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Elgi Equipments Ltd
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Ladies and gentlemen, good day, and welcome to Elgi Equipment FY '21-'22 Q4 Earnings Conference Call hosted by Asian Market 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 Market Securities Limited. Thank you, and over to you, sir.
Thanks, Rutuja. Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 4Q and FY '22 Earnings Conference Call of Elgi Equipments Limited. We have with us today Mr. Jairam Varadaraj, Managing Director, representing the company. I request Mr. Jairam to take us through an overview of the quarterly and the yearly financials, and then we shall begin the Q&A session. Over to you, sir. Thank you.
Thank you very much, Kamlesh. Good evening, ladies and gentlemen. Thank you so much for participating in this call with us. As usual, I will take you through a comparison of performance last year. I'm not going to talk about Q4. I'm going to consolidate and talk about the complete year as a whole.
So our revenue had a pretty robust growth. I'll come back and talk about revenue a little later. We did INR 25.2 million as against about 19 -- sorry, INR 25.2 billion as opposed to INR 19.2 billion last year. So basis -- costs being pretty much at the same level as last year, our EBITDA should have been about INR 4.8 billion. Instead it was about INR 2.8 billion. So I have to give you an explanation for about INR 2 billion. We had a -- the first big claim on our profitability was freight to the extent of almost 1.2% -- 1.3%, which was volatility in container availability, freight both inward as well as outward. We'll talk more about it later. The second increase is our employee cost, is about 11% increase in our employee cost. I would say about 6% to 7% is the increments and 3% to 4% is head count increase, primarily in Europe, as part of our strategic initiatives there.
Last year, if you remember, we had subsidies that we received from the U.S. government as well as the Australian government for our operations there. That's about close to INR 240 million. That is not available this year. And finally, the other fixed costs have gone up by INR 600 million, which is primarily travel, advertising and all the normal costs that generally occur in the course of normal conduct of business. Because last year was such a compressed reference, it looks pretty significant. So overall, I would say that there is nothing to be worried about except as far as the material cost changes and the freight cost changes. That we'll talk about it as we go along.
So getting into sales. Overall, we grew about 30% at a consolidated level. I will -- like I normally do a review, I will start from Australia and work backwards West. Australia was -- was a challenging year for Australia for multiple reasons. We had repeated instances of lockdowns in regions in Australia, lockdowns due to COVID. And that really affected quite a bit of our business there. In addition, because of the circumstances, many of our contracts were delayed and project contracts, and those are now being revised. So there was a delay there.
Southeast Asia, especially Thailand and Indonesia, they were -- they had repetitive instances of COVID-related lockdowns and slowdown there. So the whole of that region of Oceania and Southeast Asia was lower than the prior year.
Then we move on to India. India had a fantastic year. Tailwind, at multiple levels we had the initial part of the year. The second wave hit us in April, May. There seemed to be a slowdown, but for a very, very short period. The markets picked back up. As well as there was a huge requirement for compressors for oxygen, which lasted almost into the middle of the third quarter. After that, it's -- at the moment, we don't have any -- we don't do any oxygen-related business. So even if you remove that oxygen business as a bonus year, it was still an outstanding growth from India. Same with South Asia, Africa and Middle East. Probably, the exception was Sri Lanka for obvious reasons.
Continuing West. Europe continues to perform above our plan. The sales are higher than what we had planned and the losses are lower than what we had planned. So it's -- the initiative has -- so far it's in right track. So we have 2 more years of losses, large losses, but progressively lower losses in the next 2 years. So that would make it 5 years, and the sixth year is when we are hoping to break even and probably show a positive number. So we are on track towards that.
Moving West. North America had a very strong top line growth across all our businesses. Michigan Air was probably the only entity where the business was flat. But that was because there was one large customer that was -- that went along with the earlier brand that Michigan Air was selling. But -- and therefore, there was -- that was a significant account. But in spite of that loss of a significant account, we've been able to maintain a flat line. So there is a good organic growth, which sets the good foundation for the years to come. So everything looks good there.
Brazil had a phenomenal year. We grew, but there was a lot of challenges on material cost, on freight cost. Freight to Brazil went up almost 4, 5x, and that was a big challenge for us. In spite of it, there was growth and profitability in Brazil. ATS our automotive equipment business, also did exceedingly well, at a record year, both in terms of top line and profitability.
So overall, the business was good, but there were quite a few challenges that we faced. I would like to talk about one big one, which is the commodity and freight price cost increases. If you wind back to the first COVID year, which was '20-'21, after the global lockdown in the first quarter, business came back surprisingly strong. And then September 2020 onwards, there was a -- the commodity prices started increasing. And as a company, we were not sure whether this is just a blip or whether it's a permanent thing. So we did not react in the period from October to December of 2020. January of '21, it started going down; it felt like it is going to normalize itself. Then second wave of COVID hit and the raw material prices started again shooting up. It was quite violent and very frequent.
So this time around, we said: "This is not something that's going to normalize." So we reacted with multiple price corrections in the market. But unfortunately, every time we corrected, there was -- again, the goalpost shifted. And in industrial products, there's always a gap between price increase and price realization. So during the interim, there was again volatility in the prices.
So we were just playing catch up all the way until December. So in January, we decided -- we changed our strategy and we said: "It is not going to be a reactionary price increase. We are going to do a forward price increase," which was a bit risky because it could also mean that we could become uncompetitive if we did too large a price increase. But we had to do it because of all these changes, which we implemented in February, March.
And even as we speak, those prices are getting rolled out in various parts of the world. It's still early days to say whether we have recovered all the prices in the market. We think the first quarter would be a first -- will be a good measure to indicate whether our strategy is right. But the entire organization has now seized on the importance of price recovery. And we are also seeing competitors responding in pretty much the same fashion. So overall, there is -- I don't think there is any reason to be concerned about it. So that is the thing.
So that is really what last year was: great top line, but challenging contribution management -- margins. So net effect is: it was a volume-driven EBITDA performance, not a margin-driven EBITDA performance. We are hoping that both of them come together this year. But again, going -- segueing into what we think this year is going to be -- there are a lot of indications that we could have some pretty significant headwinds this year. But as of now, there is no indication of it, but the writing clearly seems to be on the wall.
One is all the subsidies, direct consumption subsidies that some of the large economies pumped into the market have all been withdrawn and it's stopped. So just the U.S. had a subsidy of $3 trillion. And there can be no doubt that these subsidies created consumption or spurred consumption, and those -- that consumption really trickled into consumption of a lot of products, and therefore, the demand for capacities and investment. So clearly, that is something that's been withdrawn. So we'll have to see what's the impact of that.
The second is, we have pretty much gone through 2 years as citizens, pretty much all over the world, without spending too much on vacation and travel and eating out and that kind of entertainment. Now all that is being -- is coming back and coming back with quite a bit of vengeance. So the money that was earlier available for consumption of products, I believe, is going to get diverted there. So therefore, there could be an impact on consumption of products, and therefore, for capacities to build them.
Third, and of course, we have inflation, which is lurking in different parts of the world. On top of it, we have the Ukraine war with its own negativity. So all this kind of -- if you have to summarize it, we have to expect some headwinds.
So we are watching this very carefully. The Indian market, our inquiries, our order conversions are still pretty strong. Europe and U.S. are still reporting very strong inquiry levels and interest levels in the market. Australia is coming back from a very weak last -- previous year. So that's also positive. So we expect -- as of now, the headwinds are not visible, but I think we should anticipate and plan for it. That's one thing in this year that we expect.
The second is on the material cost. We hope that the projected costs that we have made are within -- well -- adequately take care of the actual increase in material costs. So far, in the last 2.5 months, barring some -- little bit of volatility here and there, the actuals have been within the projections made. But we still have another month, 1.5 months to go, and we'll have to see what's the volatility in this period.
The third dimension that I see challenges on: people costs. '19-'20, there was no increment. In '20-'21, we made some marginal increases considering still an uncertain period. Now with the talent -- market for talent really bursting, we'll have to step up to the plate and we'll have to do something to retain our key talent. I'm not talking about across the board increase, but even a deeply differentiated compensation system for our key talent would result in some significant increases in people costs.
2 years of COVID has really spoiled us in terms of looking at fixed costs and we have gotten used to doing business with very low fixed costs, and customers supported that. But now customers are increasingly expecting that we are in front of them. The virtual calls are no longer acceptable. So these are costs that are going to go up. Freight is going to be another area that we need to watch out for.
Yes. So one of the things that we have realized -- the last challenge that we see is one of the things -- it's not a challenge; it's actually an opportunity -- is what we see is that the organization has grown and some of our controls and systems have not kept pace with the growth in the organization, not just in terms of scale, but also geographical complexity. So we will be investing in some initiatives, pretty significant initiatives during the year to raise the standards of our systems and control, because these are fundamentals that we need to put in place.
So this is really the way the year that went by, and we expect the year that has just begun. So again, thank you for joining us, and I'll be happy to take your calls.
[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital Advisors Limited.
Congrats on a very good set of numbers both for the fourth quarter and for the full year. Sir, my first question is with respect to the overall growth that we had achieved during this year, around 30%. First, my question is with respect to -- relative to this, how the industry would have grown? And within this, how would have been the volume and value mix?
And thirdly, if you can touch upon with respect to India, how the growth has been relative to the smaller ticket sized products, the larger ones that is the piston, screw? How the growth has been in the individual products and also the end market categories, that is SMEs, MSMEs, infrastructure, large ticket products, projects and PLI assistance?
Too many questions, Ravi, that I'm not able to keep track of. I will try to answer whatever I've remembered, right? So the first question is -- I'm presuming you're answering (sic) [ asking ] what's volume and what is price in our growth. I would say these are approximate numbers because they keep changing region to region, product by product. At a rough level, 1/3 is price and 2/3 would be volume, right?
As far as the supply, customers profile are concerned, I don't think there is anything unique, except I can say that we were not working on any major projects. Projects-related, right, business is a very, very small percentage. So it was not the large CapEx projects that drove the revenue for the year that went by. Yes.
And would we have gained market share in the -- in both the domestic market, and obviously, the international market?
You can help me answer that question. If you can go to Atlas Copco and Ingersoll Rand, get their numbers, then I can tell you whether we have increased. This is the problem, right? We're not able to get numbers. Everybody gives false numbers to each other and they're merrily happy with each other on that count. So it's difficult to tell. But intuitively, if you have to ask me did we gain, I would say, yes, marginally probably.
Got it, sir. And more granular with respect to the end demand drivers. So told large projects like steel, et cetera, we haven't seen kind of demand from them. It seems to be -- more like the growth seems to be driven by the smaller ticket sized investments. And what about the PLI? If you can give your broad thought process over the next 1, 2 years for India at least?
Well, PLI, we are already in touch with all the companies that have been approved for PLI, and we have already got a couple of orders and we've actually delivered to them as well. But it's very, very early days. We'll have to see how quickly the PLI schemes are rolled out and executed and invested, because these are massive amounts of capital that we are talking about in these PLIs. So still too early to say.
Got it. And with respect to infrastructure projects and also the water well and other regular projects. So any directional sense on how they are growing?
Well, the infrastructure in terms of road building and dam building and all that, that is still -- it was a strong year for us, our construction and mining compressors and thing. But whatever it looks like, India certainly has a lot of water and the farmers have a lot of water. So that's been almost a dead market, right? It's unfortunate that this is a time that we launched one of the best products in the world for water well. Whoever has bought it, they're extremely happy. But we'll have to wait and see when the market rewards.
Okay. Is it safe to assume at the company level -- we include this year, also -- for the running FY '23 also, there can be a potential double-digit volume growth at a company level? Is this the kind of target that we are looking there, that is early teens kind of growth?
If the reality matches my desire, yes. But the problem is the crystal gazing ball is a little murky right now, yes. I'm not able to see clearly.
The next question is from the line of [ Renjith ] from Mahindra Manulife Mutual Fund.
Congrats on good set of numbers given the scenario. So how much of a price hike, on a ballpark, which you would have taken like there? So is there anything more which is left? Or you feel that this is kind of adequate?
So like I explained in the response to the earlier question, if you look at our 30% growth, I would say 10% is price and 20% is volume. Now -- and I also said in my narrative that we did not fully recover our costs during the year because of various challenges. So obviously, that 10% is not sufficient. We are working towards improving that. We'll have to wait and see how the market responds to volume. That's difficult to say at the moment.
So far, the markets seem to be okay. But -- and we have rolled out price increases in various segments of the market. Like I said, announcement is not a price increase. Price realization takes time because there are old orders that are executed, there are distributors who have quotations out, where there is a lag in implementation. So all that -- that's why I say first quarter is a good time to take stock of how things will happen.
Okay. I'm sorry. If I look at the economy, textiles have done extremely well. We have seen our -- one of the companies based out of Coimbatore, Lakshmi Machine Works, coming out with good numbers. So we are also one of the major suppliers there. So have you seen such kind of growth for textile? And what percentage would be textiles as percentage of revenue for us?
We have seen good growth in textiles. But like I said, that's the -- one of the advantages of this business is we are not dependent on any one industry, right? So it's not just textiles that grew. Quite a few industry verticals that grew. And to the extent that textiles grew disproportionately, we have also had some disproportional contribution from that segment, right? But I think the honeymoon is over. I think textiles are now probably pulling back. So we'll have to wait and see.
So what will be the percentage of textiles, if you can put a number to that?
I would prefer not to talk about industry contribution.
Okay. Okay. And at least if you look at textile compressors as such, will we be the market leader there in India?
Again, it's very difficult to tell because what is our share of the market is very difficult to tell, right? Certainly, a dominant player in textile. We could have differentiated dominant position in different regions of the country. But if I have to take a consolidated view, it's very difficult to say.
Okay. And sir, if you can -- I can have my last question. Like how has been the other countries -- like the major geographical countries like Australia, U.S. and Middle East, which are the 3 major things, if you can highlight our performance in these 3?
So in my earlier narrative, I told you that Australia was a challenging thing. It was -- it had actually contributed negatively to our overall sales. So Australia -- as well as Southeast Asia. So they were lower than the previous year. India, I said there has been a good growth. Europe has been outstanding growth. Middle East has been also good. But really, if you look at contributors in terms of regions, if you take India at 50% of revenue and the rest of the world at 50%, 95% of that 50% comes from Australia, Europe and the U.S., right? So the rest of them are not significant.
Okay. And this interest rate increase in U.S., is that going to any way impact? Or you are small -- too small to get impacted by these things?
Our debt levels are not very significant. So I don't see that as the major impact directly as a cost for the company. But in terms of the macroeconomic impact, is you have to wait and see what happens.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Congratulations for good numbers. So the first question is on your comment that you mentioned that as an organization we have grown significantly, but we now need to invest significantly to processes. If you could just elaborate on this, please?
So when you look at the multiplicity of entities and the scale and the size -- I mean, the quantity of transactions that have gone up, our accounting systems, our accounting standards, our accounting, the hardware IT systems, all that need to get upgraded to reflect the new sites, right? So we can't be -- you tend -- whether it is monthly completion of P&L or whether it is a quarterly completion, there is a certain amount of consolidation that has to happen and that consolidation gets complicated as the scale goes up, right?
Now you can put more warm bodies into the current system and complete it or you go and revisit the system to make the processes more efficient, right? So that is really what we are trying to do now in terms of setting one by one -- we'll take probably North America as a reference, because they're the largest, and try and see if we can learn and put template processes across.
Sure. Appreciate it. The second question is, if you could just comment on the user industries in India. So specifically -- so you mentioned, textile, the honeymoon seems to be over. But if you could just comment on some of the key end users such as automotive, construction, general engineering, et cetera?
So if you look at our performance in India, it has cut across pretty much all industry verticals. Sometimes in a normal year, or any other year, in certain times of the year certain types of seasonal industries will contribute, like, for instance, the food industry sometimes in October, November, December period. But all that was not there. I mean it was growth across the board, across all industries, across all the months.
So it's -- textile I'm saying now because the cotton prices have gone -- and I'm talking textiles from the perspective of the spinning industry, not the whole value chain. Cotton prices have gone to such a level. It doesn't make sense for people to be buying yarn and converting it into fabric or anything else. Especially, when you have a large export market and many of them are contractual, it's difficult. So there is a bit of a pause. We'll have to see how they mitigate and manage this.
Sure. I appreciate. And on the automotive industry because that has been a pretty significant industry for...
So automotive -- what is surprising for us is they are not able to deliver vehicles because they don't have chips, I mean, enough semiconductor products so that they can put into their machine. But they -- a segment of them is continuing to invest. So it's not just automotive, but also automotive ancillaries. We're looking at automotive service equipment investments. So that's been strong. So we'll have to wait and see when they kind of throttle back.
And would it be fair to say this is roughly 1/3 of our end user industry?
Which? Automotive?
Automotive plus auto ancillary.
No, not at all. No.
Okay. The other part is if you could just help us on the Europe, where are we in terms of revenue size currently in terms of the cash burn that we've been doing? And how do you see the next 12 months given the uncertainties around the geography?
So I don't want to talk about the size of our revenue because that will be too competitive information, Bhavin. So as far as our projected -- what we had projected as the cash burn, we are far below that in terms of our accumulated losses are concerned. Our revenues are far higher than what we had planned.
So if you remember, we announced this plan about 3 years ago with a statement that at the end of the fifth year we will -- the losses will stop, and in the sixth year we will break even, probably have a surplus. So we are well along the way towards making that happen, right?
So as far as uncertainties of the war -- when the war started, there was a -- just like COVID. When COVID happened, there were all these doomsday predictions that this is going to go down, there's going to be a problem. Even we went into a huddle. We looked at whether it's going to be a U-shaped recovery, a V-shape recovery. We did various types of scenarios. But much to our surprise, the entire COVID impact was created by the lockdowns rather than people's behavior, right? The minute lockdowns were lifted, people went back to conducting their lives, conducting business as normal.
And the same thing we are seeing in the Ukraine war. I mean, initially, it started with a lot of concern, maybe blown out of proportion by the press. But people are going about conducting business, living their lives in Europe in spite of this crisis. It has not affected them. So after the initial kind of concern, I think it has died down.
Sure. Just last question from my side. In the U.S., North America, is it fair to say that the portable compressors which go for the construction that is a significant part of our business -- am I audible?
No, I lost you for a few seconds.
Sorry. Let me repeat the question. So for U.S. and North America, is it fair to assume that the portable compressor which go into the construction activity are a significant proportion of our business? And that -- as U.S. steps up on the infrastructure investment, this segment of the market can do exceedingly well?
It's not a significant part of our total revenue, but it's one of the businesses that has grown very strongly, yes. And you're right. With the greater emphasis of the U.S. -- I mean, the government to put money that they earlier had putting money into the hands of citizens, they're now putting money into infrastructure, will certainly help us. We'll have to wait and see, because anything that is spent on infrastructure has a trickle-down impact and it takes time.
The next question is from the line of [ Shyam Garg ] from Niveshaay.
Congratulations for a good set of numbers. Sir, my first question pertains to what is our current capacity for production of compressors? And what are our CapEx plans? And my second question is what would be the impact of inflation on our business? What can be the possible impact? And the other -- third question is, which sector is giving us the most order? And what are the current bookings we have done for the next year?
So the first question on CapEx, thank you for bringing it up. This is one of the points that I wanted to cover in my normal narration which I do. We have invested about INR 35 crores on CapEx during the year and bulk of it was -- a large portion of it is for a step-up increase in our -- some of our machining capabilities. So there is nothing like one big chunky significant thing except for this, right? So we've done that.
So to address your question about capacity, we have enough, sufficient capacity. What we do as a company, we invest 1 year ahead of our planned growth. So in our strategic business plan, we have an aspiration-driven trajectory of growth and we invest 1 year ahead. So we are quite comfortable in terms of our capacity. So there is no real constraint.
Of course, we had issues that seemed like capacity constraints when there was a sudden demand for oxygen compressors that had to be delivered yesterday, right? So at that time, you can't do any planning for those kinds of scenarios. We were able to respond to that by requesting some of our customers to defer their delivery in the larger interest of the nation, which they did. I mean, it was an outstanding gesture that we've got from many of our customers. So capacity is not an issue.
Your second question for -- I forget your second question. What was your second question?
What will be the possible impact of inflation on Elgi's business?
That's a million dollar question. We think that if inflation percolates down into commodities and into wholesale and retail price indices, then it's going to touch every aspect of our cost. So it will definitely touch us like any other company. There's nothing -- I don't think we are unique in terms of being insulated from it.
And the last question in terms of industry verticals. Like I said, there is no one industry that's dominant for us. We supply pretty much across all industry verticals.
And sir, what is the order booking for this year, FY '22 to FY '23?
So we are not an order book based company. We are more of a book-and-build company, right? So for us, order book is not a relevant measure at all, because we don't do projects.
The next question is from the line of [ Rohit ] from Samatva Investments.
I just had one question. I just wanted to know the demand for -- how is the demand been for the rotary screw compressors and the reciprocating compressors in FY '22? And what is your outlook for FY '23?
That's a tough question to answer because rotary compressor is a category. Within that, there are so many multiplicity of products. So it's difficult to say what is rotary and what is -- I mean, it's just pretty much the dominant portion of our business, right? So rotary compressors are used across the board in all industries, both lubricated, oil-free. Piston compressors are for small light-duty intermittent applications that are used by smaller industries, garages and stuff like that. So yes.
The next question is from the line of [ Ritwik ] from [ One-up ] Financial Consultants.
Congratulations on a great set of numbers for the year. Sir, just one question from my end on gross margins. Sir, a year ago, when our gross margins were 45% to 46% when commodity prices were going higher...
Sorry to interrupt, [ Mr. Ritwik ]. May I request you to speak a bit louder.
Yes. Can you hear now?
Yes. Please go ahead, sir.
Yes. So when our gross margins were 45% to 46% a year ago, at that time, our target was to reach around 48% with price hikes. So in Q4, we have reached this level. And you've mentioned in the opening remarks that we have taken another price hike in Q4, which will percolate in Q1 and Q2. So with some spike in raw materials in Q4 as well, do we -- so would it be a fair understanding that for the FY '23 year, we would be around 48% gross margins if the commodity prices don't spike now?
First of all, I don't know where you picked up this number, 48%, because I don't recollect talking about 48%. What we were trying to say is that we want to move our contribution margin at a material cost level down to what it was in '19, '20, right? That was our goal, right? And there was a gap that resulted in 2021 in relation to '19, '20. And therefore, in '21, '22, our aspiration was to move it back to that level. We did not, which we failed to do because the volatility was very high. And as much as we tried to keep increasing, we were falling behind, right?
Now would we reach '19, '20 levels in '22, '23? I hope so. But it's too early to tell. We will calibrate our position in the end of the first quarter. We will look at it. We will also know what is the extent of volatility. Volatility is anywhere like it was in '20, '21 -- I mean, '21, '22. -- I mean, sorry -- yes, '21,'22. It's a very difficult situation to manage. So we will fall behind. Yes.
The next question is from the line of Eshit Sheth from Anvil Wealth Management.
Congrats on a good set of numbers. Sir, my question was on your employee cost. What is the general level of inflation we should understand -- as you alluded in your opening remarks because of COVID, increments were rolled out -- I mean there were lesser increments rolled out. So if you look at our 2 compositions in India and abroad, like Europe and U.S. primarily, what is the kind of increment should we assume over the next 2, 3 years? Like, for example, in India, do we assume a 7%, 8% kind of increment except for headcount addition? And for Europe and U.S., would it be somewhere closer to 3%, 4%?
Again, I wish I knew what the -- how inflation converts to industry practice and market benchmarks. Today, when you look at India -- I wish it was 7% to 8%. I mean you look at every report that is coming out whether it's Hay or Mercer or Hewitt, they are looking at increases in the neighborhood of 11% to 12%, right?
So if we really want to hold on to some of our key talent, this is something that we need to be sensitive to. Obviously, this is something that we need to work hard on. We haven't finalized any of this. So it will take some time.
As far as U.S. and Europe is concerned, under normal circumstances it used to be anywhere between 1% to 2.5%. But with inflation kicking in there -- in many of these countries there are minimum situations. You have to pay a certain minimum by law. So we need to take those things into account and figure it out. It's very fluid right now. We'll have to see what happens.
Got it. Got it. And the second question that I had was on your oil-free compressors. Since the launch of the AB Series that we had 1.5 years back, how has the response been? And could you give us some sense of whether that mix has tilted in favor of oil-free compressors over the last couple of quarters or over the last 1.5 years?
So let me give you an answer from the perspective of India and then give you a sense for outside. It's not just AB. AB is one addition to our oil-free portfolio, and oil-free is our strategic segment. And we ran an -- continue to run an initiative in India, and the results have been very good in terms of gain in share of the market, right?
Now I don't want to talk about specific numbers and things, because it's too sensitive an information. What has happened with AB is that by -- AB does not compete directly with our standard oil-free mix. AB is -- has the ability to go at a much lower capacity as well as a far better life cycle cost than what is available in the market. So we have been able to gain entry into certain applications that were using earlier piston compressors of a smaller capacity. They were not using screw compressor -- oil-free screw because it was too expensive. So a lot of entry into segments that would have otherwise not been opened up. So with AB what we have basically done is expanded the size of the oil-free in India, right? So that's very positive.
Now as far as traction for AB, we are seeing some very, very strong traction for AB outside the country, too. Still early days. But we are quite positive about it.
Okay. And in terms of the mix change, you have any sense on how the mix would be in terms of -- I know oil-free is still small. But have you seen some addition to the share of oil-free as a total percentage of our overall compressor category?
Yes. By virtue of growth, oil-free is contributing a bigger percentage. But in relation to the overall size of the oil lubricated business, it's not something that moves the needle by a big amount.
Okay. And would you share a number on that?
I prefer not to.
The next question is from the line of Krishna Kumar from Lion Hill Capital Private Limited.
Congrats for a great performance yet again. So could you talk a little bit about what's happening on new business opportunities? With the railways and defense, we hear a lot of spending and the new projects there. So could you share some thoughts on next 2, 3 years' outlook on that trend, if you can?
There are 2 segments in railways. One is the intercity railway, which is run by the government, but is run by Indian Railways; and then there is the metro segment, right? Now our presence is primarily in the intercity Indian Railways. That's grown. But it's nothing significant, nothing to write home about, normal stuff. The metro -- because a lot of cities have opened up and they're wanting to implement metro, the metro growth or at least the requirements are -- look very big. But we are not homologated for metro because most of these electrical multiple units that go into metro are coming from either Europe or Korea or Japan. And the compressors are not -- our compressors are not homologated into them.
So we were -- it's an international business development initiative. Is it a strategic priority for us at the moment? No. Because it will take a lot of effort to go and get these compressors homologated. We are looking at other opportunities in the metro in India without this major business development as well.
Sir, on the defense perspective, is there anything incremental that is coming up?
Sorry?
On the defense...
Now again, we don't play in the defense. That's all.
Okay. Okay. Sir -- lastly, sir, in terms of broadening the management and succession planning from a longer term perspective, could you share some thoughts how the organization is doing that to take you over the next decade?
So we are working on certain plans. It's a little too early for me to talk about it. I'm hoping by either the end of the second quarter or the third quarter, we will be able to make more definitive statements about what we are planning to do.
And lastly, sir -- sir, in terms of acquisitions, we've done a lot and integrated many of them. But is there any incremental tuck-in acquisitions in any technology or the other rated areas that you would look at? Or is that something not on the front line?
At the moment, we don't have -- our main acquisition focus strategically is to acquire companies that give us access to customers. But our inorganic methods to access customers is the last priority. Our first priority is to work through independent distributors. If not that, we create -- we form joint ventures with people who are knowledgeable, which we have done. We have done 5 joint ventures in the U.S. If all else -- opportunities are not available and that region is a strategic region in terms of size, then we look at inorganic. And that to -- inorganic is not something that we have full control over. Whoever wants to -- whoever we want to buy should be ready to sell. So it's not a very deliberate strategy that we can work on.
The next question is from the line of Harshit Patel from Equirus Securities.
I had only one question. So sir, on the sales front in the fourth quarter, we have done sales of almost INR 7.3 billion. Now this is much, much higher than the quarterly average that we were doing in the recent times, and that too when the oxygen business was not present at all in the fourth quarter. Sir, could you explain a bit as to what drove this? And do you think whether this particular run rate is the new normal?
So the growth in our fourth quarter run rate is about -- I think it's about 20% higher than our Q3. So if you look at sequential quarter, Q4 is 20% higher than Q3. Typically, Q4 has a higher percentage run rate compared to Q3. So that some part of the increase in Q4 is that natural phenomenon that happens that everybody runs at the end to buy machines for depreciation or whatever purpose. So -- and you should not really compare with Q4 of last year, because last year was a bit of an anomaly, correct? So you look at Q3, which is more of a steady state. So compared to that, we have grown by about 20%.
Now Q4 phenomenon itself probably contributed to 10% or 15% of that normal kind of -- a whiplash from Q3 to Q4. So we have another probably 10%. I think that's a function of '21-'22, the year itself, because there was a lot of tailwind in the year.
Now is Q4 going to be a normal for a quarter in the coming year? Absolutely not. It will not be. But will Q3 be a normal? Probably. Yes?
The next question is from the line of Jeetu Panjabi from EM Capital Advisors.
I have 2 questions. One, what you're seeing from a geopolitical standpoint in terms of realignments, et cetera? Any of these have implications on the business either positively or negatively? And the second question is -- I heard you articulate a few concerns upfront why things are not -- maybe a little more difficult from a margin standpoint over the next 12 months. I wanted to understand, are there any concerns outside cost side concerns? Or is there something else that you would worry about?
To answer your first question. Geopolitical polarization, I don't think is going to affect us. The polarization with respect to India and China getting polarized is not a big impact for us because we don't do business -- we withdrew from China. So that's not an impact for us. Our sourcing from China is not significant. So that's not an impact for us.
As far as polarization between the West and Russia, again, it doesn't impact us. We don't do business in Russia nor do we import from Russia. So we are pretty insulated from those impacts. And we are leaning more towards the business in Europe and America. And there, there is no -- absolutely no -- there are no politically driven kind of fractures that could emerge between Europe and India or India and the U.S. So I don't see a problem there.
As far as challenges are concerned, our challenge is basically 2 things. One is the headwind that we should expect and the continued volatility in material costs. These are going to be the challenges that we have.
[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Globally, both Atlas Copco and Ingersoll Rand have announced exit from Russia, and Russia contributes between 2% to 4% of their global revenues. So it seems like there is a void in Russia. And do you believe this is an opportunity for a company like yours?
Bhavin, we built our global strategy 2016, where we very clearly articulated where we're going to play in terms of geographies and products, right? And we've been very deliberate about focusing our resources in that. Now distraction from this could dislocate our move in that direction, because we -- it's not like -- when you have unlimited resources or actually pretend to have unlimited resources, you can have all these adventures that look attractive in the short term. So while on paper there could be a vacuum in Russia, that is not compelling enough for us to prioritize Russia as a strategic market.
Sure. Fair enough. The second question is on the services business. So 3 questions here. One, what is the share of services as a part of -- a portion of the stand-alone business? Second, what could be our wallet share within our own installed base? And third is, many of the companies are now actually going for a lot of IoT and putting in chips in the product so that it becomes very difficult for any third party to service so that they increase their own wallet share within the installed base. So if you could just elaborate on this, please?
So if you look at our aftermarket -- it's not service. It's aftermarket. In some countries, our definition of aftermarket is only step up. In some countries, our definition of aftermarket is part and service. And in some entities, it is -- service is a big chunk of our business. So that's one kind of clarification.
As far as India is concerned, a bulk of our business is spare parts, not service. There is a certain small portion of service that we do for specialized compressors and for certain category of customers.
I would say that aftermarket as a proportion of our India business would be close to about 28%, 30%. Our share -- what is our share of the installed base of Elgi machines? That's a tough one. But I'm going to venture a guess. It's probably around 50% to 60%. There is an opportunity for us to improve that. As far as globally, our share would be -- our revenue would be -- about 15% of our total revenue would be aftermarket.
So there is -- first, you need to build an installed base and then you kind of get the parts and services revenue from it. So internationally, the goal is to create that installed base.
Sure. This is very helpful. The last question is, if you can just give us an update on the motor's CapEx? In the previous call, you had mentioned about a delay in some of the critical machines. Where are we in that journey? And how are we dealing in the interim?
So production of -- motors output is as per plan. The method of doing that production is not as per our plan, right? So if we had ordered an automatic machine, which meant that we would have had very few people operating that -- I mean producing motors. So the alternate to that, because they were delayed by the supplier and we had to invoke a bank guarantee and we had to stop that, we are employing more people to get the output up.
Now in the meantime, we have finalized the alternate vendor. So orders have gone out, and we will -- hopefully, this calendar year, we will have the machine. And hopefully, in this financial year, we would be -- would have stabilized the whole thing.
Thank you. Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments.
Thank you so much. Thank you, everyone, for your patience and your interesting questions. I hope our responses were -- sufficiently took care of your curiosity. So thank you again, Kamlesh, for organizing this. Thank you.
Thank you, sir.
Thank you. On behalf of Asian Market Securities, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.