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Elgi Equipments Ltd
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Ladies and gentlemen, good day, and welcome to Elgi Equipments Limited 4Q FY '23 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 the 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, Aman. Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 4Q FY '23 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 results, and then we shall begin the Q&A session.
Over to you, sir. Thank you.
Thank you very much, Kamlesh. I appreciate, as always, you hosting our call with the analysts and investors. And ladies and gentlemen, it's a pleasure for me to be with you, and thank you for taking the time to be with us.
I'm going to give you -- I apologize that we are having this call in a very short time after the results were uploaded. I hope you've had a chance to look at them at least briefly. I'm going to talk about the annual results in the context of the annual results of last year. We've had a good set of numbers. Revenue sales has grown by about 20%, and we've had a pretty significant growth in our EBITDA. So we've had the leverage benefits.
I would still like to talk about certain nuances that are unique to this performance. On the positive side, profitability at a contribution margin in terms of our variable cost control and price realization has been good. And that besides the 20% top line growth, that has been a very key contributor to the profitability -- the improved profitability that we've been able to present to you for the whole year. In fact, for the quarter, we've had even better percentages, so which I'm sure you've been able to -- you will -- if you have not already seen it, you will be able to see it as you step back and kind of soak into the numbers after this call.
So the contribution at material cost level has been a very positive development, and it's not something that is accidental. It's been very deliberate. And therefore, it's given us good results. On the cost side -- on the fixed cost side, we've had some increases on employee cost, which is kind of normal -- nothing that is extraordinary. A big part of it is our continued investment into Europe and adding to the team there. I will talk a little bit more about Europe in detail.
The other fixed cost besides people costs, we've had some -- a few extraordinary costs, which have actually reduced the profitability. Costs that are relating to our implementation of our ERP system, standardization of ERP across the world. As part of that, we've had a huge project that is still ongoing in North America. That's been a significant expense for us. We also participated in our -- once in 2 years, we have this big Hannover show. We participated in that this year, and that has been a cost.
And also, there has been some of the expenses that were there, that were treated differently in the past at -- where the accounting standards, they've said we need to treat it differently. That was relating to our ERP implementation cost in Europe, which we did last year, which we had capitalized and now the prudent accounting norm is to write it off in our revenue. So that's also part of it. So close to about INR 20 crores to INR 25 crores is a onetime expense that is sitting in our fixed cost, which I don't expect will be there in the future.
Now having said that, we also had a bonus kind of a bumper gain in the sale of our property in Charlotte. That post tax has given us close to about INR 7.5 crores to INR 7.8 crores -- sorry, INR 75 crores, INR 78 crores. I think it's in the published numbers, it is shown as a pretax value of about INR 105 crores. So this is a gain. So net-net, if I take the gain after tax and these expenses that are one time, the real benefit is about INR 50 crores. So that's something that we need to keep that -- keep in mind.
So if I bake all of that in, the performance in terms of profitability has been very good. So there is nothing really in terms of a reconciliation. Normally, I do the reconciliation based on increased sales and improved contribution. Our EBITDA for the full year is close to about INR 300 crores, and it should have been about INR 500 crores, if I take last year's levels of all costs. Now that INR 500 crores, the reconciliation, like I told you, is a question of certain normal increase in people cost, normal increase in some of the variable costs and these onetime costs. So there is nothing alarming about the gap. So it looks pretty good to me, and it looks pretty okay.
Now winding down to sales, let me start like I normally do with -- starting from Australia. I just want to step back and before I give -- all of our regions have grown compared to the previous year, right? So some have grown more and some have grown less. Now if I look at Australia, Australia has grown, but I think it could have done a lot better. I think there were opportunities that we missed because of certain timing issue. And there was also some slowing down in certain segments in the market. So definitely, it could have done a lot better than what it did. Southeast Asia, for sure, was a problem. They grew, yes, but nowhere near what the opportunity it represents.
Moving forward to India. India was -- to be honest, we could have done a heck of a lot better. The problem in the specific verticals in which we had growth issues. I believe we could have done better, and we are working on some plans to get ourselves reoriented and realigned to realize certain pockets of opportunities that we believe is there.
Going forward into -- moving forward into Middle East and Africa, again, growth was there, but not nearly where it's supposed to be, right? So there are things that we are working on there as well. Europe was a very good show. We had some significant growth in Europe. Definitely, we are tracking from a top line point of view, better-than-planned. So this is a good thing. North America was an outstanding performance for us, very, very strong numbers. And again, is a reflection of our growing strength in that market. ATS also grew with a strong -- growth for ATS, given the context of the -- their presence in the Indian market and the instability in the automotive industry in terms of supplies because of electronic supply chain challenges. Considering that, I think they've done very well.
So net-net, I think the performance has been quite good. As far as our net debt position is concerned, as of now, our net debt is about -- net positive of about INR 60 crores. We have cash including debt that we have taken in Europe, U.S. and Australia. U.S., not so much because bulk of the cash that came from the proceeds went towards settling the debt. There's still some debt that we cannot retire even if we want to in Australia, for instance, we are in a contractual thing there. And of course, the debt in Europe. I said we will talk a little bit more about Europe.
I would like to talk a little bit about Europe. Europe is done in terms of top line and the losses -- planned losses, they are at or better than what we had planned. This is a critical year for us in Europe. And we are all prepared. We are fully supported. We are looking -- as a team, we are watching closely in terms of how we are performing there. So as of now, everything looks quite okay and positive. So that's the net debt position. The overall split of our business between international, rest of the world and India is roughly 40-60, India being 40% and India and the rest of the world being 60%, that continues even this year.
So that is a summary of the holding. In terms of our CapEx spend, we planned a significant amount. We planned close to plus about INR 100 plus crores, but we have actually spent only about INR 55 crores, which is part of the budget for this year plus the carryover from last year. And I think even this year, we will probably continue down a similar kind of thing, even though the aspiration is to spend a lot more, I believe that we would be roughly in that area.
The project for our new campus is something that I would like to talk about later on in one of our future calls when things have been crystallized. So that is -- there is no specific number yet. We will talk about it when that is done.
As far as the first quarter of this year in terms of our expectations, we need to be prepared for some disappointment, not because of a business problem, it's more of an execution issue because the implementation of ERP in the U.S. is highly -- is a big challenge because it's a complex set of businesses that we are implementing in. And things are improving. But I want to be very cautious on the -- rather than project, a very optimistic number.
So we'll definitely be better than last year, but there could be some slippages that could be in the neighborhood of 5% to 8% compared to Q4 of this last year -- compared to Q4, the first quarter may have it. We would have ideally liked it to be about 2%, 3% lower, but probably it will be about 7%, 8% low. So this is what I think will be the first quarter of this year. So -- but overall, we are tracking to high double-digit growth in our business at the top line across the world. So that -- and we hope to continue to -- at the worst case, I think we will continue to hold the profitability that we have been able to achieve in Q4, right? So which means combined with a mid-double-digit growth with the Q4 level of profitability, I think we will be able to return some good numbers. So this is our expectation.
As far as India is concerned, like I said, the opportunities are big. We need to regroup, reorient and realign ourselves to the market, which is what we are going to do. We are going to be looking at bringing in outside assistance to help us with the with some reorientation. So that is something that will happen this year. So that could be some onetime expenses that could come into the company. We are also looking at building certain strategic roles filling up certain strategic roles, that could be some costs. But these are all nothing to be concerned about. Something that we are going to do. It's good for the long-term talent, succession planning, all that it's going to be something that we'll be doing.
So I will stop here, and I will wait for you to -- wait to respond to your questions as a better form of clarity. So thank you.
[Operator Instructions] The first question is from the line of Ravi Swaminathan from Spark Capital.
Congrats on a very good set of numbers.
Thank you, Ravi.
Sir, my first question is with respect to...
May I request you to use the handset, sir.
Hello? Am I audible?
Yes. Ravi, you are very distorted and it's all over the place.
Can you use the handset mode, please, Ravi.
Hello, is it better now?
Yes.
Sir, my first question is with respect to the stand-alone business where the revenue has been largely flattish year-on-year during the quarter. Any reason why it has been kind of on the flattish side, while we have delivered good growth at the sub level, stand-alone has been flattish. Is India seeing some kind of plateauing out in terms of growth?
No. I think what happened was when you look at last year's stand-alone, there was quite a bit of stock building that happened. And as a consequence, there was quite a bit of sales made to subsidiaries that boosted up last year's sales. And this year, we have really managed the business for cash, especially in the last couple of quarters. So we significantly throttled back on supplies to subsidiaries, and that's why you see a flattish stand-alone.
Okay. And last year -- last quarter, was there any oxygen concentrator repairs or it was hardly?
Almost nothing.
Almost nothing. Okay. Okay. And if you'll give a sense on how the India market is -- how it is panning out in terms of demand across key categories, industry, infra, water well, [indiscernible]?
Well, I think overall, the economy is on a positive note. Inquiries are still strong. We need to -- there are segments that for instance, Textiles is quite weak by virtue of the cotton-to-yarn parity, but things are improving there as well. So there are -- except for a few sectors like this that are challenged by virtue of very external factors, all the other segments are quite buoyant.
The large projects stuff is still kind of not moving ahead in any significant way. But I think it's going to come, it's going to come. As far as water well is concerned, it is still kind of very decile. I mean we don't see any uptick. We don't -- we are not planning for any uptick. So -- but we are prepaid. I mean, we -- our product has been a great success in the market and once the market picks up, we are quite confident that we will get to that.
So the infrastructure segments are also investing, whether it's construction and mining, there is investment going on, industrial is also. So it's a question of reorienting ourselves, getting a lot more present in certain segments that we are not in, geographical segments that we are not in, customer segments that we are not in. So there's nothing like earth shattering, but just doing the basics in a very good way.
Got it. So is it safe to assume that the compressor industry in India over the next 12 months can grow at a double-digit pace. And we can also grow on par with the industry or probably even higher than that due to certain 1, 2, 3 reasons?
Well, if I had a crystal ball that I could look into and read tea leaves, Ravi, then I'll tell you what India is going to look like. But my traditional view of India is, sometimes it's like a mirage. You don't know. It seems to be there but then suddenly it disappears. So I don't like to make any comments about India in terms of what it can. But what I can say is what we are doing is building our capability internally that in the market, we will get stronger, right?
[Operator Instructions] The next question is from the line of [ Sriram ] as an investor.
For the Compressor segment for FY '23, what would be your non-auto revenue, sir?
Sorry?
For the Compressor segment, what would be your non-auto contribution, non-auto segment of the company?
I don't like to talk about specific segment-wise sales of Compressors. That's too comparative information.
The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.
Congratulations for great set of numbers.
Thank you, Bhavin.
Sir. Jai, really positively surprised by the margins that you have delivered, 21% on the stand-alone EBITDA line. Would you believe that we are now in a position to sustain such level of margins because the other 2 competitors are also from the top level, rather being NLC. I think margin is the first thing that comes in the discussion in their board room? So do you believe now that there is a trajectory shift on the margins for yourselves as well as the industry?
I don't know about the industry, Bhavin. I think for us, the last 1.5 to 2 years was a -- the cost -- the commodity price challenge that was placed on the table got converted into a price discovery process, right? Now we had to discover a price which is sustainable for us, for the -- from the cost that we were facing. So we took certain risks, and we said we have to do it because the commodity price had gone up, freight costs had gone up. So we had to discover these prices. And fortunately, I wouldn't say this is accidental -- there were latent opportunities of prices for Elgi that we were not extracting is point number one.
Point number two, I think price levels in the market went up because commodity prices went up across the board. So if you look at our competitors' global performance numbers, and margins have also increased quite handsomely, especially Ingersoll Rand. If you look at their margins, they've done exceedingly well. Now that doesn't come purely by -- just by the leverage, operational level. Sure, they have also grown quite significantly. There's no doubt. I think managing margins at the unit level.
Sure. The second question, if you could talk about the capacity utilization in general and what's the kind of expansion that we are planning in and at the end, also if you could just stress upon what's the kind of aftermarket as a percentage of the stand-alone and the growth that you would have seen in the last year?
So as far as capacity utilization, it's a -- in our business is very hard to tell because the same capacity is used for multiple products, the manufacturing. But from a planning point of view, we have -- this is not like a process industry where you have linear expansion. There's a step-wise expansion and capacity. So we've been making these stepwise investments in our manufacturing capacity. So we are still ahead of the curve as far as our -- not only us, but also our supplier's ability to deliver whatever growth that we have planned. So I don't see that as a challenge at all.
As far as aftermarket is concerned, yes, India continues to do well. As far as percentage is concerned, I don't have the number in front of me. It's probably around 26%, 27% of our revenue. And aftermarket is also -- will grow in the other markets because that's the whole underlying logic of this business. You get your machines installed and then you derive your profit from supporting the customer and aftermarket is the opportunity. We're on track for that. I think the margin improvement is a combination of one, pricing, which we have done to reflect -- to reflect the costs; two, our own internal cost reduction project that we had initiated 1.5 years, 2 years ago.
And in the year '22, '23, I would say about 40% of it kicked in, in that year. So this coming year, we will have 100% of it kicking in because the projects are all done, right? So I think, this is not an accident. I mean this is not some kind of a fluke or a specific product mix or something like that. So this is a sustained thing.
The next question is from the line of [ Manish Goel from Thinqwise Wealth Managers ].
Yes, very good evening and congratulations again for surprising us as such. Sir, I have just like a bit surprised with your commentary on Indian market that probably you could have done better? And you mentioned that we need to realign with the market. So is it to do with the product offering or your inability to meet the growing demand? Or if you can a bit elaborate and probably what actions are you looking to take forward?
So when Europe and America growing at 30%, 40%, you get a little angry that India is not growing at 30%, 40%. When the whole world is talking about India is the next big thing, right? So you look at your own internal thing and you need to be rightfully unhappy with what you're performing to. Now it's not because of product offering. If the product offering was a constraint, then we would have problems in -- bigger problems in Europe and the U.S. So product is not the issue. The point here is, there is an opportunity.
We need to go after the opportunity a little bit more deeper and a little bit more intense, right? So this is really what I'm talking about. So when you go to a large market like Europe or America, then you throw the net into the water and as long as you have a good product, you get a lot of fish. But in a market like India, you need to go once you've already got a certain large share of the market, you -- in order for you to aspire to grow the same percentage as you're growing in Europe, which I think is possible, then you need to be at a different level of your strategy, not your current strategy. That's what I meant.
Okay. Okay. And also on, say CapEx plan, like if we look to grow strongly and particularly with our overseas market also growing very strongly. So to lead the demand, do you think you will probably need to kind of have a significant increase in capacity, number one? And number two, apart from having sales through subsidiary, are you also probably seeing a traction on direct exports from India with the China Plus One or Europe Plus One strategy, how is it like. And how are we playing this?
Like I said, our capacity today, if I have to grow 30%, I don't need anything significant, right? Our entire investment, if we are talking about investing INR 50 crores, INR 60 crores a year in machinery, that will more than adequately take care of the growth in that percentage. But if you want to double and triple our revenue, then we are talking about creating fundamental infrastructure like space. which is what we will do as part of our larger plan -- project plan, which I will talk about sometime in the future when it is ready, right? So I don't see any huge cash demand to sustain the kind of trajectory that we want to do at the current trajectory that we are talking about.
As far as -- we are not a China Plus One participant because we are not supplying to anyone, right? We don't want to supply compressors to some other brands. So the China Plus One strategy is more about sourcing. We are not a source for anyone. We are the final product, right? So the opportunity of China Plus One thinking for our product in Europe or America or for that matter, anywhere does not exist because the Chinese players are not significant players in these markets, right? The large share -- the large players in all these markets are well established, strong, multinational companies, right, or local European or American companies. So we -- so that is -- so our distributor is not looking for a China Plus One option and therefore picking up product. We are looking to say, can we be an option for the established players, not for some low-cost players from another country.
[Operator Instructions] The next question is from the line of Raju from [ Maxi & Company ].
Sir, my question is that we have a strong engineering pedigree and do you intend to leverage in the field of defense manufacturing?
No. No, we live, breathe and eat compressors, nothing else.
Raju, is your question answered?
Hello?
Yes. Sir, is the question answered for Raju?
Yes.
The next question is from the line of [ Govind Raj ] as an individual investor.
Congrats for a good set of numbers. Sir, the company what we are supplying, where we are fitting our own motors to the compressors or it is outsourced, sir?
Sorry, you have to speak a little slowly because I couldn't understand what your question was.
Sir, the motors for those compressors. Never all the compressors supplied by us are fitted with our own manufactured motors or it is outsourced one?
The motor -- motors that we fit like if you remember in my earlier calls, our range of production of, at the moment, only up to 45-kilowatt right? So all compressors up to 45 kilowatts go predominantly with our motors because some of the motors required for 60 cycles are in the process of being implemented. So India, up to 45 kilowatts is with our motors. Europe, most of it is beginning to become our motors. America will -- maybe this year will become our motors, but that's only up to 45-kilowatt. And I don't want to give you the share of how much is 45 kilowatts and below because that will be too competitive in information. So up to 45 kilowatts, a large percentage is our motors.
And when we can expect that all the compressors will be fitted by our own motor, sir? Any time line, sir? What we are expecting?
Like I said, this year, most of compressors up to 45-kilowatt will be with be -- with our motors, our compressors of 45-kilowatt. Now we don't have specific plans beyond 45-kilowatt yet. So -- and I don't want to share the numbers of what we do beyond 45. So I can't really answer the question when we will have 100% up because we don't have specific plans yet.
And one more thing, sir. You have informed in the opening speech that INR 25 crores was the onetime expenses incurred for the ERP, whether all those INR 25 crores have been incurred during the Q4 or it was done in earlier part of -- earlier 3 quarters also, sir?
A large part of it came in Q4, but it was not exclusively.
Okay. If you had explained that our bottom line would be up by how many crores, sir?
Which -- annual bottom line?
Yes, sir.
Yes. Annual profit would have been higher by that amount.
Around INR 25 crores, right?
Sorry?
Around INR 25 crores, sir?
INR 23 crores.
The next question is from the line of Vinodhsastri from Instanomic Ventures.
Congratulations on the good set of numbers. Actually, most of the questions are answered. I have 2, 3 small questions. There is a news on this European expansion for EUR 20 million going forward. Is that -- it is already done or it is going to take place in the coming years?
The EUR 20 million was an investment thing that we said 4 years ago, and we said that will be the loss that we will incur as part of our European strategy. And because of COVID, we got shifted by a year. So this is the year in which we will start showing some positive strong results from Europe but still, it will be a loss, and we will break even next year.
But just during the Hannover, the news was that Elgi is planning to invest EUR 20 million. That's why this question has come sir. So the next question would be on the railway order book. Are we seeing any significant improvement in the railway order book, sir?
No, railway continues to be as it is. There's nothing significant.
Okay, sir. And the third question would be, is there further -- even for this year, we have some asset monetization going in the pace of what it was during the last financial year?
Sorry, what was it? Asset?
Asset monetization sir, for the selling up of non-core assets.
Yes, most of it has been done. So there may be some residual stuff but nothing significant.
Okay. Then the last part would be last time during the con call, we asked for a PPT and you told you will be providing it, will we be getting that, sir? PowerPoint presentation?
So we'll work on it. We haven't done it for this year. This thing, we will definitely do it for the next one. I apologize.
[Operator Instructions] The next question is from the line of Manish Goel from Thinqwise Wealth Managers.
Yes. Sir, when you mentioned about the coming quarter of some weaknesses were you primarily referring to the only North European -- American market or it was for overall India and overseas?
No, no, no. Only North America, only America because we -- I'm only giving you a cautious thing because the ERP is going on. Business inflow continues to be as strong. It is only our ability to execute because the system is kind of clawing its way to the surface, right? So it could happen. It may not -- nothing may happen or something may happen. I'm just giving you that caution, yes.
Okay. And as far as overseas sales are concerned, so most of the compressors, which are sold would be sourced from India and assembled over there and sold? Or how is it, sir?
No. All the compressors are made here at the moment, 100%.
Okay. Okay. Except maybe some bit of it in Rotair facility?
Those are one segment of portable machines that go into a different segment that is made there where it is that emission norms are higher, and we don't -- engines made in India don't comply with those emissions. So it's better to buy it there in Europe where they make those engines.
Yes. And sir, so when we see 20% growth on a consolidated basis in top line for FY '23, how much would it be, say, price realization increase driven and how much would be, say, volume driven, sir broadly?
So our volume is at about 5%, 6%, right?
Okay.
And exchange rate was about 4%, 5%. So -- and the price is another, I guess 7%, 8%.
Okay. And we are able to basically retain our prices and probably not looking to kind of reduce in terms of its fall in commodity prices?
Commodity -- I mean, if you just look around you, there's data and then there is reality, right? Now the data, everyone says, commodity prices have come down. But the reality is the other prices are going up. You look at travel. I mean, it's crazy. I mean 30%, 40% increase in travel cost, right? You look at hotel prices, ridiculously high. .
So when all that is there, the cost of doing business may -- yes, your steel prices may have come back to what they were before that huge escalation that happened just after COVID, right? But that's only half the story, right? The cost, the rest of the costs are high, and they all get baked in somehow into your entire value -- into your supply chain, right, not only your supply chain, but also going forward in the conduct of your business, right? So there is really no opportunity to -- for you to go and look at reducing your prices because that would be suicidal to do that, yes.
The next question is a follow-up question from the line of Vinodhsastri from Instanomic Ventures.
During the last quarter, the outlook, what it was given is even if there is a strong headwinds during the FY '24, the company will be able to manage its top line and bottom line. That is what was the market outlook during the Q3 of FY '23. But this time, it is being a little bit cautious. It is just because of the America or it is a very broad-based approach, sir?
Vinodh, I'm giving you a caution only for Q1 and that too because of ERP implementation. I told you that business fundamentals continue to remain strong even in America, right? The order inflow, the order book, everything remains strong. What I will be presenting to you end of Q1 is not the order book, but the invoicing, right? So the invoicing could be a challenge because of ERP. That's the caution I'm putting on the table, right?
Because last time, it was more optimistic, but this time, it is less optimistic when it comes to the market outlook. That is where we just thought we will get some more clarity from you.
It's how you read what I'm saying. I'm saying we're going to grow high double digits. We're going to have good strong margin. Now I don't know what's pessimistic about what I'm saying.
No, no, sir, I did not tell do pessimist, less optimistic, sir.
Okay. Less optimistic means more pessimistic than before, right? It's all semantics. The question really is, I'm saying we're going to have a great year. The first quarter is going to be -- could potentially be a challenge of booking revenues and not business, right? Now you've got to interpret that the right way. I'm not saying that it's less or more pessimism here, right.
The next question is from the line of Govind Raj as an individual investor.
Sir, with regard to the Automotive segment, we are growing about 5% to 6%. Whether that will be normal growth? Or can we see any improvement in the first quarter?
Where did you get that we are growing 5% to 6%?
I mean year-on-year on sales front.
Where did you get that data?
In the segment-based result, sir.
Segment-wise results, we have not -- for the quarter you're talking about, right?
Yes, sir. Yes, sir,. Yes, sir.
For the quarter, we have grown, but the question is it's only 1 quarter. You have to look at the annual growth.
[Operator Instructions] Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference back to the management for any closing remarks. Thank you, and over to you, sir.
Thank you so much for -- thank you, everyone, for taking the time off. I really appreciate your involvement, engagement as always. So I think just to -- if there is any lingering doubts about pessimism and optimism, I want to make sure that I stated very clearly. Business looks good, but there could be some transactional challenges of a short-term nature in Q1. And that's the only thing that I wanted to say. I don't want to say anything. I don't want anybody to extend it beyond that. So that's really what I wanted to convey.
So again, thank you, and I look forward to our call after we complete our first quarter. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Asian Market Securities Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.