Rating Rationale
May 04, 2020 | Mumbai
Elgi Equipments Limited
Rating outlook revised to 'Negative'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.525 Crore
Long Term Rating CRISIL AA/Negative (Outlook revised from 'Stable' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its outlook on the long-term bank facilities of Elgi Equipments Limited (EEL; part of the Elgi group) to 'Negative' from 'Stable', while reaffirming the rating at 'CRISIL AA'. The rating on the short-term bank facility has been reaffirmed at 'CRISIL A1+'.
 
The outlook revision follows CRISIL's expectation that EEL's business performance in fiscal 2021 will be impacted by potential demand slowdown for its products across the globe due to the impact of Covid-19, and the weak business environment. In the current fiscal, the company's end customers are expected to defer capital spending plans, mainly due to the demand uncertainty from Covid induced slowdown. Therefore, despite healthy aftermarket revenues and services revenues, overall revenues are still expected to decline in double digits in fiscal 2021. A potential demand revival in end markets leading to improved performance of overseas subsidiaries and Indian operations is expected in fiscal 2022.

Earlier, its business performance was lower than expected in fiscal 2020 as well, as demand for its products slumped in the domestic and global markets. During the nine months of fiscal 2020, revenues increased by a modest 3%, while operating profitability declined by about 190 bps to 7.9% compared to the corresponding period last year. Profitability was also impacted by strategic spend in Europe for expansion of market share. The company is nevertheless taking steps to enhance operating efficiencies and enhance productivity, which should limit sharp decline in profitability in the near to medium term.

The company's financial profile still remains healthy, supported by comfortable capital structure, and above average credit metrics. Liquidity also remains adequate in form of unutilised bank lines and cash surpluses totalling over Rs.150 crore.
 
The ratings continue to reflect the Elgi group's established market position and strong brand presence in the Indian air compressor industry, healthy albeit moderating operating efficiencies, and healthy financial risk profile. These strengths are partially offset by exposure to intense competitive pressure, 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 EEL 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. EEL's joint ventures with JP Sauer & Sohn, Kiel, Germany, Elgi Sauer Compressors Ltd has also been proportionately consolidated (to the extent of 26%). All these entities are collectively referred to as the Elgi group.

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

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 a market share of around 22%, EEL 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, portable segment, and spare parts/after-sales 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 compressor segments. Geographic presence is strengthened through subsidiaries in Italy, the US, China, Brazil, the UAE, Australia, and Indonesia. The recent acquisition of Michigan Air in December 2019 further strengthens its market position in key North American markets.
 
* Efficiently run operations: Operating efficiencies are marked by well run assembly lines and focus on core competence. Furthermore, the group outsources manufacturing of around 70% of its components. Critical parts, such as air-end and top-block, are manufactured in house. This allows the group to benefit from an asset-light model and ensure product quality. Operations also benefit from in-house research and development (R&D) capabilities. Profitability declined in fiscal 2020 mainly due to higher one off consultancy costs and strategic costs for market expansion in Europe.
 
* Healthy financial risk profile: Financial risk profile is healthy. Despite a decline in cash accruals expected in fiscal 2021, the same is expected to improve from fiscal 2022 on the back of pickup in end market demand and higher contribution from overseas subsidiaries. Modest capital expenditure, proactive cost control measures and prudent working capital management, should mitigate the impact on the financial risk profile. Gearing is likely to increase to about 0.50 time as on March 31, 2020, from 0.41 time as on March 31, 2019, but still remain comfortable. Interest coverage and net cash accrual to total debt ratios were healthy at an estimated 10 times and about 0.30 time, respectively, in fiscal 2020, and expected to moderate but remain at above average levels in fiscal 2021.
 
Weaknesses:
* Modest returns from overseas subsidiaries: During the previous down cycle in fiscal 2015, profitability and return on capital employed (ROCE) had moderated to about 7.0% and 4.2%, respectively, 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 into local currency in Brazil, and admitting the French subsidiary, SAS Belair, to legal redress have helped curb losses. While these units are likely to be profitable over the medium term, their revenue contribution will remain modest. The contribution from the recent acquisition of Michigan Air in US as well as the planned organic expansion in Europe will be more gradual given the uncertainty in end markets, thereby constraining improvement in profitability and ROCE metrics.
 
* 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 and upgrades in end user industries. 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 remains strong, supported by cash surpluses of 80 crores and utilised working capital bank lines of Rs.150 crore in March 2020, Though cash accruals are expected to decline to Rs.60-70 crores in fiscal 2021 (~Rs.100 crores in fiscal 2020), due to subdued business performance, they will still suffice to meet modest capital spending and incremental working capital needs, as well as low long term debt repayments (Rs.24 crore). Long term debt repayments remain modest at Rs. 24 crore in fiscal 2022 as well.

Outlook: Negative

CRISIL believes the Elgi group's business risk profile will be impacted by demand slowdown in end markets as well as Covid-19 related issues on entire supply chain. Consequently, its cash accruals are expected to decline sharply in fiscal 2021. However, its financial risk profile will remain healthy, supported by comfortable capital structure.

Rating Sensitivity factors
Upward factors:
* Healthy growth rate in revenues (CAGR of about 8-10%) over the medium term driven by increasing market share and expansion of sales across new geographies.
* Steady improvement in profitability to ~9-10% leading to higher cash generation, and strengthening of credit metrics
 
Downward factors:
* Steady decline in profitability below 6% on a sustainable basis due to pricing pressure, lower economies of scale or higher than expected costs for organic or inorganic expansion in new markets.
* Any large, debt funded capex or acquisitions, or stretch in working capital cycle thereby weakening the key debt protection metrics (TOL/TNW above 1.5 times) and debt to EBITDA sustaining above 2.5 times
About the Company

EEL, based in Coimbatore, was set up in 1960 and is one of India's prominent air compressor manufacturers. On a standalone basis, EEL derives around 60% of revenue from the domestic market and the rest from exports. 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 China, the 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. In October 2014, the group 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. 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.
 
On a consolidated basis, net profit was Rs 41.5 crore in the nine months ended December 31, 2019, on revenue of Rs 1,375 crore, as against Rs 67.4 crore and Rs 1,335 crore, respectively, in the corresponding period of the previous year.

Key Financial Indicators - (Consolidated)
As on / for the period ended March 31   2019 2018
Revenue Rs crore 1866 1608
Profit after tax (PAT) Rs crore 103 95
PAT margin % 5.5 5.9
Adjusted debt / adjusted net worth Times 0.41 0.48
Interest coverage Times 18.85 25.95

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
date		 Issue size
(Rs crore)		 Rating assigned
with outlook
NA Cash Credit NA NA NA 33.0 CRISIL AA/Negative
NA Packing Credit NA NA NA 165.0 CRISIL A1+
NA Short Term Bank Facility@ NA NA NA 20.5 CRISIL A1+
NA Short Term Bank Facility# NA NA NA 20.0 CRISIL A1+
NA Short Term Bank Facility NA NA NA 117.5 CRISIL A1+
NA Letter of credit & Bank Guarantee## NA NA NA 30.0 CRISIL A1+
NA Standby Letter of Credit NA NA NA 45.0 CRISIL AA/Negative
NA Proposed Working Capital Facility NA NA NA 94 CRISIL AA/Negative
@Interchangeable between letter of credit and bank guarantee
#Interchangeable between PCFC and non-fund-based working capital facilities
##Interchangeable with bill discounting
 
Annexure - List of entities consolidated
Names of Entities Consolidated Extent of Consolidation Rationale for Consolidation
ATS Elgi Ltd Full common management, business synergies, and common promoters
Adisons Precision Instruments Mfg Co Ltd Full common management, business synergies, and common promoters
Elgi Equipments (Zhejiang) Ltd Full common management, business synergies, and common promoters
Elgi Gulf (FZE) Full common management, business synergies, and common promoters
Elgi Compressors Trading (Shanghai) Co Ltd Full common management, business synergies, and common promoters
Elgi Compressors Do Brasil Imp E Exp Ltda Full common management, business synergies, and common promoters
Elgi Australia Pty Ltd Full common management, business synergies, and common promoters
Elgi Compressors Europe Srl Full common management, business synergies, and common promoters
Rotair S.p.A (Rotair) Full common management, business synergies, and common promoters
Elgi Compressors USA Full common management, business synergies, and common promoters
Pattons Inc, USA Full common management, business synergies, and common promoters
Patton's Medical LLC Full common management, business synergies, and common promoters
PT Elgi Equipments Indonesia Full common management, business synergies, and common promoters
Elgi Sauer Compressors Ltd Proportionate (26%) common management, business synergies, and common promoters
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  26-04-19  Withdrawal  27-04-18  CRISIL A1+  31-05-17  CRISIL A1+  CRISIL A1+ 
Fund-based Bank Facilities  LT/ST  450.00  CRISIL AA/Negative/ CRISIL A1+      26-04-19  CRISIL AA/Stable/ CRISIL A1+  27-04-18  CRISIL AA/Stable/ CRISIL A1+  31-05-17  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
Non Fund-based Bank Facilities  LT/ST  75.00  CRISIL AA/Negative/ CRISIL A1+      26-04-19  CRISIL AA/Stable/ CRISIL A1+  27-04-18  CRISIL AA/Stable/ CRISIL A1+  31-05-17  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/Negative Cash Credit 33 CRISIL AA/Stable
Letter of credit & Bank Guarantee## 30 CRISIL A1+ Letter of credit & Bank Guarantee## 30 CRISIL A1+
Packing Credit 165 CRISIL A1+ Packing Credit 150 CRISIL A1+
Proposed Working Capital Facility 94 CRISIL AA/Negative Proposed Working Capital Facility 37 CRISIL AA/Stable
Short Term Bank Facility@ 20.5 CRISIL A1+ Short Term Bank Facility@ 20.5 CRISIL A1+
Short Term Bank Facility# 20.0 CRISIL A1+ Short Term Bank Facility# 20.0 CRISIL A1+
Short Term Bank Facility 117.5 CRISIL A1+ Short Term Bank Facility 107.5 CRISIL A1+
Standby Letter of Credit 45 CRISIL AA/Negative Standby Letter of Credit 127 CRISIL AA/Stable
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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