Elgi Equipments Ltd

NSE:ELGIEQUIP

Earnings Call Analysis

Revenue Growth and Cost Control Drive Strong Performance

The company experienced a solid quarter with 9% volume growth in sales and a higher contribution margin. Challenges remain in Europe, with sluggish growth not meeting expectations due to broad economic issues like inflation and the Ukraine war, prompting a tightening of costs. India shows potential despite some market sluggishness, and North America has returned to normal levels with a strong second half anticipated. EBITDA growth was propelled by volume growth and pricing realization efforts that began 1.5 years ago. The company plans to maintain similar profitability levels to Q2 and expects revenue around INR 3,200 to 3,250 crores, with enhanced profitability from an increasing percentage of higher-margin aftermarket sales.

Expect Continuing Growth Based on H1 Performance

The company's first half (H1) results are being used as a baseline to estimate performance for the rest of the year, suggesting a continuation of the positive trend with an expected contribution of 45% to annual results.

Aftermarket Drives Revenue with a Focus on India

The company's aftermarket segment, particularly in India, represents a substantial portion of revenue—26% to 28% of total India revenue—and is approximately 13% to 14% of consolidated revenue. This indicates the strategic importance of the aftermarket business to the company's overall performance.

Seasonal Performance Trends Expect to Maintain

Historically, the company experiences a stronger performance in the second half of the fiscal year, with 55% to 57% of revenue typically generated in this period. This seasonality trend is expected to continue, signaling potential for growth in upcoming quarters.

Cost Reduction Efforts and Improved Profitability in Aftermarket

Despite a temporal decrease in other expenses, the company is actively engaged in an ongoing cost reduction program that is expected to further bolster profitability. Additionally, as a higher percentage of revenue is projected to come from the aftermarket segment, which is inherently more profitable, the company's margins should improve.

North America Market Recovery to Bolster Second Half

The company has overcome past challenges and anticipates a strong second half in the North American market, which could be pivotal in enhancing overall yearly performance.

Striving for EBITDA Break-even in the Upcoming Fiscal Year

An important goal for the company is achieving break-even at the EBITDA level by the next fiscal year. This objective is currently in focus and efforts are being made to attain it.

Overall Revenue Growth Shows Positive Trajectory

Revenue growth has been steady, with a 9.1% increase over the previous year. Moreover, when compared sequentially with the last quarter, the company achieved an impressive 11% growth, demonstrating a strong business trend.

Guidance and Investor Considerations

For investors, the company's guidance and recent performance offer a multi-faceted view. Although precise consolidated numbers aren't available, the strong inference is that ongoing strategies and market conditions pave the way for stable growth, especially given the emphasis on the profitable aftermarket segment and cost reduction initiatives. The expected seasonal uplift in the second half, especially with a solid performance in North America, augments this positive outlook. Attaining the break-even EBITDA goal next fiscal year serves as a milestone indicating the management's commitment to financial health. In summary, the company's judicious focus on high-margin areas, strategic cost management, and seasonal revenue trends present a compelling case for potential investment.

Earnings Call Transcript 2024-Q2

[Operator]

[Technical Difficulty]

[Kamlesh Kotak, analyst]

Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 2Q FY '24 earnings webinar of Elgi Equipment's Limited. We have with us today Mr. Jairam Varadaraj, Managing Director and the senior management team representing the company. The floor of the event is Mr. Jairam will take us through our presentation highlighting the financial performance for the quarter and the half year ended September 24 -- September 23, 24 and then we shall begin the Q&A session. [Operator Instructions]

I now hand it over to Mr. Jairam for the presentation. Over to you, sir. Thank you.

[Jairam Varadaraj, executive]

Thank you very much, Kamlesh. Good evening, ladies and gentlemen. I appreciate your patience while we go through a new format that we are trying, hopefully, a better format. We are using a bit of a visual deck to take you through the normal narration that I do. I hope this is a better format for you. So having said that, let me go through the deck. So this is a standard safe harbor statement in terms of forward-looking statements they have to be responsible.

Moving on I'll start with the EBIT -- reconciliation at the level of EBITDA. So this is a bridge being part of our 2 contributing factors for the growth in EBITDA is the volume growth, where our sales grew by almost 9% compared to the previous year same quarter. And the contribution was also higher at 1.8%.

Now we also had an increase in employee cost, which is the normal stuff. And we had some abnormal increases in the U.S. because of -- we had to bring in certain additional contract people to help with the implementation of the ERP system. So all that put together with our EBITDA is at the level which is -- it's been a pretty good performance for the quarter. Now if I have to look at the sales upper starting from Australia all the way across all the geographies as well as businesses, we have done better than previous year. But it has not been to our expectation. Australia, there has been some headwinds in the economy. So our aftermarket has been very good, but equipment sales has been a little sluggish. Southeast Asia continues to be a challenge in terms of performing to our expectation. India, I will stop at India, go to India and then go back to Europe. India has been in certain segments, we have done well and certain other industrial segments we are seeing sluggishness. Inquiry levels continue to be [Technical Difficulty] but conversions seem to be taking longer. Europe has been quite a bit of a challenge combined with inflation, the Ukraine war, gas prices, it has been a challenge there. So we are taking stock of the situation to see how we should reorient ourselves there. I'll be able to tell you more about it in the next couple of quarters.

North America is back to its normal levels after the miss in the first quarter and a little bit in the second quarter as well. So we are back to normal. And I think the second half would be quite strong for North America. Middle East has grown well for us and ATS automotive equipment business has also grown.

Moving to the revenue growth, like I said earlier, it is 9.1% over the previous year. And compared to the sequential quarter, it's about 11%. So typically, we have about 43% to 45% performance in the first half and 55% to 57% in the second half, I think we can -- it will be reasonable to expect the same performance in this year as well.

Our PBT growth has been pretty strong, and we've done very well in terms of improving our contribution margin. It's a combination of both control over costs as well as better realization of pricing, which we started almost 1.5 years ago, continued effort into the market to discover the right price for our products. And I think we should be able to maintain these levels of contribution in the future as well. And the sales mix, we have [Technical Difficulty] so sales compressors is close to about 90% and automotive equipment is 10%. If you look at the regional -- the geographical mix continues to be 45%, 55%. Q1 was a little bit more in favor of India because of our -- we had some challenges in North America, but North America coming back, the 45%, 55% ratio is what we think on a steady-state basis will be in the near future as well.

So our consolidated financials at the Q2 level and H1 level are pretty strong, but it's been a good quarter. First quarter was a little weak because of North America's top line was weak, as a consequence the bottom line was also weak, but we have caught up on the second quarter. And I think we will continue to maintain this momentum into the second half as well.

So our net debt position, there's been not a big improvement since the first quarter. We do see an opportunity for a significant reduction in our inventory. We have planned inventory based on a certain expectation of growth in certain parts of the geographies worldwide. Those have not happened. And so there is a certain cycle kind before we are able to rectify, but we are quite confident that we'll be able to significantly reduce our inventory. And that's been the main cause of not having a much better cash position in the company.

Our receivables are in reasonably good condition at an overall level. So this is really what I wanted to present to you, and I will be happy to take specific questions relating to our performance.

Thank you very much, and thank you for your patience while we go through these new formats.

[Operator]

[Operator Instructions] The first question is from the line of Mr. Ritwik Sheth.

[Ritwik Sheth, analyst]

Sir, a couple of questions. Firstly, you mentioned that Europe is seeing challenges. So are we on track? So first of all, is it in terms of top line or in terms of cost over there, the costs are escalated and second, a follow-up to this is that are we on track to break even in FY '25 ? Or it's still too early to gauge.

[Jairam Varadaraj, executive]

So the challenge has not been at the cost level. In fact, we have -- we started the process of curtailing our cost and tightening it up. It's really in terms of the growth -- expected growth in the market, we are growing still double digit in Europe, but it's not to the level that we had planned as part of our overall, what I call as the Europe project. We are, at the moment, still optimistic that we will -- the bottom line performance or bottom line loss for this year will be restricted to what it was in the plan. And also, we are working towards breaking even for next year. So there is -- it is just that the top line support that we had anticipated is becoming a little sluggish. And therefore, we are working on tightening up the costs.

[Ritwik Sheth, analyst]

So basically, because of lack of top line growth, we are curtailing costs like in terms of distribution and expanding our network. Will that understanding be right? .

[Jairam Varadaraj, executive]

Absolutely, absolutely. Both marketing spend, spend on people, all that is being throttled back.

[Ritwik Sheth, analyst]

Second question is related to how competitor was recently entered the screw compressor segment. So have you seen any impact of this on pricing, any aggressive pricing from their end? And now what is a [Technical Difficulty]

[Jairam Varadaraj, executive]

Which competitor are you referring to? I'm sorry, I lost you there.

[Ritwik Sheth, analyst]

So sir, Kirloskar Pneumatic. They have recently entered the screw compressor -- screw compressor is our main segment. So if you can ?

[Jairam Varadaraj, executive]

Kirloskar Pneumatic is not a new entrant. They've been around for a while. They've been selling machines in the Indian market, but we don't see them as often as we see the other major competitors in the marketplace.

But we are mindful of it. We are watching. We know about their products. We're watching that. We are mindful of it. We're not taking it lightly.

[Operator]

The next question is from the line of Mr. Uttam Kumar.

[Unknown Analyst]

So firstly, on the domestic on the stand-alone business, I think this quarter, we had kind of [indiscernible] flattish kind of revenue growth. And also in your initial remarks, you had mentioned that certain segments have been doing well and certain industrial segments has been seeing some sluggishness. Can you elaborate on which segments where we are seeing a moderation in demand and which segments are doing well? And what is the kind of [indiscernible] for the second half? That is the first question.

[Jairam Varadaraj, executive]

So when you look at stand-alone sales, we have sales in India as well as sales that we make to our subsidiaries as well as sales that we directly make to distributors all over the world. So it's not a reflection of only the performance of India. So like I was saying, we have a kind of constraint on our inventory. We're trying to bring inventory under control. So sales to our subsidiaries in the second quarter, which is reflected in our stand-alone books has been lower than what it was in the previous quarter. So that is one of the major reasons why there is a kind of a flatlining performance on the top line and in the standalone. But having said that, looking at India, Yes, I did talk about sluggishness in the economy. I wouldn't say it is restricted to any one segment. Across the segment, like I said, even in the first quarter across all segments, there is still a lot of -- that is a positive sentiment that continues to exist, but people are taking time to finalize. So that is really what we are observing. And it's across all industry verticals. I wouldn't say it's anything specific.

[Unknown Analyst]

Secondly, it's on the abnormal expenses, which I also mentioned mean getting some [indiscernible] ERP implementation. Can you just throw some light on what kind of expenses you're talking about? What is the quantum and how much more expenses can we expect on the second half? .

[Jairam Varadaraj, executive]

I don't have the specific number in terms of cost that has incurred because of the ERP implementations, so I'm not able to tell you. The costs are by and large behind us. It is so in the future, we don't expect to see those kinds of costs that we have made. Basically, these are consultants who do to help with the implementation.

[Operator]

[Operator Instructions] Sir, there are a couple of questions in the Q&A box, which I'm putting forward to you.

The first question is directionally how close Europe is to breakeven at EBITDA level.

[Jairam Varadaraj, executive]

So this question was asked by another person in this call. Our plan is there will be a plan -- original plan itself, there was a loss this year, and we are quite hopeful that the loss will be contained to the planned levels this year. The planned -- overall plan was breaking even at the EBITDA level next year, and we are working towards making that happen even as we speak. So I'm quite confident that we will get that done.

[Operator]

The next question in the chat boxes, sir, what is the service and the spare revenue as a percentage of sales? And where do you see this revenue in the next 2 years? .

[Jairam Varadaraj, executive]

So right now, I don't have an exact number at a consolidated level. In India, our aftermarket business would be about 26% to 28% of our total revenue, India revenue. As far as the consolidated numbers are concerned, I'm taking a stab at it. I don't have the number. It will probably be at around 13%, 14%. We have the numbers, but I don't have it in front of. So as far as the future is concerned, as we continue to sell more machines, the installed base of our machines go up and that is really where the aftermarket business gets interesting. So you can see the contrast between the percentage contribution in India, where the installed base is very high and the percentage contribution globally where the installed base is low. So as we get more machines into the field, you will see higher contribution of aftermarket with more profit.

[Operator]

[Operator Instructions] One more question coming out of chat box is what is the segment-wise -- segment-wise, how has been the market in India and in [indiscernible] pockets?

[Jairam Varadaraj, executive]

Away pockets, I presuming it is meant as global markets outside of India. There's performance in India, I would not attribute it to any one segment. It has been across the board, both positives and negatives have been across the board. As far as the markets outside the country are concerned, we don't really track it at an industry level. Most of our business is done through distributors who are much more arm's length in those countries compared to India. So we don't have very strong visibility into the industry [Technical Difficulty]

[Operator]

Sir, just a follow-up question on the previous one. What would be the outlier pockets and the weak pockets, I mean, in your assessment?

[Jairam Varadaraj, executive]

Outlier pockets and weak pockets, in India?

[Operator]

Sir, I think this speaks about global [indiscernible] previous question was regarding global markets, so..

[Jairam Varadaraj, executive]

I don't -- I'm not able to understand what you mean by outlier pockets. Compressor doesn't have any outliers, just applications across the board across [indiscernible]

[Operator]

If I may interrupt you, I believe this is with regards to the segmental performance. How is the performance outline [Technical Difficulty] performance.

[Unknown Executive]

Nilesh, I think yes, let me explain. I think the question he is asking about the Indian business, how across various pockets of automotive, water well, cement, railway, and other process industry, the business is shaping up? Is there any outperformer or any underperforming segment is what the question? .

[Jairam Varadaraj, executive]

So -- you look at the industrial segment, like I said, across industries that has been a little bit of sluggishness in terms of finalization of orders, inquiry levels still continue to be quite strong. That is on the industrial side. The railway business is kind of constant. It is really a function of the budgetary allocation, which has been reasonable, and therefore, it continues to grow at a steady pace. The outlier really in the sense that is kicked in this year or this quarter, and we expect it to continue in our water segment. There has been an uptick in the demand for compressors in the water well segment. And I've been giving a feedback or update to the investors over the last 2 to 3 years, the kind of work that we have put in to build new machines, to build a new machine, which is far superior than what is available in the market. And that has given us a significant leg up in the current situation where there is a demand.

Now is the demand for these bore well compressors at those peak levels of 500, 600 machines a year, no, they're not. But compared to the last couple of years, there has been a significant uptick.

[Operator]

The next question is from the line of Mr. SR. I'm not sure what his full name is, but I'll allow the mic for the same.

[Unknown Analyst]

Sriram here. How is the recovery in the textile space? .

[Jairam Varadaraj, executive]

Nothing. It's still kind of -- it's better than the first quarter, certainly better than the previous year, but still early days.

[Operator]

One more question coming in from franchise boxes, why did other expenses fall despite higher revenue growth? Is this sustainable going forward? .

[Jairam Varadaraj, executive]

What was the question? why are other expenses? .

[Operator]

Why did other expenses fall despite higher revenue growth? Is this sustainable going forward? .

[Jairam Varadaraj, executive]

Other expenses have gone down. It is more a temporal thing. I don't think there is anything specific that we did to reduce it. There has been some savings in certain markets in terms of, let's say, in Europe, certain marketing spend has been reduced. Some travel spends have been reduced. So I would not attribute it as anything like a deliberate significant strategic mode. And for the next 2 quarters, I don't see it as sustaining itself.

[Operator]

[Operator Instructions] Sir, there is a question in the Chatbox, which says, can you provide any growth and margin guidance for FY '24 and FY '25? .

[Jairam Varadaraj, executive]

FY '24, like I said, if you take the H1 results and consider that at 45% would be a reasonably good estimate for the rest of the year. So with that, if I do the math correctly, I think we'll be at around INR 3,200 crores, INR 3,250 crores will be the number that we can expect for this year.

As far as profitability is concerned, I think the profitability will be more like the second quarter levels rather than the first quarter level. So we should be able to sustain those levels of profitability.

[Operator]

[Operator Instructions] in the meanwhile, Mr. Jairam if you can help us understand specifically how has been the performance of Rotair in North America, both LG and Patton.

[Jairam Varadaraj, executive]

So Rotair has had a good quarter and good first half on the back of both sales in Europe as well as sales to North America because a production hub of portable compressors for North American market is Rotair in Europe. So it's been a good performance. As far as profitability is concerned at a margin level, it has kind of sustained itself over the -- compared to previous year. It has not had the same kind of margin growth that LG has seen. It is at a contribution level, but it is -- at an EBITDA level, it's been very strong because of the top line. As far as North America is concerned, Patton specifically was -- the first quarter was quite disaster because of the system, ERP implementation, but the second quarter, they have caught up and they're back to a certain steady state level at which we had budgeted. So that's a good thing, right? So profitability also they're working on, and I think they will be quite strong in the second half.

[Operator]

So sir, in general, how has been the North American market you read because of inflation and other worries that.

[Jairam Varadaraj, executive]

So that's a good question, Kamlesh. We were all kind of keeping our fingers crossed, toes crossed to see when will the North American market start getting sluggish. But it's been quite surprising that it hasn't. And the second thing that kept us kind of concerned and was the strike by the UAW workers and the consequential wage settlements that could have a rippling effect on the economy. Now those wage settlements have been done. There will be some impact of that, obviously. But Surprisingly, none of -- there has been no impact, and we are still continuing to have strong inquiries and growth in that market.

[Operator]

Sir, just one question that I see in the chat box, which is, according to you, what are the most important factors that customer would look at before going ahead with a compressor manufacturer?

[Jairam Varadaraj, executive]

Well, there are 2 at a very broad level, there are 2 segments of customers. One is a TCO type customer. What I mean by that is the total cost ownership customer. They look at the life cycle cost, not just the -- not just only the upfront price of the compressor. Then the segment really is customers who have very low duty cycles, they operate the compressors for a few thousand hours in a year. They're really not worked about the energy consumption, and they are more concerned about the upfront price of the machine. So it really depends on which segment of customers.

In our opinion, in a given market, about 60% to 70% of the customers are really TCO customers because the life cycle cost of a compressor is actually pretty significant and therefore, they need to be concerned about it.

About 20% to 30% of the customers are basically buying on price, right? So this is how really the market split is.

[Operator]

Sir, the next question in chat that I have is margin guidance again. Sir, how has our oil-free compressors performed internationally? .

[Jairam Varadaraj, executive]

In the current quarter and in the first half, I think there has been a steady growth of installations. We have got some very prestigious customers that in Europe and in the U.S. and in Australia. So it's been -- I wouldn't say dramatic growth, but it's been a steady progress in terms of adding [indiscernible] customer brands as customers of our oil-free machines. So we are moving along nicely.

[Operator]

So the next question that I see is from the line of Mr. Manish Goyal. Manish, your mic has been allowed, you may unmute yourself and ask the question.

[Manish Goyal, analyst]

Thank you so much, sir, for the new format. This is much better. Thank you so much.

[Jairam Varadaraj, executive]

Welcome, Manish. We'll continue to keep improving on this. We had a little bit of tech challenges this time, hopefully, next time will be better.

[Manish Goyal, analyst]

Sir, a couple of things. So we had a historic high margins on a stand-alone basis and we have been -- this quarter, we have seen even the subsidiaries margins improving. Related question, in the context in that our employee cost is continuing to be going up. And as a percentage of the sales also, it is inching up. It's almost 20% now. So the question I'm trying to relate is that maybe -- and you did alluded that in Q1, there was some ERP-related implementation cost. I believe that is also the part of the employee cost. So how do we see, sir, over a period of next 2 to 3 years, like employee cost as a percentage of the sales, like directionally, what could we see that going forward from current 20%. That is one. And you did mention that we can maintain our contribution level at the current levels. So I believe you were referring to the India operations. And then at international, we can see further improvement. So overall, if I see with a 2-year, 3-year perspective, then probably we will also have the operating leverage playing out, so Am I right [indiscernible]

[Jairam Varadaraj, executive]

So let me address the multiple questions, dimensions to your question, Manish. So let me answer one at a time. As far as people costs are concerned, we had made a certain growth plan for this year. And basis that growth plan, we have made certain decisions, investments in people. Some of it has been -- has not happened, right? So to that extent, we will need a little bit more time for those plans to get materialized. That's one part of it. The second part of it, like I just said, we had to take on certain costs of people as part of our implementation of our ERP.

I don't see that as an ongoing thing. There will be some reduction. Also, we have just completed a project internally in India as a productivity improvement project, there will be some reductions coming out of it. So I wouldn't -- none of these are like significant, but there will be some marginal reductions that happened. But the main thing that we need to focus on is to grow the top line.

Now will it continue to remain 20%? No, I don't think so. But is it going to drop down to India levels, which is around 9% to 11%. No, it is not. So with 55% of our revenue coming from outside the country and that too in countries which are high cost, we can't expect to have people cost ratios at Indian level. So if you look at our competitor, if you look at Atlas Copco global people cost percentage, it's around 18%. So we will probably hover around 16% to 18% as we continue to grow our business. So that's the 2- to 3-year kind of a horizon that I expect.

As far as contribution margin is concerned, we are quite confident that we can sustain this. We have an ongoing cost reduction program which will also contribute to it. So I'm quite -- I'm reasonably confident that we will maintain this, but the third thing we need to look at is as we install more and more machines a higher and higher percentage of our revenue is going to come from aftermarket, which is significantly more profitable. So that's going to be another contributing factor. And the last piece, like you said, there will be that the whole idea is growth, and that's why we are really planning our presence not only in specific verticals in India, but also geographies worldwide. And if that growth comes in, you will see that coming to the bottom line. So overall, I think it's in a good shape.

[Manish Goyal, analyst]

Right, sir. And so I probably missed on the India growth outlook, maybe if you have already mentioned then probably I will skip that. But if not then, like how do you see the outlook for India growth and with upcoming ongoing state elections and general elections coming up, do you see any temporary slowdown or ?

[Jairam Varadaraj, executive]

So I think we need to look beyond. If you really look at our time horizon, we need to look beyond just a year in terms of elections [indiscernible] Manish. I think if you really look at what the India agenda in terms of the PLI schemes in terms of various kinds of incentives and programs to foster the Make in India program, getting a lot more investments into the country. There's a lot of noise being made about it. So even if a small fraction of that noise gets materialized, there will be a significant uptick in demand in the future. So that's what we are banking on. So we do have an optimistic view of India.

Besides that, like I said in the last quarter's call, we are looking at certain strategic priorities or certain strategic initiatives that we are going to kick start in India to start looking at [indiscernible] gain in share of the market, which we believe we can possibly get. So we should have started it in the third quarter, but we had some kind of shifts in the plan. So we are hoping that we will kick it off in the fourth quarter. So that could also have a good impact in the next financial year.

[Manish Goyal, analyst]

And last question, sir, like how is our progress on moving our some of the manufacturing from the existing plant to the new facility?.

[Jairam Varadaraj, executive]

So the planning started. The overall -- the master plan for the campus has started. We are hoping that we will complete this financial year and start looking at investing into phased -- we can't do this entire shift in one thing. So we're going to do a phase shift and it will start next year.

[Operator]

Sir, a couple of questions again in the chat box. The first question there is which products are manufactured outside India? And what is the revenue contribution as a percentage of sales ?

[Jairam Varadaraj, executive]

The only products that are manufactured outside India are the portable compressors and Rotair, Pattons, medical products that are made in the U.S. I don't have the numbers in front of me, but if I have to venture a guess, probably 15%.

[Operator]

The next question, again from the chat box is what is the CapEx plan for the next 2, 3 years? .

[Jairam Varadaraj, executive]

Our normal CapEx, what we call is balancing cap, capital expenditure on an ongoing basis doesn't exceed INR 50 crores. We keep -- I keep saying INR 50 crores, but we struggle to spend beyond INR 25 crores, INR 30 crores in a year. But I would say it's safe to say that balancing will not exceed INR 50 crores, which is an incremental investments in machinery. The major one is going to come when we shift our campus from the city campus to our new campus outside the city. The investment could be as high as INR 500 crores. But it is going to happen probably over a 3- to 4-year period in blocks. So once we have the plan ready and overall investment ready and the phase is ready, I'll be able to give you more specific information.

[Operator]

Just, sir, there have been multiple requests in the chart, about sharing the presentation on website and exchanges. [indiscernible] pass it on to you.

[Jairam Varadaraj, executive]

We'll upload this on the website.

[Operator]

I probably have one last question in the chat box, which says in terms of segments, with higher operational hours. Could you explain what kind of benefits would a compressor provide against not having a compressor? What would be the difference in margin between the equipment sales and this -- I'll probably take that question ahead. First question is in terms of segments with higher operational loss, could you explain what kind of benefit would a compressor provide against not having a compressor.

[Jairam Varadaraj, executive]

No, the compressor is not an option against anything else. The compressed air is like electricity, is a utility. I mean you need it, you need to buy a compressor. Electricity is generated in a central location and distributed through cables and wires. Compressors cannot be generated centrally and distributed through pipelines. So therefore, you need to have a compressor for producing compressed air, which is a utility that goes into manufacturing of products, I mean different kinds of products.

So it's not an option. When you need it, you just have to have it. right?

[Operator]

The second question there was what would be the difference in margins between the equipment sales and spare and services on average? .

[Jairam Varadaraj, executive]

At a material cost level, I would think equipment would be between -- if 100 is your equipment sale, you probably will realize 30, 35 as your gross margin at our material cost level. If it is spare parts, you would probably realize 60. If 100 is your sale of spare parts, you will realize 60. If it is service, of course, it is 100% because you're just -- you are basically pricing people and that is not -- there's no consumable cost in a sense it's a fixed cost.

[Operator]

We'll take one last on the line of Mr. Vineet Anand.

[Unknown Analyst]

Sir, just wanted to know this CapEx plan that we have, one of the reasons obviously because the present capacity is at the city and we want to go to a larger area. Apart from that, what incremental revenues or margin improvement or ROIC that it can attract.

[Jairam Varadaraj, executive]

The investment that we are making to shift from our city campus to our new campus outside is really not going to increase any capacity because it is basically we are going to be investing in buildings, right? Not the most kind of attractive investments, but it's something that we need to do for the long-term growth of the company. But unlike machines, buildings don't produce anything. So we don't see there is a link between shifting to the new campus and revenue growth.

[Unknown Analyst]

So this present facility that can be -- that can become as a real estate or what happens to that, sir? .

[Jairam Varadaraj, executive]

Well, right now, we -- one is the real estate, but that's not our line of business. But we have factories running today on rented facilities. Our motor plant is running in a rented facility. Our pressure vessel division is running on a rented facility. So there will be opportunity for us to consolidate that and gain synergies in terms of eliminating certain overheads like security, canteen, fixed cost and electricity, all that can be rationalized and brought into this campus here.

[Operator]

As I see no further questions in the chat box as well as in the question queue, I would hand over the mic to Kamlesh for the Board of thanks.

[Kamlesh Kotak, analyst]

Thank you, everyone, for joining in. Sir, any closing remarks you want to make, Mr. Jairam?

[Jairam Varadaraj, executive]

No, nothing. Thank you very much, English for organizing this format and Nilesh for conducting this. We will continue to try and improve our presence, make it more informative, more transparent and provide as much useful information as possible. So thank you for enabling that [indiscernible] very much.

[Operator]

We conclude the call. Thank you for being big part of this conference. With that, we can conclude the call. Have a good day. Thank you.