Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to ELGI Equipment's Q4 and FY '21 Earnings Conference Call hosted by Asian Market Securities Limited. This conference call may contain forward-looking statements about the company. Which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. Actual results may differ from such expectations, projections, et cetera, whether expressed or implied. Participants are requested to exercise caution while referring to such statements and remarks. [Operator Instructions] Please note that the 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, Aisha. Good day, everyone. On behalf of Asian Markets, we welcome you all to the fourth Q and FY '2 1 earnings conference call, 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 and the yearly financials, and then we shall begin the Q&A session. Over to you, sir. Thank you.

Thank you, Kamlesh, for hosting this. Good afternoon or good evening, ladies and gentlemen. Thank you for taking the time to be with us. I will first start and just give you a brief on the agenda. I will start with a Q3 versus Q4 because last year's Q4 was a bit of a dislocation. So it really doesn't make any sense to compare with Q4 of last year. So I will compare with Q3 of this year and Q4. Then I will take you through the whole year, and then we will talk about business as it is today. So jumping right into Q4 versus Q3, our sales was about INR 6,100 million -- INR 610 crores versus Q3 was INR 547 crores. We had an increase in sales of close to INR 635 million. Because of that, we should have made a profit -- additional profit of -- at an EBITDA level of [ INR 250 million ] and in contribution, we lost because of volatile and quite violent changes in raw material costs to the extent of about [ INR 60 million ]. So effectively, our EBITDA should have been close to about INR 789 -- INR 787 million, we were at INR 737 million. So I have to provide an explanation of close to INR 50 million. The biggest cost that came -- besides the contribution loss due to raw material, the biggest cost is VRS that we introduced in Q4. This was primarily to reduce certain blue-collar workmen who have had challenges working in the environment, a competitive environment. They had health issues. So it was necessary for us to go through it. So there was -- that's a onetime thing, so there's nothing to be worried about. So overall, I would say Q4, barring the challenge on raw material costs, which was across not just India, across the world. We have done well. Moving on to the whole year. Let me start with the revenue. We finished the year with close to INR 19,000 million and early last -- the previous year was about INR 18,000. India was only about 1% growth. Bulk of our growth came from North America, Europe and Australia. So the internationalization of the business has really helped us during this period. So it is a positive thing, and it is the right thing to do, and this is a validation that we are moving along in the right direction. So if I go into the P&L for the whole year compared to the previous year. The biggest cost for us is the -- besides the increase in revenue, which is quite marginal, about INR 1,000 million. Contribution was far better. The EBITDA that we made was -- our actual EBITDA was about INR 202,000 million. Our EBITDA as per the sales and the earlier contribution levels should have been only INR 1,800. So we ended up making actually about INR 300 million higher EBITDA for the whole year than what we would have done versus the last year's numbers. We had the biggest improvement is in our other fixed costs as with most companies. Significant reduction in travel cost, significant reduction in -- across all maintenance, rent, training, marketing, everything was reduced. So overall, the year was a very positive year. So I would like to give some context to this. When we started the year, there was a high level of nervousness, uncertainty, nobody knew what COVID was, nobody knew how it would play out when the lockdowns came. So while after a month, 1.5 months, I think we gained some confidence. Unfortunately, the markets rebounded products. For ELGI specifically, even during that time, the international markets continue to fire a lot better than India because they didn't have as much as a lockdown as we did. By the second quarter onwards, all the markets came back up, the confidence within the organization, confidence in markets, came back. So we did a -- we -- quarter-on-quarter, we had a great performance on the top line. But by the end of the second quarter, the volatility in raw material prices really hit us and it was happening, steel and copper and metal commodities were increasing week-on-week and that was something that was very difficult. We went through a very difficult period to manage. We continue to do that because steel prices, even as we speak, are continuing to rise on a weekly basis. Little inexplicable situation, but that's the reality. It seems to be the current volatility and prices, seems to be more an India centric issue rather than a global thing. But nevertheless, steel prices have witnessed more than a 50% increase over the last 1 year. So this has been -- continues to be a challenge. It was a challenge in Q4 -- I mean Q3 and Q4. But I believe that the team has managed things well. We continue to do that well. So this is really the synopsis, the team -- our team of -- our employees have done an outstanding job managing the company during this extremely difficult period. Their commitment, their resolve, their perseverance, their patience, their resilience. It's something that it's a textbook. I mean it's -- there's not enough words that I can use to express my admiration and the attitude towards them. So we've done a great job. And reciprocally, from a company's point of view, the fact that we took a very firm decision that we will not fire anyone like many companies did or cut salaries, like many people did -- like many companies did. We are very happy that we didn't do it, and we are very lucky that we were able to sustain that decision even holding on to that and being able to deliver good results for our investors. So overall, a very positive situation. Now if I look at the revenue contribution, I'll start typically from Australia and move west. Australia had a great results for us. It not only did better than the previous year. It did far better than our own internal expectations to our target. Very strong year. We have gained share in Australia. It's a very positive situation, and we continue to hope that we will keep gaining traction. Southeast Asia was more like India heavily impacted by COVID, all the critical countries that we're operating in. But nevertheless, we were able to maintain the business almost at the same level as the previous year. India, first quarter was a washout. Second quarter, we grew -- I mean, the last 9 months of the year, we grew by almost 18% to 20%. So it was a very positive performance in India. Moving on, Middle East was very challenging. It was probably the only region that performed below last year. But we have specific plans. We are hoping that things will turn around in Middle East and Africa. Europe had an outstanding performance. As everyone knows, we've been incubating Europe for the last 1.5 years. We continue to -- we hope. We head on to increasing our manpower headcount during the initial parts and towards the end of the year, we started releasing that going back to our original plan. Europe had a significant growth for the year. Moving on to the -- to North America. North America's performance was also outstanding at a significantly higher growth than the previous year. So overall, the globalization of the business has really helped the company, and we are in a very strong foundation in most of the markets that we are operating in. Coming down to cash flow. I think here, also, the team has done an outstanding job controlling inventory and receivables. Other than the beneficial tax refund that we received without taking that into account. Starting net debt of INR 260 crores, we are down to about INR 110 crores without accounting for the tax refund. If you take that tax refund, also, we are at around INR 90 crores. So in the overall funds management also, we are in a very, very strong position. In terms of ratios of our sales between India and rest of the world, in Q4, India, of course, came back strongly, it was 56-44. But for the financial year, it's 50-50. So international performing a lot more than India. From a CapEx point of view, we had a budget of close to about INR 30 crores, that we said that we need to invest. But we ended up actual cash outflow of about INR 18 crores to INR 19 crores. For the current year also, we expect that the investment will be in the same neighborhood. It all depends on how the COVID situation plays out. So where are we now in terms of our -- in terms of the COVID situation, how do we see our business? Now April has been a very strong month for us. We did better than last year. I mean, which is not saying anything because last year was a wash out. But we have also done better than the year before. So which is a -- we had a pretty strong month in April. May is still -- May is going to be challenging, and June is probably going to be challenging. But I believe that it's going to be nowhere near the levels of the previous year. So I think we should be in a strong wicket. But the uncertainty of how COVID is going to impact us. We know there is no longer an uncertainty about this infection. That is very clear. But how it is going to impact us in terms of people not being available, suppliers', factories going down. Freight and shipment getting delayed. These are things that we are not able to predict. At the moment, Tamil Nadu is under the severe lockdown. We are, and as the supplier to the essential commodities, our factories are still running. We are taking all the precautions to safeguard our employees, keep our factories clean and safe. We are also reaching out to our vendors, providing them with all the assistance so that they are also able to keep their employees safe. And therefore, able to make supplies to us so that we are in turn able to supply to our customers internationally. So at this point in time, while there is a lot of nervousness and uncertainty, we believe that we should in a matter of a couple of weeks, things should settle down, and we should be on a good wicket. So if there is still a little -- there is still quite a bit of positivity in the company in terms of the business outlook. Other than India, all the markets are firing. They're coming back from a very weak year so therefore, there is a resurgence of economic activity, and we are on top of it. So therefore, it should be good for the company. So this is really an overall update of how we have done and where we are today and how our future looks. So again, thank you for being with us. So I'll be happy to take your calls. Your -- I mean, your questions.

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

Congratulations on a good set of numbers. Am I audible, sir?

Yes.

Sir, first question is regarding the kind of growth that we had seen in the fourth quarter. So if you can touch upon in the domestic markets, which are the sectors which have contributed to the growth. How the growth has been from the infra side? From a private CapEx led demand, how is it? Especially, are you seeing early demand from PLI related factories being set up and the regular steel, cement, oil and gas, road construction and such kind of demand, how it is? if you can touch upon it. And probably domestic market over the next couple of years, what kind of growth trajectory that we can see if you can touch upon this, would be great, sir.

Sure, Ravi. The fourth quarter was on the back of, again, restricting my conversation to India was on the back of all sectors performing very strongly. It was not any 1 industrial sector that was really peaking. But to answer your question about infrastructure, the infrastructure-related investments had 2 manifestations. One was the inquiry levels for longer term projects, whether it was in cement steel or refurbishment of plant. These were -- definitely, the inquiry levels have gone up. But finalizations of anything significant did not happen, right? But compared to the prior quarters, the inquiry and interest in the lack health has been far better. On the other side, on the road construction where our Portugal compressors, that shows some strong results in the fourth quarter. But I wouldn't say there was anything unique because that kind of interest started for us even from the second quarter onwards, right? But the -- it remains strong, right? So the India story is infrastructure and large CapEx was not the biggest contributor. It was across the board, all industries kicking in. I wouldn't say it's got anything to do with public. It was all private investment that kind of resulted in. Probably the eventual public spending, government spending had a tickle back into private spend, but we didn't see any direct public orders -- public sector orders on us.

Okay. Okay. And certain equipments, we also supply to oxygen generating equipment, et cetera. Would that have also contributed to the growth during the quarter and...

Not in Q -- not in Q4 in any significant way, Ravi. Because even while Q4 was happening, the recognition of oxygen shortage that will happen, that will come was not there, right? It came and hit us quite suddenly in end of March and April.

April. Got it. So that demand can be good in Q1, sir, so basically this year? That is and can it be a negative...

Demand is good, Ravi, but I feel a little squamish talking about that as a business opportunity because it's really -- I don't want to make it look like we are trying to make profit out of environment, which is a national requirement. So less we talk about it, the better.

Sure, sir, sure. And what kind of price increase we would have taken across compressors on a blended basis over the, say, past 6 to 12 months, any sense on that?

I think the overall price increase has been in various regions. India was the highest. We took almost a 7%, 8% increase in increments in multiple steps. Globally, it's from maybe 4%, 5%.

Okay. Got it. And final question with respect to PLI, sir. So are we seeing initial inquiries from, say, factories being set up due to PLI? Or do you expect it to come over the next 12 to 24 months?

We are not able to isolate any of these requirements that are specifically linked to PLI, Ravi. They haven't seen it yet.

The next question is from the line of Renjith Sivaram from ICICI Securities.

Sir, congrats on a good set of numbers. Yes. I just missed your opening remarks, you told about the 9 month trailing growth from the India market. Was it around 18% to 19%, is that number right?

Correct.

Okay. And what's the outlook like going into next year, do you foresee such kind of growth traction going forward given the oxygen shortage problem also that's also giving us a good opportunity?

So when we entered into this financial year, there was no oxygen related issues. So our budgeting that was completed in January, February time frame was done without not the knowledge of this kind of a situation that will evolve. So our growth trajectory that we had planned for '21, '22 was in line with that trajectory that we witnessed in the 9 -- 3 quarters of the prior -- the 9 months prior. But things quickly changed in a hurry in May -- I mean, in March and April, so right now, it is very -- different parts of the country are experiencing different kinds of restrictions. There has to be an economic impact of all these restrictions. But it's not like a lockdown as it happened in the previous year. So therefore, while we have to taper our, our projections based on the 9-month trajectory. I don't think we need to view the future as dimly or with as much gloom as we did in the beginning of last year. So I think in a matter of maybe a maximum 1 month, 1.5 months, things should get back to normal. Hopefully, when the third and the fourth wave comes, we will be far better prepared in terms of impact on human life. So I think these are -- the vaccination drivers going to parallelly keep increasing. So I think except for this, maybe a 1 month, 1.5 months, I think we should be okay. So do I hold on to that same trajectory of growth? Probably not, but will I eliminate it and make it negative? Probably not either. So the future -- the most likely future is going to be somewhere in between.

Okay. And in terms of our external overseas performance. You told Australia was a phenomenal growth, so what's regarding the profitability of these regions? If you can elaborate on like the 2 regions, how has been the profitability, what's your expectation? And also touch upon your strategic investments?

Renjith, I'm not able to hear you, there are -- some of your words are getting muffled.

Sir, I just wanted to get an update on the margin geography was regarding your key geographies like Europe, Australia and North America. How has the margin been -- in line with your expectations? Or how has that trajectory been? And also regarding our investment with -- strategic investments which you have halted, are we going forward and doing those strategic investments?

Yes. So as far as margins are concerned, I don't want to go into specific percentages in specific regions. I can only say, barring India and Middle East, all of the geographies have performed significantly better on margins compared to the previous year. And quarter-on-quarter, they've been able to either grow -- maintain or grow those margins in the 12 months. So that's a very positive sign. And I believe that barring this volatility in metal commodity prices, we should be able to sustain or maybe even at the best case, grow these margins. So that's the positive side. As far as the strategic interventions that we had, which was primarily Europe, which we paused temporarily and which we selectively released towards the end of the year. We will continue to do open that up. The performance that we have got has been very good. So we want to sustain and grow it to the next level. So we will do that for this year.

The next question is from the line of Aditya Bagul from Axis Capital.

Congratulations on a great set of numbers. My question was -- so my question was specifically with regards to Rotair and our EU business as a whole. I embark on multiple strategic initiatives in this business over the last year or 2. I just want to understand specifically with regards to our spares and aftermarket business, how is our improvement happening in that particular region? Because that is something that would probably be a template to follow in the other geographies, excluding India as well.

So let me try and understand your question, Aditya. You said you want to understand the aftermarket business profile in Rotair, specifically, is that the question?

And EU as a whole, the reason why I wanted to understand this is, as I understand that there is a divergence in terms of aftermarket contribution between India and the rest of the world. I just wanted to understand the trajectory that we are on in the EU business, which can be extrapolated towards the geographies.

Okay. So the aftermarket business in our line of business is dependent on creating the installed base, right? Once you create an installed base, then there is a -- what you call as a recurring revenue coming from the aftermarket, right? First part, parts and services. Now as far as Rotair is concerned, their primary business is portable compressors, where, generally speaking, for in-portable compressors, the recurring revenue is typically half of that of industry. But that's the nature of the beast because most of the people who buy industrial compressors -- I mean portable compressors, they operate it in remote condition -- locations, the duty cycle, annual duty cycles are much lower. Therefore, the amount of money customers spend on maintenance is lower. As far as the other -- beyond Rotair and Europe is concerned, we are going through that phase of building our installed base now. Our focus is to very carefully monetize the base that we have already created in Italy over the last probably 6, 7 years, and we are beginning to see the results of that, right? So aftermarket as a source of revenue is a strategic focus. And we've been seeing the results of that. And That is there even in North America. So -- and in every country that we operate in, this is a strategic focus because that's where really our profits come from.

Understood. Understood. That is quite helpful. My second question is that during our analyst meet and earlier as well, have you talked about our long-term ambition. I just wanted to know if there are some milestones that you would like to talk about to achieving our $400 million revenue and 15% margin. So while I understand that this is a 5, 6-year sort of road map, if you can give us some milestones that you look to achieve in '23 or '24, that would be helpful.

So I don't know whether you had a chance to look at the MD&A in the last annual report, where we really did as much as possible detail diagnosis of our past, where we came from, what our aspirations are, why we will win and therefore, what our future is, right? And subsequently, we said that there are -- we will set some clear definition. So what we have now defined is we have to -- our target is to hit $400 million in revenue, 16% EBITDA and a minimum 30% return on capital employed. And we want to achieve this in the -- by 2000 -- I mean '25, '26. This is really our interim goal that we have set for ourselves as part of our strategic business plan. Now this would -- this translates approximately to about a little less than a 15% growth, which is -- which I think is realistically possible, right? A CAGR of less than 15%. So we think this is possible. We have made -- we have converted these into specific initiatives in each country, each product so we are well aligned to that. So I think this time around, our journey will be towards -- goals will be a lot more deliberate and a lot more confident.

Understood. Understood. That was quite helpful. My last question is more to do with our airfree -- oil-free disrupted series. If you can give us an update on that, that would be helpful.

Well, that's an oil-free compressor with a significant value proposition to the customer. We have -- like I said, in my earlier calls, we've got some very strong traction in India, and that is continuing to grow. We have expanded the range of products in terms of kilowatt there. That's also set to give us some further inroads into markets. We have got our initial successful installations in Europe. We've got a few installations going on in the U.S. But in both -- in all the markets outside of India, it is a learning process, and we are solidly on track, but it is going to take some time to gain some traction there.

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

Sir, first question was on the euro expansion plan. Sir, you had quite elaborated that we will incur a loss of almost EUR 20 million over a period of 4 years. So that is almost INR 190 crores. Now in the last analyst meeting, you had alluded that we have already incurred a loss of almost INR 75 crores in the first 2 years. So that is FY '20 and '21. So sir, could you give us an update as to are we on track on this plan? And what means the quantum of losses in FY '22 and '23. So how should we see the losses in the upcoming 2 years?

Harshit, your audio was not very clear. So I'm -- I'm going to rephrase your question. You want to know what was the -- what is our current status in terms of our plan for Europe in terms of our investment, in terms of losses? And where are we against that? And what we anticipate in the future. Is that your question?

Yes, sir perfect.

Yes. So I don't have the actual losses that we are planning for '21, '22 and '22, '23, we have it, but I don't have it in front of me. Based on what we had said that we will incur as a loss, our current status is, our losses are far lower than what we had planned. And that the losses are lower for 2 reasons. One, our top line has been healthier in terms of both contribution and volume; and two, the expected velocity of investing in overheads, mainly people has been far lower than what we had originally planned. Now that velocity has started picking up towards the end of last year. It will continue to this year. To that extent, the losses would go up. But our expected sales is also going to go up. So to that extent, I don't see the annual losses becoming significantly higher than what we have seen in the past, but this is something. But like I said, I don't have the numbers in front of me.

Understood. Understood. Sir, the second related question would be, how should we look at the employee cost for next year, that is FY '22. So what would be the quantum of increase over the last year? And out of the total increase, how much should come from Europe?

I can take this off-line with you, Harshit, I don't have the numbers. You can reach out to our CFO, and I'm sure to the extent that it's competitively prudent to share, we will share it with you.

Sure, sir, that will be very helpful. And sir, just a last question. So sir, just expanding on the question of the earlier participant. So sir, what could have been the share of aftermarket in FY '21, both at the stand-alone segment as well as at the consolidated level? And when do you think we can reach that 30%, 35% kind of a benchmark number. So would that be possible to do over the next 4 to 5 years? Or would it be too early?

Again, your audio was poor, I'm going to rephrase the question. You want to know what is the aftermarket percentage in FY '21? Is that your question?

Right sir. Both at the stand-alone, and at the consolidated level. Yes.

Okay. So I can give you some rough numbers at a stand-alone level. At a stand-alone level, our aftermarket is -- if -- it's close to about 26%, 27% of our revenue and we are well on the way towards getting to that optimal number. As far as, I think, consolidated, again, I'm guessing a number, it's probably 10% to 12%. So we have a lot of headroom for growth there. Now in every one of our markets, the aftermarket is a very strategic initiative, like I explained in my -- in answering my earlier question. And that is one of the key drivers by which we are planning to move the EBITDA at a consolidated level to 16% over the next 5 years. So that's a very critical lever for us.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.

Congratulations for a good set of numbers.

Thanks, Bhavin.

So, Jai, my question is on the international compressors. And we are actually seeing that the EBIT continues to be negative. And the way we derive is from the segmental disclosure, consolidated minus the stand-alone there. EBIT Continues to be negative around INR 5 crores over the last few quarters. While you did allude towards an improvement in the performance. But if you could help us, when are we expected to see positive contribution from the international subs? And what is the kind of target that one can expect over the next 12 months?

I would request the participants to please stay connected as the line for Jairam sir has disconnected. [Technical Difficulty] Thank you for patiently waiting, we have Mr. Varadaraj connected. So you can go ahead, please.

Bhavin, I apologise for it. So let -- yes. Sorry.

I'm not sure if you heard my question. Should I repeat?

No, can you please repeat? I didn't get your question?

No problem, sir. So Jai, I was looking at the performance of the International compressor division and the EBIT continues to be negative. And the way I'm arriving at it is consolidated EBIT of the compressor minus the stand-alone EBIT. So if you -- while you did allude towards improvement in performance, and we could see that in the revenues. But the EBIT continues to be a negative. If you could help us, how should one expect this over the next 1 to 2 years?

So if you if you look at the EBIT for, let's say, '19, '20, Bhavin, and compare it to 2021, you will see a significant improvement in that ratio between stand-alone and consolidated. And that's primarily because of the losses that we are incurring in Europe, right? And that's a deliberate investment. So it is showing our strategic investment into Europe is showing up as a EBIT loss if you consider it as a capital investment, and if there is a way, I mean, if one could wish if it could get capitalized in the balance sheet, you will not see this here. So it's really the impact of the expenses that we are incurring in Europe that is passing. And that's more strategic in nature.

Understood. Sir, if you could help us, what was the negative impact of European in fiscal year '21. And how has been the performance of the U.S. businesses?

Bhavin, I can -- if we can take this off-line because there are some sensitive information that I think if you can reach out to Jayakanthan, he'll be able to give you those numbers.

Yes. Sure. The second question is on water well. And what we do understand is you recently did launch one of the product and if you -- do you believe that the gap has now been bridged and you could climb back on the market share ladder again?

Absolutely. I don't think it's a question of bridging the gap. I think we are ahead of the gap now. Our products that we have is far superior to what the competition has, and this has been validated through extensive customer experience. We have given away close to about 7 or 8 machines to customers and let them run for more than 2,000 hours. We have watched both their fuel consumption, their running costs. Bore wells as well as the reliability of the machines, and there is absolutely no comparison with what is out there in the market. And it's not only our own feedback, but customer's feedback has been very, very positive. Now at the moment, the market is completely dead. There is no investment going on. The impact of fuel prices -- at multiple levels that this market -- the demand for bore wells have come down. And as a consequence, the demand for bore well compressors is very subdued. But there is an expectation in the next quarter or 2, things will start picking up, and we are well placed in making that happen.

My last question is, on a stand-alone basis, if you could -- from the compressor side, it could help us, what were the top 3 to 4 end users segments for us? And specifically, what could be the contribution of the auto and auto-related sectors?

Bhavin, in FY '21, like in most other years that we've had, no 1 industrial sector contributed to more than 3% to 4% of our top line. Now that's the beauty of this business because there is no industrial dependence or industry sectorial dependent of this business. So if you look at FY '21 stand-alone, at least India, we had growth just about in every industrial segment. We started off the year with chemicals, food and pharmaceuticals, firing then auto came from nowhere, least expected, the demand for automotives went up both 2-wheelers and 4-wheelers, it started going up. And then there was stock of investing in capacity. So there was a demand for compressors, but taking all that into account. It's -- every sector does. So there is no -- I can't say that it's a top 3 in any significant way.

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

Congratulations on excellent numbers, sir. Sir, just looking at the India stand-alone performance, which has been really stupendous with EBITDA margin of more than 18% in the Q4. Sir, I will not only frame my question on Q4 margins. But going forward, like you did mention, we have taken certain price hikes and commodity price volatility continues. So my question is more on margin front that with India now getting a significant benefit of operating leverage with a lot of backward integration. Are these margins on an annual basis, what we are seeing in the range of 14% to 15% are now sustainable going forward. In the context of increasing commodity prices and our ability to pass on, number one. Number two, we had declining probably certain cost last year? And how much of that is sustainable? And do you expect some of those costs to come back? So just want to get a sense that how would we see our margins on India? And then maybe on overall consolidated basis also?

So when you say margin of 14%, what margin you're talking about, Manish?

I'm looking at operating EBITDA margin of 14.4% on a stand-alone, basically, INR 159 crores of EBITDA on a revenue of INR 1,100 crores.

Okay. So your -- so if you really evaluate that EBITDA for how we were able to achieve that EBITDA, bulk of it came from our operating leverage. We were able to increase -- well, sorry, for FY '21 stand-alone, bulk of it came from the fact that our other certain fixed costs are much lower, right? And we were able to maintain other contribution margin at very good cost level, right? So that's really the story for the full financial year. But if you look at Q4, the performance in Q4, the bulk of the 18% EBITA performance has come from the operating leverage, right? Other fixed costs in Q4 started going up because travel started. Customers wanted us to come and meet them. So some of that has already -- has started moving towards normal levels, normal levels of travel, not excessive. But we have taken certain -- very strategic decisions that go beyond this COVID and the return to normalcy, things like closing down our branch offices, going into a virtual working mode, renegotiating rentals, wherever, those things are going to continue, right? So it's difficult for me to exactly quantify which are the elements, but it's not a -- it's not a small number, but it's not a significant number. So expectation is if things get back to normal, some of these fixed costs will go back to normal levels. We will be able to maintain our contribution margin at variable cost, by and large, with a gap of -- with a lag of 2 to 3 months because we are not in a business where every day, we can increase prices. So there is always a 1 quarter lag in which a price increase becomes effective, that's visible on the P&L. But we are confident that on a steady state, we will be able to recover. And it's a decision that we have made that we are not going to swallow any of these increases in raw material costs because it's a -- it's a global phenomenon. So what is -- there is really no need for us to do it. So we've decided that we are not going to. So taking that factor into account and the fact that we are looking at a growth of -- strategic business plan trajectory, we are looking at a CAGR of slightly lower than 15%. So India will have to grow at that level, assuming it does, this is reasonably possible to sustain, yes?

Sure. Okay. Got it. And one more update, if you can provide on our motor facility, what is the progress on that? And when do you expect to start that?

No, no, water plant production has started. They are supplying quite a bit of motors to the Indian market. Quite a few motors for validation have gone to Europe and the U.S. So for the year '21, '22, quite a bit of our -- close to -- I think, close to 45% to 50% of our -- from a volume basis, not value basis, volume basis, the Indian requirement will come from our motor plant -- our own motor plant. We are still waiting for that one piece of equipment that is made by a German company. It is stuck. It is getting delayed repeatedly. If that comes in, that 50% can be increased further.

The next question is from the line of Omama Hishwari from [indiscernible].

Congratulations for good results in Q4.

Thank you.

Sir the question is more about the prospects that Europe as a region holds for us. You had mentioned before on incubating Rotair and Europe paging for 1, 1.5, and now is the time to go big considering the opportunities. Mid of last year, there was this incorporation of a lot of subsidiaries, LG, Belgium becoming our wholly owned subsidiary. And then there are plans to go big there because of kind of opportunity it presents. Can you just throw a bit of light as we also feel that will be a big growth engine for the group?

Yes. So if you step back and look at the global market, roughly speaking, 1/3 is the Americas, 1/3 is Europe, 1/3 is Asia, right? This is a rough split of the global opportunity of compressors. So Europe represents approximately 1/3 of the global opportunity. And we have been playing in Europe since 2014 and specifically in Italy, which is the most competitive market out of all the countries in Europe. And we have demonstrated to ourselves, that we have gained the share -- reasonable share of the Italian market, which is proof of our products, our services and our people and our engagement with distributors. So we took that as the basis of confidence, our platform of confidence and say, now let us go organically grow the Europe market by creating our own sales and service network, but for supporting our distributor, creating more distributor, which is what we did. And these incorporation of various companies in different countries is to enable us to be able to hire people in those countries. Now you can't hire people because of all the local laws and the social contracts that are necessary to be signed. Unless you have an entity registered in these countries, and that's what we have done. So we have pretty much registered in most of the countries. We still have a few more to go. Which we will do as the year progresses. And we -- even as we speak, we are building the team and bringing people onboard. So this is strategically aligned to what we intend to do there.

The next question is from the line of Ritwik from [indiscernible] Financial Consultants.

A couple of questions. Firstly, did I hear it right that you mentioned that $400 million revenue target by FY '26?

Yes, '25, '26, yes.

Okay. Okay. And you mentioned in the initial remarks that there was a small VRS amount. Is it possible to quantify the same?

It's about INR 4 crores, INR 40 million.

INR 4 crores. Okay. Sure. And sir, my last question is on Europe. Conceptually, is this understanding right that we would be manufacturing compressors here and selling into the subsidies that we are setting up in each of the countries, and they would have trading kind of revenue. And the bulk of the revenue and the margin would come in the stand alone? Is that a fair assessment?

No. You're partly right. Partly, I need to explain it. Yes, for the current period, the intent to manufacture the complete compressor in India and ship it to the various markets in different parts of the world. But having said that, for certain project type of business, some amount of local customization will happen. It already happens in places like Australia, where we have the capability to do it. So -- but by and large, it is going to be the model of making in India and shipping there. But as the volumes increase, we need to get availability production close to the customer. This is something that we will evaluate as the market and our presence in the market evolves. So we are open to that. We are not close to it. But at the moment, it is going to be production in India. As far as margin split is concerned, bulk of the margins are with the subsidiaries. It's not with the stand-alone entity. Roughly, I would say, 1/3 is probably, 1/3 is in the stand-alone and 2/3 is with the subsidy.

Okay. Sure. So basically, once the sale of our European operations, initially, at least in the coming 2, 3 years, our revenue in India will increase, but the margins in the overseas subsidiaries will increase further because of the higher margins that is...

Right. Right.

Sure. Okay. And no, just you know, I think back on the $400 million target for FY '26, if I take the FY '21 as basis, it translates to about 10% CAGR. So are we being a bit conservative or we are being a bit realistic, because 10% over 5 years?

Well, I'd rather -- one of the lessons that we have learned in the past is don't be optimistic and underperform, rather be pessimistic and over-perform, yes? So beyond that, I don't want to say anything because we'd like to see what best we can do, yes.

Sure, sure. And sorry, teasing in one last question on Europe. When do you think that we would assume a sizable scale. Sizeable scale in Europe, would it be 2 years or 3 years or later than that?

So we made a 5-year plan that at the end of the fifth year, we will break even recover all our losses. So we are well on that trajectory. We have already crossed 2 years. We've got another 3 years to go.

Okay. So FY '24.

The next question is from the line Renjith Sivaram from ICICI Securities?

Sir, just wanted to notice in the pattern, the U.S. business, what is the overall performance because that was one segment where we had a lot of turmoil in last year. So have those issues been sorted out? And how -- is that back to profitability?

Renjith, you're talking about patterns?

Yes.

Hello?

Yes. I'm talking about patterns.

Okay. Patterns this -- in the financial year, FY '21 has been profitable compared to the significantly higher than the year before. But it is still not -- we are not ready to break open the champagne on patents yet. There's still a big opportunity ahead of us and still a lot of work for us to do. And this is part of our strategic initiative that we have worked out for the next 3, 4 years. And you will start seeing the benefit of that as we roll those programs out.

Okay. And sir, lastly, we have seen in our announcement that Anwar has been promoted to ED. Is it that you're passing over the mantle or what should we read from that?

No. Fair question. No, he is not going to -- we are not looking at him being my successor. This is primarily to enable the stand-alone entity, the Indian entity to be able to compensate him for the work that he's doing. And because he was already a Board member, the only way to do it was through making him an Executive director. Right now, his compensation is coming from the U.S. entity as an employee, but now that he's in the Board that had to get changed. Now Anwar is responsible for all our strategic initiatives that we have made as part of our strategic business plan that I explained, to take us to this $400 million, 16% and 30% ROC goal. So that's the fundamental thing. He will be mentoring and supporting the entire leadership team towards making this happen.

The next question is from the line of Ritwik Sheth from Annual Wealth.

Sir, I just wanted to -- for consolidated revenue, the 10% to 12%...

We cannot hear you clearly.

Is it clear now?

Yes, better now.

Yes. Okay. I wanted to clarify on earlier participant's question. For the aftermarket revenue, for consolidated revenue, you said it's 10% to 12%. You meant international business is 10% to 12%, right?

Yes. Yes, correct.

Yes. Sure. Sir, second question is that usually, for this quarter, a lot of traveling costs were curtailed and also starting next year, we'll also have some cost savings because of all the consultancy programs being over. So you think those 2 costs will negate each other out?

Well, the consultancy costs were already not there this year, right? So if you compare what the travel costs would be in the future compared to the travel cost of this year, the consultancy costs are not figured in anyway, right? So to that extent, they are not -- when travel goes back to normal, the reduction will not compensate because there is nothing this year for consulting, right?

Okay. Got it. And sir, the third question was on the new range of our oil free compressors, from what I remember last was that in terms of our cost, we were at close to 103% of our targeted cost that we wanted to bring it down to -- have we reached 100% or lower now?

No, no, no. If you remember, I said we -- our goal is to be at 100%, let around 150%, yes. So we -- the progression will be -- this year, we have not really focused on reducing the cost. The focus more was on getting the products out and installing them. But we have ideas to reduce by another 20%. So we will bring it down to 130%. So then it is going to become a continuous program of incremental reduction.

Okay. But at 130%. At 150%, you said you're seeing very good traction in India. So I'm assuming at 130%, it will have much better traction? If the product is right?

Either traction or more profits for us.

Thank you. That was the last question. I would now like to hand the conference over to Mr. Jairam Varadaraj for closing comments.

So thank you all again for participating. I apologize for some challenges that we faced with my audio cutting off. Thank you for your patience. So to summarize, we had a great year. Quite a bit of it was deliberate in terms of our performance, some of it was also the recovery of the market sooner than anticipated. The overall confidence within the organization is high. The overall validation of our presence in global markets is high. We stay committed to it. We stay focused on our business. There's no distraction. We're continuing to look at bringing our capital employed down. We're working on multiple ways. So overall, we are heading in the right direction and our strategic business plan target of reaching $400 million, 16% EBITDA and 30% ROCE. We have very specific, very deliberate plans, and we are quite confident that we will achieve them. So that's really the summary of what I would like to share. Thank you.

Thank you. On behalf of Asian Markets Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.