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Elgi Equipments: High on compressed air - Outside View by Luke Verghese

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Elgi Equipments: High on compressed air
Jan 14, 2011

The Golden Jubilee Year

Pleased as a punch with the Elgi Equipments performance, and also to coincide with its golden jubilee celebrations, the board of directors reached out and proposed a 1:1 offering of bonus shares to the shareholders. This issue of capital will in effect double the paid up equity capital to Rs 156 m post bonus issue. The company also rewarded the shareholders with a 200% dividend against 130% in the preceding year. The directors have more than enough reason to be pleased. A snap shot of the financials of the company over the last decade says it all. Gross sales have almost consistently increased each year since FY01, from Rs 1.6 bn to Rs 6.7 bn for the latest year. This was achieved on a less than doubling of the gross block to Rs 1.7 bn from Rs 904 m during this period. The company also became debt free over the decade. Profit before tax and the post tax profits have also done a similar encore, with the latter increasing to Rs 579 m from Rs 43 m.

Single product enterprise

The company is a straight play single product enterprise which makes and sells air compressors, which are sold to the infrastructure sector, notably the construction and mining sectors. Volume sales of compressors grew 17% to 26,987 units with a post excise sales value of Rs 5.7 bn. The Management Discussion and Analysis (MD&A) states that the compressor business accounted for 86% of the total sales of the company and also accounted for 95% of the overall profit generation. (It should actually read as 99% of the total sales of the company, going by an analysis of the breakup of sales that the company has provided.) It apparently has a hold on the market in what it sells, given the low levels of sundry debtor balances at year end, and the fact that it is able to get advance payments from customers for product sales. It also tunes its production in keeping with market needs. The result is the excellent working capital management: zero debt and no interest expenditure as a result.

Lilliputian division

It also has a lilliputian division called the manufacturing engineering division which markets globally high value and low variety components - whatever it is meant to mean. This high sounding, very vaguely worded business brought in a mere Rs 56 m, against Rs 89 m in the preceding year. Where this division fits in is not very clear, but let that be. The MD&A states that this business grew by 48% over that of the previous year. Grew in which direction please? Considering that the sales income from this division fell by a wide margin as compared to the preceding year, this business could not have ‘grown’ under any stretch of imagination. Apparently the company outsources the product range for this division and then exports it. From the looks of it though, this diversion has not been a very pleasant experience and it is likely to be put on the backburner.

It also possesses a wholly owned subsidiary ATS Elgi Ltd which makes and sells automotive equipment business, or garage equipment to put it in perspective, and has made a thumping success of it, judging by its financials. It logged a turnover of Rs 892 m and realized a pre-tax profit of Rs 77 m. The company places quite some faith on the future prospects of this venture. This venture is one of the six subsidiaries that it boasts currently, and also the flagship of the siblings.

A few apparent anomalies

There are a few apparent anomalies regarding its functioning. The schedules to the accounts state that the company purchased 'goods' worth Rs 313 m from its subsidiaries, associates, and joint venture. (The company also simultaneously sold goods worth Rs 126 m to such entities.) But the purchase schedule does not list any such separate purchase of goods, save the import of traded goods worth Rs 108 m. There is no mention of what traded goods they constitute, and besides, there is no separate mention of sales of traded goods either. The company has also paid out Rs 60 m in voluntary retirement compensation during the year. This is not a figure to be sniffed at, in the context of the overall annual payout to its employees. Obviously there has been quite some reduction in the labor force. But the directors do not seem it fit to comment on this significant development in the MD&A report, or in the directors' report for that matter. What sort of management discussion are we talking of here please? It has also forked out a loan to a group company (not being a subsidiary) and the year-end balance owed to it is Rs 114 m. There is no mention of whether this gratis is interest bearing, and if it is what the coupon rate is? Neither do we have any inkling on which group company it is, or the need for Santa Claus to lavish such love and affection on the recipient of the good tidings.

Chinks in its armour

All companies have chinks in their armor, and Elgi Equipments no less. It has invested in the capital of 6 subsidiaries, one joint venture, and 2 partnership companies to the extent of Rs 449 m. The 6 together have clocked a combined turnover of Rs 1 bn; with a pre-tax profit of Rs 44 m. (The vast bulk of this combined turnover is care of ATS Elgi). The non performers in this list outperform the ones that perform but that is the accepted norm for India Inc. It has furnished the brief working results of the subsidiaries, including its latest prized acquisition, SA Belair, France, which is into the compressor business. Elgi has paid out Rs 45 m for a 100% share, and the latest addition to the family appears be some sort of a dwarf, with a turnover of Rs 69 m (the turnover in rupee terms tends to acquire a hue, due to the weakness of the rupee, relative to the franc) and a negative bottom-line to boot. But the company is placing a lot of faith on this acquisition, and apparently this new found legacy is going to be the gateway for its spreading business into the European geography.

Both the Chinese subsidiaries are wallowing in limbo, and it may well take some time for the parent to bring them on even keel. There is also a minor investment in Elgi Sauer Compressors, which has a total equity base of a mere Rs 6.5 m. This company is apparently a complimentary unit to the parent, or some such. There is no other plausible explanation for this piddling investment. Then there is its majority stake in two partnership firms with a book value of Rs 124 m. What the latter two bring to the table has not been spelt out in the annual report, but don't expect much here. What is very clear however is that none of its equity investments appear to give any return on investment, dividend wise, that is. But these are concerns that the non management shareholders are expected to look askance at, for the greater glory of the parent.

The future

Still this is one listed company which appears to be run by and large more for the public good, and it shows in its working. Given the investments proposed in the infrastructure sector, and the company's present standing in its niche segment, and the expansions that it is planning, one can duly expect good tidings in the years to come.

Disclosure: Please note that i am not a shareholder of this company

This column Cool Hand Luke is written by . Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

Disclaimer:

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