Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '22 Earnings Conference Call of Elgi Equipments hosted by Asian Markets Securities Limited. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectation of the company as on date of this call. These statements are not the guarantees 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 this conference has been recorded. I now hand the conference over to Mr. Kamlesh Kotak from Asian Markets Securities. Thank you, and over to you, sir.

Thanks, Jacob. Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 2Q FY '22 Earnings Conference Call of Elgi Equipments Limited. We have with us today Mr. Jairam Varadaraj, Managing Director of the company. I request Mr. Jairam to take us through an overview of the quarterly and half yearly results, and then we shall begin the Q&A session. Over to you, sir. Thank you.

Thank you very much, Kamlesh. Good evening, ladies and gentlemen. It's my pleasure to be with you this evening, and I thank you for the time that you have taken to be with us. I hope that all of you and your families are safe and well and continue to -- and I wish that we continue to remain so. First of all, I'd like to apologize for a delayed presentation of our analyst call. We normally do it the day after what -- there were other Board commitments that kind of kept me away from it. But we will make sure that next time onwards that we do this call the day after the Board meeting. So I apologize. So as we -- as is our normal practice, I will look at the numbers and try to give you an explanation or a reconciliation with the quarter for this year compared to the quarter of the previous year. As you can see, we had a significant growth in the top line from -- I mean from INR 480 crores, we did INR 652 crores, a pretty impressive growth. I'll come back and talk about the constituents of it. However, the profitability was not as good as it should have been. We lost close to about 3.5% on contribution because of raw material cost increases. And this is something that was a big challenge for us. As you may know, all the commodity prices started escalating from December of 2020 onwards. And they started becoming quite frequent and violent in -- starting from March. And every time we try to respond with a price increase, the next week or the week later, there was another cost increase. So it's just in a B2B capital goods business, it's very difficult to have a highly responsive and agile price response to cost increases. So as normally a quarter lag in most cases, not only in India but also all over the world, so we have done close to 4 to 5 price increases since December of last year, but we were constantly only catching up. We were not getting ahead of the game. And that had a significant impact in this quarter. That combined with phenomenal, I mean, it's unprecedented like if there was any ever a president of freight costs, not only internal freight but also more importantly, ocean freight, combined with lack of containers, delayed shipments. So it was chaotic. And as far as shipping is concerned, it continues to remain chaotic. But commodity prices seem to have taken a pause. We are keeping our fingers crossed, but we are also looking at agile models by which we can be responsive. So I expect that the next quarter will be better, we'll come back and talk about. So that was a significant impact on our profitability in this quarter compared to last year's same quarter. We -- when you look at profitability between these 2 periods, last year, we had close to about INR 8-odd crores as subsidy from Australia and the U.S., which was not there this year. And if you can remember, we had the paycheck, we qualified for the Paycheck Protection Program in the U.S. and the JobKeeper's program in Australia, all toll. I think we got close to about $3 million as a contribution. That is 0 this year. So that has been an impact this quarter as well. And of course, normal increase in fixed cost, for instance, contract labor, which is clubbed into the fixed cost surely by virtue of volume. I mean, we have more activities. So the security, canteen, material movement, all this had to be beefed up. So that is part of the increase. So nothing alarming there, it's normal thing. And of course, we had to increase salaries because we had not -- we had frozen salaries for almost a year. So these are the reasons. But overall, even deducting for all of these, the profit numbers are better than year, but profitability could have been far better than what it actually is. I mean -- so this is really on the reconciliation of our Q2 performance compared to last year. So stepping back, if I look at the business, as always, I will start from Australia. Australia was a big challenge for us. If you remember, last year, Australia was one of our small champions, which really delivered very strong numbers, continue to deliver even through the COVID period. But this year around, they had multiple lockdowns in Melbourne and Sydney. That had a significant impact. Over and above that, we also had -- there was a big project order that got deferred by virtue of all these circumstances. So that's something that impacted our revenue performance in Australia, not only this quarter but the prior quarter as well. Southeast Asia, all those countries had serious COVID challenges and the economic activities were quite low. So there, in any case, these countries contribute a very small percentage to our revenue. But nevertheless, there was an impact there. And coming to the hero of the day, India, it has been a phenomenal performance for us across all product verticals. Over and above, it is not driven by a lot of people think that this performance has been driven by oxygen, compressor supply for oxygen generators. That is not the case. Yes, we did have some business with oxygen generators in the second quarter, just like we had in the first quarter, nothing exceptional. But the real performance -- the results of India actually has come from very strong economic activity as well as our presence in the market in various segments. So it's been a very positive one for us in India. Moving on to Middle East. Middle East has done better than the previous year, but still not come out of the shadow of COVID. We continue to have a positive expectation for Middle East in the future. Europe has done very well, both on the portable side as well as on the industrial side. As you know, Europe is a strategic initiative for us. We committed to spending close to EUR 20 million as a strategic investment through losses for building. It's an organic growth model that we are doing and it has done well. The growth has been far in excess of what we had planned, and so that's a very positive contribution in the second quarter. U.S. has done well, but the industrials had some serious challenges, availability of products, freight. So there were some challenges. But the order intake and the interest in the thing, the demand is still very strong. So we are working very hard to overcome the shipping problems and product availability, which I believe we will sort it out sooner than later. And Brazil has been also a very strong player during this period, has done exceedingly well. So all told, if you look at it geographically, all of the markets, except Australia, have done exceedingly well. Now one would be -- the first question, considering the kind of cost volatility and the corresponding price revisions that would have happened, like I said, we have done it 4, 5 times, what is really the growth from price and what is the growth from volume. So if you look at our India story and for the whole of the first half, I don't want to talk about the quarter, for the whole of the first half, we have grown close to 85% if you look at first half of this year compared to the first half of last year. And prices of that, only 8% is price and probably around a small percentage is O2. The bulk of the growth has come from actual volume. So which is a very positive thing. Now if I look at internationally outside of India, most of the instances, it's been volume growth because a lot of the price increases did not happen for bulk of the H1, it happened towards the end of H1. So you will see the results of it in the second half. In the first half, by and large, international, they don't have major price increase. Most of it has been volume growth. So again, it's a -- the quality of this growth has been good. It's not an inflation-driven growth that one would kind of expect. The other thing that I would like to focus on and give you a little bit of an update is on our Europe project. Like I said, we had planned to invest close to EUR 20 million, close to about INR 200 crores or INR 170 crores, INR 180 crores. And we are continuing down that path. The losses are a lot lower than we had planned and the revenue is a lot higher than we had planned. So on both sides, we are doing well and the loss reduction, obviously, partly because of higher than planned revenue, but also because of lower than client cost. So the Europe project is going along nicely, and it's a very strong kind of a strong footing there, and we will continue to focus and drive that. As far as the mix is concerned, if you look at just the compressor business and taking ATS out, I'll come and talk a little bit about the ATS business. The compressor business for the second quarter -- in the compressor business, India contributed 55% as opposed to 50% in the first quarter. And of course, last year's second quarter was also roughly around 50%. So India has contributed 5% more. But part of it is also not just India demand. It is -- a small part of it is because of that. But the other thing is we prioritize the sale of compressors for oxygen generators. And therefore, India got a good share of the production capacity. And shipping delays, shipping dislocations affected many of the revenue bookings in markets like Europe and in the U.S. Not lost, we have not lost orders or we don't have cancellation, but the fact is, during this period, we could not make the booking. So the reason I'm highlighting that is to say that our strategic plan to build and grow the rest of the world business continues to remain very strongly on track in spite of a huge growth in India. So that is a clear indication of how strong and robust our presence in international market is up. Coming to our CapEx. Our plan was to spend about close to about INR 50 crores. We will probably, as of now, the visibility is around INR 35 crores. So nothing significant to talk about. There's no major impact here. If you look at the net debt position, it is slightly worsened to the extent of about INR 2 crores compared to end of Q1 of this year. That's primarily because we had to build stock due to freight issues, freight delays. We deliberately inflated our stocking of both raw material at the factory as well as finished goods in various locations. So -- but this has smartly come down in October. So I'm expecting Q3 to be a very solid quarter as far as cash flow is concerned. So -- and we are generating month-on-month, we are positive on our cash flow, so which is a good thing. So our net debt right now, it was INR 93 crores end of Q1, now we are at INR 95 crores. So nothing significant there. Looking forward into Q3, what we are seeing is the buoyancy robustness optimism that we saw in Q1 and Q2 is likely diminishing. There is a bit of a dullness to the scene. I wouldn't press the panic button. It's not that bad. But there is -- we can see certain perceptions of delays, shifting of finalization and all that marginal. So we expect the top line probably for the second quarter to be lower to the extent of 5% to 10% of the top line of the second quarter. But we expect the profitability of the third quarter to be far better. So the improved profitability margin levels should more than compensate for this marginal loss in top line that we are anticipating. This is an anticipation. We are not sure, we are just looking at signals and providing a certain guidance there. So this is really what I wanted to share with you. And again, thank you very much for the opportunity, and I'll be happy to answer your questions. Thank you.

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

Congrats on a good set of numbers.

Thanks, Ravi.

Sir, my first question is with respect to the demand you had mentioned that we are seeing robust demand in India. So if you could touch upon by top 3 to 5 sectors, which are driving the growth for this demand. So basically, if you look at the 2-year first half CAGR basis, I mean on absolute basis, we'd have grown at 30%, just like how you told over a 1-year period, we'd have grown 18%. On a 2-year basis, we'd have grown 30%.

Yes.

So assuming a 8% to 10% of price hikes, so on absolute basis, 20% volume growth has been there over a 2-year basis. So if you could touch upon the sectors are driving this growth.

So we have not seen any one sector that was spiking like it did during the first wave of the COVID where food and pharma, where in the first quarter of that first wave, food and pharma were and chemicals were really going up, one. And subsequently, it settled into a rhythm where every -- just about every industry vertical was investing, and we are continuing to see the same thing. I'm not -- I cannot call out any one sector as standing out significantly for us.

Okay. And apart from investments, infra demand is also kind of robust? Or is it like on par?

So like I said, all our verticals are doing well. So our construction, mining, which is dependent on the infrastructure business, has also done well. So investments made -- being made by the government on infrastructure projects, obviously, are trickling down in -- a lot of the contractors creating capacity.

Okay. Got it. And with respect to the oxygen concentrator, how much of the revenue it would have been in Q2?

I don't want to give specific numbers because eventually, competitors are also listening in on this transcript, Ravi. But I want to say it's not a very big number.

Okay, sir. Not a big number. Okay, sir.

Yes, thanks.

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

Congratulations on the set of numbers.

Thanks, Bhavin. How are you?

All good. So we have a few questions. So maybe to start with, last quarter, you had mentioned about the newer introduction of products, and this is especially to bridge our gap. Any update on that will be useful because you mentioned that this Atlas Copco had taken market share for 7, 8 years.

I'm sorry, I'm not able to recollect the specific thing that you're talking about.

Okay. So I was actually talking about the water well drilling compressors.

Okay, water well. Well, the response to our product has been outstanding, right? But the market has been very dull. It still hasn't picked up. But whatever market is there, right now, I would say if you look at -- on the OE side, which are -- these are the rig manufacturers who buy the compressor and send them out to Africa and that the OE business, we have close to 75%, 80% of the market. We're very strong there. As far as individual drillers and contractors are concerned in India, the market is very low. But whatever is being sold, we have close to now 30% market share from almost nothing, right? So we're growing nicely. But I wouldn't break open the champagne yet because the numbers haven't picked up yet.

Okay, appreciate it. Second, on the oil free, in the analyst meet, you had showcased a few new products. How has been the response? And what could be the growth in the oil free and our market share in that segment?

The oil free products that we have added, this one is our water-injected product that we launched about 2 years ago, almost 3 years ago now, got very good traction in India, and we're beginning to see traction for these products for this particular technology happening all over the world, right? And we are beginning to sell reasonable quantity. I mean, you can't compare it quantity-wise to oil-lubricated machine. But considering the market for oil free itself is significantly lower than oil lubricated, and the fact that we are such a late player in that market, and the fact that Atlas has such a dominant presence, the fact that we are beginning to sell these machines in pretty significant countries in Europe and in America, in Australia and in Southeast Asia is the evidence of the traction we're gaining there. Now the conventional oil free machine, yes. Again, we are selling a little bit here in these markets, but our big presence is in India. We are growing our share, but I can't tell you specifically what is the share that we are because, unfortunately, we don't know the market numbers. We can only make estimates of what our share is.

I appreciate that. The other one was in the previous earnings call, you had highlighted the motor factory had certain bottlenecks in terms of one large machine. Have you been able to resolve that? And how are we shaping up?

No. So like I said in the last meeting, when I brought this issue up, I also said that we had set up processes where we can deliver the planned volumes irrespective of the availability of that machine, right? So -- which we have done very successfully. We are now selling close -- we are doing close to about 300 motors a month out of that plant, and it is operating significantly above breakeven and it is -- it's good. And the quality, the performance in the market has been outstanding compared to the other 2 suppliers that we currently use for motors. Now on the machinery supplier, we had to invoke the bank guarantee, which we did in the second quarter. And we have started the conversation with other vendors, and we hope that the new machine for -- to replace -- I mean, as the substitute machine should come into place by the second quarter of next year.

Sure. Understand. Just last question from my side, which is continuation of what Ravi asked. And automotive is a significant contributor to the demand, and that market isn't doing as well. So simultaneously, infrastructure, road construction activity was not at a healthy point because COVID-related disruptions were there. And in light of that, our performance that we see is exemplary. So I just wanted to understand if you could give more flavor of -- which are the sectors that are actually driven? Is it textile? Is it cement, steel? So some color would be more useful.

I don't have the numbers pertaining to specific industries in front of me, Bhavin. But like I told -- responded to Ravi, I can't -- there is no one industry that kind of stands up in the limelight for us, right? When you're talking automotive, automotive ancillaries, Tier 1, Tier 2 and Tier 3, there also, we have supplied to them as well, right? So I -- there's transient kind of a challenge for the automotive industry because of chip availability has not really stopped the capacity build that people are talking about. Now, when I ask around from -- with various people in terms of what is really driving this kind of a growth because we are in the capital goods business. And when customers are buy -- customers buy our product, it means they are increasing capacity. So we wanted to understand what is driving, right? Is there some expectation-based investment, which could be very dangerous, because then it could be like the times in the past when there was expectation-based investment that really -- and then it just tanks and it tanks very abruptly, right? But what we are hearing is that people are saying that for quite a few years, capacity buildup in this country was very, very sober, right? And as a consequence, a lot of them are beginning to hit that 70%, 80% utilization of their capacities, and they are saying, yes, my existing capacity is getting -- is coming to full utilization. Yes, there is a positive outlook in the economy. Yes, COVID is going to become an epidemic and then it will go away. And yes, China Plus One strategy, which is already reflecting in buoyant demand for certain simpler industry verticals, will start coming in and pervade into other industries. And therefore, we are looking at building capacity. So I -- this is happening across all. It is not with respect to just one.

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

Congratulations, excellent numbers, sir.

Thank you. Thank you.

So it's like just to look at -- just looking at the stand-alone numbers, sir, what we have seen is that the material cost on Y-o-Y business has almost increased by 5 percentage points, but your EBITDA margin is steady at 16% plus, partly due to operating usage. But I would also like to know that at the revenue mix change also helped a lot in terms of higher after market and higher exports. Just trying to get a sense. And what also it implies is that the price hikes, which we have taken has been fully absorbed by the market. So I just want to get a color on this.

Yes. So to answer the first question, the mix change has not been significant, Manish. The only thing that hit us badly was -- I mean -- and like I said, the numbers are small, like oxygen compressors. We had a contract to supply with DRDO, supply to both L&T and Tata at a certain price. And the steel prices went crazy in the middle of that contract, right? And that was not -- there was no provision for us to go and ask for a revision in our price, right? So those are the kinds of sectoral things that impacted. Other than that, other normal verticals, there has been no big change in the structure, right, from last year's quarter to this year's quarter, yes? The same thing I would say in terms of domestic sales and sales to subsidiary, right? I would say, by and large, it remains the same. So it's not the structure-related shifts that have caused this loss in margin. It's purely because of -- we just did not pass on the things fast enough, right? And we just couldn't, right? We did a price correction in one week. Next week, there was another cost increase, right?

Sure.

So we went through that period. It was a very volatile period. So other than that, I don't see it. And as far as your second question on -- sorry, I missed your second question.

It was just on the price hikes what we have taken...

Right, right. Absolutely. So if you look at our business, we are not like the project business where we quote and it takes a long time to finalize and then we have to get into a long execution cycle. It's not like that. We're a capital goods, but we are a, I would say, low-grade capital goods where the cycles are pretty short. So all the prices have been absorbed into the market. There's absolutely no issue there, right? Internationally, there's been no problem.

Okay. And are we looking for any further price hikes? Or like at the moment, we going forward get the benefit of the full price hikes would get reflected in Q3?

Well, if there are no -- if there's not going to be any further commodity price increases, we have fully absorbed those and priced it into our products, right? So therefore, we should see the recovery back to where we were before, right? So I -- but if it's something violent were to happen, then we'll be back into the same bracket, yes.

Okay. So ideally, the sense is that with 15%, 16% price hike what we have taken, that we have seen any demand destruction and we don't foresee any...

Yes. And we have seen the behavior of competitors. It's not like we are the only ones doing it, and we are watching the market as well, right? Each competitor, the timing is different because their inventory position and their contracts with their vendors are all very different, right? But you give it enough time, 2, 3 months, and you will see everyone coming into the market with corrections and we see that, right? So it's not something that's unique to Elgi and it's not just unique to the compressor business, right?

Sure. Sure. And also I wanted to get a sense, are you probably seeing any competition intensity increasing from the domestic players as well as international players? And are we able to maintain our market share?

Market share, I would -- again, like it's a very difficult number to quote. We are growing share in Australia and in the U.S. and in -- where numbers are published, yes? Where there are -- even Europe doesn't publish numbers. So what -- whereas in Europe, they are starting. So anything that we sell means we are gaining share in the market, right? India, I would say, we don't have published numbers, but I would venture to guess that we are gaining when I look at competitors growth. Again, it's difficult because there are so many different products are agglomerated into their financial statements. So we only have to guess based on our experience with a particular brand and the competitor brand in the market, how often are we losing orders to them, how often are we gaining orders from them. These are all judgments that we use. I would say we are probably marginally gaining share, right? But our bigger challenge has been that with all these sudden growth and demand all over the world, supply -- combined with the supply chain issues, with shipment issues, our biggest problem was delivering. Delivery lead times just went up. So because of that, with customers, like, I know -- we know for a fact that there were other oxygen generator companies that came to us and they desperately wanted compressors. Not hundreds, but I want 3, I want 5, I want 8, yes? We were in no position to give it to them within that time frame because it was all time bound. You had to make the generator relevant when the COVID was peaking, right? And obviously, they bought it from others, right? So the lead times definitely, we did lose some market. But net-net, I mean, lead times are bad for everyone. But some of those guys who lurked out with stock, right, they gained, right?

Okay. And sir, in your initial comment, you did mention that in international markets, the price hike happened in the end of the first half. So was it a deliberate...

No, end of the second half. I mean, end of the first half, right? End of the second quarter, right. Yes.

Right. So was it a deliberate attempt to delay the price hike? Or what would be the reason? Because when in I see in that -- if I try to do some calculations that your international or subsidiary sales have probably grown only 10% Y-o-Y, and your margins are impacted in the overseas subsidiary to some extent. I know I cannot do the full calculations, but broadly. So is my observation right, sir?

Did we hesitate to increase prices? No, we did increase prices in India. If we did it 5 times, we did it 3 times there, yes?

Okay.

I'm talking now from December 2020 onwards, yes? Now, when you are a newcomer and you do too often, then there is a certain fatigue that sets in, right? Because we are -- unlike in India -- unlike India, where we are doing both direct sales as well as distribution sales in most of the other markets, it's 100% distribution, right? So distributors, you can't fatigue them with -- and they can't handle a business where every month, there is a price increase. They can't handle it, right? So we had to be measured. Now when we looked at from end of March, April, May, and June, when steel prices just went crazy and they were going crazy week on week, we couldn't just react on a monthly basis. We had to wait and see, okay, take a pause, take a time and see -- understand what had to be done and when, right? So we took a holistic view and then said international, we're going to do this whole. So a significant price increase happened in international markets as a percentage towards the end of the first half. Whereas India did multiple small, small percentages as and when things happened, right?

Right. And last question, sir, on -- maybe a couple of more. On the -- how do you see a trend on the project orders say from the large industries, have we started seeing any pickup of demand from that segment?

Yes, there are things like cement projects are being initiated, so requirements are coming up there. We are not seeing anything yet in steel, but inquiries are beginning to happen. Power generation, not yet, but I think that will also start coming. But if you look at our business, Manish, compressors are the last thing they order, yes? Because it has the lowest lead time, yes? So I know by virtue of being present -- involved in other businesses that have a 15-month, 24-month, 30-month lead on projects, there is a certain robustness in that pipeline, right? And that will trickle down to us, but it won't happen at the same time, the timing will be different.

Yes. Got it, sir. And last question on just a housekeeping in stand-alone other income, what was the dividend income from the subsidiaries in Q2 and also a comparable number?

I will defer that question to Jayakanthan, but I'm guessing it is ATS dividend.

Yes, I just wanted the number, if you can share.

I don't have the number in front of me, Manish.

Okay. Okay, I'll get it.

They posted it on the group. It's INR 58.5 million, INR 5.85 crores.

The next question is from the line of Harshit Patel from Equirus Securities.

Sir, the first question would be, sir, in the last call, you had mentioned that you were in the final stage of rolling out a comprehensive material cost reduction program, which would target almost 2% of reduction as a percentage of sales, and it would take almost 9 months. So sir, where are we in this program? And are we perfectly on track? Would we see some results in the first half of FY '23? How is it?

Thank you so much, Harshit. I had to stare in my notes, and it missed my attention. Thank you for bringing it to my attention. Yes, we are -- we have kickstarted the project. The project is exactly on schedule. Lot of opportunities have been identified. The teams have been formed and they are working full time. We expect to see some results in the fourth quarter, but a significant part of that savings completely baked into our P&L in the next financial. And you're right, the target is 2% of the earlier consolidated sales of INR 2,000 crores, so close to INR 40 crores.

Right, sir. Sure. So sir, these additional incremental reduction in the material cost, it would be over and above our guidance of 16% EBITDA margin by FY '26, right?

No, no, no. This is -- this was partly to mitigate as a means to on the belief that we will not be able to pass on many of the cost increases that are happening, Harshit. If you remember, we started this project in the middle of chaotic raw material price increase, right? Now we believe that we can't. But now we've been able to pass it on because it's -- everybody is passing it on. So this is going to, to the extent that we are not able to, right, marginally absorb it. This is going to help us. Whether it's going to be over and above that 16%, I can't tell you that, right? I can't tell you that. But from a planning point of view, this was on the assumption that we will not absorb, but we are absorbing, but will be fully absorbed. These are things that I would like to wait for another couple of quarters before concluding.

Sure, sir. Understood. Understood. Sir, my next question would be on employee cost. So you had guided for almost INR 475 crore of employee cost for FY '22, so that would be a growth of 9% to 10% over the normalized number for FY '21. And it sounds like we are pretty much on track. So sir, what would be your guidance on the same for next year, that is FY '23?

Very early days. The attrition rate is beginning to climb. IT industries has gone berserk in terms of their compensation. We'll have to -- we are watching this very, very carefully because the cost pressures on people is we are beginning to feel very strongly. So I don't want to say anything now because there's too much volatility in the job market right now.

Sure. But we have done whatever headcount increase we want to do in Europe, right? That is majorly done away with? Or there are still some people to add in our European business?

It was to be done over a period of time. So there will be some. Bulk of it has been done. But marginal hiring will happen, but it will more than make up -- the top line growth will more than make up for that.

Understood, sir. Sir, my last question would be on the North American market. So sir, could you give us a flavor of all 3 businesses that we have over there? First, the independent business. Second, the JVs we have started establishing. And third, the Patton's and the Michigan Air, who are our exclusive distributors. So if you could give some flavor on how each of these businesses is tracking over time?

So like I said, the industrial business has not done as well and that's primarily because of our availability of machines. The order book is very strong there. So it's moving along, but we see a lot of opportunity for much larger performance from the industrial, which will happen. As far as Patton's and Michigan Air are concerned, they've all done better than the previous year, and it's continuing to track very strongly. The U.S. market is buoyant. But strategically, have we done something that is deliberately discriminating and better? Not yet. There are plans that are being rolled out. For instance, we've got a new leader at Patton's after a long search. We have found somebody and he is going to drive that business in new directions that is going to give us that deliberate difference in performance. Same thing in Michigan Air. We are looking at incubating new territories, which we have done, so that will make a difference. As far as the joint ventures are concerned, they are primarily our option that we chose when we could not find a distributor who will carry our products and support us in our growth, right? So they are like a independent distributor we have incubated and we are supporting. So all of them are doing as per our plan. In fact, most of them are ahead of the plan. We have now 5 joint ventures in the U.S., and all of them are doing that.

The next question is from the line of [ Nehal Parekh ] from Enam Holdings.

Yes. Sir, congratulations on a great set of numbers. Yes, sir, just wanted to check what would be the steel mix in our compressors? Like what would the cost contribute like just on a ballpark, what would be the steel percent?

It's a very difficult question for me to answer. I will -- I'm quite happy to give -- take it offline with you.

Okay. Sir, the reason that I'm asking you this question is that steel prices in India and Asia are probably half the price in the U.S., and obviously, 50% lower than the price in Europe. So wouldn't this actually be a tailwind for us to price our products much higher? Because I don't think our competitors have facilities in India that can source steel at the prices that we can source it, even though there have been increases. And obviously, I'm not like, at least in my last many years, I haven't seen this kind of distortion between pricing in Asia and Europe and the U.S., so...

Like-to-like when you look at, see, we are not a very special -- we don't consume special steels, yes? We consume run-out-the-mill, hot rolled and cold rolled carbon steel, right?

Sure, sure.

So when we look at it, the price difference between Europe and America and Asia are not different, right? Not significantly different. And second, when our competitors are sourcing finished products from China or from India, right? They get the benefit of the local price, right? So it's not like there is a -- arbitrage happens very quickly in a highly interconnected world, right?

Sure.

So there is no real -- a disproportionate cost opportunity that we can play on.

Okay. And sir, just another question is for our competition, what is the manufacturing? Where is it spread like even for Atlas, would it be spread all over? Or would it be dominantly U.S. for the U.S. markets, Europe for the European markets and India for the Indian markets as well as the export market. So just for the leader.

They are all over the place. They -- both Ingersoll Rand and Atlas Copco have a very strong manufacturing presence in China.

Okay. Okay.

So they are able to -- so I wouldn't say that they are high cost because they have access to extremely competitive cost of parts and even fully finished compressors. So some -- even compressors for the Indian market come from China.

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

This question is -- so the acquisition of Rotair give us access to the portables and U.S. has announced very large investment in hard infrastructure creation. So are we seeing an opportunity that -- the access to portables, which is a very competitively-priced one, can help us leapfrog our market share aspirations in the United States?

Bhavin, if you remember at one time about, I think, a couple of years ago, we acquired the U.S. operation, acquired the master distributor of Rotair in America, right? And since then, it has been a significant growth opportunity. Growth for the U.S. operations selling Rotair portable. So we are already on that, right?

But does the access to a competitive price portables and the demand for large hard infrastructure will help us, our operation in the U.S. much faster than we think?

How do you say low cost? I mean, it's because we are supplying a lot of the parts for the Rotair portables, Atlas and Doosan and all of them have access to low-cost countries, right? So I don't think there is any cost at a component level arbitrage that is pretty significant. But the fact that we make very good portables, very good products, and we play with niche customers has given us the ability to really grow the market. I mean, grow that business, sorry, not the market.

Sure. I understand. Sir, the last question is, again on India, and we are seeing multiple other capital goods categories are highlighting that. The unorganized segment is getting decimated. And is that also helping us gaining market share?

Okay. Help me understand that, Bhavin, I didn't understand.

Are these small, unorganized players getting decimated because of the disruptions due to COVID and nonavailability of funds. So categories like -- which used to import from China, they are seeing disruption and consequently, Indian manufacturers are gaining market share.

Are you saying that small Chinese vendors going out, and as a consequence, Indian small vendors are growing. Is that your question?

The Indian small vendors getting impacted and the benefit of that market share expansion getting realized...

We don't see it. I mean, if you look at the reciprocating compressor, which is where you have a lot of the small-scale industry manufacturers making replicas of either the Elgi machine or the Ingersoll Rand machine, right? They are continuing to grow. There is no -- I don't -- I think this whole thing of it is -- this COVID has impacted small businesses disproportionately, I think it's a bit of a myth. I don't think so. Yes, there are -- just like it has hit small companies, it also hit a lot of large companies. But has it been particularly bad for small? I don't think so. They've grown. And many of the small companies are suppliers to medium and large companies. So when the needle shifted, they all came back. So I don't see it at all. And in our business, it's -- there are a lot of small guys at the bottom of the pyramid and they are continuing to remain there. None of them have gone out of business. If at all, like I said, because of all these supply issues that well-organized guys had in terms of lead times, I think some of them have got the confidence to invest and grow.

That's very useful. Just last thing, I had asked this a couple of quarters ago because you had a plan that for our foundry, we are also looking at third-party orders so that we are able to fully utilize. Any progress on that front? That is my last question.

We did a lot of work on that, Bhavin, and a lot of the customers wanted machine castings, and that is not something that we want to get distracted with, right? There is -- what we have realized in the market is the demand for raw casting is very low. Most customers want the foundry to supply machine castings. We certainly don't want to invest any money in creating machining capacity for machining casting for others. That's not our business. And we don't want to tie up with outside machine shop company because that's another distraction from our business. So we're still talking to a few people, if they are interested in buying raw castings and they do all the work, then we will do it. But at the moment, nothing of significance has happened. There are some important stuff there, nothing of significance. When that happens, I'll come back and report about that.

The next question is from the line of Nakshita Mehta from Credent Asset Management Limited.

Congratulations again, they are a good set of numbers. So I just had one question on the part of inventory issue. I do see the inventories have increased and the standalone is not. So can we attribute this to one -- to the business or the other project or is that? And another one, or can you attribute the revenue to the price increase?

Sorry, I didn't get your second question. You need to speak up a little -- getting a little muffled.

Can we attribute revenue to the price increase more than the volume? Because we can see inventories increasing.

The inventory has gone up even in standalone because if the standalone books are the ones where the operations numbers are sitting, the factory where there has been a significant increase in raw material, right? And like I said, we have increased our inventory both on raw material side as well as finished goods. Now, the finished goods inventories have all increased in our subsidiaries because India business doesn't carry any inventory. The standalone number carries the inventory for the India business, right? So it is not just finished goods that have gone up, it is both raw material and finished goods and bulk of it is in raw material that is on the standalone numbers, yes? No, I don't know which standalone number you're referring to and saying it has not gone up.

No, it has gone up. It has definitely gone up. So the stand-alone number is about INR 4,357 and your standalone is only INR 1,900. But in the most of -- major part is from the subsidiaries, that's what I was referring to.

No, no. That bulk of it is raw material that is kept in the factory.

Correct. All right. Sir, I just want to understand how is China Plus One playing, so basically the chemical demand has increased from India? So are we also benefiting from that?

No, we don't see -- we are not a component supplier or a raw material. We supply finished product through a distributor to an end customer, right? So the China Plus One strategy is for bulk buying. Let's say, home textiles or fashion textiles or intermediate chemicals. Then there is a China Plus One strategy where they look at possibly Indian companies filling those shoes, but we are not in that segment of the business.

The next question is from the line of [ Shivam Parashar ] from -- an individual investor.

Congratulations on a good set of number. To ask that -- like you mentioned that the demand is coming from cement and power. So would you like to mention any more sectors that you look at that from where the demand can come like oil and gas or et cetera?

No, no. I didn't say the demand is coming good on cement and power. I'm seeing activity of capacity enhanced -- capacity increase in all these. Looking at capacity increases in this sector and it takes -- the requirement from these industries come to us with a lag, and we are still waiting on that lag, yes.

How much is the lag, sir, you mentioned?

I don't have a number, but normally, when they go to a company that makes -- sets up a power plant or a steel plant, it takes about probably 3.5, 4 years is the lead time, whereas our lead time is probably few weeks. So they tend to come to us very late.

Okay. And sir, I would like to ask that like you're saying that the demand from compressors is turning out to be very good due to certain factors. So like from which sector, do you -- are you seeing most of the orders or sales being happening from your end? Can you just specify the sectors?

Yes. Like, this question was asked earlier, and I said in India, when we look at it, just -- I can't think of one sector that stands out as a big contributor. Literally, every sector has grown. There is no one that stands up, yes.

No. Can you just specify the sectors in which most like any percentage in which your goods go like a percentage breakup of the sectors equated to?

No. We supply to just 80% to 90% of any factory needs compressed air and we supply compressors, right? So there is -- it's not like our product is not generic to one industry type. So if you look at compressed air, compressed air is a form of energy. They normally call it the fourth utility, right? So any factory needs compressed air to run their factory, right? And unlike electricity, which can be centrally generated and distributed, compressed air has to be generated on site. And that's why we have a demand for compressor. So every factory will need a compressor.

Okay, sir. And do you see the compressor demand to be sustainable and long distance?

Well, I hope so, because like I said, we've all been looking for an answer as to why there is this resurgence in demand. And the reason being given is that Indian industry has not built capacity over the last many years. And as a consequence, their capacity utilization is reaching that 60%, 70%, 80%, the time when it triggers their thinking for increasing capacity. And I hope that answer is right. If it is, then this can be sustained.

As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

I thank you again for this time and taking the time off from your schedule to be with us. Yes, we've got a good set of numbers. But for us, this is just a milestone. We need to continue to go down the track of what we have set out to do, which is to really build a company that is globally competitive, profitable with good cash. So thank you. We are on that track, and we hope to continue down that path. 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.