving, performance of overseas subsidiaries, and cyclical demand from end-user industries.

Analytical Approach

For arriving at the ratings, CRISIL has combined the business and financial risk profiles of Elgi and its wholly owned subsidiaries, ATS Elgi Ltd, Adisons Precision Instruments Mfg Co Ltd, Elgi Equipments (Zhejiang) Ltd, Elgi Gulf (FZE), Elgi Compressors Trading (Shanghai) Co Ltd, Elgi Compressors Do Brasil Imp E Exp Ltda, Elgi Australia Pty Ltd, Elgi Compressors Europe Srl, Rotair S.p.A (Rotair), Elgi Compressors USA, Pattons Inc, USA (Pattons), Patton's Medical LLC, and PT Elgi Equipments Indonesia. Elgi's joint venture with JP Sauer & Sohn, Kiel, Germany, Elgi Sauer Compressors Ltd, has also been proportionately consolidated (to the extent of 26%). All these entities are together referred to as the Elgi group.

CRISIL has entirely amortised the goodwill of Rs 135 crore upon acquisition of Rotair and Pattons by fiscal 2017.

Key Rating Drivers & Detailed Description
Strengths
* Established market position and strong brand: With a market share of around 35%, Elgi 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, a portable segment, and spare parts/after sale segments. The group has more than 100 exclusive dealerships across India and overseas, and also enjoys a dominant market presence in the water well and railway compressors segment. Geographical presence is strengthened through subsidiaries in Italy, the US, China, Brazil, the UAE, Australia, and Indonesia.
 
* Improving operating efficiencies: Elgi group's operating efficiencies are marked by its efficient assembly lines and focus on core competence. The group also outsources manufacturing of around 70% of its components, and manufactures critical parts, such as the air-end and top-block, in-house. This allows the company to benefit from an asset-light model as well as ensure product quality with critical components being manufactured in-house. Additionally, the company's operations benefit from its in house research and development (R&D) capabilities.
 
* Healthy and improving financial risk profile: Growth in cash accrual is expected to be steady on the back of pick-up in domestic demand and gradually declining losses at overseas subsidiaries. This, coupled with modest capex and continued prudent working capital management, will further strengthen financial risk profile. Gearing is estimated to improve to 0.44 time as on March 31, 2018 (0.53 time as on March 31, 2017), and further to less than 0.30 times over the medium term, driven by prudent working capital management and scheduled debt repayment. Interest coverage and net cash accrual to total debt ratios are also estimated to improve to above 18.0 times and 0.50 time, respectively, in fiscal 2018; from 16.56 times and 0.40 time, respectively, in fiscal 2017. Furthermore, liquidity continues to be backed by unencumbered cash surpluses of about Rs 25 crore as of March 2017, annual cash generation of about Rs 120 crore, and moderately utilised bank limit.
 
Weakness
* Modest, albeit improving, returns from overseas subsidiaries: Operating profitability and return on capital employed moderated to about 7.0% and 4.2%, respectively, in fiscal 2015, from over 11.5% and 30.6%, respectively, in fiscal 2012 on account of weak economic scenario. This led to recurrent losses in overseas subsidiaries and subdued domestic demand. However, restructuring of operations in China, converting most of foreign currency debt to local currency in Brazil, and admitting the French subsidiary, SAS Belair, to legal redress, have helped curb losses. However, while these units are likely to generate profits over the medium term, overall revenue contribution will remain modest.
 
* 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. Slowdown in industrial activity led to stagnation in standalone revenue 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.
Outlook: Stable

CRISIL believes the Elgi group's credit risk profile will continue to benefit over the medium term from its established presence in the air compressors segment, gradually improving business conditions, and healthy financial risk profile.

Upside Scenario
* Better-than-expected growth in revenue driven by increasing market share in the domestic air compressors segment and improved contribution from overseas subsidiaries.
* Steady improvement in operating profitability to over 12% leading to annual cash generation of over Rs 250 crore.
* Better than anticipated improvement in credit metrics; debt/EBITDA of less than 0.80 time, and gearing of less than 0.40 time.

Downside Scenario
* Material decline in revenue growth, and moderation of operating margin to below 9.0% levels impacting cash generation adversely
* Sizeable debt-funded capex or acquisition and stretched working capital cycle leading to higher-than-anticipated debt levels impacting key credit metrics; debt/EBITDA of over 2.0 times and gearing of over 1.0 time.

About the Group

EEL was set up in 1960 in Coimbatore and is one of India's prominent air compressor manufacturers. On a standalone basis, EEL derived around 60% of revenue from the domestic market and the rest from exports in fiscal 2017. 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.
 
EEL has trading and marketing arms in China, the Gulf, Brazil, and Australia. On August 30, 2012, Elgi acquired a 100% stake in Caraglio-based Rotair, which designs, manufactures, and distributes a variety of compressors and allied products for the construction and industrial sectors. On November 28, 2012, the company acquired a 100% stake in Charlotte (US)-based Pattons, which distributes and assembles industrial compressors and air products. In October 2014, EEL settled the lawsuit by Pattons against Quincy Compressors LLC, and recorded an exceptional income of Rs 22 crore. It also has a captive foundry that commenced operations in 2013.
 
On a consolidated basis, net profit was Rs 68.16 crore in the nine month ended December 31, 2017 (Rs 53.16 crore in the corresponding period of the previous year) on revenue of Rs 1143.10 crore (Rs 997.62 crore).

Key Financial Indicators
As on / for the period ended March 31   2017 2016
Revenue Rs crore 1370.16 1400.33
PAT Rs crore 44.00 23.29
PAT margin % 10.67 9.70
Adjusted debt/adjusted networth Times 0.53 0.69
Interest coverage Times 16.56 10.25

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity sate Issue size
(Rs. Crore)		 Rating assigned
with outlook
NA Cash credit NA NA NA 33.0 CRISIL AA/Stable
NA Packing credit NA NA NA 150.0 CRISIL A1+
NA Short-term bank facility@ NA NA NA 19.0 CRISIL A1+
NA Short-term bank facility# NA NA NA 20.0 CRISIL A1+
NA Short-term bank facility NA NA NA 107.5 CRISIL A1+
NA Letter of credit & Bank Guarantee## NA NA NA 30.0 CRISIL A1+
NA Standby Letter of Credit NA NA NA 160.0 CRISIL AA/Stable
NA Proposed Working Capital Facility NA NA NA 5.5 CRISIL AA/Stable
NA Commercial Paper NA NA 7-365 days 50.0 CRISIL A1+
@ Interchangeable between letter of credit and bank guarantee
#Interchangeable between PCFC and non-fund based working capital facilities
##Interchangeable with bill discounting
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  50.00  CRISIL A1+      31-05-17  CRISIL A1+  24-05-16  CRISIL A1+  20-05-15  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  335 CRISIL AA/Stable/ CRISIL A1+      31-05-17  CRISIL AA/Stable/ CRISIL A1+  24-05-16  CRISIL AA/Stable/ CRISIL A1+  20-05-15  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST  190.00  CRISIL AA/Stable/ CRISIL A1+      31-05-17  CRISIL A1+  24-05-16  CRISIL A1+  20-05-15  CRISIL A1+  CRISIL A1+ 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 33 CRISIL AA/Stable Cash Credit 33 CRISIL AA/Stable
Letter of credit & Bank Guarantee## 30 CRISIL A1+ Letter of credit & Bank Guarantee## 30 CRISIL A1+
Packing Credit 150 CRISIL A1+ Packing Credit 105.5 CRISIL A1+
Proposed Working Capital Facility 5.5 CRISIL AA/Stable Short Term Bank Facility@ 19 CRISIL A1+
Standby Letter of Credit 160 CRISIL AA/Stable Short Term Bank Facility# 20 CRISIL A1+
Short Term Bank Facility@ 19 CRISIL A1+ Short Term Bank Facility 317.5 CRISIL A1+
Short Term Bank Facility# 20 CRISIL A1+ -- 0 --
Short Term Bank Facility 107.5 CRISIL A1+ -- 0 --
Total 525 -- Total 525 --
@ Interchangeable between letter of credit and bank guarantee
#Interchangeable between PCFC and non-fund based working capital facilities
##Interchangeable with bill discounting
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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