Elgi Equipments Limited (ELGIEQUIP) Earnings Call Transcript & Summary

Good afternoon, everyone. On behalf of Asian Markets, we welcome you all to the 1Q FY '27 post results webinar of Elgi Equipments Limited. We have with us Mr. Jairam Varadaraj, Managing Director, representing the company. I'll request Mr. Jairam to take us through the presentation and the overview of the results follow which we will start the Q&A session. Over to you, sir.

Thank you, Kamlesh. Thank you. Asian Market Securities for organizing it. Ladies and gentlemen, it's a pleasure for me to be with you I hope you're able to see my screen because I'm having difficulty seeing my own grain. Just give me a minute while I --

We are able to see us, sir.

I know I'm not able to see it. Okay. Can you see the screen now?

Yes, sir, we are able to.

Perfect. Okay. So thank you again. I apologize for this bit of a challenge here. I changed the format for this year starting on the revenue and then moving to the -- so I want to look at Q1 revenue numbers compared to Q1 of last year. We grew by about 23%. And after that 23.7% was exchange-related. Across the board, we had growth. I'll come back and talk about region-wise performance. EBITDA, we grew by 28%. This has been good. I'll again talk in greater detail about the constituents of it. Moving on, on our sales mix by and large, the same between compressors and automotive equipment. -- and by and large, the same split between India and the rest of the world. We have introduced this slide to give you a sense for where our growth is coming from. So if you look at India stack, which is standalone, we have grown by about 28%. North America, we have grown by 37%. Europe, we grew by 21% and Australia 7% -- I mean, sorry, 17%. So across the board, we have had some good growth. So despite a strong growth in India, we've been able to maintain the split between India and rest of the world by virtue of growth in other geographies as well. Moving into the classical EBITDA reconciliation that we normally present. If you look at it, exchange has been -- we have carved out exchange because there was a significant impact of exchange during the quarter. So -- we have had a good volume impact. We had a contribution, negative primarily because of raw material cost increases, tariffs and product mix. We have responded to this when we expect to see part of the -- we've done this responded by cost reduction. We have also responded by price correction in the market. But the price correction, we expect to see towards the end of the second quarter and more fully in the third quarter. So by and large, we are confident that we have mitigated this. We started off the year thinking that there will be a 3% to 4% increase in material cost, cost by commodity, metal commodity prices. But in reality, it was 5%, then there was a possibility that it could go to 9%. We have taken 9% and we have taken some corrective measures. So we are confident that there will not be any impact. So even this quarter we have maintained our EBITDA percentage same as last year. In fact, we are slightly better. I think it will only continue to improve into the future. So this is -- the thing on employee cost even though the increases seem significant, primarily, it's an increment that we have given across the world. So -- overall cost is well within control. The same thing with other expenses, there's a 12% increase primarily because we have gone and taken on some rental premises for our motor plant as well as what we sold facilities that we sold in the U.S., we have moved into rental facilities. Moving on to the full financials. We are -- our PAT is at 9.7 roughly similar as the Q1 of last year. And this is with some exceptional reorganization costs. We are going through some reorganization in Australia, in Europe and a little bit in the U.S. And we think there will be a little bit of continuing of these costs continuing into the year. But the benefit of doing this is in a very short time, and it's good for the company. So we're not too concerned about this. Net cash position in the company continues to be very strong. Our CapEx, 1 is our MK-2, which is our program for shifting our campus to the new campus from City factory. That's been about half of the CapEx is towards that. And the other is we bought some land in Italy, which was contracted 6 years ago that we had to make that commitment and some equipment normal CapEx in the factory. So this is really what I wanted to present to you. I will now give an overall of the sales numbers starting from Australia. Australia was a bit muted relative to the other geographies. We have had some challenges in our service business in our distribution operations. we are working towards resetting the processes, reorganizing them. We are confident by the third and fourth quarter, we will be back to where we are supposed to be. Moving down, Southeast Asia continues to be a bit of a challenge. Part of our restructuring cost has also is towards Southeast Asia. Market is big, but there are still challenges for an Indian brand in that market. We are working on different strategies there. So it's a longer-term play. It's not a significant contributor. Coming to India, India did well across all verticals, whether it is industrial, portable aftermarket, vacuum, all of them have done well in the quarter, and we expect to continue to do at this level, though the growth rates may be less because our first quarter was -- last year was a bit of a muted quarter, and we had very strong second, third and fourth quarter. So the growth rates may not be as attractive as we have had in the first quarter, but we will continue to grow. In India, we have made some strong inroads into some of the growth sectors like EV, our growth in EV has been pretty significant, growth in the renewable energy segment has been pretty significant. And the growth in semiconductor ecosystem has also been significant. So we are riding on some of the industry waves that are happening in India. Europe is more of a P&L play for us right now. We have done all of it to make sure that it is breaking even, stays there, and it is staying there. There are some initiatives to grow the top line. We have made plans to enter into Germany and a little bit more emphasis into Eastern Europe. So there will be a tighter control over cost even while we try and grow some of the geographies and products. So again, Europe is going to show up in the medium-term, it will come back to where it's supposed to be. North America was a good story. Our distribution business is not doing as well as it should be primarily in the service side. We are working on a few initiatives. All the other businesses have done well in North America, and we expect that this momentum will continue into the future as well. So this is really the overall summary of our performance for the first quarter. Our project to enter into the -- what we call as the Tier 4 segment in the bottom of the pyramid, bottom of the industrial pyramid, where we have been facing very low-cost compressors from China. We are all lined up. Our products have been validated. In fact, we have got our first orders in already. The formal launch is this month in Hyderabad and 1 of the exhibitions we're going to have that. So -- it's -- we are on track. September will be the launch. We have got our distributors lined up. The training program has gone. Our internal organization is in place both for sales and service, so that project is on track. So anyway, this year is just the start year. It will be a contribution to the top line marginally. But really, in the next few years, we expect that to be a very strong player. So I will now stop here and rely on your questions to provide more clarification. Thank you.

Thank you, sir, for the opening comments. [Operator Instructions] Sir, the first question we have is from the line of Ravi.

Sir, my first question is with respect to the India business. It has seen a very strong growth -- any sense or color on how much of it would have been volume driven and how much of it would have been price led because a significant amount of raw material price increase has happened over the past few months, especially since the award -- so how much price increase we would have taken over the past few months. And have we completed our price correction movement? Or is there further price increase that is there on the cards? So.

I would say the growth has been primarily volume-driven. There has been a marginal correction and price, which we -- like I said, we anticipated about increase in raw material prices. And to that extent, we corrected our price. What really happened is 5% to 6% is the increase in the raw material cost. So to that extent, we were under recovered. But we have rated for that in the subsequent quarters, but the impact of it, we are not able to see in the first quarter yet.

Understood, sir. And if it is so volume driven, that is more than 20% growth in terms of volume growth has been there. Can you highlight some of the end subsegments or sectors which have actually done really well? Or is it like we have got into some newer categories and some of the newer products like the aftermarket products or the stabilized products, et cetera, which are contributing to this incremental growth?

Multiple reasons. One is, I can say across the board across all industry verticals, there's been a growth, right? So I can't say that there is 1 particular industry that has contributed significantly to this. That is point number one. Within specific industry segments, we have been able to grow by virtue of demand match. Demand match was launched in September of last year, and the traction and receptivity has been really outstanding, right? -- and we've been able to gain entry into customers who have -- who are never our customers, right? So the value proposition that we've been able to demonstrate for the product has been very powerful, and that is really carrying. So that's the second kind of a stream. There's been no real new products that we have launched, but just an upgrade of our entire range of products over a period of time. Today, we have -- our product range is 1 of the best in the world, right? So in terms of energy efficiency, in terms of competitiveness by virtue of making our own motors. So the overall value proposition that we are bringing into the market has been very, very strong. So this is the third. So I would say all 3 have contributed to the growth.

Understood, sir. And any mix change also which has contributed to this in the sense that screw compressors have grown faster than stand something of the short has it happened? Or is the mix has largely been the same.

Mix has been by and large the same.

Okay. And in terms of forward-looking inquiry numbers, et cetera, from certain large categories like industrials, especially metals and then water well instruct structure, regulated general infrastructure, et cetera. How are you seeing the demand environment on the ground -- has there been any slowdown related to the war, which has been there within India demand? Or are you seeing demand sustained inquiry levels are staying?

Inquiry still remains very strong. like I said, even in the annual call, inquiries remain small, but the gestation time for finalizations are longer than normal, right? But it is still very strong. Water well has seen an uptick in the quarter, but it is not like a day and night difference. Yes, there's been a positive contribution in terms of increase. But other than that, I would say, overall, there's been a buoyancy in the economy.

The next question is we have is from the line of Mani.

Referred to the stabilize product that we launched in 2025. We've spoken about the groundbreaking technology that we had come up with. How has been the adoption of the technology? And how do we see about the product reduction and we come up with such technology? Like do you have a gestation period of about 3 to 5 years before we reach a sizable scale to that or there has been a very quick adoption -- that's my first.

So Manjit, like I just explained, it stabilizes when we first introduced the technology. That was the name that we used -- but we actually launched the technology, and it's called -- the product is called Demand Match, right? We launched it last year like I was explaining last September and the absorption has been outstanding. So part of the significant growth in some of the industrial products where we have incorporated it. So Demand Match is a technology that sits in multiple models of our products. That introduction of that technology in models has been faced. So wherever we have introduced it in our models, the acceptance in the market, the kind of traction we are gaining has just been outstanding. And that has been a contributing factor for our growth this quarter. And that's only in India. We are launching demand match in the rest of the world this year. And that work has already started. We have had validation machines installed in all the major geographies and the feedback and experience has been, again, outstanding.

At this point in time, are we working on some technology that really excites us? Or how do we think about what research -- in which direction should we pursue the recent -- are we trying to exclude our efficiency of our existing products or we are trying to develop some new products or it is on. And are you seeing something new coming on over the next few years. I don't want to say 1 year, 3 years, I want to put a number, but is there anything under development, it's really excites you.

Well, there's a lot of stuff that's going on. See, there are -- there are 2 vectors for our technology/product development. One vector is to take the existing architecture an existing philosophy of design and move it to the highest level of efficiency and life cycle cost, right? So that's 1 vector that we are doing, and that's where new products come in, higher efficiency and lower life cycle cost. That's one. The second vector is really fundamental technology development which delivers things like demand much. So that's something that is ongoing, and we have some very exciting step. Unfortunately, I can't talk too openly about that. But again, the whole philosophy is how to reduce the overall life cycle cost for the customer, right? -- and pick the elements that are not so obvious and try and eliminate those costs for the customers. So there are quite a few exciting stuff that's happened.

Sir, next question, we'll take it from the line of the Yash.

I have a very broad question, sir. What is our right to win in the global markets. As you always say, we don't compete on price or the industry works that way. So what makes us different that a customer who has been using Inger Solar at last month, any other competitor for that reason to switch towards us or when they expand their capacity choose us over anyone else.

So there are 2 things. Yes, is a very good question. One is customer buys compressors based on certain 3 well-known parameters. Energy efficiency is the biggest. The second is the maintenance cost. And the third is the price of the compression. Now 80% of the market looks at energy efficiency and maintenance, less on the price. 20% of the market works purely on price, they're not too worried about efficiency and maintenance. So roughly, that's the split. We would like to focus on the 80%, which buys on efficiency and maintenance costs. So that's really where we are saying, how can we make the most energy-efficient compressor in the world. And today, close to 70% of the models in the industrial side, we are the best in the world, right? And this is not something that we are claiming. These are independently published numbers, right? So that's 1 part of it. When it comes to maintenance, the biggest cost, maintenance cost, which is not very well documented is the cost of failure, right? When a compressor goes down, even if you just take the cost of just renting another compressor to run the plant, that becomes the second largest cost. And we are focused obsessively on quality, and we have the lowest defect rates in the market. And that is why we are able to provide lifetime warranty, 10-year warranty in different segments of the market, and still have 1 of the lowest warranty cost on revenue, lowest in the industry, and that's a reflection of the quality that we bring into the product. So this is really what gives us our ability to win this proportionately when we are in front of the customer. Combine that with things like Demand Match technology, which nobody else has, it takes the value proposition to the next level. And that is another layer of the right to win in these markets. That's really how we are pushing the whole go-to-market.

But, sir, how are we working on getting in front of the customer, like on that side?

So that's a long process because this is primarily a distribution-led business, distributors own relationship with customers all over the world. So the real challenge is not giving value proposition just to the end user but look at what is the unique value proposition that we give to distributors. And that is a longer process than getting in front of the customer. We are very confident that we are in front of the end users, we win disproportionately, right? So the real challenge which we are working on is how do we get more distributors to represent our products, and that's an ongoing process. There is no switch that we can quickly turn on to make that happen.

Sir, we'll take the next question from the line of Mr. Ravi Samanage.

A few more follow-up questions, sir, which I have. Given the kind of strong growth that we have seen during this quarter, is it safe to assume that you would have gained market share in the Indian market.

I think so. But I'd like our competitors to tell us that.

Okay. Got it, sir. And second question is with respect to aftersales service. after say seeing similar kind of growth, the product sales would have seen. And what kind of contribution does after sales have in our overall revenue mix both at the India level and at a global level.

I kind of expected this question based on your prior questions on the same things in the past week, Ravi. So I prepared for this. So after looking has grown not only in India, but it has grown all over the world. And that's been one of the reasons why in spite of an increase in material cost, we've been able to sustain our profitability. I'm not saying that's only one contributing factor. As far as aftermarket revenue, I would say that if you just take parts, we are at -- if you look at overall in the world, it is -- we are at around 22%, 23%, right. In India alone, we'll be at around 30-odd percent, right, 28% to 30%, right? So U.S. it's got a mixture of both parts and service because our distribution business does serve us as well, right? And service is a very lumpy kind of a thing because it's -- we charge hundreds of dollars per hour for service. So that's -- that's -- it is -- it colors the whole thing. But we are at around 30%. But if you remove the service part, probably we're at around 16% or 17%. So I would say it's fair to say in India, we are at around 28%, 30%, rest of the world at part level at around 15%, 16%. So there is headroom for us to grow in India as well as well as headroom to grow in the rest of the world.

Okay. And the global benchmark for aftersales service as a percentage of revenue, it used to be around mid-30s. Is that right understanding? We would try to.

It's somewhere between in that -- between 35% and 40%, I would say, 38% probably that.

Understood, sir. And with respect to -- you had mentioned about EV application in the comment -- initial comments. So if you can elaborate more as to do the compressors covert EV applications. In the initial comments, you had mentioned that we have done well in electric vehicle, EV applications also. So if you can talk about that, the compressors go into EV applications.

Is it the EV ecosystem. -- right? So if you look at the EV vehicles, there are suppliers to the EV vehicles, there are EV vehicle manufacturers themselves, the compressors going into the factories. It is not going into an EV vehicle. No. Okay.

So it's kind of an extension to the auto products that.

Absolutely. The number of new players in the electric vehicle category, especially in the 2-wheeler segment is a lot more than in the 4-wheeler, right? We're all setting up factories and we are involved with them in helping them with their factories.

Understood, sir. Very clear. Final question, if you can give a mix of sales mix between industrial, infra and retail sales and also between system and screw that will be great.

I don't have the number with me, but I wouldn't like to split it between Piston and screw because that's too competitively very sensitive. But infra -- industrial, infra and retail, I don't know what you mean by retail. I don't have the numbers in front of.

Sir, retail means automotive garages, et cetera, odor, and all these things, I think 1 can classify it into retail.

We don't break it up that way. We don't break it up that way. So I won't be able to tell you what we sell in automotive garages. We don't measure that separately.

Thank you, Ravi. Sir, the next question we take it is from the line of Mr. Vipul Kumar.

So my question is what is our -- in reply to earlier question, you said you have 1 of the lowest warranty costs. So is it possible to quantify what is our warranty cost as a content of sales and how does it compare with over.

Warranty cost, I don't want to give you a specific number, Vipul, but it is less than 1% of our revenue.

And how do we compare to.

Well, we don't know. Nobody reports it, but from people who are from competitors who have given us casual references, it is higher than 1%, right? So that's the thing. I mean, they are higher than 1%, we are lower than 1%.

And in your opening remarks, we had also mentioned semicenter ecosystem. So where computers are used in semiconductor system.

So in manufacturing, there are oil-free machines that are used that are suppliers to the semiconductor industries where regular compressors are used. The ecosystem of semiconductors has a wide set of applications. The final one, the fab is the cleanest -- it's got the highest standard of air quality and all that. We are participating there. We are also participating in the entire eco chain of them.

What percentage of our return should be relating to semiconductor.

it's -- I wouldn't like to share that detail, Vipul, but considering that it's a nascent industry that is coming to India, it's not a significant number, but it's a growing number.

So very fast going side. Is that understanding for it.

It is a growth Yes, it is a growing number yes.

Sir, the next question we'll take is from the line of Mr Ankur.

First question on the distribution side, both in India as well as in the global markets. You did mention that demand match has been launched across India. Will it be fair to say that more or less the entire nation is covered with this now? Or there are still some.

Absolutely, absolutely. Because we have now, like I said, demand match is a technology that gets embedded in all our products, right? And we have sequenced the introduction by virtue of the most popular products. So wherever we have launched embedded that technology into a product, 100% it has been absorbed, right? And even as we speak, we are continuing to add more products into that demand match technology. So I expect in another year -- all our products will have demand much embedded in it all over the world.

Sure. And the time lines that you will see for the global side as well? It's 1 year only, right? In India, it's largely done globally, you're saying 1 year.