Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

So my question is on these cost saving initiatives that you are going to put in place if tariffs remain at 50%. Right now, you've already done a 25% kind of -- bridging the gap between what you were earlier and with the new tariffs. Now another 25% seems like a very -- at least to us as outsiders that seems like a very tough one to achieve. So I would love to understand maybe 1 or 2 examples of what you have managed to do to bring it down. And related to that is how much time do you think you need to get from 25% to 50% tariff adjustments?

So Salil, what I had said is we have a solution in place for the first 25%. We don't have an immediate solution in place for the next 25%. The next 25%, the solution is not going to look like the solution that we have had for the first 2. So that's why I said the second 25% will involve certain structural changes in the way we are organized, the way we are -- our geographical presence and all that. It will demand a much more fundamental change. Now those changes, those fundamental changes will be expensive to implement. It will take time to implement. And therefore, before we trigger them, we need to be 100% sure where this tariff is going to settle down. Till then, we will not trigger those kinds of solutions. The first 25% is in the bag. We don't have an issue. We will deal with it. Part of it will be a price increase because everyone is looking at a price increase. Some of them have already implemented it. We will wait and watch at what levels the market settles down as far as prices are concerned. We think it will be anywhere between 5% to 10%. It will be the price correction that will take place as a consequence of these tariffs. Now therefore, it leaves us a gap of anywhere between 15% to 20%. We have enough done to be able to mitigate that. So 25%, we are very comfortable.

Right. If it settles below 25%, then obviously, you maybe pass on some of the prices to the customers?

No, it's profit for us.

Profit for us. All right. Fantastic. Great. Sir, second question is this domestic market share, what looks like could possibly be a market share gain. Would you hazard a guess as to -- is it your new variable frequency drive products that are driving this? Or would this be a longer-term investments in business that you made, which has helped you get where you are?

This is not technology that -- like I said, the technology of our -- new technology that we have launched has not been launched yet. So the impact that you're seeing is not from that. It's just fundamental shifts in the way we are doing business, engaging with customers, our market strategy, our marketing strategy, all of it. So I can't put a saying that this one thing has given us that.

Fair enough. Great. And sir, lastly, if you were to look at -- you mentioned that till the tariff increases happened, domestic market looked all right in the sense that your customers seemed quite optimistic of the outlook. Textiles and auto comp are now impacted. But broadly, you see ex of tariffs, what is the general demand commentary? Because the macro does not -- the newspaper headlines always seem to be a little pessimistic. But when you are on the ground meeting customers, how do you see broader industry demand in India over the next 12 months or so?

Ex tariff, I think everything is positive. But it's very difficult to say we'll ignore the tariff. And it's a large market. It's a large economy. So again the market in the U.S., it's a large economy, which any dislocations there could have a ripple effect globally. So nobody can really ignore it.

The next question we'll take it from the line of Amit.

Sir, am I audible?

Yes.

Yes, Amit.

So first question on the delay in finalization of orders which you highlighted, which many companies are highlighting amid tariff uncertainties and geopolitical situation, which we saw. So I wanted to understand even if with the scenario of 25% tariff or 50% tariff, are we going to see the delays continue for the remaining 9 to 12 months? Are we going to see the projects getting shelved off because of the higher tariff, even if it is 25% some understanding there. And any particular sectors where we are seeing the finalizations has been particularly delayed because of these scenarios? That is my first question.

So I can't give you a coherent answer at an economy level, Amit. I can only say that certainly, customer sentiment is wait and watch. It is not about closing projects. Nobody is closing projects. Everybody is saying, let's wait and see. That's the prevailing sentiment. The optimism with respect to the Indian market continues to remain. But everyone is saying, let's wait and see. As far as the segments are concerned, like I said in my earlier thing, there are things like textiles who have a significant dependence on the U.S. market and who have a significant impact because of tariffs and where there are alternate countries as solutions for the American customer, they are a lot more concerned and therefore, a lot more cautious about investments. Textiles is an example. I mean, when you look at textiles, you have Bangladesh, you have Vietnam, you have Indonesia, you have Thailand, all of them have got much lower tariffs than India. So there is definitely -- and the switching costs in these are not very high. So when that happens, there will automatically be an apprehension. The rest, we'll just have to wait and see where it lands because it's too much of turbulence and dust for us to see through this cloud.

Sure. The second question is on the Europe and Australia market. So I recollect for Europe, we did also highlight it that we'll be expanding into Nordic countries where the opportunities exist and also setting up expanding the distribution network there. So have we done any progress there? And despite Europe has slowed down, are we thinking of any other strategy apart from what we highlighted in last call that we want to expand to Nordic countries? So any further strategic change we are doing in Europe to become better there?

So Nordics was nothing new. We've always been present in the Nordics, and it continues to do well for us. The problem is not a specific location in Europe. Generally, there is -- first, the Ukraine war really dislocated energy prices and there were issues there. Then all the major economies in Europe had -- took an impact on the cost of many refugees coming into Europe from various countries, the Syrian, from many countries. So they had to pay for it. So there was economic constraints because of that. And then the general -- now the general U.S. tariff thing. So it's a combination of multiple things that there is a certain economic stagnation. But one vector that everyone is looking at as a bright spot is the huge investment that the whole EU is making on defense. [Technical Difficulty]

Sir, I can't hear you. Am I audible?

Yes, yes. I think Mr. Jairam has just frozen. Give us a minute. I think he will reconnect.

Hello?

Yes, you are audible, Kamlesh.

Can you hear me now?

Sir, we can see you. Your voice is a little lower again.

Is it better now?

Yes, sir, go ahead.

I apologize for all these constraints. I was telling about the investment that's being made by the EU in the defense sector. There's a significant amount of capital that is being put in. There will be a trickle-down impact on the demand for general industrial growth. So we expect -- that's a bit of a rainbow at a distance, and we are hoping that the economy -- the whole European economy will get a boost by virtue of this. But that's not a short-term play. That's more a medium- to long-term play.

Right, sir. And sir, lastly, on our CapEx plan, we did talk about INR 250 crores in first 2 years. Just wanted to understand, amid all the challenges, is this on track. And second, our guidance of $450 million this year. Is this on track? That's my last question.

So yes, the investments that we have -- we are not here for the short term, Amit. We are here for the long term. There are certain expenses that we may cut back, which we can defer, we will defer. But whatever is required for sustaining the business in the longer term, as per the longer-term plan, we will definitely continue to do. So that investment is continuing. It's on track. A few delays here and there by virtue of rain and stuff like that. But otherwise, we are okay. As far as the guidance of $450 million, we are on track towards achieving it. But the question really is, if the rupee becomes 90 or 80 -- now it's already INR 87, you shouldn't hold us accountable for that division. So if you divide it by a larger number, obviously, our India revenue is going to become smaller. But general direction structurally, yes, we are there. So there were some questions in the Q&A. You want me to...

Yes, sir. Sir, we'll take those questions. These are from participants who couldn't unmute himself. So first question we'll take from Mr. Vipul Kumar. He said, sir, what is the progress in introducing economical range of consumers, which can compete with low-priced Chinese products?

So the products are ready. We are now -- they are all undergoing field validation. We are very confident that they will work because the fundamental architecture is based on our own products. So we have not developed any new parts. So to that extent, the reliability is very, very high. Nevertheless, we wanted to get customer feedback. So that's where we are at. What we are really focused on is our strategy for the low-end market. It's not -- product is only one part of it. Price is the second part of it, which we are already clear. The product and price is clear. But the whole strategy does not work with just product and price. There is a whole idea of how do you brand it? How do you take the brand to the market? What is the distribution network? How do you get to the customers? So these are all pieces that we are now building up. So we are confident that the whole launch strategy of entry into that market, we will do sometimes this year, this financial year.

Sure, sir. The second question from Vipul is, sir, what percentage of our motor requirement is manufactured in-house? And where do we see ourselves in next 3 years? And what impact will it have on our margins?

So I don't want to talk specifically about the profit margin that we are going to make. I will give you a general direction there later on. Percentage-wise, right now, we are at around 40% to 45%. By the end of this financial year, we'll be close to about 70%, 75%. I think by -- in another 2 years, we'll be close to 90%. So this is really the progression that we will have in terms of our motors supply -- our in-house production supplying to ourselves. Directionally, our motors are at the same cost structure as the Chinese motors that we were importing. Now having said that, half of our revenue that is primarily India, Southeast Asia, a little bit of Australia, we were using Chinese motors. The rest of the world, whether it was Europe or America, we were using either European or American motors. Now if -- the difference in pricing between the Chinese motor and a European American motor is in the order of about 20%, 25%. So you need to do the math in terms of interpreting this. Roughly, that's the general direction.

Sure. Next question I take again from line of Mayank who couldn't unmute himself. Sir, segmental gross margin in compressor has increased sharply sequentially, 53% in 1Q FY '26 versus 50% in 4Q FY '25. Is this associated with some kind of price hike?

So I see this question. I would like to understand what he means by gross margin because we have -- the way we look at it is we look at contribution margin, which is after variable cost. Now the contribution margin after variable cost is pretty much flat. So there has been no sharp increase. So if he is looking at a different definition of margin, I don't know what that is. So that's point number one. Now that contribution margin combined with on a higher revenue, a flat contribution, sustained contribution on a higher revenue is giving us an EBITDA -- flat percentage of EBITDA. And the primary reason for that is the investments that we have made on various initiatives in people and certain software and consultancy that we have done. So what kind of margin we expect, I believe that the contribution margin will be sustained and EBITDA margins at the current level will also be sustained. So I don't see that as a concern.

Sir, next question, I take it from line of [ Naysar. ] I hope I have pronounced the name right.

What I wanted to understand is, sir, you mentioned about the tariff situation that after maybe a 5%, 10% price hike, you have the 15%, 20% to adjust, which you should be able to do. The quantum 15%, 20% is not less. I just wanted to understand what levers are you using to ensure that even after that 15%, 20%, the impact on profitability is not much.

So this is not something that we -- as an initiative that we develop now. This is an initiative that we developed 2, 3 years ago. The biggest one of such initiative was the motor production. Now that in-sourcing of the motor is going to help us in the U.S. market because last year, we had supplied sufficient number of test motors into the U.S. We have validated all the motors. They have run enough hours and they have stabilized. Now we are going -- we have started selling compressors with our motors, and that's a significant cost compression for us. If the tariffs had not been there, that would have been a significant margin expansion for us. So that's the lost opportunity. So like that, there were initiatives as part of our overall cost compression program that we started 2, 3 years ago. Those are all coming to loose now. And that's why we are confident that we can take this much -- this much we can bear.

Got it. Fair. But effectively, because you would have done -- we've done CapEx for motors and like you said, lost opportunity. Just from a competitive perspective, how do you see it? Because of the tariffs, will the price rise be limited to 5%, 10%? Or how will it work in general? Because eventually, it's a CapEx. So you also would, at some point, want to make money of it and things like that. And I'm sure even competition would think like that. So...

No, I don't understand your question. I'll try to answer to the extent that I've understood. I don't know, 5% to 10% is our estimate of what the competition or the overall market has to increase to sustain their profit at the current level. This is an assumption. Now it's -- this dust will settle down in maybe a month or 2 where everyone then realizes what is the real cost because of the tariffs and basis that they will set their pricing. Already, we are seeing some of our competitors increasing prices in this range. And that's why we are saying it could be anywhere between 5% to 10%. So that's point number one. Point number two is when we looked at our motor plant and our motor project 5 years ago, it was done to mitigate the risk of dependence on China, risk of dependence on China at a pricing that did not make any commercial sense. Those prices at which we were buying motors or the rest of the whole world is buying had no relevance to the cost because the cost of a motor is easily ascertainable because it uses commodities like copper and steel and castings. There is no magic in terms of estimating those costs. Now when your supplier is supplying to you at a price which has no relevance to cost, then it's a huge risk in terms of when that's going to -- when that rug is going to get pulled out of your -- pulled from under your legs. So that's when we started looking at motors and saying we need to hit those cost points, but we do it not by employing cheap Indians, but by using technology. And we set aside a certain amount of money to first do a proof of concept to see whether that technology can be developed, which we did very successfully. We built about 50, 60 motors, put it into the field to check the reliability, that passed the test. So when we made the investment into the motor plant and did the costing of the motors, it includes that investment. So it's not just at a material cost.

Got it. No, that's very clear. That's very helpful. Just one follow-up, if I can. From a U.S. market perspective which geography would be like the lowest common denominator? So if you take the cost of production plus the tariff, which according to you would, as the things stand today, would be at the lowest cost in terms of...

I don't understand your question. .

What I'm trying to ask is from a competition perspective, which competitor or which region will have the lowest cost now after we take into consideration the tariffs?

Obviously, a company that is manufacturing compressors in America will have the lowest impact because there's no tariff directly on their compressor. But no compressor company in America buys everything in America. They import from all over the world. Now they will import from China. They will import from Europe. They were probably importing from India. Now all of them are going to come in with a certain percentage of cost, additional cost. Now what is their raw material component that is subjected to import and what percentage of that import is at 15% tariff, what percentage is at 30%, that's something that we would have. But we know, by and large, there will be an increase. And based on the behavior, it's 5% to 10%. So that's the worst case. I mean that's the case that we need to match. Everything else will be even higher than that.

But the U.S. manufacturer will also have a...

Naysar, could you please -- I mean could you please wait in the queue. Sir, in the interest of time, we'll take a couple of more questions. One, I'll take it from the chat and one I'll probably take it on the call. So the next question is from Bhavin Vithlani. He says for the stabilizer, would Elgi have in-house manufacturing of PCBA. We have seen multiple electric companies face quality challenges for not having control on -- of the embedded software.

So our new technology has no electronics. So there is no question of electronics going into our new technology that we have launched. It's a mechanical design, and that's really the beauty of the whole technology. So that's not an issue for us.

So I'll just take 1 last question from Rahul because we had tried to unmute him, but he couldn't unmute. Rahul, you may please unmute yourself and go ahead with the question. Your mic is on.

He's mic is not on.

I mean the line is on. He has to unmute himself.

I think he's continuing to have challenges on...

Sir, with that, I think we've already exited our dedicated time towards it. I would request everyone whoever has questions to please reach out to the IR team or the management directly. Thank you once again, sir. I would leave it to Kamleshji to end the...

Yes, Jai, just one point, if you can just elaborate on the progress of vacuum product business. Any update you want to share?

Yes. Thank you, Kamlesh. Thank you for raising that. Our indigenization of the vacuum products has been completed as per plan. So we have set up our sales organization. Month-on-month, we are growing our sales. But the numbers are so small, it's not material for us to report it separately. But the business is growing as per our plan, and we are quite pleased with the performance of the product, the customers' response, customers' repeat buying. So these are all positive directions. So I just want to -- considering that we had so many challenges in this call, and I apologize for this, please reach out to us to our investor@elgi.com. Please refer to the call and please send us your questions, and we will respond to them. And we will post those questions and the responses on our website.

Great, sir. Thank you. Investors, thanks for joining in. With that, we conclude the call. Thank you, Jai. Any closing remarks you want to make, sir?

No, that's it, Kamlesh. And again, I want to apologize for this. We'll make sure that we do a diagnosis of why things went south and we'll ensure it doesn't happen again. Thank you very much.

Thank you. Thank you so much, sir.

Thank you.