Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q3 FY '23 earnings conference call of Elgi Equipments Limited, 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 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 is being recorded. I now hand the conference over to Mr. Kamlesh Kotak from Asian Market Securities Limited. Thank you, and over to you.

Thanks, Yashashri. Good evening, everyone. On behalf of Asian Markets, we welcome you all to the 3Q FY '23 earnings conference call of Elgi Equipments Limited. We have pleasure in welcoming Mr. Jairam Varadaraj, Managing Director, representing the company. I request Mr. Jairam to take us through an overview of the quarterly and 9-month results, and then we shall begin the Q&A session. Over to you, sir, thank you.

Thank you, Kamlesh. Good evening, ladies and gentlemen. Thank you for taking the time out to be with us this evening. Like we normally do, I will take you through a reconciliation of our EBITDA performance compared to the Q3 of last year. So we grew sales by about 18%, and we improved on our contribution level, contribution by about 3%. So effectively, we should have had an EBITDA of close to INR 1,500 million, and we posted an EBITDA of INR 1,120 million. So it's a gap of about close to [ 150 odd INR 3,000 million INR 30 crores. ] So the main thing is we have to look at comparing to last year. One, the fixed costs were very, very low because we were still coming out of COVID and business were still conducted by and large, virtually. There was very little travel by employees, very little travel -- all other costs were low. That has changed progressively this year. Besides increased travel, the cost of travel has also gone up. So as a consequence, that has taken up quite a bit of our costs compared because actually when you take -- go back to the pre COVID levels, we're not in such a bad shape. Of course, employee costs have also gone up by virtue primarily of increments because that was also subdued during the COVID period. And we have done some marginal headcount in different locations in the world. So there is nothing to be alarmed about. So overall, I think the profitability has been very good in this quarter at all levels of profit, whether it's at an operating profit level or at the contribution level, we have done well. Moving on to the sales number. The 18% growth is roughly 3% in volume, about 10% in price and about 5% in exchange rate. That's really the contributing factor for our 18%. India -- I'll --so like I normally do, I'll start with Australia, and work my way west. Australia did better than the previous year, but there were some challenges with specific product -- specific business verticals, which are temporary, and we are hoping that in the last quarter, we will do even better. Southeast Asia continues to be a challenge, though they have done better than last year, they were really not anywhere near what we targeted the performance in that region. But we continued to pay attention to how we can improve our share there. Coming to India, we had a reasonably good run, but I think there are opportunities in India that we need to explore a little bit more deeply. There were some verticals that were absolutely dead like our water well business. Our new product, which we launched about 3 years ago has taken on very good traction in the market in terms of acceptability, not just acceptability but as a product preference over competitors, but the market has been literally dead. So that's something that we did not anticipate that it will be this bad. And it's still early days to say when -- if and when this market is going to come back. On the profitability side, we have a railway business, which is contractual business. We get orders. We participate in tenders and the orders are generally for execution over a year. And we were stuck with legacy prices and current costs. So as a consequence, there was a compromise on margins. Nothing significant but I am just giving it as an overall assessment of the business. Europe continues to grow for us. We are aligned and in line with the overall strategic plan that we made for Europe. So it's been a positive experience on the top line. We're waiting for the coming year when we expect to see a significant shift in the volume, which will start changing the bottom line profile of Europe. North America was again a very strong performer for us. We continue to grow in that market. It's a little -- both Europe and North America, a little bit of a conundrum for us. The published information or the press keeps talking about doom and gloom. In Europe, they talk about the war. They talk about the energy crisis. But we continue to grow there. And I think -- I believe that from whatever we have been able to glean out of our competitors' numbers, they have also grown. The same thing with North America with the stated inflation and the threat of unemployment, in spite of all that, we are growing, and I believe our competitors are growing as well. So this is really the synopsis on -- and ATS, of course, has continued to do well this year, our automotive equipment business. So going on to the revenue mix, we continue to maintain 45% India and 55% rest of the world. That ratio continues to remain. The fourth quarter, we expect it to be as strong as the third quarter. We normally have very strong fourth quarter, more like most companies in India. We are not sure considering the way there is all these uncertainties and changes that are there, whether we will have that kind of a hockey stick in the fourth quarter, but we still believe it will be as good as the third quarter. As far as profitability is concerned, we expect that we will continue to maintain it. We don't see continued improvement in the same trajectory, but we'll be able to maintain the current levels of profit. As far as CapEx is concerned, we had projected that our total spend will be about INR 50 crores, and we're still well within that. I don't think we will exceed that number for this year. Having said that, we are looking at building our longer-term, bigger CapEx for moving our current facility from the city campus to our new campus where our new facilities exist. We haven't finalized the number. We hope that by the end of this financial year, we will have finalized that number. And probably during the next call, we'll give great more details about what that would look like. So as far as the current cash position is concerned, with the sale of our property in South Boulevard in Charlotte, we have no debt in the books. Effectively, the net debt position is actually positive. So that's the situation as far as we are concerned on the cash side. So this is a kind of a summary for Q3 and be happy to answer specific questions. Thank you very much.

[Operator Instructions] We have a first question from the line of Ravi Swaminathan from Spark Capital.

Congrats on a very good set of numbers.

Thank you.

First question is with respect to the general demand scenario, which is there in the domestic market. Are you seeing it moderating across the industry? So basically, [indiscernible] industry's infra, your views on how budget can kind of trigger infrastructure-related spend and how we can benefit Elgi. So if you can talk about the India market, it will be really great.

Yes. Well, except for a few verticals, not even a few, specific verticals like spinning industry in textile, which is really be challenged for the last year. We don't see any problems in any of any specific verticals or any slowing down. Enquiry levels continue to be healthy. In the earlier quarter, I had kind of expected that there will be -- we kind of senses maybe that there is a bit of delaying of finalization and all that. We are not seeing anything of that nature at the moment. So the domestic market is running along quite nicely. As far as the budget is concerned, one thing that is a big highlight for us is a huge investment in railways. We are a strong player in that segment, and we are waiting to see how the -- how this budget is going to get translated into production of locomotives, which is really what our business is, which is what our business is linked to. So even though there will be some expenditure towards expanding the rail network, I think quite a bit of it is going to go towards rolling stock enhancement. So that would help our business. The general investment in infrastructure that the budget has talked about, we need to know the specifics. We don't know the specifics yet. But we are in the capital goods business. So any infrastructure bill, which requires capacity, we will be there. So we're quite optimistic that it will only contribute positively to our business.

Sir, what would have been the volume growth during this quarter in the India market? Any sense on that?

I don't want to go too granular on that, Ravi. I gave you an approximate at the aggregate level, we had told you the volume growth is about 3%.

We have a question from the line of [ Vinod Shastri from Instanomic Ventures. ]

Congrats on the good set of numbers. Sir, 2 questions, sir. As per the earlier con call, we discussed that Europe will come into the breakeven or we will be profitable [indiscernible] and that was a very deliberate plan. Considering the opening up of the European economy, is there any chances that we will turnaround before that? Is there any chance that we will be profitable over there?

No, I don't think -- like I just explained to you in the preamble, we are on track to our original plan. Our original plan, as you can -- as you might remember, got pushed back by a year due to -- pushed forward by a year due to COVID. And we are going along as per that revised plan.

And then the one more thing would be, is there any chance that just during the results is there any chance to provide a PPT, which will be helpful for the investors actually.

Sorry, say that again. I don't know what you meant by that.

Just during the results, if there is a PPT which is released from the company that it would be helpful for somebody to just go through what just has started during the quarter.

Are you referring to a PowerPoint presentation...

Yes, sir.

Sure, we'll do that.

Then one more question will be on the stand-alone basis, the margins were 19% versus 17.97%, close to 18%. And on a consolidated basis, it is INR 14.83% versus 15.25% quarter-on-quarter. And on the stand-alone side is these margins at sustainable level, this 19%.

You are talking about the EBITDA margin. What margin are you talking about?

EBITDA margin, sir?

Okay. Yes, these are sustainable. Like I said, the fourth quarter, we expect performance to be pretty similar to the third quarter at the very least, right? Normally, the fourth quarter, there is a hockey stick, but I think considering the various financial economic conditions, we think it will be very similar to the third quarter. So and which means both the top line and bottom line, we'll be able to sustain it.

[Operator Instructions] We have our next question from the line of [ R. Govindaraj ] an individual investor.

Congrats for a good set of numbers.

Thank you.

Sir, in the expense annexure, it was mentioned that we have some joint operations with L.G. Balakrishnan & Brothers. Can you throw some light on those, which are the operations we have with [indiscernible] with.

I don't know, which one you're referring to. We don't have any joint operations with L.G.

But in the -- no [ stock ] was given.

There is -- the company is a partner in a partnership firm that is called L.G. Balakrishnan & Bros [ Firm. ] It's got nothing to do with L.G. Balakrishnan Brothers Limited.

And regarding this in the annual report of '22, you had described that we'll sell all the noncore assets and monetize from them. So far, how much has been done and how much is left over?

Well, we've been giving updates on that. We have sold our Ahmedabad office. We've sold our Bombay office. We've sold our apartment in Bombay. We have sold our Delhi office earlier 2 years ago, we sold our Chennai office. So progressively, we are getting rid of all our noncore businesses, I mean, noncore assets.

And any ballpark amount, sir?

Sorry?

Any ballpark amount? How much it will be [indiscernible]...

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

And last question, sir. In the recently concluded Auto Expo, we have showcased some of our products for the automakers that is [ relining ] equipments. Whether we are already in that business or is it a new venture, sir?

We've been in this business for more than 20 years, 25 years.

Whether this new business will replace that older one or it is just launched now.

These are new products that we display in an exhibition as part of our continuous improvement of our product range.

[Operator Instructions] We have our next question from the line of Harshit Patel from Equirus Securities.

Sir, my first question is on the pricing in the Indian market. I remember in the last call, you had mentioned that you might have to roll back prices in some specific categories of product based on how the market behaves. Sir, could you elaborate on how was the scenario in this particular quarter? Have you done any cutbacks on the pricing? And I mean, what do you see will happen in the next 3 quarters, a number?

So we've never -- we've not rolled back any pricing. We've held on to our pricing. We have realized that in the price discovery process, we have established a reasonably good relationship between the price and brand. So I think we are okay.

So you don't foresee a scenario where you might have to cut back on the pricing, specifically to the Indian market going...

Not at an overall level, pricing is a very dynamic thing that will continue to happen. But at an overall level, we don't see that happening.

So ideally now that should flow into our gross margins, right? Because I think we have now by far absorbed almost all the raw material price inflation, right? So I think that should enhance our gross margin significantly, going ahead?

That's what you are seeing in Q3 results. You can't expect more than this.

And sir, my second question would be on the European front. As you have mentioned, we should be able to breakeven in FY '25. So sir, what was our loss for the first 9 months of FY '23.

I don't want to get into the detail of specific regions' performance because that's not good for the competitive situation. We have made an overall plan of a loss of INR 200 crores over a 5-year period that cost pushed us to about 6 years, and we are well on track to that.

And just a last to check on the motors facility expansion. So are we on track to produce bulk of the motor requirements for our FY '24 production?

Yes, absolutely.

[Operator Instructions] We have a question from the line of Amit Anwani from Prabhudas Lilladher.

Ma'am, your voice is very, very feeble. I don't know what the problem is. I don't whether it's on my side or your side.

I'm sorry. Is it okay now?

Yes, far better.

We have a question from the line of Amit Anwani from Prabhudas Lilladher.

Just wanted to understand the aftermarket business contribution for this quarter? And how is our outlook with respect to the market's contribution in, let's say, next year or a couple of years?

So our aftermarket contribution is 2 dimensions. One is aftermarket in India, which is our core -- or I wouldn't say core business, but it's our largest market in terms of our tenure of presence. So we have a large installed base in India, and therefore, there is a very attractive aftermarket revenue stream coming from that. That has consistently grown for us. And probably today, we are at around 25%, 26% of our revenue coming from aftermarket. Is there room for further growth? Absolutely, there is. But this is a very metered and very deliberate movement from where we are to where we could be. As far as the rest of the markets are concerned, the first strategy in this business is to create an installed base, which is where we are right now. So it's a little premature to be measuring aftermarket in markets outside India. Having said that, it doesn't mean we completely ignore it. We are keeping a careful eye on it. We make sure that the installed base -- share of our installed base is maintained so that when the number -- the installed base starts becoming bigger, we are able to extract the value, the true value of that potential.

Next question is on the geographical performance. I might have missed. So I remember, I think from past H1, we were facing headwinds in Southeast Asia, Sri Lanka, Middle East. So your outlook on that?

Southeast Asia still, like I said in my preamble, it's still a challenge. It's an extremely price-sensitive market, but we have grown compared to last year. The potential is there. We're still trying to figure out what would be the most appropriate strategy for that region. But it's a very small percentage of our total revenue.

And last question on the manpower cost. So is it better to assume this INR 140 crores, INR 144 crores quarterly run rate will continue till we breakeven in Europe? Or this is likely to increase, decrease?

Are you talking about the current employee cost, which is about INR 144 crores.