Analysis Report: ESAB India Ltd. (BUY; Estimated Price: Rs. 970)

Introduction:

ESAB India Ltd. was incorporated on 10^th November, 1987 and commenced its operations in July 1988 with the acquisition of Peico Electronics and Electricals Ltd., now known as Philips India Limited. ESAB India is a leading supplier of welding and cutting products and has its manufacturing facilities located in various states of India. It has got ISO certifications for four of its principal manufacturing facilities located at Kolkata, Chennai and Nagpur. It has variety of products which include welding consumables, reclamation consumables, arc equipments, industrial gas equipment, cutting machines and welding automation. They are now an integral part of industries like Shipbuilding, Petrochemical, Construction, Transport, Offshore, Energy and Repair and Maintenance.

Shareholding pattern:

Cat Code	Category of Shareholder	Number of Shareholders	Total number of shares	Number of shares held in dematerialized form	Total shareholding as a percentage of total number of shares
A	SHAREHOLDING OF PROMOTER AND PROMOTER GROUP	3	11347960	11347960	73.72
B	Public Shareholding
1.	INSTITUTIONS
A	MUTUAL FUNDS/UTI	14	119129	110828	.77
B	Financial institutions	9	2102	1582	.01
C	Foreign institutional investors	6	213863	213863	1.39
2.	NON- INSTITUTIONS
A	Corporate Bodies (Indian/foreign/Overseas)	227	379259	373996	2.46
B	Individuals(Resident/ NRI/ Foreign National)
(i)	Individual shareholders holding Nominal share Capital up to Rs.1 lakh	9837	1668061	1372751	10.84
(ii)	Individual shareholders holding Nominal share Capital above Rs.1 lakh	5	84713	84713	.55
C	Any other (specify)	92	1577933	1577933	10.25
	Total Public Share Holding (B)	10190	4045060	3735366	26.28
	TOTAL(A+B)	10193	15393020	15083326	100.00

The Executive Director of the company has recently been changed. Mr. Rohit Gambhir, who had joined ESAB India Ltd. in March, 2013, is the current Executive Director and Chief Executive since November, 2013. He has earlier received Eagle Award for exceptional performance while working in Stanley Black and Decker as its Business head. At the end of December 2013 the Company had 644 employees as against 683 at the end of 2012.

  

Products/Services

ESAB India has a wide and comprehensive range of welding, cutting and allied products and services. The product range covers Welding Consumables, Reclamation Consumables, Arc Equipment, Industrial Gas Equipment, Cutting Machines and Working Environment Products for specialized welding, cutting and allied needs. ESAB India also markets the latest generation of Welding Consumables and equipment and cutting machines from other group companies located outside India and thereby acts as a one-point source for all the needs of the industry.

Production Equipment

ESAB Production Equipment offers equipment and know-how for the production of MMA electrodes, MIG/MAG wire, flux-cored wire, SMAW wire and agglomerated flux. To ensure effective production of quality products, the development of production processes and consumables is integrated at ESAB.

Welding Consumables

Their range of consumables, i.e. covered electrodes, cored wires, solid wires, TIG rods, strips and fluxes, covers all needs for all types of welding. Packaging is also being developed to make handling even more rational for the customer. MARATHON PAC™ and VacPac™ are examples in this particular context.

Cutting Systems

The traditional thermal cutting technologies such as plasma, oxy-fuel and laser cutting are joined by waterjet cutting technology. Marking, signing, lettering, punching, shot blasting, surface cleaning, drilling and powerful software tools complete the cutting product family.

Welding Automation

A wide range of mechanized and automated welding applications are manufactured to meet needs for any special solution. ESAB can supply solutions for plasma arc welding, butt welding up to 8 mm, submerged arc welding stations, mechanized (orbital) TIG equipment for tubes or pipes and much more.

Completing the extensive accessory portfolio from ESAB is the Special Process Equipment range, which includes tungsten grinders, gouging torches and fume extraction units.

Capacity of the company to manufacture goods and services

Colfax, holding company of ESAB India had acquired Victor Technologies in April 2014. Victor Technologies has a wide product range as well and this acquisition has helped in creating a comprehensive product portfolio for the company. ESAB completed its project expansion of manufacturing solid wires in 2010 at Nagpur plant. The installed capacity to manufacture copper coated wires is 17,800 tonnes.

Industry Analysis

ESAB India Ltd. is operating in the machine tool industry which can be divided into metal cutting and metal forming sectors. Historically, the machine tool industry was dependent on the automobile and auto component sector for most of its business. But, diversification into emerging areas like aerospace, defense, space, power, railways and heavy engineering has given a new lease of life to the sector. It is a strategic industry with around 200 manufacturers in the organized sector and 400 in the small scale units. Machine tools consumption has reached Rs.4421 Cr during Apr- Sept-14 compared to Rs.3678 Cr during Apr- Sept-13. A growth of 20% in the consumption pattern can be registered here. All types of machines CNC, non CNC, metal cutting, metal forming, are consumed in India. The production, import and export figures for the last two years are given in the table.

(Rs. In crores)	Production	Import	Export
2012-13	3885	7598	214
2013-14	3481	4672	246
Growth Rate	-10%	-38%	15%

Market Analysis

The financial year 2013 has been a difficult one for most of the segments in the economy as the Country continued to experience low growth and high inflation. However energy, construction and shipbuilding sectors have, to a large extent, been recession-proof and have been generating moderate demand. Robust growth in these sectors has been registered which in turn will underline growth in the Indian welding market. A gradual move from manual to automatic welding equipment is seen, which is a key driver in boosting market revenues. The global steel market has seen a slump in the past year but the Indian steel market has seen a growth of 10%. The augmenting demand for steel will boost the demand for welding equipments. A large number of unorganised players in the market pose a threat to ESAB India Ltd. HEG and Ador Welding are its competitors. Its EBITDA is 14% approximately and its cost of materials is 53% approximately, which shows that ESAB has good margin.

  

Financial Analysis

ESAB India’s financial year ends in December every year. For the financial year 2013-14, the total liabilities stand at Rs. 83.01 crores as compared to Rs. 95.13 crores in the previous year. ESAB India has zero debt and its reserves and surplus has increased from Rs. 220.56 crores in the previous year to Rs. 251.88 crores in 2013-14. Current assets constitute 67.08% of the total assets, i.e., Rs. 350.28 crores. Current investments are Rs. 104.76 crores as compared to Rs. 77.77 crores in the previous year. Zero debt and increasing current assets reflect sound stability of ESAB India.

Balance Sheet of Last Five Years

(Rupee in crores)	2009-10	2010-11	2011-12	2012-13	2013-14
EQUITY AND LIABILITIES
Share capital	15.39	15.39	15.39	15.39	15.39
Reserves and surplus	151.8	175.6	196.2	220.56	251.88
Non-current liabilities	9.56	10.62	10.37	8.72	8.55
Trade payables	32.15	50.33	42.35	43.8	52.58
Other current liabilities	25.28	50.9	27.33	42.61	21.88
TOTAL	234.18	302.84	291.64	331.08	350.28
ASSETS
Fixed assets	88.9	93.15	104.38	98.72	95.94
Other non-current assets	6.9	16.6	22.43	13.2	19.36
Current investments	2.47	33.5	34.02	77.77	104.76
Inventories	38.8	53.7	64	67.42	61.39
Trade receivables	9.6	27.24	20.12	22.9	27.38
Cash and bank balances	57.95	41.79	30.8	40.73	32.62
Other current assets	29.56	36.86	15.89	10.34	8.83
TOTAL	234.18	302.84	291.64	331.08	350.28

Revenue from operating activities has decreased by 13.5% from Rs. 503.52 crores in the previous year to Rs. 435.55 crores in the financial year ending December, 2013. Operating expenses amount to 88.15% of operating income in the current year as compared to 87.92% in the previous year. Net profit is 7.6% of operating income as compared to 7.5% in the previous year. Overall, though the revenue has decreased from last year, the expenses have gone down as well, which is why the profit margin still remains more or less the same.

Profit & Loss Statement for Last Five Years

(Rupee in crores)	Dec, 2009	Dec, 2010	Dec, 2011	Dec, 2012	Dec, 2013
REVENUE
Revenue from operations	425.23	508.07	544.58	503.52	435.55
Other income	4.09	6.39	3.24	5.14	7.09
Total revenue	429.32	514.46	547.82	508.66	442.64
EXPENSES
Operating Expense	321.32	416.86	465.45	442.68	383.93
Depreciation and amortization	7.74	10.54	11.75	11.82	11.23
Other Expense	34.4	29.26	23.18	16.39	14.36
Total Expense	363.46	456.66	500.38	470.89	409.52
Profit for the year	65.86	57.8	47.44	37.77	33.12

Cash conversion cycle of ESAB India has increased to 42.47 days in the financial year ending December, 2013 from 41.24 days in the previous year. Return on Capital Employed is 29.49% as compared to 35.16% in the previous year.

In December quarter of financial year 2014, total revenue from operations was Rs. 111.5 crores as compared to Rs. 111.07 crores in the same quarter year the previous year. This reflects that revenue is more or less constant. Operating expenses have increased by 3.94% from Rs. 100.46 crores to Rs. 104.42 crores. Net profit has had an effect due to this increase in expenses. Overall, the performance of ESAB India has deteriorated a little.

Profit & Loss Statement of last Two December Quarters

(Rupee in crores)	Dec, 2013	Dec, 2014
REVENUE
Net Revenue from operations	109.3	109.77
Other Operating Income	1.77	1.73
Total Revenue from Operations (1)	111.07	111.5
Other Income (2)	1.91	3.1
Total Revenue (1) + (2)	112.98	114.6
EXPENSES
Cost of materials consumed	64.02	58.11
Purchase of stock in trade	11.83	11.47
Changes in inventories of finished goods, work in progress and stock in trade	-1.88	4.12
Employee benefits expense	10.44	11.77
Other expenses	16.05	18.95
Total Operating expenses (3)	100.46	104.42
Depreciation and amortization (4)	2.9	2.84
Total Expenses (3) + (4)	103.36	107.26
Profit from operations before finance costs and exceptional items	9.62	7.34
Finance costs and exceptional items	0	0
Profit from ordinary activities before tax	9.62	7.34
Tax Expense	2.56	2.24
Net profit after tax	7.06	5.1

It is our assumption that this industry will see a growth in the near future. As a result, ESAB India’s revenues should shoot up. The company, having zero debt and sound stability currently, will be able to take full advantage of the increasing revenue and convert it into huge profits.

The current market price of ESAB India is Rs. 641.00 in NSE. Using the discounted cash flow method, we projected the stock price of ESAB India to be around Rs. 970.

Projected Balance Sheet for Next 5 Years

(Rupee in crores)	2014	2015	2016	2017	2018	Terminal
EQUITY AND LIABILITIES
Share capital	15.39	15.39	15.39	15.39	15.39	15.39
Reserves and surplus	283.39	315.11	354.91	404.31	465.18	529.49
Non-current liabilities	8.55	8.55	8.55	8.55	8.55	8.55
Trade payables	47.28	47.28	56.73	68.08	81.69	85.78
Other current liabilities	21.88	21.88	21.88	21.88	21.88	21.88
TOTAL	376.49	408.21	457.46	518.21	592.69	661.09
ASSETS
Fixed assets	95.63	93.06	91.12	89.74	88.88	88.50
Other non-current assets	16.31	16.31	16.31	16.31	16.31	16.31
Current investments	104.76	104.76	104.76	104.76	104.76	104.76
Inventories	63.18	63.18	75.82	90.99	109.18	114.64
Trade receivables	25.14	25.14	30.17	36.20	43.44	45.61
Cash and bank balances	62.64	96.92	130.45	171.38	221.28	282.43
Other current assets	8.83	8.83	8.83	8.83	8.83	8.83
TOTAL	376.49	408.21	457.46	518.21	592.69	661.09

Projected Income Statement for Next 5 Years

(Rupee in crores)	2014	2015	2016	2017	2018	Terminal
REVENUE
Revenue from operations	435.55	435.55	522.66	627.19	752.63	790.26
Other income	0.00	0.00	0.00	0.00	0.00	0.00
Total revenue	435.55	435.55	522.66	627.19	752.63	790.26
EXPENSES
Operating Expense	378.69	378.69	454.43	545.31	654.38	687.10
Depreciation and amortization	11.55	11.24	11.01	10.84	10.74	10.69
Other Expense	13.80	13.89	17.43	21.63	26.65	28.16
Total Expense	404.04	403.83	482.86	577.79	691.77	725.95
Profit for the year	31.51	31.72	39.80	49.40	60.86	64.31

Price Performance

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About the Author

This report has been authorized by Mridul, Sanyam Mittal, Ayush Aggarwal and Sukruti Shah. All four are pursuing MBA from Institute of Management, Nirma University, Ahmedabad, Gujarat, India.

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