Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Elgi Equipments Q1 FY '21 Earnings Conference Call, hosted by Asian Markets Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Kamlesh Kotak from Asian Markets Securities. Thank you, and over to you, sir. Mr. Kamlesh Kotak, you may go ahead.

Hello. Good day, everyone. On behalf of Asian Markets, we welcome you all to the 1Q FY '21 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 results and then we shall begin the Q&A session. Over to you, sir. Thank you.

Thank you, Kamlesh. Good afternoon, ladies and gentlemen. Thank you for your time to be in our call. As is our normal practice, I will take you through the financial performance and then talk a little bit about the business situation. Focusing on our consolidated numbers for the quarter in comparison with the same quarter of last year. We had a revenue drop of close to INR 180 crores. And just as a quick summary, we'll talk more about this. The biggest drop, obviously, was in India. The positive thing is all the other geographies did very well considering the situation. I will come back and talk about it. I'll focus now on the EBITDA bridge. So if you look at the drop in sales, it was quite significant. On the other hand, our contribution percentage has significantly improved almost to the extent of 2%, and I'll come back and talk about that also, the causes for that. Net-net, our EBITDA should have been a negative INR 41 crores. In reality, we made a positive EBITDA of INR 60 crores, which means we've been able to improve to the extent of almost INR 47 crores. Now the biggest contributor to that better performance under these circumstances is our variable cost, our contribution margin was -- variable cost on sales was actually 10% better. At material cost, our contribution margin -- I mean, sorry, at total variable cost our contribution margin percentage is far better on sales, so that was a significant contributor to a relatively better performance under these circumstances. Our employee cost was lower to the extent of almost INR 13 crores, and that had multiple dimensions to it. In India, our employee cost went down by INR 14 crores, and the major contributor to that drop has been we were able to reduce our contractors -- number of contractors during this period, contract employees. We had changed our leave structure permanently. We're no longer allowing encashment of leaves. So to that extent, we have not provided for that amount and that we have asked employees to take leave rather than encash it. And we've also reduced the performance pay because of the current situation. So all that contributed to close to a INR 14 crore reduction in employee cost in India. We -- the employee cost compared to the previous quarter in Europe and the U.S. was higher. It's not that we have added more this quarter. It's just that more people were recruited in Europe as part of our strategic initiative in the second, third and fourth quarters of last year, which was not there in Q1 of last year. So that kind of balanced out. The interesting part is in the U.S. and Australia, we've got -- we received subsidies from the respective governments to the extent of almost $3.3 million, of which in this quarter we have used up $1.9 million towards job protection program given by the 2 governments of the U.S. and Australia. And that added up to another INR 14 crores. So net-net, if you look at -- the total employee cost went down by about INR 14 crores. And in addition to that, our other fixed cost has -- came down by almost INR 18 crores or INR 19 crores. And across all, we have been able to come down strongly on our cost management on -- some of the costs reduced automatically under these circumstances of lockdown or restrictions of travel. Travel cost has been almost 0, very negligible. That is not something that we did. That was the circumstances. But on many things, on repairs, on rentals, on -- there's an active cost management by the team, and as a consequence, we've been able to reduce cost by about INR 19 crores. So net-net, we've been able to -- through variable cost reduction, with better contribution over variable costs, reductions in employee costs and other fixed costs, we have released close to INR 47 crores of cash. And that is the one that has contributed to a positive EBITDA of INR 6 crores under these very difficult conditions. I will now go through -- I will talk a little bit more about the sales performance that I talked about. It has been very interesting for us. The U.S. and Australia, which are our 2 strategic markets, it is very heartening to see that the sales performance was almost the same as the previous year's quarter. India was a washout. April was a washout for us. Started improving from May, and it was good in May and June. As a consequence, for the quarter, we were close to 60% lower than last year. Europe. In Europe, Italy was locked down for most of April. Because of that, Rotair got affected. But not -- non-Italian performance of Europe is actually 4% better than last year. So we have -- actually, all our strategic markets that we have invested in over the years actually is -- are helping us under these circumstances. So this is a very interesting situation for us, very positive situation. Today, in the first quarter of this year, India has contributed to about 40% of the revenue, whereas the rest of the world has contributed to 60%. This is the first time there's been a significant shift in the contribution of our global markets to the revenue of the company. Now moving on to the debt position. We have done exceedingly well. Our opening debt in the 1st of April was close to about INR 260 crores. Today, our debt is hovering around INR 200 crores. So we have substantially reduced our working capital. This is -- and this is something that I expect will continue to be even when business comes back to normal because some of the things that we have done are fundamental and not by virtue of a drop in revenue. We have managed our receivables far better, and we have managed our inventory far better. And definitely, we will continue to do this. So our cash position is extremely positive at this point in time. Now if you look at our stand-alone results. Actually, at the EBITDA level, our stand-alone EBITDA is high -- is a negative, whereas our consolidated EBITDA is positive. This is again an indication of the strength of the business and the company's strategic investments to grow international business. And so this is a very positive thing and strategically aligned to the future of the company. You will notice that there are -- there was a tax situation in spite of consolidated PBT being negative, and that's because the consolidation of taxes doesn't happen across geographical entities. There are some geographies where we actually made profit, and therefore, there was tax paid there. And there are some geographies where we have made losses. So at a consolidated level, it's a little distorted under these circumstances. So this is really the summary of our performance. I will spend a little bit of time talking about the overall business situation. Like I said, Australia has done well for us. They are almost -- they're better than last year in performance. So -- sorry, they were very close to last year. They've grown very well, so it's a very positive thing. Southeast Asia continues to be a challenge. It's very similar to India. Coming to India, our April was a washout, except for we ran the plant with skeletal staff just to support our subsidiaries. So otherwise, business in India in April was almost 0. Started picking up in May, did well in June and it continues to look quite positive. When we started the quarter in India, we thought like, everybody else, that there will be only sectoral activity like in food and beverages, pharmaceuticals, chemicals, some of the essential products. But to our surprise, we are seeing sales activity across-the-board, across all industry verticals. And we are in the middle of reaching out to customers to understand what are the key demand drivers for our customers so that we are well prepared for the rest of the year. So it's a very positive situation that we are in even in India in spite of the first -- in spite of April and May being quite weak. Middle East, similarly, was the same situation. April and May was weak. It's coming back up. Europe has been exceedingly strong for us. Except for Italy, in the month of April, everything is coming back and we expect to continue to grow as per our strategic plan for which we had invested quite a bit of money over the last year, 1.5 years. U.S. has been very strong. Like I said, they have -- they're almost at last year's levels of revenue. All the businesses have done well. It is not just any one particular vertical. Our portable business, our patents activity, Michigan Air as well as ELGI Direct, they've all done exceedingly well. So under these circumstances, I would say, though the revenues looked quite low, the fag end of the quarter is really the indication of what to expect for the next year and that looks quite positive. As we speak, July was a very positive number. And we expect -- based on that, we expect the second quarter to be very close to what we did in the second quarter of last year. So this is -- and we expect that the cost containment that has happened to continue into the second quarter as well. So this is really the summary of our business and financial performance, and I will wait for now the questions to provide specific clarification. Thank you very much.

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

Sir, you had highlighted that food, pharma, et cetera, were doing well in the domestic market. If you can touch upon how infra segment, water well, even large industries like steel, cement, how they are doing? I mean if you can upon the other segments also qualitatively, if you can give, are they on par with last year? Or are they below or above that? It will be really great.

Ravi, I didn't say that food, pharma are the ones that are doing -- we started the year thinking that that's how it will be as with everyone in the rest of the country. They were thinking only these essential services will be firing. But to our surprise, across-the-board, we have seen investments happening by our customers, right? Now the only difference I can say is large projects are -- almost no activity is there. But small incremental capital investment, balancing investment is very strongly there in the country. And that's what we are seeing because compressors are not large investments. But they sometimes go into large investments like a new power plant or a new steel plant. Those activities are weak whereas the regular investment by an automotive component manufacturer or an automotive -- it's all quite strong.

Okay. Got it, sir. Got it. Got it. And in terms of pricing, so basically, has there been any disruption in terms of pricing? I mean have competitors cut prices during this period? Or it's just wait and watch and people are just maintaining prices during this phase in the domestic market I am asking?

We don't see any pressure on our pricing so far, anything that is significant and worrisome.

Got it, sir. Got it. Got it. And with respect to international geographies, would you be continuing spends in Europe as you had mentioned in the analyst meet close to around INR 160 crores, INR 180 crores over the next 3 to 4 years? That kind of spend is likely to continue? Or we will relook at it and take a pause...

No, no, no. We have slowed down some of the incremental spend that had already -- beyond what had already gone in, in March. We had paused all that. But the costs, like I explained, the invest -- this is the organic incubation. This is not an acquisition where we have invested in building a team of people to pretty much do business in almost every geography in Europe except Germany, all right? So that salary cost continues and it is beginning to show the impact of -- the benefit of that we are beginning to realize now.

Got it. Got it. That INR 160 crores, INR 180 crores, that would stay or will it be cut down on later, how is it sir?

Still early to say. Right now, we have paused it in terms of not doing fully, but we will wait to see how the -- is the trajectory of growth continuing? If it continues, then we will selectively release some of those costs.

Got it, sir. Got it. And my last question is with respect to the debt levels. You had told current debt has reduced to INR 200 crores vis-a-vis INR 250 crores in the beginning of the year. What is our debt target by FY '21?

Ravi, at this point in time, I'm very hesitant to give targets because it's all a function of how the markets hold, right? If they continue to hold at the level that they did in June and July, we are quite confident that we will be at or lower than INR 200 crores, right, at the worst case, yes?

Got it, sir. Got it. And one small clarification. You had mentioned some subsidies for employment, which we had used it up this quarter. What is it with regards to local employment?

The U.S. government and the Australian government provided certain subsidies for protecting local jobs, and our subsidiaries were eligible for that. So we applied for it and we got qualified and we have got the money.

Got it, sir. But is it per employee -- per head of employees? Or is it a proportion of the salaries that they get or how is it -- I mean just wanted to get a sense especially...

Different countries have different schemes. In Australia, it's a certain value per employee, provided you are able to continue to hold them in employment. And in the U.S. also, it is partly towards -- a significant part of it is towards employee cost, but they've also allowed for certain other costs like rentals.

The next question is from Renjith Sivaram from ICICI Securities.

Congrats on good set of numbers, given the challenging environment. It's good to see at the top of it. One thing, which we discussed during the last call, was 20% target of reduction in overhead. So I think first quarter, we have achieved our bid. So do you expect to continue with this run rate? And is there any cut in the salaries of the overseas employees?

So our fixed cost, other than people cost, has reduced by almost -- I would -- if I have to calculate quickly, the percentage is almost by 40%, right? So like I explained, part of this is because of the business situation like travel. Travel has been -- was a big part of our expense in other fixed costs. That is almost negligible now. So that once the business picks up, some amount of travel will be necessary. It's very difficult to estimate that. So whether we will continue to retain 40% throughout the year is difficult to say. But that 20% reduction is certainly definitely possible on the other fixed costs besides people costs. Now as far as people cost is concerned, at the moment, unlike other companies in India, we have not cut salaries, nor have we cut headcount. This is on the belief that we have a responsibility to ensure that the financial well-being of people under these circumstances are protected. But having said that, we will wait to see whether the trajectory of growth that we are seeing continues. And if we are confident that we will get back to the normal run rate of last year, we will not touch it. But if there are indications that we are not moving towards that trajectory, we will certainly examine to see where all we can take cost out on people costs.

Okay. And sir, we are seeing an anti-China sentiment across the globe. So Australia is one big market where there is a huge sentiment against Chinese. So how big are Chinese compressors in the Australian market? And do you see any advantages because of that in those kind of markets or even in Europe and...

Globally, Chinese compressor manufacturers other than in China play -- have a very small share of the global market, right? So we don't see any significant impact of those anti-China sentiment. And nevertheless, this anti-China sentiment to take root and cause some fundamental shift will take time. I don't think it is going to happen in a hurry.

Okay. And in terms of the segments, like the monsoon has been good. So are you seeing signs of water well market picking up because that is dependent on monsoon?

No. The water well market right now, except for a big tender that is being thought about by the Andhra Pradesh government, other than that, regular contractors' demands are all quite subdued. We are ready with a very significant marketing program, which we will launch in the next month or 2. We have very strong products that we have lined up. And we are very confident when the market picks up, we will have a strong position.

Okay. And in terms of the European market, if you can break out. Okay, you told Italy is bad. So apart from Italy, where are you seeing growth?

We have started selling in pretty much every country other than in Germany in Europe. And it's still very early days. But month-on-month improvement that we are seeing across the products that we have chosen for Europe is very encouraging.

And the U.S. markets were also profitable this quarter.

Absolutely.

The next question is from Aditya Bagul from Axis Capital.

Congratulation on good set of numbers, given the challenging environment. So I have 2 questions: one, very near term and the other more strategic. So in the very near term, within the domestic segment, while you talked about a little in terms of food and pharma, can you talk about some of the end-user industries where you foresee that you will see a reasonable demand over a period of the next 9 months? Specifically, if you can comment on the railway segment.

Specifically on what segment?

Railways.

Yes. Well, like I said in the beginning, we anticipated only food and pharma and the essential verticals -- industry verticals would see activity. But contrary to that expectation in the first quarter as well as in the month of July, we have seen activity across all industry verticals. Now the only difference compared to the past is large projects, whether it's power or steel, those are very subdued. But all other industry verticals are investing. This is what I said. As far as railway is concerned, it is a function of the budget that the government allocates. This is -- it's still early days because the government is grappling with using its total funds available to weather through the storm that has been created by this virus. So we'll have to wait and see whether there are -- so far, there have been no significant changes in the budgetary allocation to railways, so we'll have to wait and see. So it's positive at the moment, but again, railway is a very small percentage of others.

Understood. Fair enough, sir. Sir, can you also talk a little in terms of the status of our oil-free disrupted series, how is the momentum there? I know it might be challenging in the current environment, but some thoughts on that would be helpful.

Overall, our oil-free business in India and in the rest of the world has continued to grow. The base -- the starting base obviously was smaller. But in spite of all the circumstances, our growth has been good, both for our conventional oil-free and more specifically for our AB Series, which is our disruptive oil-free market. Its response from the market has been very good.

Okay. Understood, sir. Sir, last question, slightly more strategic. While we talked about our product mix and EBITDA mix over longer term in February, just wanted to get your sense on a post-COVID scenario. Over a period of the next 2 years, how do you see the revenue mix between geographies and the EBITDA mix within geographies move from where it is currently?

Yes. At the overall level, if you look at consolidated EBITDA has traditionally been significantly lower than the stand-alone EBITDA. We see that this gap will start converging to a point where our consolidated EBITDA will get slowly closer and closer to our stand-alone EBITDA. That's the futuristic next 2 to 3 years kind of a direction we are looking at. Now as far as the revenue mix between India and the rest of the world, it is very difficult to say. At this -- the first quarter, there's been a big shift from almost 55-45 India-rest of the world to 40-60 India-rest of the world. Whether this will sustain is a function of how the Indian economy recovers and how quickly it recovers. So it's still very early days to talk about it. Whereas in the months of June, which is beyond -- I mean July, which is beyond the quarter that we are talking about, the India share of the overall thing has increased beyond the 40%. And whether it's going to sustain, it's difficult to say because now Europe is coming very strongly for us. So we'll have to take -- we'll have -- there are a lot of moving parts right now in the economies all over the world. So we'll have to wait and see how those shape up.

Fair enough, sir. Sir, last question, more of a data point. I just wanted to understand, you talked about our improvements in terms of our contribution margin on a consolidated level. Can you throw some color as to the shift in terms of the contribution margin? How much of that was purely because of international doing better than the domestic given that international has a significant edge in terms of gross margins there?

There are 2 contributing factors to the higher contribution margin in the quarter. One is, obviously, the higher percentage of revenue from international markets where our contribution margins are higher than in India. The second is even within India, the share of aftermarket was significantly higher than the product. So therefore, that also contributed to an improvement in our margin.

Okay. Understood. India after sales would be closer to 35% by now?

No. No. It varies by product. It is not -- I can't give you one specific number. The percentage varies by product. So overall, it's been positive.

The next question is from Harshit Patel from Equirus.

Sir, I have just one question on your European expansion plan. So you have outlined very detailed about your plan. So sir, I wanted to know that would basically done through exclusive distributors or we are appointing multi-brand distributors over there.

Harshit, in most of the world, except India, close to anywhere between 60% to 80% of the distribution channel is multi-brand. And therefore, our strategy is to -- is one, to get into the -- become one of the brands that they deal with; and then in the second phase, increase the share of their wallet among all the brands. We have done this in Europe -- I mean in the U.S., where we have entered into distributors with multi-brands. And progressively over time, by virtue of our product performance, our support and our warranty program and all of it, we've been able to increase the share of the wallet for these -- of these multi-brand distributors. It's the same kind of a strategy in Europe as well.

Right, sir. So sir, presently, as of now, how many distributors would be then acquired in Europe? And what would be our targeted number, let's say, 3 to 4 years down the line?

I don't have a specific number, but I have an approximate number from my recollection. We have close to about 140 distributors in Europe. And in terms of a target number, I'm sorry, I'm not able to give you a very specific target number.

[Operator Instructions] The next question is from [ Devang Shah from 1Up Financial ].

Yes. Regarding the overall ability to cater to the demand, in the past, you have alluded to the fact that we want to be among the top 5 compressor manufacturers globally. In that journey, I mean have you transited almost all these touch points that would make you -- make your journey relevant for that positioning? So that's question number one. And question number two would be -- you just alluded to the margins in the consolidated also moving more closer to the India part. So how far do you think would the completion of the entire portfolio help us? So are there any new products that will help us transit to that journey or we are complete in terms of -- as far as product offerings go?

Okay. I'll try my best to answer the first question in terms of where we are in the transition. So if you look at the market, it's products and markets. Now if you look -- let me first address the markets. So the strategic markets that we have chosen to play in and go deep and be disproportionate in terms of our attention and resources, they constitute close to 60% to 65% of the total market opportunity. So countries like China where China is the #1 market for compressors. We were present there. We realized that our readiness to take on a significant share in the Chinese market is not -- we are not ready yet. And the effort that we need to put in, in China cannot be deployed elsewhere. So we strategically decided to withdraw from China. So other than that, other than China, we are pretty much operating in most of the market. And the strategic markets that we have chosen, which is Australia, Indonesia, Thailand, India, Europe and America, they constitute close to 60% to 65% of the market. So we are well positioned. And in each of these markets, over a period of time, we have invested deeply and our presence is not just superficial. They're very significant, substantial presence in these markets. So that's on the market side. On the product side, today, except for centrifugal compressors, we pretty much have the full drain. And centrifugal is probably -- they contribute maybe less than 10% of the total market. So I would say anywhere between 80% to 90% of the product is available for us. So that's really the start -- our current position. And we are constantly investing in technology to bridge the -- close the gap between the 80, 90 to 100. That's an ongoing process. As far as markets are concerned, we are going to stay with these strategic markets for the next at least 4 to 5 years and go deeper into these markets because this is where the significant opportunities are there.

Great, sir. And for the margins, do you think we have the ecosystem as far as the spares and all of that are concerned because spares would ultimately -- spares/AMC would possibly form a significant part of the population once it is there in the system? So do you think we are very prepared for that kind of ecosystem already?

Absolutely. I mean parts and service capability, besides the profit opportunity of that business vertical, is a fundamental requirement to be able to sustainably win in all these markets, right? So without that, you don't even have a right to play, yes? So in all these markets, before even being ready to sell products, we ensure that we are ready to sell -- provide service to the customer and support. So we are all well established on that.

Great. Great, sir. Any -- in the so-called journey to reach #3, #4 player, anything yet significantly leaving a gap or you feel that you need to possibly bridge something before that journey is really smooth for you?

No. I don't think so. We -- the foundational blocks are all in place, both in terms of products and in terms of markets. Now it's a matter of just going deeper and deeper into each of these markets and gain more share of that opportunity.

[Operator Instructions] The next question is from the line of [ Rithvik Sheth from 1Up Financial ].

Yes. Just a couple of questions. Sir, you mentioned that the cost reduction is sustainable going forward. So can you throw some light on this? Because how long will the subsidies from U.S. and Australia last and also the other cost reduction that are sustainable?

Okay. So the subsidy value that we have been entitled to and we have received this USD 3.3 million, of which in the first quarter we have utilized $1.9 million. So in the second quarter, we will see the balance, $1.4 million, getting reflected in our P&L. So beyond that subsidies, we have to wait and see whether these governments are going to renew their subsidies or come up with other subsidies and whether we'll be eligible for. It's too early to talk about beyond September. That's on the subsidy side. As far as cost is concerned, like I said, today the cost reduction of almost 40% in our -- other than people fixed cost is partly contributed by the business situation where travel is just not possible or even feasible or even required. But once the markets open up, once the confidence come up and once the impact of the virus is kind of mitigated, there will be some incidence of travel. So to that extent, the cost -- other fixed costs are going to go up, but it's too early to say what exactly that could be.

Okay. Okay. And the employee cost at about INR 90-odd crores, INR 87 crores, INR 88-odd crores for the quarter, this run rate will continue for the rest of the year and it will...

To the extent of the subsidies being reflected, it will not continue if the new subsidies don't come for the second half of the year, yes? We have got subsidies for the first half, the first quarter and the second quarter. So that's one part we don't know. So if you look at the total subsidy, value in the first quarter was about INR 14 crores, right, which is about 60% of the subsidy value. The balance, 40%, will be realized in the second quarter. So beyond that, I can't say whether it's going to continue. As far as the other costs in terms of reduction in India of contract people and our leave salary thing, those will continue.

Okay. Okay. Sure. So -- but sir, just one follow-up on the India part. As the demand picks up, do we not go out and employ at the contract level? Or we are sufficient on that front?

No. We are -- in the process in the last 3 months, we've been able to get to 80% to 90% of our normal output in our factories without these contract workers. So fundamentally, even while we are struggling through making the deliveries at the best -- continuing good quality, we've also been parallelly looking at how we can change our processes so that even on a steady-state basis we are able to work with much better optimization of people costs. Now I must say our back-end operations and operations team has just done an outstanding job under these circumstances.

[Operator Instructions] The next question is from Kashyap Pujara from Axis Capital.

Great to see decent cost-containment measures in such challenging times. So clearly, looks like you will reach top line now. I think that's the only thing that's coming through the half. Just one question, more from a -- how you stack up or the performance that you've delivered, especially in the overseas market versus those whom we compete with. So just wanted to understand that while we did well in Europe ex Italy and did better in, say, U.S., how does it compare to how our competition did and how the markets there were? Because I did read in the annual report that we've gone on and set up dealerships and did conscious, deliberate marketing across Europe and U.S. in the last year. So wanted to understand whether this is more -- our performance is more a function of us doing better than the market and competition there or whether we basically were in line with the market performance?

So it's -- Kashyap, it's very difficult to make very deliberate statements about our share of the market at a highly reliable level because we don't have the specific numbers of our competition. But having said that, we look at -- in specific geographies, we look at associations that we are part of, which publish the overall market size for a particular period, what was the sales made by all the manufacturers. So in all the key markets where that such associations exist, that is Australia and in the U.S., the markets have gone down and we have grown, which means we have gained share of the market. So that's one data point. The second data point is we look at the quarterly earnings calls and conference proceedings of our competitors and we look at what they have said, and they have dropped numbers in some of the regions where we have grown or at least maintained last year's level, so -- which means, again, there is an indication that we have gained some share of the market. So if I have to take a cue from these 2 data points, which are not -- I can't bet my house on it, but they are very strong indications of our presence and our performance, I would say we have grown our share in the market.

Great. That's encouraging, and that's all from my side. I wish you all best of luck. And I hope that the cost-containment measures are structural. And whenever the top line grows, the incremental margin really shows us in profitability.

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

Yes. Sir, just a couple of questions. One on the subsidies, what we received. So how do we account it? Does it go to the revenue line item? And how does it work like?

Well, different countries, different -- Australia is a direct subsidy, so it goes into a revenue item. Either you reduce -- you net it off in your people costs or show it as a separate line item, the impact is the same, yes? Yes. As far as U.S. is concerned, it was a loan that would -- that will be forgiven. We have spoken to our auditors there and the law firms there and we are eligible to be forgiven. So we have accounted it provisionally. Even though it is sitting as a soft loan, we have accounted it in this quarter as a subsidy that is loaned in proportionate to that -- for that period and proportionate to our eligibility.

Okay. So where I was coming from is that the improvement in contribution margin, what we see. So was it a function of that this subsidy is getting accounted in...

No, no, no. They're not. Subsidies are accounted below variable costs. So what you are seeing is contribution margin improvement is at a variable cost level.

Right. Okay. Okay. So ideally, assuming that a worst-case scenario that the subsidies doesn't resume in forthcoming quarters and if the operation seems to be on expected lines or normalizing, we will continue on employee program like in terms of the cost structure, what we have right now. That is the worst case we can...

So like I explained the numbers, Manish, INR 14 crores in this quarter has come from subsidy, right? That represents 60% of the total subsidy that we are eligible for, right? In the second quarter, the balance, 40% will get booked, yes? So beyond that, those subsidies are not -- we don't know whether they're going to be there, whether we'll be eligible, right?

No. No. I agree. I understood that. I was just trying to paint a picture that if in case in Q3 onwards we don't receive subsidies, but on other side, if we see normalcy returning to the operations in international market, we would not probably look to devise a plan on the employee cost. That is what I was trying to...

No, no, no. Our people costs that we have reduced so far in India will continue. That will continue. India has got no subsidy...

So that was a function of -- but sir, that was a function of reduction in the contract employees. So in case if business resumes and if your international operations are doing well, you need to export compressors from India, so you may probably see these contract laborers coming back.

So that's what I told you. In June and July, we have done 80% to 90% of our normal output of the factory without these contract people.

Okay. Understood. Great, sir. And last question in terms of our plan in terms of the setting up the motor facility and on the backward integration we already have with the castings. So how do we see going forward in terms of their utilizations and...

So the motor plant has started producing, and we are now supplying our compressors with our own motors in the Indian market. We have sent motors for Europe and for the U.S. for field validation. Now our biggest constraint in the motor plant is one key machinery is stuck in Germany. Because of the COVID situation, the plant there is shutdown and they are just going to start, complete the assembly and testing of the motors. And we have to figure out how to do the inspection of the motors remotely, and we are hoping that the machine will reach us by October, November of this year. If that happens, then our -- we'll be able to ramp up production of our motor facility. And in India, we have done the field validation over the last 1.5 years. We have had perfect performance of our motors. So we will significantly increase the share of the motors to our motors once our production is established. Now that's the bottleneck as far as the motor plant is concerned. As far as the foundry is concerned, like I said in the last quarter's -- last call, we have decided to get outside customers for our foundry. We have started the work. We've already received drawings from outside customers. And it's too early to say, probably in the fourth quarter of this year or the first quarter of next year, we will start seeing some revenue coming through -- coming from the foundry from outside customers.

Okay. So how much of the capacity do you think that we should be comfortable with in-house operations and balance could be basically used for...

We are setting aside about 1/3 of our capacity for outside.

That was the last question in queue. I would now like to hand the conference back to Mr. Kamlesh Kotak for closing comments.

Hello. Yes. Before there's some point I just wanted to understand. Sir, could you help us understand how much is the capital investment, if at all, we have made during quarter and what will be the plan for this year as well as any strategic investment, as we stated in the European market we update and how we are going to make it this year?

The capital investment in this quarter was almost nothing, Kamlesh. We have certain open procurement that we have done in the past last year. But we will have to, like I told you about the machine for our motor plant, there is one other machine for our compressor plant. They're all very small in number, yes? So besides that, we don't see any further investment in our -- in CapEx, right? As far as strategic initiatives are concerned, we don't see anything happening in this year. We don't have anything lined up nor do we visualize pursuing it at this point in time.

Okay. Okay. So all those big costs, which we were aiming to put in will only be accrued from next year you say, is it?

Which costs you are talking about? The European costs?

The big cost which we are -- yes, European costs.

No. European cost is not CapEx. It's OpEx, Kamlesh. It is basically salaries and travel costs that we had baked in as part of our Europe strategy, right? That we have trimmed down when this whole situation came up. But whatever was sunk is continuing, yes? Those costs are continuing. And what results you are seeing is after those costs that have been taken into account.

Okay. Okay. All right. Secondly, sir, you mentioned about U.S. markets across verticals. Can we get some color about pockets of Europe, like patents, ELGI Direct, Michigan and our distribution acquisition, all that things, how has it played out?

So all our verticals in the U.S. are doing well. They are almost at last year's level, right? And they are continuing to grow. We have some very specific, strategic initiatives that we have kick-started in the U.S., not in relation for any CapEx, but more of operational rigor. We are bringing in certain strategic focus and we expect that those will produce even better results in the future, right? But are they going to show up in 1 or 2 quarters? No. But in the next 3 to 4 quarters, we are going to see a significant shifting of the needle in the U.S. As far as Europe is concerned, we are already seeing the needle getting shifted by virtue of all our investment in people and facilities in various countries other than in Germany. We are beginning to see results coming out. And September really -- Europe shuts down for part of July and August. So we are expecting to see a big uptick in September and that will sustain it.

Okay. Okay. So broadly, sir, at this point in time, the operation level across India, U.S., Europe is in what end? Is it normalized to 100% or there is still some kind of uptick that is going to be seen in operation? What is it? Is it 60%, 30%, what level we are seeing?

So if you look at the first quarter, India was at -- India was 60% lower, right, if you accumulate it for all the 3 months. But if you take June alone, India was close to -- it was only about 25% lower, correct? And if you look at the month of July, India was only 10% lower, right? Now if you look at our expectation for July, August, September quarter is we will be at a consolidated level close to last year's level, almost there, right? Now whether in the third quarter we will continue to grow beyond the second quarter is difficult to say at this point in time.

Okay. Great, sir. So that's it for the call, sir. Any specific closing remarks you would like to make, sir?

No. At this current point in time, the situation looks a lot better than we anticipated. In fact, if I have to look at the second quarter, the second quarter looks very good in relation to the second quarter of last year. But unfortunately, I'm not able to make any clear statements of how it will -- will that growth trajectory continue into the third or fourth quarter, it's still early to talk about.

Yes. Great. So with that, we conclude the call. Thank you, everyone, for joining for the call. A special thanks to Mr. Jairam and his team for getting valuable insight. With that, we conclude the call. Thank you, and have a great day.

Thank you so much. Thank you, everyone. Thank you, Kamlesh.

Thanks.

Thank you very much. On behalf of Asian Markets Securities, that concludes the conference. Thank you for joining us. You may now disconnect your lines.