Esab India (Esab) is a leading player in the Indian welding consumables and equipment industry with a market share of over 23% in the domestic structural welding consumable market and ~30% in domestic equipment market. It mainly operates in two segments viz. welding consumables (70%) and welding equipment (30%). Esab's balance product portfolio, debt free status, strong global brand image and parentage (Colfax Corp) augur well in the long run. However, there could be short-term Covid-19 impact in FY21E.
Welding consumable segment to sustain superior returns...
Esab's consumable segment (70% of revenue) has grown at a CAGR of 9.3% in FY15-20 while it is expected to grow at 8.7% CAGR in FY20-23E factoring in the Covid-19 impact and expected demand revival in high performance products like electrodes, wires and fluxes led by gradual economic recovery. Consumable EBIT margin has expended more than ~450 bps to ~17% levels in FY16-20 and is expected to sustain at similar levels in coming years. Consequently, consumable segment RoCE has been at 35-40% over the last few years and is expected to sustain, aided by mix of operating efficiencies, product mix, cost control, technological innovation and growing investments in infrastructure and manufacturing sectors.
New launches, automation, robotics to aid equipment business
Esab's welding equipment (~30% to revenue) segment has grown at a decent CAGR of 11.5% in FY15-20. However, the recent domestic slowdown and muted incremental capex for new projects is expected to have some short term impact with a rebound in the medium term over FY20-23E with CAGR estimated at 7.4%. Esab is focusing on R&D to develop and introduce new advanced technology based products to improve capacity utilisation, which will subsequently help improve EBIT margins in the long run, which is hovering at around 6.5-7.5% over the last few years. The expected recovery in manufacturing, railways, auto and other infrastructure and heavy engineering sectors to further aid the segment performance.
Valuation & Outlook
Overall, the company is expected to further strengthen its leadership position through value added new product offerings, penetrating automation and robotics products in the welding industry, which will drive growth and help gain market share. Esab's debt free status would help further enhance its return ratios and operating cash flows earnings momentum and superior margins in the long run led by cost efficiencies, product mix and global capabilities through Colfax Corp. Further, Esab is currently trading at 26.8x P/E on FY23E (vs. forward median P/E band of 28x, up cycle and down cycle average TTM P/E of 35x and 12x, respectively). We value Esab at Rs. 2230/share, implying multiple of 33x on FY23E EPS with a BUY rating on the stock.
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Shares of ESAB INDIA LTD. was last trading in BSE at Rs.1773 as compared to the previous close of Rs. 1826.4. The total number of shares traded during the day was 945 in over 281 trades.
The stock hit an intraday high of Rs. 1849.95 and intraday low of 1772. The net turnover during the day was Rs. 1710279.