Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Good morning, everyone. On behalf of Asian Markets, we welcome you all to the 2Q FY '26 earnings webinar of Elgi Equipments Limited. We have with us today, Mr. Jairam Varadaraj, Managing Director, representing the company. We'll start with Mr. Jairam giving a presentation on the quarterly and 6 monthly performance of the company, followed by Q&A session. I hand it over to Mr. Jairam. Thank you, sir. Over to you.

Thank you, Kamlesh. Thank you, Asian Market Securities for organizing this call as always. Appreciate it. Ladies and gentlemen, thank you for taking time to be with us this morning. I will follow the same format that I normally do, which is start with an EBITDA reconciliation for the quarter compared to last year Q2. So, moving to that slide, you will notice that EBITDA is relatively flat. And I have given the reason sales grew by 11%. So, there's been a volume, good volume contribution. But in spite of it is EBITDA is relatively flat. Employee cost seems to have gone up by 15%, but there is some explanation to that. 6% is the normal increase that we have gone through. Exchange rate by virtue of increase in the bureau exchange and the dollar exchange is contributed to 4% on the employee cost and fees, and we have added 3% in headcount. This is something that I have explained even earlier. Strategically we are spending close to about 1%-1.5% of our EBITDA on special initiatives to build foundational capabilities in finance and an IT and head count. And this has been towards that. Similarly, on other expense, the significant increase has been primarily coming from the initiatives. So overall initiatives have taken away 1.2% of the EBITDA. So, the EBITDA in its current value is 14.9% of revenue compared to 16.3% last year. And if I add this 1.2%, which is our running, our EBITDA percent is very close to last year. So, the point of this is there is no major concern in terms of profitability structure of the business. The focus is on growing the top line. So, moving on to sales, all the regions have pretty much grown at various levels. Even Europe has been muted. We have taken some, again, some very strong action in Europe in terms of streamlining costs further, and I am reasonably confident that in the balance of the year, our [Indiscernible] of Europe will look better. I'll come back and talk a little bit about both North America and Europe growth in both these two regions. So the financial highlights are, the revenue is compared to the various quarters of prior years and previous quarter, and the PBT. The PBT growth, if you may have noticed is 28% even though EBITDA has been flat and the primary reason for that is we had a one-off income in the sale of property in the US, so if I eliminate that and then PBT is roughly the same as the previous year. Moving on to the sales mix, pretty stable in terms of split between compressors and automotive and India versus the rest of the world, those shifts are well within that range. Structurally, there is no change in the revenue contributions. So overall, this is the consolidated P&L write-down to PAT level. So, if I include the one-off gain on sale of property, PAT is about INR 947 million for the quarter, which is roughly similar to what it was the previous year, previous quarter. Looking at the cash position we have definitely improved this number. These are all numbers stated in rupees. And when I take the net cash position, I have to net off the loans in Europe and the U.S. where with the depreciated rupee, the value of those loans go up. So, the net cash position that we are present in is actually a little skewed. So, you need to look at the cash position in September in the table below. We have really improved our cash position, and we continue to improve it by better management of our receivables as well as inventory. So, I'm very optimistic that going forward, we will continue to improve our cash position. So this is really the presentation on the numbers. I would like to talk a little bit about revenue. Australia grew and it's not as to our expectation, but definitely better than last year. Last year was a weak year, and therefore, the growth has been good this year. We continue to remain optimistic about Australia. There are some good improvements in the economy, and we are hopeful. But in any case, it's a very small market in terms of our contribution, I mean, contribution to our revenue. Southeast Asia continues to be a challenge. The contribution, again, is very, very small to our overall level. Coming to India, India has done well in pockets. We have this go-to-market initiative that we kicked off 1.5 years ago. It is gaining traction, but we are yet to see the full-blown results of it. There are some marginal improvements in performance in different segments. And we remain hopeful. I believe the third quarter, we will see a lot more impact of that initiative than we have seen in the second quarter. Middle East continues to remain strong. We had some pricing challenges which we have corrected. But otherwise, the demand profile looks quite strong, and we are continuing to grow. Europe has been a disappointment and a challenge for us. We expect it to grow despite the Ukraine war and energy problems there. I think it's time for us to reset our strategy, which is what we are doing. I will combine both that conversation after I discuss what we have done in the U.S. North America has grown very well for us across all verticals of the business, except our distribution operation. But there also, we are beginning to see some green shoots. We think the third quarter will be strong. So by and large, the U.S. market has been very strong for us. But both in Europe and the U.S. we are going back to the drawing board in terms of rejigging our strategy. The real, the problem definition earlier was how to gain entry and grow, which we have done successfully. Now the problem statement is how do we increase the rate of our growth in these 2 markets. And therefore, the strategy that got us to where we are today is not going to take us to where we want to go. So that's the conversation internally in the company. And we are hoping in the next couple of quarters, we'll be able to arrive at certain directions that will give us very clear growth path in both these large regions. One point that I would like to spend some time is in this whole tariff impact. In the second quarter, there was no impact like I explained in the call for the first quarter. We are bleeding out our inventory, and that's what we did in Q2. So, the impact was not much. In Q3, we expect that there will be an impact, but at an overall consolidated P&L level. So, there could be an impact at the contribution margin in the U.S. specific to industrial product vertical. But at a consolidated level at a P&L, we don't see any impact. We have already done enough of cost mitigation measures across both variable cost as well as our fixed cost, and we are confident that we will not have an impact in our P&L as we continue to grow our, sales. So just to summarize thing, if you look at a steady state 1 year, so let's take, for example, next financial year, which is '26, '27, assuming a certain growth rate, the impact of tariff, both from the exports from India to the U.S. as well as from Italy to the U.S., the combined impact would be $9 million if we didn't do anything, $9 million at an EBITDA level, right? And what we have done in terms of cost reduction at the material cost level, cost reduction at certain overhead levels, price increases that we have been able to get in the market without affecting our competitiveness, all of it gives us actually a surplus. So, we are quite confident that even at the current tariff rate, we will not have any issue impact on our profitability. Now the way the tariff conversations are going, there is a realistic possibility that 50% will drop further down. And if that were to happen, we will be in a good wicket from a profitability perspective. So, this is really the summary of the performance of the company for the second quarter. Now I will open the floor for questions.

[Operator Instructions] The first question is from the line of Harshit Patel. Harshit, please unmute your line and go ahead with your question.

Thank you very much for the opportunity. You have mentioned that we have had a challenging first half in Europe and you have also talked about certain mitigation strategies. So, are we confident about the recovery in the second half? And also, in the case that the end markets don't improve over there, how do we plan to conduct our operations given that we have invested quite a lot towards fixed cost in that region over the last 6, 7 years?

Okay. So fair question. So, we are planning on the basis that the second half will be roughly similar to the first half, even though our performance towards the end of the second quarter was actually better than the prior months. So, but we're not taking that in. We are assuming it will be at the same levels. So, what we have done is really gone back and cut deeply on some of our costs and resize the organization to the most realistic level of revenue, considering our experience in the last 1.5 years. So those costs are going to be taken out during the rest of the quarters of this year. But we will not see an immediate P&L impact because there is a certain cost of letting people go and the resettlement costs are going to be involved. So even though there will be a significant reduction in people costs, there will be the exit costs that will be there. So next year, we will be starting the organization at a much lower cost structure. So that's on the cost side. We need to grow our top line to be able to recover the investments that we have made in Europe so far. And that is where I said the current strategy that has taken us to a 3% to 4% share of the European market is not going to take us to, let's say, to go to 6%, 7% share of the U.S. market. And we are looking at what should be the revised go-to-market strategy for Elgi in Europe, similarly in the U.S. as well. But focusing on Europe, we believe that a hybrid model of going direct in partnership with distributors is going to get us, put us more often in front of the customers. And we have found that when we are in front of the customers, we win right? So that's really the goal that we are working on. We are not going to increase any cost because of doing that within the existing cost structure, we are going to try and leverage a different strategy so that we are able to improve the top line.

Understood. Sir is this model would be more similar to what we are already doing in the North American market where we take the control of the distributorship?

No, no, no. That's an acquisition, Harshit. We are not looking at acquisition at all, right? What we are trying to do is we have now split our entire sales organization into a channel and direct in Europe. So, while the channel organization will continue to manage the relationship of existing channel partners, the direct organization will start going to connect with end users directly, but in partnership with distributors in those regions so that the distributors are able to deliver service, we do the sales.

Understood. Sir, just a bookkeeping follow-up on that one. How much EBITDA and PAT we have generated from European and North American operations in the first half of this year?

I don't have the number in front of me, Harshit, but Europe was negative, and North America was almost breakeven.

So, you are talking about at the EBITDA level or at the final bottom line level?

At the EBITDA level. I'm not taking in the property sale and the other income.

Just lastly from my side on the stabilizer front, since we have already launched the product commercially in the market, how has been the customer and the competition response to this innovation? And how much incremental revenues we can garner in the second half and the full year FY '27, considering both the opportunities, the new product sales as well as the retrofit that you have mentioned before?

So, first is I'm glad you brought that up. It is not, we don't call it stabilizer anymore. It is called Demand=Match. That's the brand name that we have created. Now we've launched, we launched it in October in different parts of the country in India and the response has been very, very good from the customers. Now, we have standardized this product across our products. So, we are making it as a standard offering. So, it's not an option. So, the response from the market has been very positive, but it's still early days. It's just been a month since we put it out into the market. So, we have not really gauged any reactions from competitors. We have not really assessed it yet. I will be able to give you a better sense for it in probably the third quarter call or most likely the year-end call, but we will try and see what we can do in the third quarter call. Now as far as the retrofit is concerned, we have not, we have kept it ready, but we have not launched the program yet. So, we, all our energy is focused on launching this system for the new machines. So, maybe in the last quarter, we will launch the retrofit program.

The next question we will take from the line of Mr. Ravi Swaminathan. Please go ahead.

Sir, my first question is with respect to the stand-alone business, which is largely a representation of India. If you see the past 4 quarters growth average, it's somewhere around 7%, 7.5% vis-a-vis the strong double-digit that we used to see just post COVID. My question is at what rate is the industry growing, which are the sectors which are doing well as of now? How is the inquiry pipeline? And is there a reasonable visibility that this high single-digit growth can move into the double-digit growth, similar to what we had seen just after COVID?

Okay. So, what you're seeing, Ravi, is growth consolidated across all products. So, if you look at the industrial products, the growth has been higher compared to our Construction and Mining and Water. So that's point number one. And so therefore, the 7% or 7%, 8% growth looks a little muted. But if I segregate and look at the industrial, it has not been, it's not as bad as the 7% to 8%. But nevertheless, we believe that there is a significant opportunity to grow even higher than that by gaining share, which is really what our initiatives that we've been running. And like I explained a little earlier in my call, we hope to see results of that in this quarter and the next. Now in terms of inquiry pipeline, inquiry pipeline in India continues to be strong, but the time to convert or to conclude is still taking, is a little extended compared to before, right? So, while the inquiry bank is good, we're not seeing the conversion happening as fast as it used to be maybe 1 year, 1.5 years ago. As far as industry verticals are concerned, I don't see anyone, of course, the automotive aftermarket, like the garages and all that, there is an uptick in terms of demand for servicing cars. So definitely, there is an increase there. But rest of the industry verticals, I don't see any one industry being disproportionately higher than that. I can only tell you textile continues to remain a little muted. They were getting into the year itself with challenges. Now with the tariffs, the challenges have been even more. So, they are very muted in terms of investment. But otherwise, all the industries, I don't see a difference.

Okay. And in India, among products like piston compressors, crew compressors, is there any big difference in terms of growth or all are growing?

No, all are growing. I think industrial as a category is growing.

Understood. And aftersales service as a proportion this year, has it continued to increase because I see the gross profitability has improved for us. So, I would read like would have contributed to that. So is that understanding.

Partly it is aftermarket contribution, partly is also a product mix. Quarter-to-quarter, it's not a product mix is not exactly identical, right? So, this is, I would not read too much into that. It is just one of those beneficial blips.

Understood. And my last question is with respect to one clarification related to that U.S. impact that you had mentioned. At an EBITDA level, you had mentioned $9 million impact would have happened, but you are taking corrective measures. Is that understanding right?

So, $9 million is our expected impact if we hadn't done anything for the full year, I took '26-'27 as an example, right? Not '25, '26, '26, '27. And we have fully mitigated and prepared for that.

The next question is from the line of Mr. Sushil.

Sir, my first question is, I know you already alluded to it to some level. But if the U.S. tariffs were to be reduced from the current level of 50%, does that mean that we might actually see an EBITDA margin improvement in our U.S. business?

Absolutely. Absolutely because there is no, sorry, go ahead.

Sorry, which is currently flat is what you alluded to.

So the, again, if you look at the U.S. business, it has got multiple verticals. There is the industrial vertical, there is a portable vertical, that is distribution operations vertical and the medical, patents medical vertical. Combined, it's flat. But if you look at specific verticals inside, I don't want to get into the profitability of each vertical because that will be too sensitive data. The industrial vertical was always profitable, right? So, the tariff impact was only a question of reducing its profitability if the tariffs continue. Now the mitigation done, our profitability will not get compromised. But if tariffs go down, then obviously, the profitability would go up on the industrial side.

Sure. And sir, my second question is 2 little, small bookkeeping things. One, you mentioned that some employee cost went up because of the rupee and rupee depreciation vis-a-vis euro and U.S. dollar.

Yes

So we would have got similar benefit in our top line as well, right, when we report top line in.

Yes. Absolutely. We got a top line benefit. But since Europe is a loss, the bottom-line impact is much more higher.

And second thing is, sir, this healthy cash generation that we've had in this, we reported in the first half, some amount of it will also be because of the running off our inventory in the U.S., right?

Partly the inventory impact has not been very high, Sushil, so far because one is when tariffs were impacted, we felt it may not be good for us to reduce inventory, it's better to hold on to historical inventory, which is at a lower cost, right? Otherwise, we were planning to bring the inventory back as a means to redeploy it in the rest of the world. And that we paused. So, to that extent, the inventory reduction in America has not been a major factor, though it has been less. But the bigger contributing factor in this particular quarter and the first half has been the reduction in our receivables. We managed our receivables well, and we brought it under control. And we expect that inventory management in Europe and in India will start gaining momentum by virtue of the Project One initiative that we are running internally to bring greater control and deliberateness to inventory. So that will yield some very good results in the second and third, I mean, third and fourth quarter.

The next question is from the line of Parag Thakkar. Please go ahead.

I would say that in a very tough macro environment you have delivered very well. In U.S. can you say that industrial product was profitable, and the profitability will further increase if the tariffs come down. So, that itself is a $9 million impact?

No. So, like I explained, Parag, $9 million is an impact of exports from India and exports from Italy because our portable business in the U.S. is relying on products from Italy, where the tariff has been 15% for Europe, right? So that has also had an impact on the U.S. operation and the India tariff, which is 50%. Combined put together is $9 million for the whole company, yes.

And for the whole U.S., right? The whole U.S. business?

Yes, because there are only 2 businesses that get impacted primarily by tariffs. One is the industrial business, and the other is the portable business. distribution operations and the medical are not as impacted as the others.

Okay. So basically, right now, sir, what we are reading, hearing is that tariff is going to come down. So, when the tariff is actually brought down, say, to 25% just for the assumption, then what kind of EBITDA increase we can see from here on at a consolidated level for Elgi Equipments?

Yes. So, I don't know how to split that $9 million, Parag, but I would think close to, if I look at the split between portable and industrial, I would say about $6 million would be the impact. 6 million would be, will come down to, let's say, $3 million, yes. So, $3 million would be the benefit. That's my estimate. I don't have the numbers in front of me. $3 million...

Okay. And sir, what is your aspiration? For example, right now, we are going through a tough environment, as you very rightly said, for textiles in India and U.S. tariffs. If suppose all this noise settles down over the next 2 to 3 months, what can, what is the aspiration of Elgi Equipments as a company to grow in terms of, at the EBITDA level, I would say, not in the revenue level because as you said, you have done a lot of investments and you are going to change your strategy also go-to-market strategy in Europe and U.S. What is the aspiration with which we are working? And I know you are very conservative, so we'll take it like that. But what is the aspiration you have in terms of for, how much EBITDA growth we can expect? Very conservative. I'm not asking for guidance.

Well, right now, if I remove the special initiatives that we are running, we know we are doing that deliberately. We are currently at around 16%, which is what we said we will achieve as a guidance that we gave 5 years ago, right? So, we are on track. So why don't you bear, give me a little bit of time till the either the third quarter or the full year call for me to give you a much more well thought through guidance on revenue over what period and EBITDA over what period.

We are looking for that.

We will do that.

The next question is from the line of Vaanga. I think there is some problem with his line. We will take the next question from the line of Salil. Please go ahead.

Sir, my question is on the cost control initiatives. Now both employee costs and other expenses they've grown 15%,16% this quarter. For employee cost, you gave some breakup of what the act has been for special initiatives and ForEx. But in spite of that, 6% growth in employee cost after you've done, say, taken a knife to some of these costs. So just trying to understand what is, what is the net benefit of some of these cost control initiatives that one could expect, because the gross margins have declined this quarter year-on-year, so the material cost or reengineering. So, if you can take us through some more details, that would be very helpful.

So one is that 6% increase is without taking into account the employee cost reduction that we have initiated and completed in Europe. So actually, so that will be over and above what we have done. So, this will actually come down in the subsequent quarters. I don't know which data you're referring to where you say gross margin has come down. Actually, our contribution margin continues to remain quite strong, right? So as far as the cost reduction is concerned, we are looking at a combination of both variable costs. I'll give you an example. We have done an initiative on our Power and Fuel. We are not a very high-power consuming company. But nevertheless, there is a significant chunk that is there. And we are going to over-index. We already have a significant part of our power as renewable. We are going to over-index on that, and that's going to give us about INR 5 crores to INR 6 crores of savings every year, right? So, we are running multiple such projects. There is optimization of our container costs, our transportation, our travel costs, certain travel reduction, like Power that I talked to you about. And there is a huge saving that we are expecting on, expecting already baked in and with our own motor production. So all this is what we are talking about in terms of cost control.

Understood. That's helpful. Just on the gross margins, I was referring to this number, at least my calculation shows we were at about 51.9%...

This quarter, which data are you looking at?