Elgi Equipments Q3 FY26: Robust Revenue Growth Overshadowed by Margin Pressures and Valuation Concerns

The quarter presented a paradox for investors: whilst revenue growth remained robust with the company crossing the ₹1,000 crore mark in quarterly sales for the first time, profitability took a sharp sequential hit. The 21.58% quarter-on-quarter decline in consolidated net profit to ₹95.20 crores, down from ₹121.40 crores in Q2 FY26, reflects the impact of elevated other income in the previous quarter and operational headwinds. However, on a year-on-year basis, the performance remains commendable with 18.14% profit growth, indicating underlying business strength despite near-term margin pressures.

The company's nine-month performance for FY26 (April-December 2025) tells a more encouraging story, with consolidated net profit reaching ₹302.20 crores, representing growth of 21.15% over the corresponding period last year. This demonstrates that the Q3 sequential decline is more of a normalisation after an exceptionally strong Q2 rather than a structural deterioration in business fundamentals.

Financial Performance: Revenue Excellence Meets Margin Moderation

Elgi Equipments' Q3 FY26 revenue performance was exemplary, with net sales reaching an all-time quarterly high of ₹1,003.40 crores, marking sequential growth of 3.66% and year-on-year expansion of 18.38%. This milestone achievement underscores the company's strong market position and robust demand environment for air compressors across industrial segments. The consistent revenue trajectory over the past four quarters—barring the seasonal Q1 dip—demonstrates operational momentum and effective market penetration strategies.

However, profitability metrics present a more nuanced picture. The consolidated net profit of ₹95.20 crores in Q3 FY26, whilst showing healthy 18.14% year-on-year growth, declined 21.58% sequentially from Q2's ₹121.40 crores. This sequential contraction is primarily attributable to the normalisation of other income, which stood at ₹24.50 crores in Q3 compared to an exceptionally high ₹51.40 crores in Q2. Adjusting for this volatility, the underlying operational performance remains relatively stable.

Operating margins excluding other income contracted marginally to 14.34% in Q3 FY26 from 14.45% in Q2, reflecting modest cost pressures. Employee costs remained elevated at ₹194.00 crores, virtually flat quarter-on-quarter, whilst revenue grew 3.66%, indicating improved productivity metrics. The PAT margin of 9.49% in Q3, down from 12.54% in Q2, was impacted by the other income normalisation rather than fundamental operational deterioration.

On an annual basis, FY25 demonstrated robust financial health with net sales of ₹3,510 crores (up 9.10% year-on-year), operating margins of 15.00%, and PAT margins of 9.80%. The company's ability to maintain double-digit operating margins whilst scaling operations reflects operational efficiency and pricing power in its core markets.

Operational Excellence: Strong Returns Underpinned by Healthy Capital Efficiency

Elgi Equipments continues to demonstrate exceptional capital efficiency, a critical strength that distinguishes it within the capital goods sector. The company's return on equity (ROE) of 19.40% for the latest period remains robust, reflecting superior profitability relative to shareholder capital deployed. Whilst marginally below the five-year average of 20.46%, this ROE level is commendable and indicates the management's ability to generate strong returns even as the business scales. Higher ROE is a hallmark of quality businesses, and Elgi's consistent performance in this metric underscores its competitive advantages in manufacturing efficiency and market positioning.

The return on capital employed (ROCE) paints an even more impressive picture, standing at 27.02% for the latest period against a five-year average of 22.61%. This elevated ROCE demonstrates that the company is deploying capital into high-return projects and maintaining operational discipline. The strong ROCE, significantly above the cost of capital, validates the company's investment decisions and operational strategy.

Working capital management has shown improvement, with debtors turnover ratio reaching a high of 6.05 times on a half-yearly basis, indicating efficient collection cycles and strong customer relationships. Current assets of ₹2,277.10 crores as of March 2025 comfortably cover current liabilities of ₹1,082.10 crores, providing a healthy current ratio and ensuring operational liquidity.

Cash flow generation remains a key strength. Operating cash flow for FY25 stood at ₹390 crores, up substantially from ₹284 crores in FY24, demonstrating the company's ability to convert profits into cash. However, investing cash outflow of ₹282 crores reflects ongoing capital expenditure and growth investments, which should support future revenue expansion.

Industry Context: Riding the Industrial Capex Cycle

Elgi Equipments operates in the compressors, pumps, and diesel engines sector, serving as a critical supplier to diverse industrial segments including manufacturing, automotive, textiles, pharmaceuticals, and infrastructure. The company's performance is intrinsically linked to industrial capex cycles and manufacturing activity levels across India and international markets where it maintains presence.

The recent quarter's 18.38% year-on-year revenue growth suggests healthy underlying demand, likely driven by India's manufacturing push, infrastructure investments, and gradual industrial capacity expansion. The company's ability to achieve record quarterly revenues indicates market share gains and successful product portfolio expansion beyond traditional air compressor offerings.

Elgi's positioning as the largest player in its sector provides competitive advantages in terms of distribution reach, brand recognition, and economies of scale. However, the sector faces challenges from Chinese competition, cyclical demand patterns, and raw material volatility, which require continuous operational vigilance.

Peer Comparison: Premium Valuation Amidst Sector Leadership

Elgi Equipments' valuation metrics reveal a premium positioning relative to operational performance when compared with sector peers. The company's price-to-earnings ratio of 38.95x places it at the lower end of the peer group, which includes Cummins India (52.39x), KSB (46.92x), and Ingersoll-Rand (42.17x), yet above Kirloskar Oil (36.68x) and Kirloskar Brothers (30.93x).

From a return perspective, Elgi's ROE of 20.46% positions it favourably, trailing only Cummins India (22.90%) and Ingersoll-Rand (31.26%) whilst significantly outperforming Kirloskar Oil (14.23%) and KSB (16.17%). This superior return profile partially justifies the valuation premium, though the price-to-book ratio of 8.06x appears elevated relative to the quality of returns generated.

The company's net cash position (debt-to-equity of -0.17) is a distinguishing strength, matched by peers like Cummins India, Kirloskar Brothers, and KSB, all maintaining negative net debt ratios. However, Elgi's dividend yield of 0.43% remains amongst the lowest in the peer group, with only Kirloskar Brothers matching this level, whilst Ingersoll-Rand offers a substantially higher 2.15% yield.

With a market capitalisation of ₹16,257 crores, Elgi ranks as the third-largest company in the sector, providing adequate scale advantages whilst maintaining growth potential that larger peers may struggle to replicate.

Valuation Analysis: Premium Multiples Limit Upside Potential

Elgi Equipments trades at valuation multiples that reflect market optimism about its long-term growth prospects but offer limited margin of safety at current levels. The stock's price-to-earnings ratio of 38.95x represents a 21.7% premium to the sector average P/E of 32x, which appears stretched given the company's recent growth trajectory and margin profile.

The price-to-book value of 8.06x, whilst lower than Cummins India (15.46x) and Ingersoll-Rand (18.09x), remains elevated relative to the company's ROE of 19.40%. Typically, a P/BV ratio above 5x requires sustained ROE above 25% to justify the premium, suggesting current valuations embed aggressive growth expectations that may be challenging to meet consistently.

The EV/EBITDA multiple of 28.56x and EV/EBIT of 33.39x are substantially above historical averages for capital goods companies, which typically trade in the 15-20x range. The PEG ratio of 1.39x suggests the stock is reasonably valued relative to growth, though this assumes the company can sustain mid-teens earnings growth consistently.

The stock currently trades 16.09% below its 52-week high of ₹608.25, having corrected from elevated levels. However, at 30.86% above the 52-week low of ₹390.05, the stock has not provided a compelling value entry point despite the recent correction. The valuation assessment of "Very Expensive" by proprietary models reflects these stretched multiples and limited downside protection.

Shareholding Pattern: Institutional Churn Signals Caution

The shareholding pattern over recent quarters reveals notable institutional activity that warrants attention. Foreign institutional investors (FIIs) have been consistent sellers, reducing their stake from 29.39% in December 2024 to 23.11% in December 2025—a cumulative decline of 6.28 percentage points over four quarters. This sustained FII selling, with a 3.01% reduction in Q3 FY26 alone, suggests concerns about valuation sustainability or growth outlook amongst sophisticated international investors.

Conversely, domestic mutual funds have been accumulating shares, increasing their holding from 3.53% in December 2024 to 6.50% in December 2025, with a significant 1.79% addition in Q3 FY26 alone. This divergence between FII selling and mutual fund buying suggests differing perspectives on valuation and growth prospects, with domestic investors potentially more optimistic about India's industrial capex cycle benefiting the company.

Promoter holding has remained stable at 31.19% throughout this period, indicating confidence in the business whilst maintaining a relatively moderate stake that limits control concentration. The promoter group, led by Dark Horse Portfolio Investment Private Limited (20.10%) and Jairam Varadaraj (8.91%), has not participated in open market transactions, suggesting a long-term commitment to the business.

The increase in non-institutional holdings from 34.33% to 37.61% over the year reflects retail investor interest, potentially driven by the company's sector leadership and growth narrative. However, this shift towards retail-heavy shareholding can increase stock volatility during market corrections.

Stock Performance: Underperformance Reflects Valuation Concerns

Elgi Equipments' stock performance over the past year has been disappointing, declining 2.87% whilst the Sensex gained 8.52%, resulting in negative alpha of 11.39 percentage points. This underperformance extends across multiple timeframes, with the stock declining 16.77% over two years against the Sensex's 15.47% gain, and underperforming by 20.82 percentage points over three years.

However, recent momentum has been positive, with the stock gaining 15.91% over the past month and 7.80% year-to-date, outperforming the Sensex which has declined 3.04% in 2026. This recent rally suggests renewed investor interest, potentially driven by improving industrial sentiment or value hunters identifying the stock's correction as an opportunity.

The longer-term picture remains impressive, with the stock delivering 203.45% returns over five years and an extraordinary 739.13% over ten years, substantially outperforming the Sensex's 60.30% and 259.46% returns respectively over these periods. This long-term outperformance reflects the company's successful transformation into a market leader and consistent execution over the past decade.

The stock's high beta of 1.53 indicates significantly higher volatility than the broader market, with annualised volatility of 40.55% compared to the Sensex's 11.46%. This elevated volatility, combined with negative risk-adjusted returns over the past year, classifies the stock in the "High Risk Low Return" category currently, suggesting investors are not being adequately compensated for the volatility they are assuming.

Investment Thesis: Quality Business at Stretched Valuations

Elgi Equipments presents a classic investment dilemma: a high-quality business with strong fundamentals trading at valuations that offer limited margin of safety. The company's proprietary Mojo Score of 55 out of 100, resulting in a "HOLD" rating, reflects this tension between operational excellence and valuation concerns.

The "Excellent" quality grade is well-deserved, reflecting the company's strong ROE of 20.46%, robust ROCE of 22.61%, minimal debt (net cash position), and consistent profitability. The five-year sales CAGR of 16.72% and EBIT CAGR of 39.04% demonstrate the company's ability to scale operations whilst improving profitability—a rare combination in capital goods manufacturing.

However, the "Very Expensive" valuation assessment cannot be ignored. At 38.95x trailing earnings and 8.06x book value, the stock prices in substantial future growth that may prove challenging to deliver consistently in a cyclical sector. The technical trend remains "Mildly Bearish," with the stock trading below several key moving averages despite recent recovery, suggesting technical momentum has not fully turned positive.

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