Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Elgi Equipments Limited Conference Call hosted by Asian Market Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamlesh Kotak from Asian Market Securities. Thank you, and over to you, sir.

Thanks, Ayesha. Good morning, everyone. We welcome you all to the conference call of Elgi Equipments Limited to have an update on the company's business operations post the outbreak of COVID-2019. We have with us today Mr. Jairam Varadaraj, Managing Director of the company. I request Mr. Jairam to provide us an opening remark regarding the business updates and post which we shall begin the Q&A session. Over to you, sir. Thank you.

Thank you very much, Kamlesh, and ladies and gentlemen, good morning to you. I appreciate the time that you've taken to participate in this call. I would like to give you a little bit of what has happened so far in the company and what we are anticipating and what kind of plans we are looking at, what are the challenges that we will face that could be unique to Elgi and what are the positives that are unique to Elgi that we are also looking at. So when the shutdown happened in March, we lost close to half the month revenue. And as a consequence, what we had presented as an anticipated EBITDA in the last investors meet in February we probably will miss that to the extent of between 10% to 15%. So that's the reality. I don't want to talk specifics till such time we have finalized and audited the numbers and presented to the Board. So a rough direction is we are not going to be -- we will not be able to -- we are not meeting the EBITDA that we had projected in the investor meet, but we are not very far away from that. Now when the lockdown happened, we had to take stock of how we visualize the world in the future, not just India but the rest of the world because considering almost half of our revenues is outside. It was a very difficult situation because what to anticipate, how extreme will the situation be and how long will the situation last is something that we really had to go through individually in our businesses, individually in each of the regions, collectively through all the leadership team. And we arrived at a certain view of the future that is probably about 2 weeks old. Now basis that view of the future, we started taking initiatives to bring our cost under control, and the goal was to manage the business for cash and ensure that the company remains financially strong as it transits through this period, which is, again, what is the extreme level, what is the extent of the impact and how long the impact this is something as the months roll by, we will be able to -- we will realize the actual. Today, it is all hypothetical, and we are looking into the future with certain assumptions. Now we're also creating a model by which we are able to quickly react to changing situations that are different from what we have anticipated. So those models are in place. We believe that the speed and agility with which we will respond to situations that are very different than what we had anticipated is also there. So these are some of the things that we have put in place. Action has already been started. It has been started all over the world. In some countries, there the governments have initiated subsidy programs for protecting jobs. We are -- we have already enrolled in such of those countries that have enacted. In such of those other countries that are in the process as soon as the clarity comes in, we will enroll ourselves. What will be the benefit that we will get from all these legislations and subsidies? It's still very early. We will try to provide updates as and when significant number of these things get crystallized. So this is something that we are parallelly pursuing. Now if you look at what is the challenge that could be peculiar to Elgi is you'll have to look at it from the psyche of people worldwide in the context of this virus. Today, the psyche is extremely negative. People are wondering how long will this last and how extreme will be this impact, and nobody has an answer for either of these 2 dimensions. And therefore, because of that high levels of uncertainty, the psyche is very, very negative. And our anticipation is as long as this psyche is going to be hanging over the heads of people, consumption is going to be reduced to the bare basics. People are going to conserve cash. Now when that happens, it will trickle down all the way down -- all the way and which means nobody is going to be looking at either upgrading their facilities or enhancing their capacity. And our business is dependent on upgrade and enhancement of capacity. So when that -- those 2 dimensions are going to be very subdued, we expect that the level of activity that we will experience for our products in the market is going to be extremely subdued. The plus side of that is considering that -- and this is really going to help us in a very significant way compared to other companies in India which are very India centric. Assuming that all the economies in the world are going to operate at a very miniscule level of what they were in the past, we will be participating in those miniscule activities of all those countries, which means we will be able to bring in revenue that is not just centered around India but also around the other countries. And we have -- as we speak, India is the only country that has locked down the country to the extent that it has. All the other countries have not locked down to this extent. In fact, even as we speak, our factory in Italy is still working. Our people in all our sales organizations in Europe, in America, Australia, Indonesia and Brazil, they are still engaged with customers. And we are still getting orders from these -- from customers in these countries to our subsidiary. Even in India, in some critical industries like pharma and food which have to contribute to the current condition, we are able to conclude orders working from home. So we have all these things that are positives that are happening in Elgi. So I think, at this point in time, we have taken a certain view of the future to the best of our ability in terms of what will be the severity of the impact and what will be the duration of the impact. And basis that, we have taken the initiative to rein in cost. And at this moment, we are managing the business for cash. And what we have planned will keep us -- keep our head above the water as far as cash is concerned. Coming to our debt position. From what it was in February, our debt levels have actually come down. But as the months roll by without revenue, there will be some challenges in cash, especially when customers don't pay us, the receivables are going to get sticky. And inventory, which is -- which was at prior -- which was there for prior levels of revenue are going to take a little longer to liquidate. But nevertheless, there will be liquidation of inventory. So that -- while there will be transitions of cash flow challenges, on an annual basis, we believe that we are in a reasonably comfortable situation. I don't see any significant challenges to our debt levels. Our term loan repayment schedules for 2021 is only about INR 16 crores. There are 2 installments that are due, one in Italy and other one in Australia. And we are well protected in terms of our ability to repay these loans. So I don't see any problems there. So this is a broad summary of what the situation is, what we have anticipated and how we have planned. So if there are any specific questions, I'll be happy to answer them. Thank you so much.

[Operator Instructions] The first question is from the line of Kashyap Pujara from Axis Capital.

Clearly, I understand and appreciate the need to conserve cash and cut costs. But to ask you a very pointed question, would it be fair to assume, given that we are in lockdown mode in this quarter, what we lost and things will take a reasonable period of time to come back to normalcy and globally, also, things are looking pretty bleak. So would it be fair to assume that we should be now looking at a 50% drop in revenues in this year with virtually no-profit kind of a situation? Or could we potentially slip into red as well?

So I don't want to -- we have done a scenario plan, Kashyap. I don't want to get into the specific details by product verticals and regional verticals. So we have looked at a revenue drop anywhere in the range starting from 20% all the way up to 50%, depending on products and region. So basis that we have -- when we look at the bottom line, where bottom line is still -- I wouldn't say it is still black, it is marginally red, but it's not significantly red. It's very marginal. So that is one part. The point that we are doing also is we are saying that this is the scenario, but the actions that we have taken are moderated rather than extreme. So we are taking these actions in steps rather than trying to take an extreme step which could destroy the morale, the psyche and everything in the organization and create a permanent damage. So to avoid that, what we are saying is, this is a scenario we have planned. We have taken some action, but in April, we are going to watch how the situation unfolds. And if the situation is better than what we had anticipated, we will continue with those actions. If it is worse, we will cut deeper. So we have some arsenals that have -- are available to roll out and increase the intensity of our actions as things -- the reality becomes a lot more clear.

And just to ask you another question for -- on the overseas operations. Would you be -- are there any layoffs or are we having salary cuts at different levels? How are we kind of looking at those things?

Yes. So as a principle, we looked at 2 things. Like I said, the first level of action, we said we will protect jobs and the financial security of people in the lower levels of the organization. So this is the first level action that we have taken. Basis that, people above a certain level, there is a deferment of salary. We have not cut the salary yet. We are deferring it, which will be compensated over a period of 3 years when the situation improves. So this is the first level. If it continues to be at or better than what we had planned, we will remain at this level. But if it gets worse, then we need to trigger, we need to go lower in terms of the levels. We have to go beyond deferments into actual cuts. And if it gets even worse, then there will be reduction in jobs. So we are looking at multiple levels of initiatives and trigger them as and when the situation emerges. We don't want to go to the extreme and then create a permanent damage to the organization.

[Operator Instructions] The next question is from the line of Aditya Bagul from Axis Capital.

Sir, a couple of questions. Can you talk a little in terms of our fixed costs in various geographies? What is the kind of impact that we see there? And you mentioned that there is a chance you can slip into red this time around. So if you can talk about a little in terms of your nonemployee overheads as well and what are we doing there?

So for the nonemployee overheads, Aditya, we have looked at -- we have gone back to 0 base. Not only have we looked at 0 base, we have looked at the assumptions based on which we are incurring certain costs. So all this has been tapered down significantly in relation to our anticipated revenue level. So there is a significant reduction in all these costs that are anticipated as it is. So right now, all those costs are pretty much close to 0, right? Except manpower costs that we have to pay, certain statutory expenses. Rest of it is all -- because in India, there's no activity. In the rest of the world also, where the cost has been prune down to the basic level of what the activity is. And in fact, disproportionately, it has gone further down in relation to the drop in them. So this is how we are going back to individual items that constitute 85% of our other than people costs, and we are taking a zero-based approach to reconstructing these costs in the current context.

Fair enough, sir. Understood. Sir, the second question, just wanted to get a little bit of your thoughts. While we may have a clear issues with regards to our product -- productive, this could be an opportune time to push our service business in various geographies. Just some thoughts around that would be great, sir?

Aditya, you need to speak up a little bit more. Can you repeat that, please?

I'm sorry. I hope I'm audible now.

Yes, yes. Now you are.

So what I was saying was that while there are clear challenges with regards to our product business, this might be an opportune time to push the pedal in terms of our service business. Is there something that you would like to comment on that, please?

If you look at our -- in India, obviously, that is not possible except where we get special permission for manufacturers who are doing essential products, but that's a very, very pinch level. But everywhere else, where the markets are still functioning, we are seeing a significant level of service business compared to our product business. So even when India opens up, we expect that the aftermarket business to be a lot more stronger than the product business because whatever level of economic activity that has to -- that will be there in a country, to sustain that economic activity, there has to be a certain level of maintenance of compressors. So we think that, that will be -- aftermarket will be a bigger chunk of our expected revenue than the product.

Perfect, sir. That's quite helpful. Just last question on data point, please. Just wanted to understand if we are looking at inventory write-downs or higher holding cost of inventory in many of these geographies over a period of the next months?

The quality of our inventory in almost all the locations are very good, Aditya. There's no -- we don't see any need to write-down any of these inventory.

No, I was referring more in terms of the holding cost, and if you would believe that a particular product may not sell in a particular geography, and hence, will have to be transferred, something on those lines will do.

No, we don't have inventory of that kind at all. Most of the inventory that we have in all of our locations are moving inventory, and they are not so esoteric that in terms of their demand. So the inventory profile is pretty solid.

The next question is from the line of Manish Goyal from Enam Holdings.

And hope so that most of the people in the organization are safe and secure, sir.

All are well. All are well. Thank you.

Wonderful, sir. Sir, on the -- just to take it forward on the cost cutting. So you did mention that on nonemployee overheads we have cut the cost. So like -- you had shared certain numbers during the last meet. So how should we look at it, that at least on base case, what is the level of fixed cost we have cut and maybe going forward what is something which you will be able to cut and sustain the operations like? Is it that your fixed costs are cut by 15%, 20% or how much? If you can give us some sense on the base case and maybe the reasonable case going forward?

So based on whatever we have projected, we are looking at both people cost and fixed cost reduction in -- depending on geography, from anywhere -- from 30% -- from anywhere between 12% to 30%, right, is the reduction that we are seeing across various geographies, both on combined between people and other overheads.

And this would be visible from the current quarter itself, sir?

Absolutely, because some of these costs have already been initiated. And in India and in -- India, of course, other fixed costs are already nothing in terms -- literally nothing because we are only paying whatever is there to statutorily has to be paid. Other regions that -- other countries that are running, they're running at very skeletal level. So other fixed costs are going to be very low.

Sure. Okay. And also like -- so you did mention that Italy factory is operating right now. So like at the international level, what is the level of activity? Is it at 30%, 40% of your normal or how is it?

I would say it, again, varies from country to country. Australia activity seems to be higher than Europe. Europe seems to be higher than America. So India, of course -- India, I would say, it's not 0. We've got permission, special permission to operate the plant with skeletal people only for our export. So there is some activity here in India as well. But whereas our model assumes, it's 0 for the first 2 months.

Okay. And are you probably reviewing your plans, especially for Europe in terms of we were already hiring additional people on the front-end and...

We have frozen all those -- the new hires, Manish. So not -- what we had presented in our investor thing in terms of additional costs that we are looking for in Europe for the next year because of additional headcount that has been stopped. So that's not going to be there. And in addition to that, we are also looking at reduction in cost of people.

Even in Europe, sir, the recent hires what we have done?

Yes, yes, yes, all over the country -- all over the world. And like I said, there are various governments that are at various levels of enacting job protection legislation. And as and when they are done, we will take those into account as well.

Okay. And last question, like, in terms of in India, what are your expectations in terms of from the government on, say, any package on economy revival or anything? Like do you think that -- what do you think, what are your thoughts on that?

Well, I think the main -- See, right now, the main thing is to ensure that people's jobs are protected and financial security is ensured. If that is removed, then economic activity is going to get even worse, right? So indirect measures like investment in infrastructure which will trickle down towards employment, those are all things that are not going to help us now, right? We need direct measures. And reducing taxes would be the wrong thing to do because I don't think tax saving in this scenario is the right thing. So therefore, the government's approach should be to say how to protect jobs and to protect the financial security of those jobs, right? So the problem is how do you make it happen, but that's the challenge.

The next question is from the line of Shrey Loonker from Motilal Oswal Asset Management.

Sir, I just wanted to know that your thoughts on -- so looking past this 1 year that we are in right now which is very unforecastable. If you were to just take a [ 3-year ] view, where you think your growth prospects will be better? Will it be India or will it be the exports?

Very difficult question to answer because it is a function of what each country is going to do to revive the economy, right? So it's -- at this juncture, it's very difficult to say. But I think the impact -- my expectation is the impact in India could be higher than the rest of the world.

[Operator Instructions] The next question is from the line of Ravi Swaminathan from Spark Capital.

Sir, an extension to Mr. Manish question. So basically, the spend that we were talking about cumulative close to INR 150 crores, INR 160 crores in Europe over the next 3 years, are they all at hold or is it like probably we'll wait for a year and then we may...

No, no. Whatever we -- the headcount that we have already taken on board, that cost is not going to go. The cost is going to go down, but that full amount is not going to go away, right? But additional that we had looked at close to about 30 -- no, INR 18 crores of additional headcount that is not going to happen.

Okay, okay. Got it, sir. Got it. And in terms of the demand environment in U.S., et cetera, I mean, obviously, it's early days, but how is it panning out now? Is there any traction at all from -- for Patton's and Michigan Air...

Yes. Like I said, Ravi, there is still activity of both service and sale of equipment happening in the U.S. as compared to 0 or literally 0 in India except for the export consignment that we are sending out.

The next question is from the line of Susmit Patodia from Motilal Oswal Asset Management.

Sir, just 2 questions. One, I wanted to understand just from a global landscape perspective, do you think China will lose out even in this segment or this segment could be immune from this entire backlash against China that we are seeing? And hence, it could benefit us from bigger export opportunity?

See, my -- I think I've -- let me rephrase the question. Are you looking at -- are you asking what will be the impact for China in compressor business? Is that what you're saying?

No, sir, just from a manufacturing perspective, would you -- would there'll be certain customers who were, let's say, buying from China, if there were, will now start looking at India as an option?

It's a much larger canvas. I'll try to explain it in bits and pieces. In terms of our own strategy, we have taken a decision that -- we import very little from China, but we have taken a decision that strategically this is a risk. And therefore, over a period of time, we will develop alternatives by which we reduce or eliminate the dependency on China. That's Elgi's perspective. Assuming that a lot of companies are thinking like Elgi, there could be an opportunity for companies outside of China to become the points of source for these companies that are looking at it. But that's not going to happen immediately because changing a vendor base for critical parts cannot happen overnight. That is point number one. So I do see a change and an opportunity coming in. Second is the whole world has to look at China in terms of -- the reason why China became the global source for the whole world is because the efficiencies and the infrastructure that they offered to anybody who wanted to source from there. The ability of competing countries, whether it is India or Vietnam or anywhere else, to provide that is going to be a lot less. They are not going to be able to match that. So companies have to take a conscious decision that from a risk mitigation point of view, they will switch their supplies and assume the inefficiencies and accept those inefficiencies as a cost for derisking their entire supply chain in the context of what has happened. So there will be a lot of shift, but I don't see the shift happening very quickly, but definitely, there will be opportunities that come out of this.

And sir, what percentage of compressors will be made in China, just a broad number?

Well, China is the single largest market, domestic market for compressors in the world, now -- and quite a bit of it is supplied by local Chinese companies. Now they will try to see -- once the demand in China goes down, they will try to see whether they can sell more outside the country, outside China. So there will be a lot more of these Chinese companies coming into global markets. But to build those global markets for capital goods, the critical capital goods is very difficult. You look at our own experience. It's taken us a long time to establish ourselves in developed markets like Europe, America and Australia. So for a Chinese company to come and turn the switch on overnight, it's not possible. So I don't see that as a big threat at this point in time.

And sir, second question, maybe too ambitious for me to ask, but I'll still attempt it is that the whole INR 3,000 crore top line, have you done any scenario analysis as to how far that gets pushed out now?

So that's -- like I said in the beginning of the thing, we have looked at scenario plans at a product level and a regional level, and we are looking at a drop in revenue anywhere from 12% to 50%.

That's right. Yes. That's for this year?

Yes.

And what about the long-range plan that you had presented to us...

So we -- our plan is based on the assumption that we will get to January, February levels of this year by March, April of next year. That is the plan at the moment. But we will see how it evolves. It's very difficult to predict the severity of the impact and the time duration of the impact.

[Operator Instructions] The next question is from the line of Bhavin Vithlani from SBI Mutual Funds.

My question is, if you can just guide us on what's the aftermarket revenue for Elgi? And in the conference calls, Atlas Copco also mentioned that this has been impacted given that this cannot be controlled remotely and people cannot go and work at the site. So if you can give some flavor on the aftermarket side of this?

See, like -- our aftermarket as a total percentage of our revenue is at around 20-odd percent. Now if you look at India alone, it is much higher as a percentage of our India revenue. I don't want to talk about the specific percentages. Now when the economies come back up, I expect that the demand for aftermarket will be a lot more than the demand for products because people and companies are not going to upgrade their facilities with new compressors or -- nor are they going to add capacity in this current scenario. That being the case, the -- whatever factories have to run, they need maintenance and parts. So I expect aftermarket to be leading the recovery rather than products. But in the current situation, where it is a complete lockdown in India, we are unable to get the permission to go. But wherever -- whichever customer of ours is coming under the essential goods for making medicines and stuff that are required for this current crisis, we are able to get the permission and render a little bit of aftermarket support. Whereas in other markets like Europe or Australia or America, there is still aftermarket that is being done, but nowhere near the level it was before.

Sure. My second question is on the Patton's. So in the previous call, you mentioned that the compressor which goes for the medical was impacted. Given the current situation, do you believe that has now bounced back?

No, no, I didn't say it was -- medical was impacted. And in fact, I was saying that we are able to close orders in the medical sector. That means they are still buying. Yes? And Patton's Medical which supplies equipment for hospitals in the U.S., they've had some pretty -- they've had significant inquiries and activity levels.

Sure, sure. My last question is on the fixed cost. Except the employee cost. When I'm looking at the FY '19 balance sheet, out of the INR 300-odd crores of other expenses, INR 180-odd crores looks to be the fixed cost. And of that, INR 48 crores was legal and consultancy charges. Would you be able to cut down on this in a considerable way and bring down the fixed cost level? Or if you can give a flavor of, by what level can you bring down the INR 180-odd crores of fixed cost?

So you're talking now stand-alone, right?

No, no, consolidated. Consolidated other expenses was about INR 300 crores in FY '19 or that's the balance sheet we have currently.

Yes, yes. So a significant part of that cost, there were large chunks of costs that we had booked -- paid to BCG, both in India and in the U.S., which is over now. There is no cost anymore. So under the legal and consultancy, a big chunk of it was that. I don't have the specific numbers in front of me. All that will be 0. In addition, quite a bit of our other legal and consultancy expenses are also going to be 0. So in terms of reduction in other fixed costs, like I said, it varies geographically, it is anywhere from 30-odd percent -- from 12% to 30-odd percent.

Okay. And this 12% to 30% is ex of the variable fixed cost, just as a clarification?

No, no, this is fixed cost, I'm talking about.

Understand. Third is, are we changing any course on our product development or that goes unabated?

No. All of our strategic initiatives in terms of technology, products, cost reduction, quality improvement, they're all continuing without any lack of commitments or a reduction of commitment in those directions.

[Operator Instructions] The next question is from the line of [ Jay Daniel ] from Entropy Advisors.

Sir, you had said 50% of our revenues come from India. How severely compromised do you think our Indian revenues are going forward? I mean vis-à-vis the international revenues, how fast -- soon do you expect it to pick up vis-à-vis international? I mean if you could give a broad sense of that?

So we have planned that April and May will be a wash. This is how we have planned it. And we are expecting marginal recoveries from June onwards, getting back to our January, February levels of revenue by March, April of next year. Now this is the plan that we have made, and that converts to approximately, if I annualize the numbers for 2021 for India, it comes over half the current revenue.

Sir, we don't have anyone in the queue. Should I do more reminder?

Yes, any further questions?

No, sir, we don’t have anyone in the queue.

Okay. So with that, we conclude the call. Jai, any closing remarks you want to make?

The only remark that I want to make, Kamlesh, is the situation is very uncertain. So I'm unable to make very precise statements about the future. But I want to -- what I wanted to assure everyone is we have taken a sufficiently pessimistic view of the future and started working on cutting our costs that are in line with that realistically pessimistic view. Now while doing that, we are also saying let us temper the rolling out of these initiatives so that we don't destroy or permanently damage the company. So it's a very close review that we are doing to see what is the emerging reality. And as and when the reality emerges, we are able to quickly move to calibrate the initiatives and cost reduction programs that we have started. So this is really what we can do at this point in time.

Thank you, sir. It was very insightful for you to provide us an update on the business operations and the impact of COVID-19. With that, we conclude the call. Ladies and gentlemen, thanks for being on the call. Have a good day.

Thank you, Kamlesh. Thank you, everyone. You have a good day and be safe. Thank you.

Thank you.