Buy Recommendation – Elgi Equipments
Revival in capex in the domestic market, manufacturing /trading presence in high potential developing markets such as China and Brazil and a strong cash position that allows scouting for acquisitions in new markets are factors that favour earnings growth for the company over the medium term.
At the current market price of Rs 80, Elgi’s stock trades at 8.5 times its per share earnings for FY-11. The stock is currently at a steep discount to its bigger peer Ingersoll-Rand; the latter not yet fully out of the slowdown.
Could be a dark horse play
We do not expect any significant ramp-up in revenues in the next few quarters, owing to peaking of demand (according to the management) for air compressors used for water wells and the continuing sluggishness in overseas market.
However, given that the industrial business segment has also been contributing actively to revenues and emerging markets such as Brazil and China are likely to buttress sales growth over the long term, Elgi may have to be a buy and hold candidate in one’s portfolio.
The stock, at this point, could be a dark horse play; investors can consider buying it in small lots and accumulate on declines linked to broad markets.
Investors with at least a two-three year perspective can consider buying the stock of Elgi Equipments, a manufacturer of air compressors and automobile service station equipment.
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