Elecon Engineering Company Limited (505700) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Elecon Engineering Limited Conference Call hosted by Emkay Global Financial Services Limited. [Operator Instructions] I now hand the conference over to Mr. Abhishek Taparia, Emkay Global Financial Services Limited. Thank you, and over to you.

Good afternoon, everyone. I would like to welcome the management and thank them for this opportunity. We have with us today Mr. Chintan Shah, CFO; Mr. Dipak Dalwadi, Head of Gear Division; and Mr. Kaushik Patel, Head of Material Handling Equipment Division. I shall now hand over the call to the management for the opening remarks. Over to you, gentlemen.

Thank you, Abhishek. Good evening, and a very warm welcome to Elecon Engineering's Q1 FY '27 Earnings Conference Call. Joining with me today are Mr. Dipak Dalwadi, Head of Business Gear Division; and Mr. Kaushik Patel, Head of Business for MHE Divisions. Our earnings press release and investor presentation have been submitted to the stock exchanges and are also available on our website. We will start by sharing an overview of our business. This will be followed by a detailed review of our financial performance. After which, we will be happy to take your questions. Elecon Engineering today stands among Asia's leading manufacturers of industrial gear solutions and material handling equipment. It is built on decades of engineering excellence deep domain expertise and trusted customer relationships. In our Gear division, Elecon continues to maintain a leadership position in India's organized industrial gear market, offering one of the industry's broadest product portfolios across sectors, such as steel, cement, power and marine. Our Material Handling Equipment division is backed by over 75 years of experience. The division possesses the capability to design and manufacture large, complex and high capacity equipment such as stacker reclaimers, crushers and specialized convey systems. Our key differentiator is fully integrated manufacturing model, where every critical process from growing to design to manufacturing to testing to quality control is carried out under one single roof. Today, Elecon serves customers across more than 95 countries through domestic operations and overseas subsidies. It provides us with a diversified growth platform. With that, I would like to hand over the call to Mr. Dipak Dalwadi and then to Mr. Kaushik Patel to discuss the performance of the Gear and MHE dividend respectively.

Thank you, Chintan, the Gear division, which contributed nearly 80% of our consolidated revenue to INR 416 cars during the quarter, delivered a strong performance with revenue growing by 16.3% year-on-year. The growth was underpinned by steady execution of our order book and supported by gradual improvement in the international market. The international market has accounted for nearly 36% of our consolidated Gear division revenue, showing a robust growth of 7.6% Y-o-Y. Similarly, the growth momentum can also be seen in our order inflows and our open order book. The consolidated order intake increased 18.8% year-on-year to 57 years during the quarter. Moving on to our open order book, which currently stands at INR 1,043 is up 46.9% year-on-year, providing strong revenue visibility and giving us confidence in our growth trajectory over the coming quarters. This demand shown in across key user industries. However, the major key contributors were from power, steel, cement and energy. Specifically, the power sector has contributed approximately 27% of revenue in the form of a lab single order which was mentioned during our Q4 FY '26 con call. As we look ahead, the business environment continues to remain encouraging. Inquiry activity has been healthy and order inflows are showing steady improvement across both domestic and international markets. Demand across our key user industries continues to strengthen, providing greater visibility for rest of the financial year. We remain confident in Gear Division's ability to build on this momentum and deliver sustainable growth going forward. With that, I would like to hand over the call to Mr. Kaushik Patel, Head of our Material Handling Equipment division, who will take you through the performance of the MHE business. Thank you.

Thank you, Dipak D. The MHE Division reported a marginal decline in revenue during the quarter, with revenue moderating by 2.9% year-on-year. This was primarily on account of project execution delays. Nevertheless, the underlying business momentum remain encouraging. Our healthy order book and improving order inflow provides a strong visibility for the quarter. During the quarter, order intake witnessed a significant growth of 38.1% year-on-year, reaching INR 185 crores. The order intake was primarily driven by the strong demand from power remain followed by or reflecting the continued investment momentum in these key end user industries. Our open order book stood at INR 475 crores as of June 31, 2026, reflecting a 18.8% increase compared to the corresponding period last year. These indicators reinforce competence in the reason growth trajectory and project execution data space. We continue to see encouraging inquiry activity across the creek key sectors, which provides confidence in the medium- to long-term outlook for the division. We are pleased to say that the MHE division has secured overseas orders worth approximately INR 21 crores in port industry, reflecting the growing acceptance of our capabilities in international market. With that, I would now like to hand the call back to Mr. Chintan Shah, who will take you through Elecon's financial performance in greater detail. Thank you.

Thank you, Kaushik bhai. I will now briefly review our consolidated financial performance for the quarter. Before I begin, I would like to highlight that all year-on-year growth compares are based on Q1 FY '26 adjusted performance. The Q1 FY '26 numbers have been adjusted to exclude the impact of INR 25 crores towards arbitration award, the additional INR 10 crores towards arbitral claim settlement, both recorded under other income and also excludes the [indiscernible] of INR 30 crores arising from the realized mark-to-market gain on the reclassification of [indiscernible] which was recorded below PBT as exceptional income. All these 3 income of INR 25 crores, INR 10 crores and INR 80 crores, respectively, are pretax numbers that we have excluded. For the quarter ended June 2026, Elecon reported consolidated revenue from operation of INR 21 crores. This represents a healthy year-on-year growth of 11.9% over adjusted revenue of INR 465 crores in FY '26. This commence was primarily driven by the Gear division, which returned to a stronger growth trajectory during the quarter. During the quarter, our revenue mix witnessed a shift. Our overseas business contributed INR 151 crores, which was approximately 29% of consolidated revenue. It reflects the improving momentum across our international markets, while the domain business environment remained relatively muted. Despite a spike input cost due to geopolitical tensions, our consolidated EBITDA remained resilient and grew by 3.9% year-on-year to INR 109 crores. EBITDA margins remained stable and sustainable at 21%, reflecting the strength of our business model, disciplined cost management and continued focus on the operational efficiency. Profit after tax stood at INR 70 crores, with a margin of 13.5%, registering a growth of 2.3% year-on-year. Our consolidated order intake increased by 23% year-on-year to INR 755 crores from INR 614 crores in the corresponding quarter of the previous year. Our consolidated open order book also strengthened significantly, rising 36.8% year-on-year to INR 1,518 crores, providing a healthy revenue stability for the quarters ahead. Now moving on to the divisional performance. I will begin with our Gear division. In Gear dividend, we delivered a stronger quarter with revenue increasing to INR 416 crores, up by 16.3% year-on-year. This reflects healthy execution and sustained demand across all our key markets. EBIT grew by 14.7% year-on-year to INR 75 crores despite higher input costs during the quarter. We maintained a resilient EBIT margin of 17.9% through disciplined cost management and operational efficiencies. Moving now to MHE division. MHE division reported revenue of INR 105 crores during the quarter compared to adjusted revenue of INR 108 crores growth in Q1 FY '26. This represented a marginal decline of 2.9% year-on-year. As highlighted earlier, the moderation in the revenue was primarily due to temporary delays in the project execution. EBIT for the quarter stood at INR 27 crores, declining by 25.3% year-on-year. This was largely due to sales mix during the quarter, coupled with the increase in the input cost and delayed execution of few critical orders. The underlying fundamentals of the division remains strong, and we are confident of the MHE business regaining the momentum in the coming quarters. The strength of our order pipeline, the healthy order intake and robust inquiry levels provide us with a strong visibility and confidence for the quarters ahead. Moving on to our overseas business. We delivered a strong performance during the quarter. This was supported by improving market conditions and gradual easing of geopolitical tensions. Overseas revenue increased to INR 151 crores from INR 124 crores in the corresponding quarter of the previous year. This registered a year-on-year growth of 21.9%. The momentum was equally encouraging on the order front. Overseas, order intake grew by 63% year-on-year to INR 194 crores with INR 21 crores contributed by the Energy division. Our overseas open order book is now strengthened significantly. It has increased by 73% year-on-year and it has reached INR 256 crores as of June 30, 2026. This provides healthy visibility for the future growth in this market. Moving on to balance sheet and capital allocation. We continue to maintain a strong balance sheet with a net cash position of approximately INR 700 crores. We also remain committed to our previously announced capital expenditure program of approximately INR 400 crores over FY '26 to FY '28. The CapEx program remains on track. As we progress through FY '27 and complete our first quarter, it is a time for us to provide full year guidance. Given the ongoing macroeconomic uncertainty and limited near-term feasibility, we are targeting to have a low double-digit consolidated revenue growth while maintaining the EBITDA margin as we had it in the last year. This is supported by healthy order book strong inquiry pipeline and disciplined execution. We remain confident in our long-term growth prospects. With that, I would now like to open the floor to further questions.

[Operator Instructions] The first question comes from the line of [indiscernible].

So my question is that our MHE division margins fell this quarter. So I wanted to understand how much of that is from product mix change and how much is from the higher costs? My second question is that 29% of our revenue is coming from international markets. So I wanted to understand, does this business carry higher margins for side than the domestic business?

Yes. So coming back to the margin decline, there are 3 factors which have contributed to margin decline when it comes to MHE business. One is the shift in the sales mix. Second is the input cost increase and this overall revenue degrowth. Our data suggests that it's almost 2.5% to 3% margin decline is because of the input cost increase, almost 3% margin decline we see is because of the change in the sales mix. And rest to 3%, we see the balances declined because of the lower thought good volume for the quarter for the MHE division. Coming back to the export market. We do have slightly higher margins on the products that we supply to the exports market. And we continue to see that margin profile for the coming quarter also.

Sir, what should be the sustainable margins for MHE division going forward?

We are seeing a 22% to 24% EBITDA margin for MHE business for the year as a sustainable margin.

Just one more last question. So I see that we have a few patents that we have planned for. So just wanted to know what are the commercial prospects for the same.

We have these patents, which are applied for, but we would not like to openly discuss the kind of markets that we are targeting and the segments we are targeting as of now. So we remain silent on that.

The next question comes from the line of [indiscernible].

So on the international revenue side, [indiscernible] this quarter. Could you please talk about which are the geographies mutually contributed for this growth? Also, you can talk about the Middle East impact on the international revenue side, is there any specific end markets within Middle East regions, like oil and gas and Infra driving this weakness? And we felt we can expect a recovery in the Middle East side.

Right. So bulk of the growth that we see right now in this quarter has come from Middle East as well as U.S. And both this growth we have because some of the orders which were onboard in Q4 last year, because of the improvement in the macroeconomic conditions, the hold has eased out. And so we have started doing the dispatch. This is number one. Number two, if we look at the open order book as well as the nature of and the quantum of the inquiries. We also see that both these regions witnessed a stronger traction. What was your next question?

[indiscernible] in Middle East like which are the specific [indiscernible] and gas infrastructure. So these are things we are seeing weakness and [indiscernible]

Mainly it's cement and mining and minerals.

[indiscernible]

We are unable to hear you. Could you please come closer to the mic?

[indiscernible]

We can't hear you properly. Can you come to the mic and repeat your question please?

[indiscernible]

We can't hear you clearly. Could you please come to a better network area?

Sir, I think some network issues, I'll come back.

You can continue now, your voice is clear.

Yes. So [indiscernible] related to 2010,'11 [indiscernible] that balance sheet is around INR 102 crores in FY '25, it's reduced to [indiscernible]. Also, tax deduction of GBP 1 million remains over 4 years in the U.K. [indiscernible] . So I'm trying to understand like does this goodwill impairment have any cash tax impact or it was purely a noncash accounting charge whether we can expect any future tax benefits from this down? And is there any changes in our future acquisition strategy?

So I will break your question into 2 parts. One is a tax impact on the goodwill and secondly, on the acquisition strategy. In the year ending on 31st March 2026, we did impairment of goodwill but we did the impairment in the consolidated financial statement. The goodwill, which was recorded as an asset in the local books of accounts in European entities. There is a tax reduction, which is available, and we have been claiming on a yearly basis by way of amortization. So the accounting impact of the impairment of goodwill is purely a non-tax there is no tax impact of this impairment of goodwill. There is a marginal amount of goodwill, which is now left as a book value in a European entity that we have it, and we will continue to advertise over the balance year which are like 3 to 4 years now. Coming back to the acquisition opportunities, we are not actively looking for any acquisition opportunity in European region, especially where the opportunity demand significant investment in a manufacturing setup. So this is what all we can communicate right now.

Okay, sir. Sir, the thirdly, small questions. On the defense side, if you are taking orders, it would take execution of at least 2 to 3 years, while other sectors, it may be less than a year. So I'm trying to understand what is the working capital cycle difference between defense and other sectors? Is there any upfront investment required different side?

Yes. So we have done the investments over the last 3 to 4 years where we have kind of created dedicated, not just the manufacturing setup, but also the business and operating vertical for the defense. In terms of working capital cycle, literally, if we have execution time line over 2 to 3 years, the working capital for that particular business will have a higher number of base. But that being said, what we are communicating is that the total order that if at all we receive, we will execute over 2 to 3 years. So within those 2 to 3 years' time, we can always plan our manufacturing in line with the dispatch schedule and try and see how we can keep our working capital at the minimum level. So in the past also, we had similar execution of the orders where working capital was increased by 15% to 20% compared to overall Tier division that we had it. So this is how we see it right now. But at the same time, with the margins slightly higher in those kind of orders, we'll be able to absorb the cost of the working capital interest for that particular business.

The next question comes from the line of Raj Shah with Enam AMC.

So my first question was regarding the margins. As you mentioned that in MHE, there have been 2, 3 reasons why margins have declined. But on confirm level also, if we see the -- there has been a decline in gross margins. So if you can explain in between years why there was no margin growth despite having a revenue growth?

Yes. So within years, the margin growth has not happened because whatever growth that we could see that has been dragged by raw material price increase at the [indiscernible] business also. And that is the reason it has slightly lower margin or maybe I would say it's the same margin percentage in the year compared to last corresponding quarter. At the same time, what we see is that in a tier business, for the full year last year, we did an EBIT margin of about 18.8%. Right now, we are at 17.9% EBIT margin. So we are hopeful that we'll be able to regain the margin loss that we had, we are seeing it right now. Similarly, for MHE, if you look at, if we compare for the last corresponding quarter, then just there is a margin decline. But we also had published over the last year, the results on MHE division and category [indiscernible] Q1 was a quarter with the exceptional margin because of the couple of orders that we had. So if you look at MHE dividend for the full year FY '26, we had EBIT margin of 24.7%. So against that, we are at EBIT margin of 25.6%. So which is broadly in line with what we were expecting for this quarter and this year going forward. I hope this answers your question.

Got it. Got it. Secondly, on the revenue growth, I was not able to understand if our order book is up by 37%, our order inflows are up by 23%. I think we are running on record order books now. Then why are we guiding only for low double-digit revenue growth?

I'll tell you what happens is this -- this quarter, Q1 and again, the way we see Q2, we see the quarter with high input cost. And we are not talking about a minor increase. We are talking about a significant increase in the raw material price. So with this kind of increase in the price, the time taken for converting the inquiries in the order has significantly increased. And that is even if we had a good order book in Q1 we ended up with a very high order book, and we could not convert the order book into the revenue. So this is number one. Secondly, in the Q2 also, we are seeing that we will pick up -- the market will pick up, but it will still gradually pick up. So we are expecting Q2 also with the improvement, but not that stiff percentage improvement. So Q3 and Q4 is what we are expecting to improve significantly when it comes to market acceptance of the stabilized prices.

Okay. And [indiscernible] mentioned that there is some -- even in the press release that there is some execution-related temporary moderation that you are seeing. So can you go a little specific which kind of orders -- is there any large orders where you are seeing some kind of delays and by when do you see the pace increasing to the normal?

In MHE, yes, there are, I think, 2 big orders we have. In fact, in MHE, let me give you [indiscernible]. All the products are customer and the major business, we are getting it from power sector. In fact, what 2 orders, I'm talking about, those are related to power sector. So normally, design engineering, taking much time. In fact, in this particular case, in fact, we were expecting to get our design engineering clearance, I think, in the beginning of quarter in month of April [indiscernible] we could not get [indiscernible]. So design engineering taking much time for end customers. And we are not directly reliant with the end user. It is through their main contractor who are taking complete EPC. So there are [indiscernible] that is the reason it is taking time. But of course, over the period, I think, in quarter 2, yes, we will see some progress on it, and we will get the good amount of revenue from those.

Okay. Got it. Lastly, for this gears, can you give us a breakup of catalog and engineered products?

So for the quarter, catalog product, given the revenue mix [indiscernible] and for the engineered product, it is 46%.

The next question comes from the line of Abhijit Singh with Systematic.

Sir, [indiscernible] could you give us the state of the geographies in terms of the export revenues for the full year?

The full year means you are seeing a guidance to be broken into respective geographies?

No, sir, this year, FY '26 export revenue to be [indiscernible]

Okay. FY '26, we've broken down into geography. Okay. So almost INR 66 crores we had it from Middle East. Almost INR 102 crores. We had it from [indiscernible] USA. UK contributed again INR 102 crores. We call it Baslers Europe Group, where we had INR 171 crores and Singapore about INR 22 crores.

All right. Sir, and in terms of the commodity price impact on our margins. So have you taken any price hikes in any of the segments?

Yes. So the -- most of the orders that we have accepted in Q1, these are in the price increase. And the moment we have the orders acceptance, we have a back-to-back strategic tie-ups with all our key raw material suppliers where we lock the raw material prices.

Right. I'm just trying to understand why in the MHE division, we have seen a larger impact compared to the year division. What are the dynamics that payout that bring out [indiscernible]

So Abhijit, as just discussed, right, it's purely an engineering business. There is no EPNCP. In Gear, we have a EPs more than 50% -- close to 50% -- 54% comes from [indiscernible] project. And in catalog products, we have a price risk, which is reflected on every 1 month basis, right? So imagine a business where 55% of the revenue comes where the prices are always almost the latest prices. And that's how you have 50%, 60% of the impact is diluted. The second is the IT business where we have also had the raw material price locking, which we had done it, right? So that's how the impact in the EP business also reduced when it comes to MHE, what happens is that it is a business which involves a lot of customization, and it includes working at a project level. So when we are talking about the conveyor bill system, the vacant triple, the crushers and everything, it is installed in an integrated way at the particular client's location, right? So there, even if we try to lock the raw materials, there are also other components than the raw material which includes our delivery cost, which is like fuel costs, packing material costs, so on and so forth. So these are the reasons where we are seeing that the price increase impact which is broader in [indiscernible] Equipment division versus what we see in the Gear business.