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

Ladies and gentlemen, good day, and welcome to the Elecon Engineering Limited Q2 FY '27 Earnings Conference Call hosted by Elara Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to Mr. Harshit Kapadia from Elara Securities India Private Limited. Thank you, and over to you.

Thank you. Good evening, everyone. On behalf of Elara Securities, we welcome you all for the Q2 FY '27 and H1 FY '27 Conference Call of Elecon Engineering Limited. I take this opportunity to welcome the management of Elecon Engineering Limited, presented by Prayasvin Patel, Chairman and Manting Director; Aayush Shah, Executive Director; Chintan Shah, Chief Financial Officer; Dipak Dalwadi, Business Head years; Kaushik Patel, Business, Material Handling Equipment. We will begin the call with a brief overview by the management, followed by a Q&A session. I will now hand the call to Prayasvin, sir, for his opening remarks. Over to you, sir.

Thank you, Harshit. Good evening, everyone, and welcome to Elecon Engineering Q2 and H1 FY '27 Earnings Conference Call. The earnings press release and investor presentation have been filed with the stock exchanges and are also available on our website. I will begin with the industry context, the operating environment and our performance during the quarter. Chintan will then discuss our financial results in great detail, after which, we will take you through your questions. India's industrial outlook remains constructive, supported by public capital expenditure, infrastructure development and domestic manufacturing. Demand from cement and power together with the anticipated threefold expansion in the steel production capacity represents a substantial opportunity for the capital goods sector. Considering the industry research estimates, the Indian heavy-duty industrial gearbox market will grow at approximately 8% CAGR through FY '30. Key drivers include capacity creation, brownfield modernization and the need for efficient, reliable solutions. While global uncertainty, geopolitical developments and raw material volatility warrant continued vigilance, India's industrialization plans provide a strong and aerator foundation for long-term growth. At Elecon, our gear and material handling equipment divisions are distinct but complementary growth engines. Both serve critical industrial applications. And together, they give us the scheme, technical grid and market access to convert structural demand into sustained business growth. Over more than 7 decades, we have built a strong position in industrial gear solutions and material handling equipment. Our focus is here, expand in overseas market, deepen our domestic footprint and execute with discipline and convert opportunities into profitable revenue growth. We will continue to protect margins, strengthen earnings, quality and allocate resources to areas where Elecon has durable competitive advantage. Our MH division is now establishing a meaningful international presence. Securing orders worth approximately USD 9 million during the first half. This outcome validates the strategic decisions and capability-building initiatives undertaken in recent years. It also demonstrates that our engineering expertise is competitive in global markets and gives us confidence in the division's international growth road map. In the Gear division, Elecon continues to strengthen its leadership in India's organized industrial gear market. Our comprehensive product portfolio deep application expertise and ability to manufacture customized high-precision solutions, meeting Ding Class 2 standards for critical applications have enabled us to build enduring relationships across key industry sectors. Turning to the MAH division. We see an increasingly important growth engine supported by established engineering capabilities and leadership in bulk material handling. Our record in complex applications and demanding project environment is difficult to replicate. We intend to build on this position by expanding in more industrial sectors and improving execution. Moving to segment-wise performance. The gear division, which contributed approximately 76% consolidated revenue in Q2 FY '27. The reported revenue of INR 488 crores, representing year-on-year growth of 10.6%. This performance was led by 30.3% year-on-year growth in overseas markets, supported by stronger execution across international operations and sustain from overseas customers. Domestic demand remained stable. The result reinforces the value of our international strategy and the strength of our execution capabilities. The MHE division regained momentum in Q2 FY '26 reporting revenue of INR 151 crores, with year-on-year growth of 10.4%. Execution improved progressively compared with Q1, while demand from steel, power, cement, fertilizers, imports remains supportive. The division enters the second half with a 3-year execution agenda. Despite an uneven macroeconomic environment, and delays in project execution clearances, our Q2 and H1 performance remain in line with expectations, with consolidated revenue growing by 11% in H1. This outcome reflects the resilience of our diversified portfolio across gear and MHE as well as growing contribution of international markets, which helped offset near-term softness in domestic activity. Our priorities for the second half are equally clear. We continue to build order pipeline and broaden our market footprint, maintain execution discipline and sustained profitable growth to navigate through volatile market environment. Elecon strategy for the long term is anchored in 3 priorities: extend our reach across markets and applications. expand our engineering capabilities and execute consistently. Our investments in R&D, technology and production development are directed towards practical customer outcomes, higher efficiency, reliability and life cycle value. This disciplined approach will broaden our addressable market, strengthen our competitive position and create a scalable platform for sustained growth. With that, I will hand over to our CFO, Mr. Chintan Shah, who will take you through the Q2 and H1 FY '27 financial performance in greater detail. Over to you, Chintan.

Thank you, sir. I will take you through Elecon's financial performance for Q2 FY '27 and the first half along with the key operating drivers. The results reflect disciplined execution and the resilience of our business model. Before discussing our financial performance, I'm pleased to share 2 important developments. The outlook of the company's long-term credit rating has been upgraded from AA stable to AA positive, while it's short-term rating has been reaffirmed at A1 positive. In addition, our lead banker has released a collateral security for both fund-based and nonfund-based working capital limits, thereby removing the hypothecation of movable and immovable properties, including plant and machinery. Both the above developments reflect the continued strengthening of our balance sheet and our growth outlook. Coming back to financial performance for Q2 FY '27. Revenue from operations increased 10.5% year-on-year to INR 639 crores compared with INR 578 crores in Q2 FY '26. When compared with revenue of INR 521 crores in Q1 FY '27, our company has registered a growth of 22.7%. This reflects a clear acceleration in execution and improved conversion across our businesses. Profitability strengthened faster than revenue. EBITDA increased 17.7% to INR 148 crores, while EBITDA margin expanded by 140 basis points to 23.1%. Profit after tax grew 9.8% to INR 96 crores with PAT margin at 15.1%. Financial performance for H1 FY '27. For like-to-like assessment, H1 FY '26 revenue and EBITDA are adjusted for INR 25 crores of onetime arbitration settlement and income recorded in energy. On this basis, H1 FY '27 revenue grew 11.1% year-on-year, demonstrating the underlying strength of our businesses. H1 EBITDA reached INR 257 crores, up 11.4% over adjusted H1 FY '26 EBITDA. EBITDA margin was sustained at 22.2% compared with 22.1% of corresponding adjusted period. This consistency demonstrates our ability to protect profitability while supporting the growth. Profit after tax was INR 167 crores. Adjusted PAT increased 6.5%, excluding the after-tax impact of arbitration income and INR 80 crore net of tax unrealized mark-to-market gain from reclassification of investment in the prior period. Now let me take you all through our segment-wise performance. Beginning with gear division. The gear dividend delivered a strong Q2 with revenue increasing 10.6% year-on-year to INR 488 crores. H1 revenue reached INR 903 crores, representing growth of 13.1% with power remaining our high contributing industry. Profitability improved decisively. Q2 EBIT rose to 27.2% to INR 108 crores and EBIT margin expanded by 290 basis points to 22.1%. H1 EBIT increased 21.8% to INR 182 crores with margin at 20.2%. This demonstrates the earning potential of disciplined execution. Q2 order intake was INR 493 crores, broadly stable year-on-year, while H1 order intake increased 8.8% to INR 1063 crores. The open order book was INR 1,056 crores as of September 30, 2026. This is up by 37% year-on-year, providing strong H2 visibility. Power, steel and cement, our 3 larger contributing industries remain supported by India's midterm and long-term development priorities with established technology manufacturing depth and customer relationship. The gear dividend is well equipped to translate demand into sustained earnings growth. Coming to Material Handling Equipment division, the MHE division delivered improved execution in Q2. Revenue increased 10.4% year-on-year to INR 151 crores from INR 137 crores. H1 revenue stood at INR 256 crores, up 4.5% over adjusted H1 FY '26. With improved clearances on the projects, MHE has started scaling up the operations. We made tangible progress in Q2 and are positioned to accelerate through the remainder of H2 FY '27. Demand indicators are encouraging. Q2 order intake increased 32.5% to INR 253 crores. This includes overseas orders of INR 68 crores. H1 order intake rose 34.8% to INR 438 crores. The open order book reached to INR 579 crores as of September 30, up 27.3% year-on-year. This provides sound execution visibility. Now coming back to geographical mix. Our overseas business continued to build momentum. Q2 overseas revenue increased 30.6% year-on-year to INR 159 crores. H1 overseas revenue reached INR 309 crores with a growth of 26.2% year-on-year. Now overseas business contributes 27% of consolidated revenue compared with INR 245 crores in H1 FY '26. Balance sheet and capital allocation. Elecon's financial position remains a strategic strength. As of September 30, 2026, shareholders fund stood at INR 2,009 crores. The balance sheet carried no conventional borrowings. The debt in our balance sheet primarily represents lease liabilities. This gives us resilience and capacity to invest. Working capital per month improved during H1 with the cycle towards normalizing to 89 days from 98 days in FY '26. We continue to maintain a strong balance sheet with a net cash position of approximately INR 700 crores. We also remain committed to our capital expenditure program for 3 years, which remains on track. Furthermore, we are pleased that the Board has declared an interim dividend of INR 50 paisa per equity share of value of INR 1 each, reaffirming our commitment to delivering value to our shareholders. As an outlook, as we enter the second half, our priorities are clear. We wish to accelerate M&T execution, convert the order pipeline will discipline sustained margins and advance our international strategy. Given continued macroeconomic uncertainty and inflationary environment, but improved execution cycle we are expecting a medium double-digit consolidated revenue growth for remaining part of the year while maintaining minimum EBITDA margin at last year's labor. We have the financial capacity and operating capabilities to deliver profitable growth while building a stronger, more diversified Elecon. With that, we conclude the financial review, and welcome all your questions. Thank you.

[Operator Instructions] We take the first question from the line of CA Garvit Goel from Sabine Alpha Analytics.

My first question is on management remarks regarding the near-term softness in the domestic market. I wanted to understand more about that, like what do we mean by that? Like what is driving this socket with factors contributing to it? And in terms of the outlook for the full year, we are again like not clear in terms of the number, right, we are speaking about mid-digit -- double-digit growth something like that. So can you please put some more clarity in terms of the growth outlook as well as what is happening in the domestic market? Because despite the decent demand from the end industries, which we also mentioned in the opening remarks, our business is more or less stagnant there. So please help us to give more clarity on this point.

Yes. First of all, I would like to say that there was a lot of volatility in the pricing of steel in the last 6 months. it would affect our margins. That is number one. The second aspect was that there was a bit of slowness because the monsoon as we all know, has not gone in the way that was expected. And therefore, the there is a little bit of lethargy in the execution of various projects. They are going a bit slow. However, the orders are all formed and fixed. We have manufactured goods lying with us. Some of them are yet to be delivered to our customers. But what it looks like is that after Diwali, the expected momentum would catch up for the near future, okay, especially in March. We have a very healthy order booking on hand. And these orders are all executive most of them, which means that we will be able to deliver a sizable amount before March. So this is the overall scenario that is prevailing as of today. But in spite of all this, we have done well, and we expect to do even better in the H2 second half. I hope this answers your question.

So where exactly we are targeting in the number in terms of the revenue that we used to think about that we will give the clarity in H2, right, sorry, H1. So where we are targeting the number in the terms of the top line for this financial.

So in terms of the guidance, we just said that we are looking for mid double-digit revenue growth, and this can be somewhere around 15% in that range. This is, again, considering the improved execution that we have recently seen in the last couple of months, but we still don't want to overlook the macroeconomic conditions, the geopolitical conditions. And also the inflationary pressure, which we have just spoken about, which is like volatility in the base raw material prices, the rupee depreciation and the high inflation rate is already being announced and under a lot of discussions.

So when we say the inflationary pressure there. So are we not able to pass on the commodity price, especially the deal? We all know that prices have increased significantly. But in this quarter, if you think the margins have improved. So, from the standpoint of view, the commodity inflation vis-a-vis the product mix getting improved, it is more going towards the export site. How one should look at the overall margin trajectory in the second half? What is your view on that?

So as we look at our current performance in H1 itself, at an overall level, we have been able to maintain EBITDA margin of 22.2%. Our sense that we should be able to maintain the same margin, but out of the abundant caution, we have said that we will be having a minimum EBITDA margin percentage what we achieved in FY '26 because what we have visibility of the current orders that we have locked and back-to-back locking of the prices that we have done it. But there are a few businesses like city business, as you know, which is about 50% of our total revenue, where the back-to-back pricing doesn't happen. We typically -- we typically release the price list on a monthly basis. And there, we start getting the orders and there are manufacturing cycles less. So the kind of business, our ability to transfer the price from immediate buying that we do, that ability is slightly on a lower side compared to the businesses that we have other businesses like engine product process.

Garvit, I will request you to please join back the queue for follow-up questions. [Operator Instructions] We take the next question from the line of Raj Shah from Enam AMC.

Sir, my first question is on the MHE segment. It was very delightful to hear that we have received $9 million order inflow in the H1. So my question was regarding, sir, margins. If we see in MHE segment, there is a fall in margins 27% last year to around 22% in this quarter. And even sequentially, there has been a fall in margins. I recollect that in the previous call, the management team mentioned about some projects in power sector where there were some kind of delays, if you can give -- if you can throw some light on the margin trajectory in this business and the cause of problem in this particular projects.

Yes. Thank you. As far as MHE division is concerned, I think we have given guidance that we will maintain our margin throughout the year, that is in the range of 20% to 24%, okay? And the 2 orders we were talking during our Q1 conference call, I think now [indiscernible] is happening now and good amount of invoicing we did in Q2 itself. And over the quarter, we will get a good amount of invoice as well from those projects. And of course, for overseas business, yes. slightly higher margin than what we are getting in domestic business. I hope I answered your question.

Understood. Sir, second question was on the defense side. We are aware that the RFP for P17 Braun has already been issued to the shipyards. So based on what you have been saying in previous interactions at around 6 to 9 months with that kind of lag, we can expect the order should be received by players like you. So can you throw some light on when can we expect this in large orders in defense.

Yes. See, regarding the P17 Bravo, though the -- I mean, RFP is given to the all CPR. And recently, only we have submitted our budgetary offers, but still, they are deferring the final ordering to the shipyard. So we push that in the Q2 or Q3 of the next financial year, you can get the offer -- I mean, RFP for submitting our final offer to the all shipyards. And beginning of the financial year '29, Q1 we are expecting the orders to be avoided.

I would request you please join back the queue.

No, no. It's not a question, sir. It's just a follow-up to what the management is answering question. Sir, based on your assessment, sir, this depends order execution shall take place in F '29 and '30. Is that understanding correct?

Yes, it normally takes 2 to 3 years for executing the complete project.

Got it. And do you see any competitive intensity for this particular order? Or we are reasonably...

It's a call on orders of the 17 Alpha. So we will be the single bidder. So that order goes to the Elecon only.

We take the next question from the line of Patanjali Srinivasan from Sundaram Mutual Fund.

I have few questions. So firstly, I want to know, we have seen a fair bit of increase in our margins in the gas business. So I think we are at this level after almost 5, 6 quarters. Could you explain what is 1 or 2 reasons that has helped in this? Is it product mix? Or have you taken a price hike? What have we done yet?

So we have -- basically, we have taken a price hike and also a bit of improvement of product mix. And on top of it, margin improvement has also come from contribution of our overseas exports orders where we typically see a slight high margins. There were some others in the exports, which we were trying to execute and complete in Q1, but because of the softness that we had we could do it in Q2, and that's the reason there is a spike in the market because a bulk amount of the export order has come in Q2, which could have been distributed evenly between Q1 and Q2.

So when you say our product mix has improved, can you tell what is the quarterly catalog and engineered product mix?

It's about 53% catalog, 47% in engineering. But within engineering also, we have a lot of highly engineered complicated solutions that we design themselves. So that also has improved a lot. Again, at a macro level we say, in Q2, we had 22% gear EBIT margin, right? And with that, we did almost 20.2% in H1 for gear. And this is the rate we are talking about for gear. Since last couple of quarters, we were not doing good lately in FY '26. We asked a lot of questions about how gear will bounce back and what kind of margin trajectory gear will maintain. So we could -- we used to always guide to our shareholders that we make in 20% to 22% EBIT margin for gear. And we are happy to report that we are leaning towards that trajectory that we always wanted to achieve.

Just to find one thing, you said price hikes offset whatever margin water input costs have gone up, your price hikes will cover it even going forward. And I just want to know, on your order book growth is a bit weaker, and our execution also seems to be a bit lower than what we have done over the last few years. So could you just give some color on these things?

Right. So in terms of the price increase, when we had the volatility of steel. We were a little aggressive in quoting price to our customers. At the same time, we also worked very aggressive on locking the price on our supply chain side. So that's where we have -- we typically keep a cushion or a conservative approach on both the sides, and that's why we see some monetization happening in that particular space. Coming back to the order backlog, we are working on almost 60% city utilization on a consistent basis. There are some machines where we have a category constraint. We are still quarterly moderating the capacity. We are quarter-on-quarter reassessing and putting more kind of machines that we want, and that's how we will see a gradual improvement in that case. Coming back to the order backlog, the H2 seems to be very promising, even though there was some slowness in Q2 in terms of order intake. But when it comes to the availability of order, we are pretty confident that we'll be able to execute the sales.

Just to follow up on what you're saying. You're saying that...

I would request you to join back the queue.

I'm just continuing on the again. So I just want to finish on line. So order book growth, you mentioned that it can get better in second half. Is that the correct way to understand what you're saying?

No. What I said is the execution of the order book because what happens is even though there was a slowness in the order intake, but the clearances from the customer in terms of our projects have improved. And that's the reason MHE has did improve in terms of the execution. The gear is also picking up. The kind of visibility we have in terms of the clearance, the clear executable order is far better.

We take the next question from the line of Gauram fromTunga Investments.

I have 2 questions on the Gear division.

I do apologize to interrupt you, but your audio is not clear.

Is it better? I have 2 questions on the gear division. First one, on the domestic gear side, I think in the previous Q1 call, you had mentioned 3 sets of issues. One was related to inflation, which was leading to delayed decision-making at your clients? Second was related to peer who are sitting on low-cost inventory. And third one on the public CapEx government I would like to hear your thoughts on these things how they are shaping up right now? So that is question number one. And second one, on the export side, I think it's very heartening to see almost growth on top of the previous quarter when we also grew very fast. While the domestic seems to be muted. I just wanted to get a sense that the export demand, what is the sustainable growth rate on the export side? And is there something which has changed, which is giving us confidence on that. So these are the 2 of my questions.

Right. So, I will, I think, answer the first part or the first question, and the second question will be answered by Mr. Dipak, who heads our business Gerson. on the Q1 side, when we said that there was a huge volatility in the raw material, I think that volatility has been stabilized. The Q1 volatility was a significant volatility because of the capacity and supply chain constraints, the price rise that we could see in Q1 was abnormal. We do not see that price rise in Q2. That's number one. Number two, we explained you that whenever there is an abnormal price increase, if there are players in the market who are sitting on a high inventory. Typically, they will have a slight advantage because they will carry the inventory at a lower price. And we could see few cases but it has not significantly seen in Q2. So I think that positioning is soften, the market is normalized. And I would say that in the guidance also we stated that this was expected to be normalized in Q2. Typically in a sudden event when there is a sudden increase in the price increase, this is what happens over a quarter, and this is what we did. So Q2 as of now, as we speak, we don't see that problem. So this is what it is. Coming back to the government spending, we -- from a midterm and long-term standpoint, all the sectors that we are catering to, we see a strong demand, strong spending as our CMD sees said in the official phase. There is a softening right now, which has happened, which is more a temporary in nature, which we feel because of the monsoon and kind of factor. But post Diwali, we are expecting to be picked up. And what we are seeing is based on the current discussion, which is happening on a lot of pipeline orders. Coming back to the export to your second question, I will hand it over to Mr. Dipak.

Yes. So our overseas business is definitely picking up, and we are having the market is increasingly shifting from standard gearboxes towards the application engineer and condition monitoring application solution based overseas business is increasing. And as you know, that the now data center is also picking up overseas business. So we are having a very good traction from the database centers, cooling tower application for the database. At the same time, we are having oil and gas applications Also, we are getting good orders from the oil and gas applications. So applications are moving from the standard gearboxes towards the nonstandard and very specific customized gearbox. So we are having all capabilities developed here at R&D centers. So we are having good orders on hand for the all this customized gearboxes, so we are hoping still and containing or increasing the overseas the business what we are planning for in H2 also. So we are having a very good order backlog for the H2 for the engineering product, and we are booking the same numbers for the growth in H2.

We take the next question from the line of Heath from Quantum AMC.

Yes, yes. Yes. So firstly, I mean, my question is more on the long term. So we have an export target of 50% mix in FY '30 in the previous con call, we had given the INR 5,000 crore top line guidance, and that's something expectational? So what gives us the confidence? And what are we doing to move from INR 600 crores, INR 650 crore export presently to say somewhere around INR 27 crores by FY '30. Secondly, in terms of overseas order inflow, what is the Y-o-Y growth for this quarter? And where in the end industry are we seeing more action? Could you just give some sense on that?

Yes. Basically, we are confident that by FY '30. We will reach 50% of our turnover from overseas markets. Now this growth is not only going to come from organic growth, but also from an organic or inorganic. Now considering this fact, right now, there are a lot of areas where the -- your company is planning to dive deep into it and develop different sectors where the company will penetrate deeper into it and get additional business. Apart from that, we are expecting a sizable quantity of defense orders coming in from marine sector.. There is also a huge demand coming in from heavy-duty, large-sized steel boxes okay? MHE also has got great prospects for exports now. Okay, we are just seeing that this is in. We are also having large inquiries coming in material handling business from abroad. So all in all, we are expected to do quite well. And this is over and above the fact that there is a possibility of inorganic growth with acquisitions possible. So considering the fact we are quite confident of achieving our INR 5,000 crores top line by FY '30.

Second -- my second question is on areas order inflow for the quarter and Y-o-Y growth.

Our overseas orders are dealing an upsurge, okay, especially numbing in from the Middle East and the Americas, 35% and the -- which is to the tune of 35%. We are also expected to do much better than this in the future years to come because United States, especially has got great potential. We have just got the tip of the iceberg. There is a huge potential in United States. The good part and the heartening part is that we have started getting good references in various different types of industries in the United States. And this will help us get more business in those areas, especially cement, steel, even power. And therefore, we want to cash that momentum. Even the data centers are being as good business. We've got a good order from healthy order that area also, which we believe should open up large doors for us. So all in all, we believe that exports is the way that would be growing Middle East is also showing great momentum, especially the Africas and the northern part of which they be. So all in all, we are very positive and looking forward to more orders coming in from those sectors.