Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the ELGI Equipments Limited Q3 FY '21 Results Conference Call hosted by Asian Market 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 Market Securities Private Limited. Thank you, and over to you, sir.

Thanks, Mallika. Good day, everyone. On behalf of Asian Markets, we welcome you all to the 3Q FY '21 Earnings Conference Call of ELGI Equipments. 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 or good evening, ladies and gentlemen. It's my pleasure to be with you this evening. I hope all of you are safe and sound, families are safe and sound. I think we have done an outstanding job so far as a country to bring us to this level, and I hope that with the vaccine and everything we'll be in much better shape going forward. I would like to give you a brief overview of our quarter performance. Typically, I look at the consolidated numbers, compare it with the previous year same quarter. But because the previous year -- I mean this year was a special year for various reasons, I will also look at a comparison between -- I think it's also relevant to look at Q3 versus Q2 of this year. So comparing Q3 of current year with the previous year, our sales was higher by 18%. And at the EBITDA level, we were higher by 93%. So -- just give me a minute, sorry. So in terms of reconciliation, our EBITDA compared to last year should have been high -- should have been about INR 957 million. As opposed to that, we were at INR 599 million. The difference is about INR 358 million. So the primary reason for us in this particular quarter has been, our contribution was -- has dropped. As you may know, from October onwards, there has been a very volatile and very frequent change in metal commodity prices. We could not react fast enough with our price increases because the volatility was very high. At the contribution level, we lost about INR 145 million. Employee cost was higher by INR 55 million, but that's primarily because of exchange restatement of our foreign employees. Michigan Air employees which were -- who were not there in the previous quarters of the -- I mean, Q3 of previous year have been accounted now because we did the acquisition last December. And the Europe initiative cost a little bit of increase. So these were the reasons. Nothing significant in terms of either headcount increase or compensation increase. And in Q2 of this year, we had -- sorry, Q2 of this year, we had -- sorry, I'm sorry, I'm getting carried away. So in -- compared to Q3 of last year, we had 40 -- INR 85 million of other fixed costs and savings. So overall, we were able to contain it. The biggest challenge was the contribution level. We lost quite a bit of margin. Going to Q2 of -- comparing ourselves Q3 and Q2, just give me a minute, let me pull that. We -- our EBITDA should have been -- was INR 599 million, INR 600 million, and we -- sorry, the explanation that I gave you was for Q2. Let me do the explanation for Q3, please. Can you go back? So our EBITDA was INR 599 million. Our EBITDA should have been about INR 670 million. The primary loss has been employee cost. And like I explained to you, the employee cost is because of addition of Michigan Air; addition of the Europe industrials, which is an initiative that was not there last year; and the ForEx impact of the statement of our employee cost. So while we had a great opportunity in Q3 because of an 18% growth in the top line, we lost that primarily because of the volatile material cost, but things have improved. We have responded into the -- through price increases, correcting for the raw material price increases. And we've seen -- started seeing the results in January itself. So I think the rest of the quarter of Q4 should be far better in terms of at the contribution level. So moving on to a business level evaluation of the statement. Typically, I start from Australia and work back -- work across the globe. Australia was a very, very strong year for us compared to Q3 of last year. We grew by almost 60% in Australia, on the back of some very strong orders across the board. Coming into Southeast Asia, it was muted, roughly similar to last year. There was no growth, but it was flat. India -- like I -- India -- said, India has grown quite significantly for us, close to about 20%. The Gulf was a challenge. Gulf dropped compared to last year. Europe was a very positive performance. We grew by almost 60% in Europe as well. America was also strong at around 17%, 18%. So -- and our automotive equipment business also grew by 18% compared to those. So all around, except for few geographical pockets, our businesses grew well. We believe that we have gained some share in our market in various geographies. In India, it's very difficult to say because we don't have market share -- market size data, whereas in the rest of the world, at least in some parts of the country, we have. So we -- so overall, it's been a positive Q3. I think we could have -- if we had not had the volatility, we would have definitely done very well, far better. But I think we have corrected it. We have taken control over the situation. I think it's -- Q4 should -- on that count, Q4 should be quite positive. So this is on -- so if you look at our share of business, India in Q3 was -- has come back. It is now 53% of our revenue compared to 47% of the rest of the world. But year-to-date, India is still 47% and rest of the world is 53%. So when you start -- when we started this year, Q1, India was quite bad, the rest of the world really pitched in, and the percentage is high. So now India is coming back into stream, so the percentages are shifting. Going into our net debt position. Net debt is right -- is INR 109 crores. We've had a substantial reduction in our debt. This INR 109 crores includes about INR 11 crores that we got as an IT refund. We -- this was not -- this is still a mystery refund that has been received. We are still working with the Income Tax Department to figure this out. So this includes that. The same number in Q2 was INR 149 crores. So we've been able to reduce about INR 40 crores in this quarter. Just as a trend presentation, in Q1, without the IT refund, we were at INR 205 crores. So from INR 260 crores, we reduced to INR 205 crores. From INR 205 crores, we brought it down to INR 150 crores; INR 150 crores to INR 109 crores. So we have good control over our raw material and our receivables. But international business as well as our import has been a big challenge because, as you must have all heard, containers are becoming a problem. Freight costs have gone up. Shipments are getting delayed quite significantly. Many of our vendors are finding it difficult to keep up because of raw material challenges. So there will be a phase that we will be going through to -- there will be an increase in inventory as we have to do it as a means to protect against this level -- this temporary -- what we believe is a temporary volatility. Maybe it will last 2 to 3 months and it should come back to normal. So that's an overall presentation of our finances. I'll be happy to answer your specific questions. I apologize for that initial mishap where I was going -- I was floundering a little bit between quarters. Sorry about that. Thank you.

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

Congrats on a good set of numbers.

Thank you.

Sir, first, you had mentioned in the press release that the outlook seems to be good in the domestic market because of good traction seen from the Union Budget, et cetera. So what kind of growth we can see -- which are the sectors which are likely to drive growth in the Indian markets, especially infra-driven? And what kind of growth can we expect for the domestic market, sir, if you can give broad view.

Well, like I said in the previous Q2 presentation, Ravi, the growth that we are experiencing in Q3 and we're continuing to do into Q4 is on the industrial side across all industries. There is no -- I would not say there is one specific industry that's disproportionately high. All of them are back in the market and looking at capacities. The infrastructure emphasis of the government in terms of roads and construction is also giving us, on our portable range, there's been good traction. We are beginning to see that across most of the portable category. So these are the 2 areas that I see. As far as growth going into next year, it's very difficult to say because this was a distorted year. If you -- if we continue down our trajectory, our revenue for this year will be equal to last year. Effectively, what that means is that we have done 12 months revenue in and about 9.5 -- 9 to 9.5 months. So if you look at that, that itself is a growth of close to 20-odd percent, right? Now growing again. If you look at it, that growth has happened in -- partly in Q2 and Q3 and Q4. Now to go beyond that is a bit difficult. But the fact that we lost one quarter this year, we are going to get that quarter back next year, right? So if I add it back, I think 10% to 12% growth is realistically possible at a very minimum.

Okay. Okay. And so -- I mean in the last investor meet when we had met, you had mentioned domestic market kind of might remain kind of subdued. Is -- what are the things that you are seeing that it is incrementally positive from, say, last February to now?

Last -- from last February to now. I mean, if you look at the last year, besides the COVID thing, if you look at it, October onwards, we started -- the economy started getting very sluggish, right? And we were going through a very muted period in terms of demand. Overall, there was a lull in the economic activity. So now it is completely different. It's a completely different landscape right now.

Okay. Okay. Got it, sir. And what can be -- what's the quantum of price increases we have taken on a blended basis to compensate for raw material cost increase?

It varies from product to product. It's anywhere from parts to products and different kinds. It's anywhere between 2% to 4%.

2% to 4%. Got it, sir.

Yes.

And any Chinese imports that might have lost market share or we might have gained market share, given the fact that supply chains for them also have been disrupted, especially in the piston compressor range? Anything of that sort that we have seen in terms of market share gains, even from Chinese imports?

Like I said, it's difficult in the Indian market to talk about market share because there is no collective data that everyone kind of submits to understand the size of the market, right? So it is only speculative that you can say because of your growth and then say like I may have gained market share. So it's very difficult to say. So we'll have to wait to see the results of our competitors, which many of them are not listed, they are private. So it will take a year by the time they -- those numbers come out.

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

Congratulations on excellent numbers, sir.

Thank you.

Sir, I have a few questions. First on the VRS which Board has approved. So just would like to know. No doubt, last year, you were mentioning that we would probably look to do certain employee rationalization, especially in India. So maybe if you can just give a perspective as to, is it -- VRS is for only India or overseas? And what kind of numbers in terms of employees we are looking and the value, right, sir?

Yes. So the VRS is only for the Indian market -- for the Indian operation, and it is primarily in our operations in the blue-collar category of employees. We expect there would -- it's not a big number. We expect about 30 to 35 people reduction, and it's going to cost us maybe around INR 5 crore.

Sure. Okay. And in terms of U.S. -- particularly U.S. and Europe market, we had seen a reemergence of the pandemic second wave. So -- no doubt Q3 has been very strong for us. But if you can just give us a perspective as to, are we seeing any slower growth trends or -- and also specifically, I missed the U.S. performance in Q3. So if you can just dwell upon U.S. and Europe markets, sir?

Well, both, yes, they had multiple waves in those countries. But I think the arrival of the vaccine and vaccination process and generally people having adjusted to a way of working with protection with the COVID virus around, business is not -- it's not going down anymore. It is on a return path. So I don't see that as a challenge. And I think the whole world -- '21/'22, I expect the whole world will have a good year because '20/'21 was a very bad year. So that's not -- it's a no-brainer to say that, yes. As far as the U.S. is concerned, North America, we grew by about 16% -- 15%, 16%. Growth in certain segments were high, certain segments were kind of flat. Europe grew by almost 60%. Like I said, I mean, in Europe, we are starting at nothing. I mean there's so much headroom for growth irrespective of whether the market is growing or going down, the headroom for us is so high. We put the right strategy in place. We had the right team of people. We have the right products. And therefore, we are seeing the results, right? So there is -- it is a very deliberate, this is not accident thing, it's a very deliberate thing. Australia also is very deliberate. This is a result of many years of work. We are beginning to see that. So it's positive. Yes.

Sure, sure. And on the fixed cost, sir, we were looking to -- for a certain reduction. And now with almost 10 months have passed, so what kind of sustainable fixed cost reduction we can kind of factor going forward for the company, sir?

Well, we don't have a final number on that, Manish, in terms of what will be -- see, if you look at Q3, some of the fixed cost has increased and part of it is also because of the business has grown, right? But if you look at the increase in fixed cost in relation to the increase in business, it's a fraction of what it used to be earlier, right? So we still haven't really done a detailed calibration of what, when things get back, the vaccine has been -- vaccination has been done and people are coming out and things come back to normal. A part of our -- the way we conduct our business is also a function of the customer, right? Today, our customer is quite happy to tell us don't come to the factory or don't come to our office. We're quite happy to talk to you virtually. But when things get back to normal, if customer starts saying, no, we want to see you, then it changes, right? But we will have to see how best to optimize it. So it's very difficult. I'm taking travel as one because that's one big heavy aspect of our fixed cost, right? So it's difficult to say. But there are certain costs like, for instance, travel to the head office, head office people going to the branches, these kinds of costs we have, we will definitely save, right? Because we have said, no, we're not going to do that, right? We're going to use the virtual platform for those kinds of meetings. So -- we are -- like I said in the earlier meeting, we have decided to shut down our branches, right? We are already talking to all our employees. So that's going to be a saving. So those are sustainable. So we still haven't done a final tabulation of how the steady state will look like.

Okay. And sir, you did give the number for India sales at 53% for the quarter. So can I have the comparative Y-o-Y number for Q3 last year and also 9 months last year?

Year on -- you mean the percentage of ELGI -- I mean percentage of India versus the rest of the world?

Yes. So India, you said 53%. I wanted a comparative number.

Yes, for earlier -- the earlier quarter was also 53%. Earlier -- sorry, Q3 of last year was also 53%.

Okay. And 9 months also, sir?

In 9 months this year, India is 47%. Last year was 54%.

[Operator Instructions] The next question is from the line of Harshit Patel from Equirus Securities.

Sir, I had a few queries on our oil-free compressors business. So sir, how is that business now shaping up for us? In the last quarter, you had mentioned that we had started doing reasonably well, even in the international markets on that front. So sir, how is that we are scaling up in that business now?

I think the traction we gained in the prior years in India is continuing. And Q3 was also a good quarter for us on that thing in India. And the international traction, that I mentioned to you in Q2, continues to remain strong. So -- but it's a long path in that product segment because it takes some time.

Sure, sir. So sir, could you give us some idea as to what portion of our revenues would now be coming from the oil-free?

I wouldn't like to share that number, Harshit, if you don't mind. It's too competitively sensitive. Yes.

Sure, sir, no problem. Sir, my second question would be on the motors front. So you had earlier highlighted that we were doing some validation trials for the developed markets, both U.S.A. as well as Europe. So sir, have we now started supplying compressors with our own motors for those markets? Or is it still more of an India Inc.?

No, no, the regular supplies have started for the Indian market, quite steadily. The motors are -- we don't want to take any risks. So the validation process for doing it in Europe and America will take some time. So it will be probably around the second half of the next financial year is when we will start seeing more regular supplies for our motors into those markets.

Sure, sir. So sir, just a small follow-up on the same. So in India, how much portion of our compressors have now our own motors?

I don't have that number in front of me. I don't have it. I can -- I don't have it in front of me, sorry.

The next question is from the line of Ritwik from Deep Finance.

Sir, I have one question on employee cost. If I see the consolidated number, it's up 10% sequentially from Q2 of FY '21 and stand-alone is flattish. So does that imply that the entire employee cost is increasing due to Europe investment?

Q2? You're comparing Q2?

Yes, correct, of current financial year.

Okay. So what happened in Q2 is there was a huge subsidy, both in Australia and the U.S., right? That is not there in Q3, yes. That subsidy was close to INR 83 million. So if you add that, it almost becomes level.

Sure. Okay. So that explains the entire part of it. Okay.

Yes. Yes.

So going forward, should we consider this INR 110 crores as a stable run rate going forward since the subsidy would be gone completely in the coming quarters as well?

Yes, for this year, yes. The next year, like I said, we have a strategy in Europe, which we paused because of the COVID situation. We will recommence that strategic initiative. So there will be an increase in people cost as a consequence of completing that strategic initiative. Then there will, of course, be some normal increments and all that will commence, right, because we had frozen increases, we had frozen all kinds of stuff this year. But the team has done an outstanding job. So it is only fair that we reinstate those practices that we had before. So those will -- for next year, there will be an increase.

Right. So this is the EUR 25 million that we plan to invest from FY '22 onwards or a 3-year...

No, no, no. No, we started in '19/'20, right? So we paused it in this year, right? Now -- and now we've gained -- we're gaining traction. We believe that we are past this COVID now and then slowly, we are getting back to that original plan, yes.

Sure. Okay. And sir, in the revenue split, could you give us the figure for Europe and USA? What would be the percentage for 9 months FY '21?

The total -- I don't know the percentage of -- well, Europe as of FY '21, the whole year, I don't have it in front of me. So I would say, Europe, I have it only for -- I can't say it for the whole year.

Okay. Okay. Okay. And sir, sorry, harping on the Europe investment, again. Could it be about -- what is the kind of run rate that we are looking at from FY '22 on an annual basis to -- for employee cost increase?

Sorry, I didn't get your question.

So we mentioned that Europe investment will restart from FY '22 because we are seeing good traction in that region. So what is the -- if I'm not wrong, our earlier plan was to invest about EUR 25 million to EUR 30 million for 3 to 4 years.

EUR 25 million to EUR 30 million would be the loss over a period of 4 years that we will incur in our initiatives. That's what I said, right? So in terms of increase in people cost next year would be about INR 13 crores to INR 14 crores.

Okay. That's on an annual basis?

Yes.

The next question is from the line of [ Kishore ], an individual investor.

Great set of numbers, again.

Thank you.

The question I had was more to -- more a generic...

Sorry to interrupt, Mr. Kishore. Sir, this is the operator. Sir, there's a disturbance coming from the background, sir, from your line.

Okay. Is it better?

Yes.