Elgi Equipments Ltd

NSE:ELGIEQUIP

Earnings Call Analysis

Strong Growth with Challenges in US and Inventory

Elgi Equipments Limited reported an 11% revenue growth and a 17% increase in profit before tax for Q1 FY '25 compared to the same quarter last year. Despite strong performance in most regions, North America struggled due to ERP implementation issues and a 30% market drop in the portable vertical. The company faces higher inventory levels due to shipping delays but expects improvement later this year. India showed robust growth, with significant contributions from the water well vertical. Elgi aims to enhance market penetration through strategic initiatives with McKinsey, targeting better results in future quarters.

Company Overview and Financial Insights

Elgi Equipments Limited has reported a robust performance for the first quarter of FY '25, highlighting a year-over-year revenue growth of 11%, and an impressive PBT increase of 17% compared to the previous quarter. The gains attributable to volume growth and a favorable product mix suggest that the company is well-positioned in its market. Regional performance was generally strong, with all areas except for Australia showing growth. However, North America remains a point of concern, primarily due to previous ERP implementation issues that have hindered expected performance.

Challenges in Operations and Inventory Management

Despite favorable overall results, Elgi faces challenges in cash generation which stem from increased inventory levels. This inventory build-up is largely due to logistical delays caused by geopolitical issues affecting shipping through the Red Sea and congestion in key Asian ports. The delays have increased transit times by a couple of weeks, impacting the company's cash flow. Elgi is actively working on initiatives to reduce inventory, with expected improvements anticipated in the latter half of the financial year.

Regional Performance Analysis

India showed particularly impressive growth with approximately 18% growth in the standalone business, driven by increased activities across all industrial segments. The aftermarket segment has emerged as a critical area for Elgi, accounting for 25-28% of revenue in India, compared to about 12-15% in the Rest of the World. Given that most growth was volume-driven rather than price-driven, the company's strategy appears effective in capitalizing on market opportunities despite sectoral challenges.

Future Outlook and Strategic Initiatives

Looking forward, Elgi's management is optimistic that operational challenges in North America will be resolved, potentially boosting profitability in upcoming quarters. Continued efforts to enhance aftermarket services are vital for improving gross margins, as they currently benefit from established customer relationships. Moreover, the company is engaging with McKinsey for a go-to-market strategy refresh, expected to yield results by the third quarter of FY '25, enhancing market share.

North American Market Recovery

Elgi anticipates a reasonable contribution from North America to overall profitability for the fiscal year. The region has faced setbacks, primarily due to a significant 30% contraction in the portable vertical market. However, hope remains for recovery following early ERP challenges, with management expressing confidence in the region's turnaround.

Capital Expenditure and Capacity Planning

Elgi is also strategizing on capital expenditures necessary for expanding production capacity. The current plan involves an incremental capacity build-up with typical annual CapEx between INR 30 crores to INR 50 crores. In time, the company plans to relocate operations to a new campus to enhance production capabilities over a projected span of 5-6 years at an expected cost of around INR 500 crores.

Conclusion and Investment Considerations

Overall, Elgi Equipments Limited presents a solid investment opportunity grounded in its consistent revenue growth, proactive responses to operational challenges, and a clear strategy for market expansion. While North American challenges remain, the company's strong performance in India and plans for improved efficiency through strategic consulting initiatives provide a positive outlook for future profitability. Investors should monitor the company's ability to navigate these challenges while capturing growth opportunities across its diverse segments.

Earnings Call Transcript 2025-Q1

[Kamlesh Kotak, analyst]

Good morning, everyone. On behalf of Asian Markets, we welcome you all to the 1Q FY '25 earnings webinar of Elgi Equipments Limited. We have with us Mr. Jairam Varadaraj, Managing Director, representing the company. The event will start by a brief press presentation by Mr. Jairam Varadaraj, highlighting the quarterly financial performance and the business updates followed by Q&A session.

Mr. Jairam, you can start your presentation. Thank you.

[Jairam Varadaraj, executive]

Thank you, Kamlesh. Ladies and gentlemen, thank you so much for your time this morning. And as always, thank you, Kamlesh, for organizing this. Let me share the deck. Just give me a minute, please. Are you aiming to see my deck?

[Kamlesh Kotak, analyst]

Yes, sir, it's visible. Yes.

[Jairam Varadaraj, executive]

Yes. Thank you. So I want us to go directly to the EBITDA compared to the previous year. We had a pretty good profitability. I will dissect it a little bit in the context of this.

So if you really look at the bridge from last year's to this year's EBITDA, our volume was the primary contributor to the EBITDA increase during the quarter. Contribution margin continued to remain strong, marginal improvement by a better product mix and region mix.

Now EBITDA should have been close to 1.33. Our biggest challenge has been in the U.S. If we had U.S. delivering to our budgeted expectation, then this would have been a lot better. So the increase in cost has been employee cost, which is a 7% increase, 11% in India and a reduction in some of the regions globally, net-net has been 7%.

In other expenses, there's been a 7% increase, primarily, this is an initiative that we are running through a consulting agency for the Indian market. I will talk more about it in the subsequent slides.

So when I look at sales compared to the previous year, all the regions except Australia have grown. And the reason Europe is showing a red or a downward arrow is because accounting cutoff. In Europe, the accounting standards are quite stringent about what you can take as an invoiced amount for the month.

So in the month of June, last quarter -- last month of the quarter, we had a significant invoicing during the last week, which was not -- could not be taken into account, and that's why Europe is showing as red. But otherwise, it has also grown beyond last year.

So if you look at the revenue, we have grown 11% over the previous year same quarter. And PBT has been 17% improvement over the previous quarter. So overall, I think it's been a good thing profitability-wise. But we are really not satisfied because as one region, which is North America, which we had a problem last year due to our ERP implementation, that continued into the quarter a little bit, not -- we didn't expect it to continue, but it is, but we are still resolving it. Most of the problems are resolved so I think the next quarter should be far better.

Besides that, in North America, we are one particular vertical, our portable vertical, the overall market has dropped by almost 30%, not our sales alone, but the market has dropped by 30%. So that's another significant impact that is there in North America. But I expect that the subsequent quarters there will be stronger.

So if you look at the split between Automotive and Compressors, it pretty much remains stable at 92% and 8%, and also India versus Rest of the World, this particular quarter, India has contributed more than the Rest of the World, primarily again because North America did not fire to our plan. So if that had happened, the ratios would have been pretty much the same as in the past.

So the consolidated financials as a consequence of all this, this is the number. Like I said, the overall financials performance has been good, but there are still opportunities for us to improve, which we will continue to do in the rest of the quarters.

One of the challenges that we had this quarter was our cash generation was not as we wanted it to be. And the primary cause of this is inventory, and the reason for the inventory buildup has been the Red Sea problem because of which the transit times from India to Europe and America have increased.

And as a consequence, we've had to bulk up a little bit on inventory, which we were anyway reducing from the post-COVID period, but this particular situation has again, brought it up, brought it back up. We are putting a large initiative to really cut the inventory down across all levels.

We expect to see some good traction by the third and fourth quarter of this year. Besides the Red Sea problem, there's been a huge congestion in China as well as Singapore that has affected our shipments to the eastern part of the world. So these are the reasons why the inventory cash position has not been as good as we wanted it to be. But we should improve it in the next few quarters.

So thank you. This is what I really wanted to present to you, and I will rely now on questions to further clarify whatever you may want to ask. Thank you.

[Kamlesh Kotak, analyst]

Sure, sir. [Operator Instructions] First question we have is from the line of Mr. Ravi Swaminathan.

[Ravi Swaminathan, analyst]

And congrats on a very good set of numbers. My first question is with respect to the stand-alone business, which majorly would be India business, which has seen a very strong growth of around 18%, especially during election quarter.

What has been the top 4, 5 drivers of it? If you can talk about the India business model. I mean -- and I sense a lot of it would have been volume-driven growth. I mean there is no pricing angle to it or there is -- I don't think there's a big one-off angle to it. You can give your thoughts on that.

[Jairam Varadaraj, executive]

So yes, we had a very strong growth in India, Ravi, and it is across all verticals. And one vertical that stands out for us compared to the previous year has been the water well, right? So I wouldn't say water well is the only reason for our growth, but it's been a sizable contributor, but all our industrial verticals have grown.

Our aftermarket has grown, our water well construction and mining, non-water well portable business. So I would say all the verticals have grown. And we believe that there is ample opportunity for Elgi in India. Even if the economy does not grow as anticipated, we are expecting that there are opportunities for Elgi to improve market share considering the whole new slew of really top-class products that we are continuing to launch now, right?

So to capitalize on that is the project that I referred to earlier. We have engaged with McKinsey for a go-to-market refresh in the Indian market. And the goal is really to get deeper into the market, the piloting of the project has started. We expect to roll it out by the third quarter of this year, and we expect to see the result of that -- greater results, greater traction of this in the next year.

[Ravi Swaminathan, analyst]

Understood, sir. And what is your sense on the overall industry level growth itself probably in the last -- past by quarter? And how was the demand from industries that is right from the small SME, MSME, all the way up to the large steel and refinery, cement and all these kind of sectors in India?

[Jairam Varadaraj, executive]

We are seeing across the board higher level of activity, across the board, right? There are some sectoral issues like textile, which are still weak, right? Other than that, most other industrial sectors, we are seeing a lot of robust activity.

[Ravi Swaminathan, analyst]

Understood. And one more follow-up question. There are certain segments like railways or data center. Even during the analyst meet, you had talked about railways doing well. If you can talk more about business potential from railway side, how big can it be, yes, overall.

[Jairam Varadaraj, executive]

Railways is not a big part of our business. I mean it is -- it's a good business that we are in, but it's not like a sizable part. And the growth in Railways is a function of the budgetary allocation because railways is still a very government-controlled entity.

So this budget, there's been an emphasis on infrastructure, Railway is being one of them, right? So we'll have to see how this pans out, how much of the investment goes towards building. See, our business goes when locomotive production goes up, right? Not because of railway budget alone, right?

Railway budget can go towards safety devices, it could be towards expansion of network. It could be towards expansion of rigs, which is the cargo transport. But all that doesn't improve our business. Our business improves when locomotive capacity is increased. So we'll have to wait and see how the budget is used into the various sectors.

[Ravi Swaminathan, analyst]

Understood. And just to get more clarity on the India business. We generally don't share the breakup across top 5, 6 segments, et cetera. But, say -- from a, say, descending order of importance wise in terms of end sectors, would infra, then industrial, then retail, then water well, will that be the picking order in terms of size for us? Or is there anything else that I would have missed or?

[Jairam Varadaraj, executive]

Ravi, I'll be giving this up indirectly to you. I wouldn't like to talk about our contributing factors either in percentage or in order to our revenue, right?

[Ravi Swaminathan, analyst]

Understood, sir. And sir, the last question, in terms of the vacuum products that you had talked about in the analyst meet, any progress with respect to that.

[Jairam Varadaraj, executive]

So the collaboration work has started, the drawings have been shared and the indigenization work has started. Our team is going to visit in the next month or so. So in the meantime, we have already started seeding installations in the market fully finished units. So it's moving along.

[Ravi Swaminathan, analyst]

Okay. So in the presentation last time you had mentioned in India itself, it's [ $150 ] million, $2,000 million business. So essentially, that will translate into INR 2,000 crore to INR 2,500 crore market. I'm sorry, not business, but market size in India.

[Jairam Varadaraj, executive]

India is not INR 2,500 crores.

[Ravi Swaminathan, analyst]

$150 million to $200 million. So that comes to around INR 1,500 crores to INR 2,000 crores market if -- it won't be that big?

[Jairam Varadaraj, executive]

No, no. Not in India. No. The total market, we estimate is about $3 billion to $5 billion worldwide, yes? And in India, I don't have the numbers in front of me, Ravi, but I think it's around INR 400 crores or INR 500 crores. I don't have the numbers in front of me.

[Ravi Swaminathan, analyst]

Understood, sir. Any targeted market share over 3, 4 years for this?

[Jairam Varadaraj, executive]

It's a 10-year play because there are well-entrenched players in this market. It's not something that is going to -- this is like Elgi entering the Compressor business for the first time, right? You can't expect to see an immediate inflection. But it will be a slow journey, but it's a profitable synergistic journey that we need to engage.

[Kamlesh Kotak, analyst]

The next question we have is from the line of Mr. Harshit Patel.

[Harshit Patel, analyst]

Sir, my first question is on the profitability in North America as well as in Europe. I think we were on track to breakeven in FY '25 so -- in euro. So what is the update on that?

And second, how do you see the profitability in FY '25 for the North American market? Since that the growth is coming back, the challenges with ERP implementations would be over, at least by the next quarter also the leadership hiring is also in place in the North American market. So how do you see the margins in these 2 regions?

[Jairam Varadaraj, executive]

Yes. So as far as Europe is concerned, we are on track to breakeven this year. So the first quarter's numbers are indicative of the fact that we will hit that. We are very optimistic that we will breakeven this year in Europe.

As far as North America is concerned, the worst year was last year. And compared to that year, we are doing -- we are tracking far better. And my reference to North America in terms of challenge was in relation to the plan that we had rather than in comparison to the previous year.

Compared to the previous year, we are still doing far better. And we are hopeful in the next 3 quarters, we will have a reasonable contribution from North America to the overall profitability. And that -- this year will be like a year that we recover most of it.

[Harshit Patel, analyst]

Sir, my second question is on the motors production of our own. I think by the third quarter, we aim to start producing even 160 kilowatt motors as well. So what is the progress over there? And when the -- I mean, when we will begin that particular production, what would be the quantum of production that -- I mean, the share of our own motors as a percentage of our overall procurement, where that number will reach?

[Jairam Varadaraj, executive]

So Harshit, the plan was to release the design and pilot by the third quarter, not to get into regular production. The regular production of the higher kilowatt motors will stabilize in the next financial year, yes.

Now overall, if you look at if 100 is the total number of motors in quantity that we are buying today. By the year -- by FY '26, we would have covered close to about 85% of our requirement, complete range.

[Kamlesh Kotak, analyst]

The next question we have is from the line of Mr. Rangan.

[Jairam Varadaraj, executive]

Maybe we can move on to the next and come back.

[Kamlesh Kotak, analyst]

The next we have is from the line of Mr. Mohit Jain.

[Unknown Analyst]

Sir, my question is on the CNG compression part, gas compression. So I've seen other players into it, Kirloskar, IR, Atlas. So are we planning to move into this market because there's a lot of allocation in CNG gas stations from the government and all. So is this a lucrative business for us?

[Jairam Varadaraj, executive]

Well, Mohit, we looked at this business about 12, 13 years ago, and we were looking at a potential partner to work with in the Indian market. But after doing a lot of detailed study, we felt it is a distraction for us on multiple reasons -- multiple levels.

Technology-wise, it's not a challenge because it's quite adjacent to the knowledge that we possess in the company. So that's not the issue. But the go-to-market and the volatility of the business is -- was not something that we are accustomed to doing.

It's government, it's tenders, it's projects, sometimes long working capital cycles, uncertainty in terms of installations, when it will get commissioned. So we said this is not [ christening ]. There are huge opportunities in air globally rather than focusing on CNG in India. So we've decided to stay away from that business.

[Unknown Analyst]

Yes, likewise. I've seen government tenders getting delayed and delayed so that answers my question.

[Kamlesh Kotak, analyst]

The next question we have is from the line of Mr. Raj Shah.

[Unknown Analyst]

Yes. Am I audible?

[Jairam Varadaraj, executive]

Yes, Raj.

[Unknown Analyst]

Sir, my first question was regarding the Water Well segment. So the question was the growth that we are reporting. Is it a factor of, say, sector tailwind or the new products that we launched. Because if I'm not wrong, in the last few years, we lost market share in this particular segment to a competitor. So what has worked in our favor? Please share your thoughts, sir.

[Jairam Varadaraj, executive]

So the contribution of water well is a combination of both, Raj, it's a -- the sectoral growth, the demand in that sector has gone up, plus our growth in market share. The growth in market share is primarily because our product is a far superior product. It took a while for the customers to establish and believe its credibility. That was almost a 2-, 3-year time frame.

But fortunately, that 2, 3 years of trying to convince customers was during the downside of the segment, demand in this segment. So just at the time when the demand started picking up, the confidence levels in the market on our products was at a very high level.

Today, if we can produce more, we can sell more. And the constraint for us today is the supply of engines from Cummins. It's not our internal constraints.

[Unknown Analyst]

Okay. Okay. Got it, sir. So say, if we are in the steep part of the curve -- or whatever segment, what kind of contribution of water well is there to a stand-alone revenues? I don't want the exact number, sir, approximately?

[Jairam Varadaraj, executive]

Well, I don't want to give percentages, Raj, because then that reveals exactly what our contribution is. But I can tell you it's a -- from a growth point of view, it was a sizable contributor, yes.

[Unknown Analyst]

Okay, sir. If you can say in the total addressable market for our products, water well, is it a significant contributor to overall market?

[Jairam Varadaraj, executive]

Overall revenue?

[Unknown Analyst]

Not company revenue, sir. Market size. In overall market size.

[Jairam Varadaraj, executive]

No, no, no. From a market size point of view, no.

[Unknown Analyst]

Sir, next question is regarding the competition in India from the 3 MNC players as well as Kirloskar. So how is it panning out? And because this is for the second consecutive quarter that we have reported very good growth numbers in stand-alone business.

[Jairam Varadaraj, executive]

So Kirloskar, the comparability of ours with Kirloskar is not exactly like-to-like because they are in CNG, they're in refrigeration, they're also making transmission products. So their participation in the pure Air Compressor business is relatively small. And so therefore, the comparability is not here.

As far as the other 3 multinational companies are concerned, well, 2 companies, we -- they are not listed. So we don't -- we wait for their results only at the end of the year. The listed entity, we are waiting for their quarter results to be published. We don't have it yet.

[Kamlesh Kotak, analyst]

[Operator Instructions] Sir, the next question we have is from Mr. Ravi Swaminathan.

[Ravi Swaminathan, analyst]

Follow-up question. This question is slightly long term-ish. So what I observed in the stand-alone business of yours is that the gross profit or the sales minus raw material consumed has kept expanding over the past 5 years or even over a 10-year period. I think this has been a combination of mix, after-sales service and pricing improving.

If you can talk about how much more there is a possibility for this to improve further. So I'm taking off from say, 3 to 4 years from today. Today, the business environment is good, et cetera. But how much of this would be more of a structural improvement in nature? And how much of it would be a business environment-driven one in nature. So if you can...

[Jairam Varadaraj, executive]

So structurally speaking, the growth in profitability in the future will be a function of how much of our revenue comes from aftermarket, right? Now as the installed base keeps going up, the aftermarket numbers will keep improving, right? And there is still quite a bit of headroom for growth there as a percentage of total revenue when I compare it with larger companies with a much more steadier state aftermarket business, right? So there is room for us to grow there from a profitability point of view.

Structurally speaking, we have also developed some new products to, like I was telling you about the competition from cheap Chinese imports. We have developed some exciting new products which can take them on squarely, right? And that would be structurally speaking, less profitable, but it is a contribution to revenue that would have otherwise not been there, right?

So while it might depress the percentages, it will increase, it will enlarge the overall quantum of profit, yes? So these are the two structural things that I see, I don't see an opportunity for us to keep increasing our prices at this point in time now.

[Ravi Swaminathan, analyst]

And the pricing difference between us and probably the market leader would have significantly narrowed as we stand today vis-a-vis...

[Jairam Varadaraj, executive]

Yes. This is true.

[Ravi Swaminathan, analyst]

All right. And second is from a capacity to manufacturer standpoint. I mean -- so we are growing in India at probably more than 15 or mid-teen kind of growth over a 2-, 3-year period, probably this continues for another 2-, 3-year time period. Do we have enough capacity for catering to that. Would we think about CapEx in the next 2, 3 years?

[Jairam Varadaraj, executive]

So like I've explained in the past, there is the regular CapEx, which I call as balancing assets, right? That is in the -- and depending on a year, it is anywhere between INR 30 crores to INR 50 crores, right? This gives us -- see, our philosophy on capacity planning is to look 1 year into the future and have that capacity ready even now, right? So that gives us the flexibility to respond to unexpected increases in demand, right? So that philosophy continues and that principle is there. So we have enough capacity to respond to market requirements.

Now at some point in the future, there will be a requirement for space, right, that is factory has to expand, which is what we are talking about in our process of moving our city plan to the new campus. That's going to happen over a 5-, 6-year period, which we said we are going to cost us about INR 500 crores.

The first phase of it has already been cleared. Plans have been made. Approvals are being processed. So we will probably break ground this financial year, yes. And yes, so that will be ready in another 15 months or a couple of years, right? Then we will keep investing into the progressively moving each line into the new campus.

[Kamlesh Kotak, analyst]

[Operator Instructions] Sir, we have Mr. Rangan again.

[Jairam Varadaraj, executive]

I don't know whether he's having some challenges. Rangan, you need to unmute yourself, otherwise I won't hear you.

[Kamlesh Kotak, analyst]

Rangan. I think we are facing some technical challenges from Rangan's side. Rangan, you may unmute yourself and go ahead with your question.

[Unknown Analyst]

Hello.

[Kamlesh Kotak, analyst]

Yes, it's Kamlesh, sir, you may go ahead.

[Unknown Analyst]

In the meanwhile Jairam, sir, if you can highlight, you touched up on the logistics issues both in Red Sea related as well as in the China and Singapore side. So how is it getting impacted our operations in terms of shipping from India? Or how it is? And is it being resolved now or it still persist?

[Jairam Varadaraj, executive]

So the Red Sea problem still persists because the transit times have increased because there are multiple effects. One is the transit and you're going via the Cape of Good Hope rather than going through the Red Sea and the Suez Canal, right? So the transit times have gone up by a couple of weeks. So to that extent, your inventory has gone up, right?

Because of the congestion in China and Singapore, the availability of containers have got -- has become a problem so freight rates have gone up, right, quite significantly. So besides lead times to the eastern part of the market, the world market. We are hoping that this will get resolved or it becomes a steady state and everybody absorbs these costs at some point, yes.

So it's really out of our hands in terms of finding a solution rather -- I mean our only solution is find ways to take cost out to compensate for this freight because we really can't pass this cost on. Because already, there are challenges in Europe and America and in India in terms of price absorption. So we can't really pass this on.

So we are looking at where can we cut costs to compensate for these rate increases and trying to optimize our inventory so that we are able to extract cash while at the same time, retain enough inventory to serve the customer on time.

[Kamlesh Kotak, analyst]

Yes. Nilesh. Any other questions?

[Unknown Analyst]

Sir, we have 1 question in the chat box from Mr. Venkatesh. Sir, what are the current consulting ongoing programs going on? What has been the amount spent till date and what more is likely to be spent?

[Jairam Varadaraj, executive]

So we have a project with McKinsey for our go-to-market in India. We have already spent about INR 6 crores maybe. And we have another maybe INR 13 crores to INR 14 crores left to be spent. We also have a project with Deloitte for our finance transformation project, that's a very small amount, it's about a crore, which most of it has been spent. It's not a significant area.

We are going to create a few more projects in HR, in supply chain, which are going to be a thing, but I don't expect them to be very significant. A few crores may be spent this year, but not significant.

But overall, I think what has happened in the last 10 years is the business has grown beyond the capability and capacity of the enabling functions like finance, HR, some of the back-end operations. So we are investing heavily into beefing up the processes and the strength of these organizations to respond to requirements globally, right?

So there will be a cost that the company will incur. For instance, digital and our information technology infrastructure is far behind what the business has grown into, right? So as part of getting in a leader, a pretty seasoned senior leader for heading our digital initiative and our technology initiatives, information technology initiative, we will be investing quite a bit on those platforms. So that will be over the next 2 to 3 years.

[Unknown Analyst]

Sir, a follow-up question on the chat is, if in FY '24, transport costs have declined sharply this year, both in stand-alone and consolidated basis, are these either genuine reduction in cost or different ways of presenting it? I need to understand.

[Jairam Varadaraj, executive]

I don't understand the question.

[Unknown Analyst]

Sir, further explanation is given that the costs have been down Y-o-Y from INR 105 crores to INR 87 crores. While on stand-alone basis, the costs have gone down from INR 61 crores to INR 39 crores.

[Jairam Varadaraj, executive]

Which costs are they referring to?

[Unknown Analyst]

This is transport cost.

[Jairam Varadaraj, executive]

Sorry, I don't have that level of granular information in front of me. I suggest whoever has raised that question to e-mail it to us, and we will try and explain it.

[Unknown Analyst]

Sure. Sir, the next question, it's a pretty lengthy question, and I'll take it part by part. Sir, could you kindly speak about the installed base mix? How much is in India versus Rest of the World. And as far as our penetration in terms of aftermarket sales of overall revenue goes, what would it be in India and Rest of the World?

[Jairam Varadaraj, executive]

So the installed base, I don't want to give specific numbers, but as a percentage, I would say approximately India would be close to 80%, and the Rest of the World will be 20%. Now in terms of penetration of our aftermarket presence in India would be probably around 70%, 75%. And the Rest of the World probably around 80%.

[Unknown Analyst]

Sir, an additional point of it is, can you please speak about what initiatives are we taking to improve this penetration?

[Jairam Varadaraj, executive]

So that's an ongoing operational thing. There's nothing strategic. It's about engaging with customers, making sure that there are systems and processes in place, both at our level as well as our channel partner level to be able to get to the customer at the right time for parts and service to be rendered, to be supplied.

[Unknown Analyst]

And finally, is there any difference in the aftermarket margins of India versus Rest of the World?

[Jairam Varadaraj, executive]

The margins in India are definitely lower, but you need to look at the margins -- at a growth level, they are lower, but at a net level because people costs are less, it's higher. The gross margins in the Rest of the World are higher, but people costs and other overheads are higher. Therefore, the net margins are low.

[Unknown Analyst]

There is a question, sir, which says, are there any inorganic opportunities of growth possible in the market today?

[Jairam Varadaraj, executive]

So like we've been saying inorganic growth for us is not the preferred option to grow, our preferred option is to grow through organic means through association with strong channel partners. That has been our model right from the beginning. That continues to be the model everywhere.

It's only when strong channel partners are not willing to take our brand and we need to grow in the area that they are in. We look at one joint venture with someone or if there is an inorganic possibility, we look at it. That's on the customer access kind of opportunity.

The second inorganic is adjacent products, right, products that are adjacent to our business related to us. If there are opportunities of that nature, we will certainly look at it, but we have not come across any yet.

[Unknown Analyst]

Sir, the next question is, do you have any future plans of application of artificial intelligence to Elgi products?

[Jairam Varadaraj, executive]

We are definitely doing that. I mean, we are -- if you look at our Air Alert project, which we have now at our cost installed, we are going to install close to 2,000 machines. The idea is to get data and a lot of AI is a function of having data and able to make sense out of that data.

So once we have those machines installed and we start collecting data from these machines, we will be able to use developed algorithms by which we will be able to predict failures, predict potential savings opportunities for customers. So that will definitely something that we are working on.

[Unknown Analyst]

Sir, there's a follow-up question on India versus the Rest of the World. Could you please speak about the aftermarket revenue percentage of total in India versus Rest of the World? And the question on margin, which was also on aftermarket, what would be the aftermarket margins in India versus the Rest of the World?

[Jairam Varadaraj, executive]

So our aftermarket in India is roughly about 25%, 25% to 28%. Rest of the World is probably at around 12% to 15%. Margin, I would not like to go into the details of the specific margin percentage.

[Unknown Analyst]

Sir, in the interest of time, we will take 1 last question from Mr. Ravi Swaminathan.

[Ravi Swaminathan, analyst]

Thanks a lot once more for taking this question. There are a few emerging sectors that are there in India. So I'll just read them out. If you can talk about the air compressor opportunity from the incremental CapEx angle across value chain in each of these. Electronics, one, green hydrogen, data center and renewables.

So for example, renewables means right from, say, the manufacturing of module or glass, et cetera. And someone who puts up a CapEx and therefore, the demand for compressor. And electronics means the entire CapEx is being built and you need clean air and all these things?

[Jairam Varadaraj, executive]

So Ravi, I can't tell you specifically what's the value of the opportunity because it depends really on -- electronics is too broad a category, right? That could be as complicated as an integrated circuit type of a thing where we make semiconductors all the way to something simple as making a PCB and surface mounted devices. So it's a wide spectrum, right?

Now each of them have different levels and the scale at which they are being done is there's going to be a lot of requirements, particularly for oil-free compressors, right? And we have seen this already, we are supplying that in countries like Malaysia and Thailand and Vietnam where we do have customers in these segments, right?

As far as green hydrogen is concerned, it is -- hydrogen needs to get compressed and that principle of -- at very -- to very high pressures, and that's a different business altogether, right? So there is really no application there, right, for us.

As far as renewable concerned, manufacturing of solar modules and all that, it's like a regular manufacturing. So we will be requiring -- they will be requiring and we are already -- we have quite a few customers in that one.

[Ravi Swaminathan, analyst]

Okay. Okay. And data centers?

[Jairam Varadaraj, executive]

Like I said, we really have no clue of what is the requirement, yes?

[Unknown Analyst]

Participants whoever have put questions in the chat box, I believe in the interest of time, you can email it to Mr. Jairam or the IR team at Elgi. Sir, we would request you for your closing remarks and then followed by the [ vote of thanks on completion ].

[Jairam Varadaraj, executive]

Thank you so much. Ladies and gentlemen, thank you again for your time and your extremely perceptive questions. It has been a pleasure to interact with you. Like I said, the performance has been good. but it is not something that we are very satisfied with.

We expect that the subsequent periods of this financial year should be better. And we are quite optimistic about the future, especially India, where we are having a renewed focus into these markets. So I look forward to engaging with you shortly as the quarters go by. Thank you very much.

[Kamlesh Kotak, analyst]

Thank you, Mr. Jairam for that insightful discussion. And participants can log out of the meeting. Have a great day ahead. Thank you.

[Jairam Varadaraj, executive]

Thank you very much, Kamlesh. Thank you [indiscernible] for organizing this.

[Unknown Analyst]

Thank you, sir.