Elgi Equipments Ltd
NSE:ELGIEQUIP
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Elgi Equipments Ltd
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Ladies and gentlemen, good day, and welcome to Elgi Equipments' Q1 FY '23 Conference Call hosted by Asian Markets Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ from such expectations, projections, et cetera, whether expressed or implied. Participants are requested to exercise caution while referring to such statements and remarks. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamlesh Kotak from Asian Markets Securities Limited. Thank you, and over to you.
Thanks, Mike. Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 1Q FY '23 Earnings Conference Call of Elgi Equipment Limited. We have with us today Mr. Jairam Varadaraj, Mining Director, representing the company. I request Mr. Jairam to take us through an overview of the quarter results and the business performance, and then we shall begin the Q&A session. Over to you, sir. Thank you.
Thank you, Kamlesh. Thanks always for organizing this analyst investor call. And ladies and gentlemen, thank you very much for participating. It's my pleasure to be with you this evening. And I'm presuming you haven't had too much time to delve into the numbers that we just probably for our Q1. At a very broad level, our sales has grown by 42%. But before I talk too much about the sales part, I would like to first, as always, give you a reconciliation of the EBITDA compared to the previous year Q1. Taking the same contribution level at a material cost, we should have had -- considering the growth we should have had an EBITDA of close to $400 million as against that, we had close to about $800 million. The biggest cost has been -- one has been the return of some of our overheads. -- business has come back to normal. And therefore, there has been an increase in our overhead. And of course, people costs have also gone up because it's been 2 years.
In the first year, there was no revision. In the second year, there was a very marginal revision and the market for talent right now is [ point ]. So these were the 2 reasons that really bridge the difference between what our EBITDA should have been and what we came out with. So I will rely on your questions to go deeper into the profit numbers. So stepping back and looking at the sales, as usual, I'll start with Australia and then work my way west. Australia was better than last year, but not as good as what we had anticipated it to be. Southeast Asia continues to be a challenge because it still had some remnants of COVID, but things seem to be picking up and coming back there. India had a good solid run across all the verticals, there were some challenges in terms of pricing. I will come back -- I'll come back and talk about that. Moving to the Middle East, Middle East was not as good as it should have been. There are certain markets in which we grew and certain markets were challenging. And of course, in South Asia, especially Sri Lanka was a big as a problem. Europe continues to be strong in terms of our top-line growth.
So our overall project to incubate Europe is on track, and we are continuing to push it. We need to optimize the business model, which we are continuing to do. And we're continuing to increase the size of the team there and expanding our reach and things are going as per plan. Moving on to North America. We had an excellent Q1 in North America across all the business verticals. So all the years of initiatives that we have done are beginning to show the results -- so it has been very positive in North America and Brazil, of course, continues to be strong. Our automotive equipment business had a very solid growth, and that's roughly because the Q1 of last year was very, very poor for the -- especially the automotive equipment business. So it had very good growth.
So if I look at the total growth at a consolidated level is about 42%. Out of that 42%, 28% came from volume and 12% came from price and 2% came from exchange rate. You may be wondering why our exchange rate contribution to growth is so muted as you got to remember that we have are -- other than India presence is equally split between Europe and the U.S. while the dollar appreciated quite significantly, the euro actually depreciated. So net-net, the contribution of exchange rate has been only 2% compared to a lot of other companies that have been publishing with far higher gains on exchange rate.
Overall, if I have to make a longer-term adjustment, we said that by 25, 26, we will touch $450 million with a 16% EBITDA and a 30% ROC. We are well on our way there. The only -- at the moment, the sales number and the EBITDA numbers seem to be tracking in the right direction towards that. We had a temporary setback on ROC for a simple reason that we had to invest quite significantly in inventory, not only in the plant, but also in our subsidiaries because of huge satellite disruptions that we face, and we didn't want to be left flat-footed without machines when the order was there. So in fact, that has paid off. In fact, some of our growth can be attributed to the fact that we had availability in the market for immediate satellites to the customer. So that has been -- I think we have close to about INR 85 crores I would not say INR 85 crores is a full effect. But I would say, out of that INR 85 crores, I would say about half of it is inventory, which we will try and bring down. The other half of it is -- we've been having that challenges in the GST.
We've considering that we have a huge international or export business to our subsidiaries. We have not been -- which is not -- which does not attract GST. So we have a lot of surplus input credit, which under the technically that money should be refunded to us, but that is something that the government is hesitating to do. They would they are taking a longer-term to do that. So we have to -- from an accounting on a procedure point of view, we have to pay GST on export even though it is not and then claim a refund on that. So that seems to be the pettiest way. Because of that, some amount of money, capital is up there. We are hoping that it will get resolved.
Similarly, in Europe, we have close to about EUR 4 million worth of VAT credit that is hitting there. We are going to give a banker. It's a temporary phenomenon, they want to establish credibility of the company before releasing it. So we are giving a bank guarantee as a substitute for credibility for the government and then getting that money release. So I think in the next quarter, we should be able to release quite a bit of this capital out of our working system. So even as we speak, now the satellite situation seems to be improving, far better than what it was certainly in Q4 of last year and the early part of Q1. It is [ things are improving ], both on the import side as well as on the buying side as well as on the selling side, even on the export side, we are finding that availability of containers is a lot better.
The freight lead times are far shorter, so that we have the freedom to work with lesser inventory in our subsidiaries as well as freight rates are beginning to come down. So still far away from what it used to be many before COVID but it seems to be correcting in the right direction. So I would say this is a kind of a position. I'll come to the last part before we start asking questions. One is the challenge of our raw material prices, which was a huge problem in '21, '22.
The volatility was high and the frequency with which price change is very high. So we went through some serious challenge in terms of our margins. We took a very firm view end of last financial year, and we try to increase prices, correct prices in the market. We are still in the middle of that. So we are not confident that all of the price directions that we had that is required to cover the full cost increases that have happened. We will be able to realize we are still analyzing what the possibilities are. But what you're seeing now is a situation where on the front-end, selling was at relatively subdued prices because the revision has not taken full effect. But on the back end side, the cost as we look in the past, the new costs are fully booked. So I would expect that going forward, the margins in the worst case will continue to be as strong, and the expectation is at some point, it may be -- there may be a slight uptick. But it's still too early days. There are uncertainties around it. So I can't make a firm statement on that. So this is really the summary of Q1. And I'd be happy to take your questions. Thank you.
[Operator Instructions] We have the first question from the line of Ravi Swaminathan from Spark Capital.
On a very good set of numbers. My first question is with respect to demand, especially the India market, so basically, how is the nature of demand as we speak compared to what it was, say, 3 to 4 quarters ago, which are the top both sectors, subsectors or industries which are driving the demand. If you can give us a broad thought process, it will be great.
So first quarter, India was -- continued to be strong, but the trajectory of growth compared to the various quarters of the previous year, the trajectory was not there, but it continued to remain strong at those levels. But it's still early days. My expectation is considering that in a global environment when almost $3 trillion of stimulus amount with was pumped in has been withdrawn and then you have geopolitical uncertainties. And we also have individuals beginning to spend more of their money on services like vacation and travel, one would expand on top of it inflation pressures across the world. One would expect that there has to be some level of softening of this demand. We get to see it, but we believe that in the third quarter, we will start seeing something of that nature. And we are prepared for that. As far as industry verticals, like I've always maintained all the verticals are firing. There's no one vertical, I would say, has performed disproportionately higher than the other.
Got it. Between, say, infra demand and industrial demand, which one is from the broad but at least you can do a broad [ bad ] process?
I think, Ravi, if you look at the nature of our sales, our dependence on infra in actual monetary terms as a percentage has been always very small, right? Yes, the inquiry levels in cement and in steel are all quite strong. But even when they materialize, they don't constitute a big percentage. So touch up my response, it is industrial that is really driving.
Got it, sir. And with respect to margins for the stand-alone business, obviously, other costs have jumped up significantly. Should we look at the same run rate of other costs as a percentage of sales for both other costs and both employee costs also...
Employee cost, what you see in Q1 is what is the revision and that will not continue to increase at the same pace. It is just -- it is going to multiply probably into form, right?
Correct.
As far as other fixed costs are concerned, I expect to pay behavior, but you've got to understand both those costs were at very low levels in the prior year.
We have the next question from the line of Harshit Patel from Equirus Securities.
Sir, my first question is on the current economic situation in Europe. So given the current situation, could there be a delay in our plans to ramp up pace and reach a breakeven point in FY '24. But could it play the other way around in the sense that the competitiveness of Europe's local players may come down, and we might be able to gain even more market share from them, higher than what we are expecting right now? So how do you think it could play out in your opinion?
Harshit, like we are seeing a very paradoxical situation existing in the whole world. Earlier, it was COVID and now it's the Ukraine go, right? There was a lot of press during the peak times of COVID except for the first quarter of April, May, June 2020, which is really the first quarter of COVID. After that, the whole world decided to just ignore covered results happen, right? So it was -- so that was one. And second, when the Ukraine what happened is the same thing. There was a lot of press saying that this is going to happen, there's going to be a total collapse, there's going to be chaos as going -- all this is going to happen. Nothing happened, right? Business is going on as usual.
Now I'm beginning to feel that citizens of the country recognize crises, but they don't go into a cell and behave in an extreme fashion in response to this crisis. They are taking a very moderated perspective and license going on. So even in Europe, if I look at some of our competitors' performance in Europe to our mature players with large market share, they've done well. And for us who are at the bottom of the market, any turbulence at the top of the surface is irrelevant because our market share is so small and it's like a pitch at the bottom of the ocean. So what if there is a storm at the top? It doesn't matter for us, right?
Sure. Understood, sir. Sir, my second question is on our outlook on the CapEx plans for the next 2 to 3 years. You have earlier mentioned that you were planning to consolidate all the manufacturing operations in a single campus. So any visibility as to when you will start that process? Or it is still too much far in the future?
Well, we have already kickstarted the idea and the planning of it. We have not put any money on the ground for the campus yet. But we have decided that we are going to do it. And I expect some -- a little bit of amount being spent this year, either in planning or consulting for that a long will be spent. But I expect in the next 2 to 3 years, we will ramp up our expenditure for the new campus. So that as far as the amounts are concerned, it's a little too early, but as soon as the plans are crystallized, I'll come back and talk about what we are planning to spend for our move for the consolidation.
We have the next question from the line of Amit, ICICI Research Division.
In compressor side, from which sector company is seeing major demand?
Amit, I get like I just responded to another question. Our business doesn't rely on any one sector. And what we are seeing for the last 2 to 3 years, and it's continuing on in Q1 of this year is that we are seeing growth across all industrial sectors.
We have the next question from the line of [ Mihir Mamania from Credent Asset Management ].
Sir, I wanted to understand, I mean, in the air compression side, specifically, we are one of the dominant peers in India. And with respect to the great compression technology, which is there. And now we are seeing one of the competitors in this industry entering into the product specifically the [ screw air ] technology. So how do you see the competition panning out here, given the fact that [ screw ] segment is like 70% of the overall air compressor market? And my second question was on the gas side. I mean, given the emerging opportunity in the CGD space, I mean how are we looking at this opportunity? Yes, those are the 2 questions.
Mihir, I couldn't understand your question. I mean what -- which competitor are you talking about those rent...
[ Pulling ] these sorry.
You're talking about [ Kilo ]?
Yes, yes.
Well, it's not -- they're not enter -- they've been in this base for a long time, right? So yes, we do have a presence in the market, but they have a long way to go in terms of getting their products ready and the range ready. And I don't know whether they have global aspirations like we do. So yes, the [ watch time ] expect them. But I'm not having sleepless nights because of that. And the second thing is they seem to be quite strong in the gas business. which is an area that we have specifically said we will not play, it's not an opportunity.
Sure, sir. So just to understand, to improve my understanding, I mean my understanding you said they have launched this air compressor. They were not a rear present at screw air technology so is that understanding correct? And now they have launched it.
That's not true. They had 2 contractors before and then they invested in new designs and technology, but it's not like there's new to screw.
We have the next question from the line of Bhavin Vithlani from SBI Mutual Fund.
So Jairam, could you just help us understand what has been the increase in the pricing, especially in the domestic market in India? And our customers reacting to such a steep hike because we understand that there has been some resistance across the board, not just the compression given the steep inflation that we [ acure ].
Yes. So like I explained to a 42% growth 12% is from price, right? So this is compared to Q1 of last year, right? But if you look at what commodity crisis went up from Q1 of last year to now till, let's say, March of '22, it was close to 25%, 30%. So what we have really increased is 12%. So question really is 12% excessive, then we have seen roughly, we are still under recovering even at 12%. Whether we have to absorb it through volume and maintain at an EBITDA level or do we maintain our profitability at the margin level. These are things that we need to be very careful in calibrating in terms of competitor response, right? Now I don't want to get into specifics of what price increases we have done in India with the rest of the world and all because these 2 are sensitive on information. But the fact remains that if I take the commodity price increase that has happened since the quarter of last year, I mean, that is all published information. It's not my own a smartish projection. We have recovered only 40% of that.
I think despite that, we were mentioning the gross margin, it seems really a commendable German to design from value engineering fund source, I think that is really commendable from a company standpoint. The second question is especially in the domestic market, if you could give us flavor on the 2 subsegments. One is the portable compressor segment, which is both that goes into the infrastructure as well as waterwork. And secondly, on the oil through -- oil compressor side, we had mentioned about additional products that we have been introducing and deepening our presence here. And alongside, we understand the leader in the market is facing a lot of constraint on the supply chain side and these times under the goings have gone up considerably. So how are we benefiting on that?
So on construction and mining, if I look at the whole portable business like into construction, mining and whatever, construction mining has done very well as much as it completes strong in terms of growth with the industry, so a very strong performance and the fact that there is a lot of infrastructure investment priority by the government, there is a trickle-down impact. And I expect that as long as the government continues down with part of investments, there will be a continuing demand for these products. That's one part of the story. The other part of the story is the water well market as we really hit the bottom and it's in a very poor shape. It's not that we are very -- on top of the market, we know how many machines have been sold. We know our shareholder market has increased. But the market itself has got into a paralysis.
And the main reason is because fuel prices have gone so high, it is no longer economical for farmers to be drilling borders. And there circumstances have be saved to some extent by the fact that there's been good monsoon, right? So if the monsoons varied then probably the demand would have been still stronger in spite of the diesel prices because then that's basically customer, right? So these are environmental periodic challenges that are there, but a product itself that we have launched as outstanding risk. I mean, that's teaching. And therefore, when this market comes part, we believe that we will be in an extremely strong growth.
And that's what we are working on. But having said that, that product has got some very good traction in some of our international, which is a positive thing. On oil 3, we are continuing to grow as also had a good quarter. I wouldn't put a negative of a competitor as a positive for us. I mean, it's a very strong competitor lead time challenges are there for everyone. So I wouldn't take that as in -- there may have been 1 or 2 orders here and there that we gained because of our ability to deliver what I don't think in a technically sensitive products like oil-free, customers are going to make a decision purely on delivery. So I don't see that as a free advantage.
Just last question from my side. If you want to request you to [ Crystal ] in next 4 quarters, would a mid-teens growth for the consolidated entity in our view need a real estate aggressive or conservative?
You got to say the question again, Bhavin. I didn't really get it.
Sorry, let me -- if you work in the quest [ Crystal ] is next 4 quarters, which is from second quarter of this year to the second quarter of FY '24, and mid-teen revenue growth for the consolidated entity in your view, would it be conservative algorithm or realistic assumption?
I think the -- it's a good question, but it's a very difficult question for me to answer. So I think Q2 will be a strong Q2, but it will be an unfair comparison because Q2 of last year was on the back of pent-up weak Q1, pent-up demand because of a weak Q1. So while this year's Q3 will be quite good if you -- in comparison to Q2 of last year, it may not be as dramatic as what we have done in Q2. So that is one step forward as far as Q2 is concerned. My concern beyond Q2 is -- what will be the impact of all these negative economic factors, there is inflation or whether it is the demand for services that will take demand away from products, the stimulus [ placemat let ] of margin and consumption in the hands of people. So I don't know. It's very difficult for me to say.
Now what I can say is that India for me is -- I don't know whether it's going to have strong growth. It will probably have reasonable growth. I'm very optimistic about our international business for the reasons that I said our share of the market is low. So I don't want to put a percentage, but if I -- mid-teens has a big number for me to commit to looking into the future. But it's very difficult to say at this point.
We have the next question from the line of Rahul Gajare from Haitong Securities.
Congrats on a very good performance in the first quarter. Continuing with the earlier question on Bhavin on the pricing front, I want to understand what is the pricing difference after taking 12% price line. I want to understand how the other players are leading players in the industry, especially globally, have done on the piping line. So I want to understand the gap that would be there between your company and say terms of pricing. It is, I believe pricing will be one of the important element of growth, especially in the national market. That's my question.
So it's almost impossible for me to say what percentage of price difference is there between Elgi and [ Atlas Copco ] or a [ Carborndum ] that is impossible to say. There is -- the price is such a dynamic thing in the market. You need to look at general trends of where we are. Now when we look -- on a steady state basis before all this COVID-related chaos and commodity prices is, we were -- in India, we are probably 10% to 15%, maybe 10% lower than Atlas and [ Carborundum ].
In the rest of the world, we are probably 20% or lower than 20% or 25% lower than in [ Greaves ] or Atlas Copco. Now what are we today? I don't know. I mean are we still lower, probably we are lower, but the percentages are very hard to get. Now if you have looked at the performance of Atlas Copco second quarter or their second quarter, which is our first quarter worldwide. There has been a significant loss of profitability due to supply chain, which basically means that their pricing, their costs have gone up and they have not increased that. But they have gained significantly on expense. So they're compensated for where the benefit of that and we -- if you look at [ Ingersoll Rand ]
India numbers, Q1 India numbers, they have compared to the prior year, Q1 of last year, the material cost has gone up by 6%. Now if you look at Elgi, I would say we are not so different either, right? Only if you take the India, I mean, you can't look at the stand-alone then you can't look at the consolidate because if you look at the India business, we are pretty much in the same kind of a deterioration in Atlas Copco. So I would then have to say that we have not are away from what that earlier parity in price was between us and our competitors. But it's still early days. We've got to understand this dynamic a little bit more.
I think that is very… My second question is on backward integration. Now I do understand that you're looking at eating manufacturing into a fee rate. Could you discuss more on what is it that you're doing? And how is this going to be playing out not in terms of cost now but in terms of the overall manufacturing for you all? And therefore, are you looking at more backward integration from what you already do? And I think considering that the question, would all of these backward integration will be able to meet all your internal requirements or you still need to go out and source from [ entrance ]?
So there are 2 things. One is building our new campus that has got nothing to do with aconitation. That's efficiency improvement capacity. The current city campus is bursting at its scene. We can't afford to operate the way we are operating here. So we need to grow to a larger campus and have the [ arboroom ] to breathe and improve our overall efficiency. So by doing that, we will also be saving certain costs which are replicated in toes. So that's one part of it. As far as by core integration is concerned, there are 3 areas of backward integration that we have done. In the order of chronology, one was our pressure within digital.
Second was foundry and third was [ motor ]. Now why did we do preservative in pressure item because it's a safety-related component? We are growing our strategy, our goal at that time and now as well is to build the business globally. When you have a pressure that if it breaks or is it first, it's a catastrophe experiment. We can't afford to have that. So we could rely on the inconsistency of quality with our suppliers, and we could put our brand name on that. And we could have had some disaster consequence. So that was the reason why we did it.
Now we do all of our preservation are no reason. There are diluted less technical compressors, maybe for the India market where we know what is required, how to control it. We do have suppliers. So it's not like it's 100%. Moving to the foundry is the same reason. I mean we've paid it for quality. We have to have the quality for some of our casting and we have achieved that. And today, the quality of the casting that come out of our foundry is just outstanding. And we make 100% of our castings. No. There are certain castings that we buy from other foundries. Same thing with motor. Now the reason why we integrated backwards into motor to improve supply chain, improve the performance, specific power performance of our compressors, and also ensure that we don't have a cost tenancy with respect to sourcing from China, and we wanted to reduce the sourcing risk of China. So that's what we achieved. Now have you done all? No. Do we buy motors still from China? Yes, we do, and do we buy from [ foundries ]. But it's not like we are switching over and very strategic pieces that we have had. So that will be -- that's how we will continue into the future.
Sure. Can you put some range in terms of internal -- the backward indication that managing India and what you have to show externally?
Across these things if we are talking about percentages, is very something good quarter will be very different. And I don't have the number. There are no more questions or I'm not sure...
Mr. Chirag Shah, can you hear us?
Yes, yes, I can.
Yes, you may go ahead with your question.
I have 2 questions, but that is not related to the numbers actually. What is the structure? Is there any sections that is going within energy would be the first question. And the second one would be, what is the attrition rate within India as of now at least in the fourth quarter of '22.
Yes, [ suspection ] is a very active subject. We are seeing discussed as soon as a clear plan is finalized that is in the process of being made. Once it is finalized, we will certainly announced, both in terms of what the process as well as timing. As far as attrition is concerned -- there's a lot of background noise, I'm not able to…
Mr. Chirag, kindly go to outside the call as the background on is still prominent inside the call.
Yes.
So as far as attrition is concerned, we've got a slight pick at various bands. So if you take the band that is at the top load employee level, our attrition in [ Pro ]. Then if you take the attrition right at the top, it is marginal, almost nothing, right? Then if you look at the middle layer, also, it is not very high, but it's only in the entry-level, white-collar employees in the first 5 to 6 years of their career track, there is attrition, but it's nowhere near the attrition that the IT industry takes. So I don't have a consolidated attrition percentage that our regulatable attritions are very, very [ low ].
So we have no further questions.
Hello, Jairam, you would like more points to make?
No, I'm [ point coat ]. I think I pretty much covered what I wanted to say. I want to thank you for taking the effort to organizing this. Appreciate it. Thank you.
Thank you, everyone. With that, we conclude the call. Thank you for joining us. Have a good day.
Thank you. On behalf of Asian Market Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.