Elgi Equipments Limited Q3 FY23 Earnings Conference Call Insights

Key highlights from Elgi Equipments Limited (ELGIEQUIP) Q3 FY23 Earnings Concall

Management Update:

• [00:07:59] ELGIEQUIP expects 4Q23 to be as strong as 3Q23, and capex is expected to remain within INR50 crores.

• [00:09:40] ELGIEQUIP said that with the sale of its property, the company has no debt on the books and has a positive net-debt position.

Q&A Highlights:

• [00:10:59] Ravi Swaminathan at Spark Capital asked about the current demand situation in India, and how the budget can stimulate infrastructure-related spending to benefit ELGIEQUIP. Jairam Varadaraj MD replied that the domestic market is running well and the budget’s investment in railways and infrastructure should contribute positively to the company’s business.

• [00:13:23] Ravi Swaminathan at Spark Capital enquired about the India volume growth in 3Q23. Jairam Varadaraj MD said that at an aggregate level, the volume growth is about 3%.

• [00:14:00] Vinod Shastri from Instanomic queried if it’s possible for Europe to be profitable before FY25, and will the opening up of the European economy increase the chances of profitability in Europe. Jairam Varadaraj MD clarified that the company doesn’t think so about the profitability. ELGIEQUIP is on track to its original plan that was pushed forward by a year due to COVID.

• [00:15:52] Vinod Shastri from Instanomic asked if the 19% standalone EBITDA margin is sustainable. Jairam Varadaraj MD answered that it should be sustainable and the company expects 4Q23 performance to be similar to 3Q23 in terms of both top line and bottom line, despite various financial and economic conditions.

• [00:19:22] Harshit Patel from Equirus asked for an update on whether there were any price cutbacks in 3Q and what ELGI expects to happen in the next few quarters. Jairam Varadaraj MD clarified that the company has not rolled back its pricing. ELGIEQUIP has held on to its pricing and believe it is reasonable for the brand. At an overall level, ELGI don’t see any cutbacks happening.

• [00:21:39] Harshit Patel from Equirus queried if the company is on track to produce bulk of motor requirements for FY24 production. Jairam Varadaraj MD replied that the company is on track to meet the requirements for FY24 production.

• [00:22:28] Amit Anwani from Prabhudas Lilladher asked about the current quarter’s contribution of aftermarket business and outlook for the next couple of years. Jairam Varadaraj MD answered that the aftermarket contribution to ELGIEQUIP’s revenue is currently 25-26% in India and ELGIEQUIP is keeping a careful eye on the installed base in other markets so that when the number of installations starts becoming bigger, it can extract the true value of that potential.

• [00:24:34] Amit Anwani from Prabhudas Lilladher enquired about the headwinds faced in 1H at Southeast Asia, Sri Lanka, Middle-East and its outlook. Jairam Varadaraj MD said that Southeast Asia is a challenge due to its price sensitivity, but revenue has grown vs. last year and potential is there. ELGIEQUIP is still figuring out the best strategy for the region.

• [00:25:18] Amit Anwani from Prabhudas Lilladher asked about the manpower cost of INR144 crore quarterly run-rate, if it will increase or decrease. Jairam Varadaraj MD said that it will continue to be at this level and from April, there could be a revision, which is normal.

• [00:26:37] Vinod Shastri from iInstanomic Ventures asked about the R&D investments made so far and what progress has been made on them. Jairam Varadaraj MD replied that R&D investment in value terms in India is estimated to be around 3-4% of revenue in rupee terms, and 7-8% when normalized for global costs.

• [00:27:32] Vinod Shastri from iInstanomic Ventures asked for a hypothetical estimate of Siemens’ potential market share from the INR26,000 crore order placed by Indian Railways. Jairam Varadaraj MD said that it’s too early to answer the question of who Siemens will work with for the order, as there are many considerations and it is a large, complicated order.

• [00:29:01] Vinod Shastri from iInstanomic Ventures queried if there has been any resilience towards the difficulties and lower order inquiries the textile sector is currently facing. Jairam Varadaraj MD clarified that the company is still at the same situation, textiles has not shown any significant improvement yet.

• [00:30:42] Manish Goyal enquired about the reasons for ELGIEQUIP’s international business growth, any challenges it may be facing, and the expected volume growth in Europe. Jairam Varadaraj MD said that the disproportionate growth of the company outside of India, particularly in Europe and the US, could be due to the energy crisis in Europe, inflation in America, potential unemployment increases in America, people’s reactions that are different from what economists predict, and countries looking to reduce their dependence on China by investing in insourcing production.

• [00:35:27]  Manish Goyal asked for an update on inventory levels and the supply chain situation, as well as ELGIEQUIP’s net cash from the sale of property in the US. Jairam Varadaraj MD answered that as of today, the net debt position of the company is zero or slightly positive. This was achieved by selling a property for $17 million and generating more cash, although inventory remains an issue that the company is working on to extract cash from.

• [00:37:28] Priyesh Babariya from Axis Capital asked about the competitive scenario in the past, how it has been shifted and the current scenario. Jairam Varadaraj MD answered that the same competitors are still in the market, and while there have been some Chinese manufacturers who make low cost machines of lower quality, they do not provide a realistic pricing structure. The company has strategies in place to address this.

• [00:40:31]  Bhavin Vithlani at SBI queried about the growth of the compressor business in India and its market share and if ELGIEQUIP has benefited from supply chain issues experienced by some European competitors. Jairam Varadaraj MD said ELGIEQUIP’s competitors globally have grown significantly despite supply chain challenges and while ELGIEQUIP has gained some share due to being able to deliver quickly, there hasn’t been a large shift towards them.

• [00:44:49]  Bhavin Vithlani at SBI asked about the pricing strategy for ELGIEQUIP’s product, which is now matching or exceeding international competitors’ prices, and wondering if customers will accept it. Jairam Varadaraj MD said that ELGIEQUIP is still working to build its price points to market levels, but is lower than its large multinational competitors on average.