Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

I welcome you all to the 4Q and FY '24 Earnings Webinar of Elgi Equipments Limited. We have with us Mr. Jairam Varadaraj, Managing Director, representing the company. The flow of the event is Mr. Jairam will make -- take us through a presentation about the financials and numbers for the year as well as fourth quarter followed by Q&A session. Over to you, sir.

Thank you, Kamlesh. Good evening, ladies and gentlemen. It's a pleasure to be with you this evening and take you through our performance for the fourth quarter as well as for the financial year. I would like to spend a little bit of time on Q4 and spend a little bit more time on the financial year. So moving on to the Q4. This is an EBITDA reconciliation compared to Q3 and -- I mean Q4 of last year and Q4 of this year. Our biggest charge has been employee cost. And out of that employee cost, if you really look at it, as part of our reorganization in Europe to realign our strategy to the realities in the market, there were some severance costs that we had incurred. It also incurred certain severance costs in India through our VRS program, so that's about INR 60 million. There was an increase in our employee cost to the extent of INR 201 million. This is basically on account of headcount increase and compensation increase. 8% -- 7% to 8% is compensation increase and the balance is headcount increase. There is nothing alarming here. It is just that we were a little challenged on our top line growth because of which this part of our expense looks a little bloated. I will explain more about this in the full year. So going to sales for Q4 of this year. Except for Southeast Asia, Europe and North America, all the entities grew compared to the previous year. So this is a reality. So there's been strong performance in India and the Middle East. So if you look at our Q4 revenue growth compared to the previous year, it's about close to 4%, and sequential growth is about 5.5%. Profitability in Q4 has been lower than the previous year for the reason that we had a onetime expense, and there was a higher other income in the previous year. Otherwise, there is nothing concerning about this performance. Our sales mix for Q4 between compressors and automotive remains pretty stable. But in this quarter, India significantly increased over the rest of the world, and that's primarily because of the drop in North America and Europe. So the consolidated financials for Q4 compared to Q3 of this year as well as the Q4 right here, so the story really is that if you look at our contribution, we have done very well. Our pricing and our material cost control has been very good in terms of our margins. Margins have been very positive. We lost out because of the increase in certain costs on people, onetime as well as increments. So focusing more on the full year. If you look at the financial year, the EBITDA reconciliation, this is more a leveled out reconciliation. You see the volume growth has been strong and the contribution growth has been very strong. Employee cost has been high because of the, one is the severance has been high. Our new hire and replacement was quite significant. Increase in other expenses was a marginal, INR 53 million. So overall, if we had hit our top line quite significantly, we had looked at a double-digit growth, whereas we came in only at around 6%. So if we had hit our planned growth, I think these numbers would have got normalized. And I'll talk a little bit more about how this year looks a little later. So our net cash position is very good. We generated quite a bit of cash this quarter. So our position is about INR 2,140 million is what we have. So I'm going to stop here and talk a little bit about full year and what to expect for the current year. So far, the current year has been a very positive 2 months, has been very strong. Growth has been good in India, Middle East. We have done well in the U.S. compared to the previous year. So that's a strong thing. Europe continues to remain at the same level. We are tracking towards breaking even in Europe this year. We have taken cognizance of cost, and we have strict control. Australia continues to grow marginally. Southeast Asia is kind of flat. So overall, I expect that the margins to be continuing to be at the level that we are. And so with that, combined with a pretty strong top line growth, I expect that this year that there will be a very strong performance for -- that when I say this year, I'm talking about '24-'25, assuming there are no serious political or economic uncertainties that come our way. So this is something that I wanted to share with you. And the other thing is there is a significant plan of bringing in Anvar, who has joined. He was the Executive Director. He is in the Board. He was in the U.S., heading the North America operations for a year -- a little over a year. Now he's taken over as the COO. He will be responsible for all the sales and marketing of the regions as well as the back-end operations of the company. Technology, finance, HR and IT will continue to report to me. So this is part of our larger transition plan. So in terms of time frame, we haven't nailed it, but it is going to -- it is -- the process has started. So I will stop here, and I will rely on some of your questions to clarify this further. Thank you.

[Operator Instructions] The first question we have is from the line of Mr. Ravi Swaminathan.

Congrats on good numbers, especially from the India perspective for the fourth quarter.

Thank you.

My first question is, we have seen, once again, growth recovering back in the India business. Past few quarters, it was kind of stand-alone numbers were more like flattish kind of numbers. But now this quarter, you had seen 18% growth and first 2 months commentary also has been good. So which are the larger segments which have started driving the growth with respect to the India business? And in terms of profitability, this is probably one of the highest numbers that we would have seen in terms of margins. So your stand-alone EBITDA margins is at 21.5%. It's way above the long-term average. So how to think about the sustainability of this profitability over the next 2 to 3 years?

So thank you, Ravi. So to answer the first question in terms of what is driving India performance during the current year, it is multiplicity of -- almost all the verticals have grown. But if I have to single out a few, it is construction and mining, along with water well that are driving a larger part of the growth. Our aftermarket is also driving a large part of our growth. Our industrials also has performed well. But from a -- if I have to stack them in a hierarchy, it is construction, mining, water well, followed by aftermarket, followed by the industrial. As far as the EBITDA on a stand-alone basis is concerned, I think it is a continuing improvement of the prices that we had set in the past. That is one contributing factor. But a marginal one because post-COVID, changes that -- the dynamics that happened, we had reset our prices. We are continuing to do ongoing cost reduction program, which has now been institutionalized in the company for our material cost. So they deliver anywhere between 1% to 1.5% every year. So that's a program that also delivered. And the third is our product mix. The contribution of aftermarket was also a little higher. So that has also contributed to margin. Is it sustainable? I think it is possible.

Understood, sir. And how to -- then I'm -- what I'm looking at is international business, which I'm simply looking at as a consol minus stand-alone kind of number. Yes, it includes ATS Elgi also, but for the broader scheme of things, I'll consider is international. Now how to think about growth there also? There are so many moving parts there. That is one. And more importantly, just like how we had seen a big leg up in margins in the India business, should we think of what we are seeing a 6%, 7% EBITDA margin reading as a strong double-digit number over the next 2 to 3 years?

So Ravi, if you look at the international, a big chunk of our international close to -- so if you assume 50-50 is India and the rest of the world, out of the rest of the world, 50% -- close to 40% out of that 50%, meaning 40 percentage points out of the 50 is U.S. and Europe, right? Now as far as Europe -- U.S. is concerned, it is our own internal creation. We messed up our ERP implementation, and there was a setback. We've got out of most of it. There are still some few lingering issues, but the big one is behind us. So that was -- otherwise, we would have had a reasonably good growth in the U.S. So that was a bit of a challenge, which is pure internal, nothing to do with the market. As far as Europe is concerned, there are a lot of uncertainties in the market. A lot of -- the economic situation is not very strong. So in spite of that, we grew. So the challenge in Europe is not -- at the moment is to sustain our top line, but more importantly, focus on improving our bottom line by breaking even, which we think we are going to do. So if you look at a few years ago when there was a much more balance, the consol -- stand-alone plus consol gave us close to about a 15% EBITDA, right, when the stand-alone was only at around 18%, 19%, right? So that means the consolidated was delivering close to 12%, 13%, yes. So it's possible to take it back up to that level quite quickly, right? But to get to about 20%, it is a function of a larger presence and a longer presence in the market because EBITDA comes in this business primarily from aftermarket, right? So you need to build the installed base, which is what we are doing in Europe or Australia or in the U.S. right? Once that installed base is there, we are very careful and even now very closely tracking and monitoring our aftermarket performance for each of our machines. So it is only a matter of time before it comes.

So next question we have is from the line of Mr. Harshit Patel.

Sir, my first question is on the European situation, why we may able to break even in FY '25. But then what about our plans for the next couple of years? I mean, will we make slightly lower margins than what we were envisaging earlier when we had put the plan in motion because I think going by your commentary, sales are not coming through as fast as what we had envisaged. Although we may do some cost reduction, some optimization, but will it be difficult to do the kind of margins that we had earlier thought about?

So Harshit, thank you for your questions. Now if you really look at our plan that we made for Europe, it was not a margin-driven plan. It was a top line-driven plan, right? So if the -- we were looking at a breakeven of the operations in the fifth year and making profits in the sixth year. We shifted that by a year due to the COVID period. Now the margins in Europe are significantly lower in the U.S. Overall, combined margin of India and Europe put together is quite healthy. But individually, as a margin in the subsidiary is lower. So the top line is the most important. So what we had done was in hindsight, maybe a mistake, we went all over Europe, except Germany, including certain markets where the pricing was extremely competitive, which is primarily Eastern Europe. So what we have done is we have reconfigured our entire sales program to focus where the markets accept our performance and pricing, right? So that reconfiguration we have done, and that's one of the reasons why our severance costs have gone up for the last quarter. So our cost structures now are pretty competitive. What we need to do is grow the top line. Now how are we going to do that is to really look at the specific markets that we are focusing on and go deep into those markets. The opportunity is still there, but our go-to-market strategy that took us to where we are today is not going to take us to the next level. And at the moment, even as we are speaking, we are looking at a different kind of a go -- not different, an augmented go-to-market strategy for Europe, and we are hoping that, that will create the trajectory for higher growth.

That's true, sir. Sure. Sir, my second question is on our -- one of our emerging business, which would be the vacuum products. I think last time in the analyst meet, you had highlighted about the licensing agreement with DVP Vacuum Technology. So how has been the start of this business for us? Have we started manufacturing any products? Or have you started selling those products by importing from DVP? Where are we? And if you could highlight a little bit on what are our plans for FY '25 and '26? And also, how do you see the margins in this particular business vis-a-vis our base compressors business?

Okay. So the licensing process has started. Drawings have been shared. Details have been shared. So the indigenization process has started. There will be exchange of people in the second quarter. So we are proceeding as per time line for the indigenization of these products. As far as sales is concerned, what we are doing is basically incubating the market with some key customers. We are installing the fully made units from DVP and that's to basically get customers to experience the product. So this year, that is FY '25, we don't expect to see any great revenue generation. But I will come back and talk about specific revenue that we have planned for FY '26 when we are fine -- when we are ready. As far as the margin profitability of the business -- so there is a similarity. The similarity is the profitability in the aftermarket. So to that extent, these -- the vacuum business has the same profile of profitability as the compressor business. But unlike the compressor business, where the margins on equipment are relatively low, the margins on vacuum equipment is not so low, right? So there is -- so to that extent, it has an advantageous thing. But the unit value of a vacuum product is much lower than a compressor. So to that extent -- because we are not going to be making the systems. Our system producers are going to be our customers. So we make the vacuum pump. So when you're making just a vacuum pump, the still value of a unit is much lower than a compressor. So to that extent, the sales effort and the sales costs are a little more, but the margins are better.

Next question we have is from the line of Mr. Vaibhav Shah.

My first question is regarding the oil-free compressors. So with a lot of CapEx announcement across the electronics sector, how has our inquiry pipeline grown? And also our supplies are to the cleanroom technology companies or directly to the end users as well?

So our presence in electronics is just started, Vaibhav. When we created a strategic plan for our oil-free machines, the electronic industry was not very robust or vibrant in India. It is just starting. So our focus was on food processing and pharma, and we made some very good inroads into those industry verticals. Now with electronics, semiconductor coming in, we are beginning to get some inquiries in, but it's a long game because most of the equipment manufacturers, who supply the complete systems, are based out of Europe or Taiwan, and they have long-standing supply relationship with other compressor manufacturers. So it's going to be a little longer process to get ourselves homologated or included in the opportunity space. So we are working on that.

Understood, sir. Sir, my second question is related to the data center. So previously, you highlighted that we are not into the data centers. So is it due to the technological limitations and if yes, so with the data center market growing so fast domestically, do we have any plans to address those limitations and enter into the market?

So it's not so much the limitation. It's the application knowledge, right? So we have to build that over a period of time, which we will do, right? If there are opportunity, we will certainly do that.

So sir, any indicative time line for that?

I don't have anything specific to tell you, Vaibhav.

[Operator Instructions] Sir, there is a request from someone saying that if you may please upload the presentation after the conference call is done.

Absolutely. That's where we normally do that. That's not a problem. We'll do that.

I have a question from Mr. Harshit Patel.

You have, just in this quarter, announced a new CapEx for both screw compressors as well as the global support center. So could you highlight what would be the quantum in each of these areas? What exactly are we trying to produce here? Are these newer kind of products or just the line extensions of the existing products that we have? So just give some flavor on this particular CapEx?

So there are two basics. So right now, our global support center, which is our spare parts warehouse and supply center, is located in our new campus as part of our overall air center factory. Now we have run out of space there for that, and the demand for parts globally has gone up. So we are setting up a fully automated warehouse in the same campus for which we are investing in a new building. So that is roughly half of the INR 250-odd crores that we have planned. And the other is for our portable compressor, which is construction, mining and water well, which is right now produced in our city factory. We are running out of space here. And also we need space for our expansion of -- and new businesses that are coming in, new expansion of products. So that -- we are moving that also to our new campus, and that will be roughly half the value. Now we hope we are going to start it this financial year, and we hope to complete it by March '26 -- before -- well before March '26. So this is really the plan. And this is just -- about a few calls ago, I had announced that we are making a larger plan to shift our city office to the new campus. We have made a master plan, and we will continue to keep making these investments progressively over the next probably 4 to 5 years' time and shift all our city operations to the new campus.

So sir, just a follow-up to that. Does this INR 250 crores, is it part of that broader plan of INR 500 crores, INR 600 crores? Or this is in addition to that?

No. This is part of that.

The next question we have is from the line of Mr. Vipul Kumar. Vipul, are you online? I don't think so Vipul can hear us. [Operator Instructions] Next question, sir, we have is from the line of Mr. Ravi Swaminathan.