Kirloskar Pneumatic Company Ltd (505283) Q1 FY23 Earnings Concall Transcript

Kirloskar Pneumatic Company Ltd  (NSE:505283) Q1 FY23 Earnings Concall dated Jul. 20, 2022

Corporate Participants:

K. Srinivasan — Managing Director

Jitendra Shah — Company Secretary

Suhas S. Kolhatkar — Vice President & CFO

Analysts:

Dhirendra Tiwari — Antique Stock Broking Limited — Analyst

Kashyap Javeri — Emkay Investment Managers — Analyst

Vishal Biraia — Max Life Insurance — Analyst

Suraj Nawandhar — Sampada Investment — Analyst

Kunal — B&K Securities — Analyst

Anurag Patil — Roha Asset Managers — Analyst

Balasubramanian — Arihant Capital — Analyst

Akshay Kothari — Envision Capital — Analyst

Mansi Desai — Dalal and Broacha PMS — Analyst

Sonali Shah — Sonali Shah — Analyst

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Aditya Chheda — InCred Asset Management — Analyst

Unidentified Participant — — Analyst

Kashvi Dedhia — Centra Advisors — Analyst

Digant Haria — GreenEdge Wealth — Analyst

Amit Shah — Antique Stock Broking Limited — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Kirloskar Pneumatic Company Limited Q1 FY’23 Analyst Call hosted by Antique Stock Broking Limited. [Operator Instructions] Please note that, this conference is being recorded.

I now hand the conference over to Mr. Dhirendra Tiwari from Antique Stock Broking Limited, thank you, and over to you, sir.

Dhirendra Tiwari — Antique Stock Broking Limited — Analyst

Thank you. Good evening, ladies and gentlemen, welcome to 1Q FY’23 post results conference call of Kirloskar Pneumatic Company Limited. We are glad to have with us today, Mr. K. Srinivasan, Managing Director; Mr. Suhas Kolhatkar, CFO; along with other management personnel.

I would now invite Mr. Srinivasan to start the call with initial remarks post which we’ll take the audience for question and answer. Over to you, sir.

K. Srinivasan — Managing Director

Good evening to all of you. Before we start the call, can I request our Company Secretary, Mr. Jitendra Shah to read out the Safe Harbor clause, please.

Jitendra Shah — Company Secretary

Yes. Thank you, sir. Good evening to all. The discussion on the operating performance of the Company may contain statements relating to future business developments and economic performance that could constitute forward-looking statements. While these forward-looking statements represent the Company’s judgments and future expectations, a number of factors could cause actual developments and results to differ materially from expectations. The Company undertakes no obligation to publicly revise any forward-looking statements to reflect future events or circumstances. Further investors are requested to exercise their own judgment in assessing various risks associated with the Company and also the effectiveness of the majors being taken by the company in tackling them as indicated during the discussion. Thank you.

K. Srinivasan — Managing Director

Yeah. So good evening to all of you once, again, at the outset, wishing you all good health. We are in the midst of a great monsoon season. The munificent of the rain god would probably ensure that we’re going to have good harvest season followed by and also we will ensure that there is enough wealth going around for all of us to have a good year ahead.

Q1 F’23 started on a strong move for us based on a strong order bank. The rapidly changing situation in the commodity prices, supply chain and logistic disruptions made execution that much more of a challenge. The global inflation and the general uncertainty created a slowdown in the order finalization. However, the inquiry flow continues to remain strong, particularly in the oil and gas space.

Sales for the quarter was at INR272 crores as compared to INR169 crores of the previous year, a growth of over 60%. This was largely driven by project execution in oil and gas space. The profit before tax grew from INR9.8 crores to INR21.7 crores, a growth of 121%. All businesses, air, refrigeration, gas compressors and air compression systems all did well. Export sales in the first quarter at INR48 crores was significantly more than export that we have done in any full year so far. However, the pricing and execution of one of these large export orders was the challenge and this impacted the overall material costs in the quarter. We do not expect this to continue in the quarters ahead. The overall order bank was marginally lower at INR100 — INR1,225 crores compared to the opening order bank of INR1,255 crores earlier.

We have several new initiatives coming up in Q2 and Q3 and this should ensure that we have a smooth order flow to meet our sales budget going forward. The overall order bank has been good. We expect to finalize several orders going forward. We have spent a capex of about INR5 crores in Q1 and committed, another INR10 crores. We will execute the planned capex of about INR40 crores during the year F’23 and this will help us to build capability and capacity required for our future growth plans. The overall cash generation from operation was close to INR10 crores in Q1 and this is in a way a demonstration of the quality of our earnings.

Now let’s discuss the results by our product lines. The air compressor business scaled up on the production of Reciprocating Compressor packages and Centrifugal Compressor packages for various applications like metal production, LPG bottling, carbon dioxide for carbonated drinks, etc. We launched for the first time a range of stock and sell standards screw compressors for general applications. The initial response has been encouraging. The oxygen compressors for the oxygen plants at hospitals continue to be maintained and serviced by our team during this period post the COVID era. But we expect that this will ensure that even if the demand for oxygen where to pick up, the oxygen compressors would be up and ready to meet the requirements. We continue to be the preferred choice for even the air separation plants, which deliver oxygen and we continue to have a leading position in this as well.

Refrigeration compressors and systems, there was a slowdown in the off-take of compressors for the cold chain and ice plants. However, we expect this to pick up in Q2. Major order finalization and execution for the petrochemical and hydrocarbon industries will happen in the coming quarters. We also have significant opportunities in the overseas market in this space. The QNA [Phonetic] screw compressor for refrigeration has been through all the internal and external testing. We have been talking about this last year and we are happy to say that this is now ready for a formal launch. We will have this product out there during this quarter and this will meet the requirements of the pharma, food processing and dairy industries in India and Southeast Asia.

Process gas compression systems, we executed a major export order in this space during the quarter, as I had already mentioned, this did pull up — pull down our contribution in terms of being a higher material costs, but this is a one-off and we needed this to make an entry in this space. Consequently, this being an entry strategy, the margins were under pressure on this order, and like I said, this will only be for this quarter. However, it has given us an opportunity to expand market access and acceptability. And based on this several new orders are being negotiated for execution in this space. We surely hope to benefit from this going forward.

The dispatch of CNG packages was slightly curtailed by many of the gas companies due to their internal planning issues as both gas and site readiness was a challenge. We expect the gas companies to scale up their off-take of hydro booster compressors going forward to meet the mismatch of demand and supply, as can be seen by the extending queues at the gas stations. We will formally launch our hydro booster compressor this quarter. It has already passed all internal test and external testing. We have also completed the approval process that is required for launching this product.

The O&M service business continues as normal across India and we continue to support and service our machines across 15 states. We have several large gas compression systems under execution and many of them will be dispatched during Q2 and Q3. We continue to focus on the newer export opportunities in Middle East and we expect this will help us to overall scale up exports.

Outlook for Q2, the war in Europe, the logistic and supply chain challenges, the continuing shortages in chip and the depreciating rupee have all impacted the business environment. KPCL will be less impacted than others in this space as we are much less dependent on imports. Our value chain is predominantly in India. While we have the order bank to meet targets for this year, we need to work on our strategy is to see that the benefit from the changing competitive landscape, so that we can be more competitive and scale up our overall growth targets. Being a company that competes based on differentiated offering rather than efficiency and cost comparativeness and consequently being less dependent on volumes, we are better placed to compete in this world.

We are confident that with the new product launches and the emerging opportunities. We will continue to maintain our growth momentum. We remain committed to our aspirational target of being a INR2,000 crores company in the next two to three years.

I’m now going to request my colleague, Mr. Suhas Kolhatkar, the CFO, to take us through the financial numbers. Suhas?

Suhas S. Kolhatkar — Vice President & CFO

Thank you. Good evening, ladies and gentlemen. I hope you were able to go through the results, which we had posted on the BSE website yesterday after the conclusion of the Board Meeting. We also operate these results as usual, a presentation on the trends of Q1 results on our company’s website. I’m sure you must have visited our Company’s website also. But just for the benefit of those who probably did not get a chance to go through, let me summarize the results for the quarter one of FY’23.

Before I touch upon the various elements of the financial performance, let me first broadly talk about some highlights of the quarter. The company during the year achieved as Mr. Srinivasan said a couple of landmarks, the sales of the quarter were the highest in Q1, and stood at about — stood at INR272 crores. Company also executed it’s major export order making its entry into overseas oil and gas market. That was something different for us because our exports on an annual basis were always about in the range of INR20 crores to INR25 crores. The order that we executed, the exports for the fourth quarter, we are close to about INR40 crores. PBT jumped to INR21 crores, compared to INR9.8 crores last year. The order book as of July ’22 was also over INR1,225 crores.

Now I’ll now turn to the business results for the quarter one. As I said, the sales for the quarter were the highest Q1 sales for the company at INR272 crores. It registered a growth of over 60% compared to Q1 sales of the previous year. Export orders to oil and gas sector in the oversea market and the product supplies in the domestic market helped us in achieving this milestone. Other income, which is not so significant, quarter one total revenues stood at INR274 crores compared to INR172 crores in the previous quarter, a rise of over INR100 crores in the quarter.

Rising input costs in the recent times coupled with a mix of project, which was close to about 65%, our product sales of 35%, project orders and the product orders and the cost for strategically accepted export quarter, which Mr. Srinivasan talked about. So as to ensure our entry in the overseas oil and gas space, the overall material cost for the quarter to 58.6% compared to 52%. Excluding this project order and the project cost, we would have been close to about 53% and that cost would have been lower than the previous quarter as well as full year FY’22, which stood at close to 54%. So there was no significant increases in other product — in the cost of other products, except the fact that we had this strategic order to enter into the overseas oil and gas space.

We expect material costs to ease to its normal level in subsequent quarters. ERE was higher at INR37 crores, compared to INR32 crores, this represents the promotions in the increments that we offer to our deserving employees during the year in line with the industry trends. The overall employee cost was about 13.7% in the — of the current year sales compared to 19% of the previous year. There was no interest cost as the Company is a debt-free company. At this juncture, I would also like to state that the company has a net cash position of about INR170 crores as on 1 July, ’22 compared to about INR260 crores last year. You may observed that during the past year, the company incurred a capex of over INR90 crores, paid dividend of INR32 crores and also repaid the loan of INR40 crores.

Depreciation is in line with the previous year and additions to assets that we have incurred so far. Other expenses, generally a mix of fixed and variable costs and are at 17.4% on the sales compared to 19.1% of the previous year. There is no significant variation in the level of expenditure during the current quarter except that the normal level of pre-COVID expenses are being incurred.

EBITDA as a result, in quarter one is marginally lower because of higher material cost at 10.9% of the total income compared to 11.5% in the previous year. This was mainly on account, as I said, drop of margins attributable to rise in the material costs. So it could be export order. PBT, profit before tax, for the quarter one was at INR21.7 crores, higher at 7.9% compared to 5.7% in the quarter one of the previous year. It stood at INR9.8 crores, this returns 120% plus growth over the previous year.

Profit after tax also rose to INR16.3 crores, which were at 5.9% compared to INR7.1 crores in the previous year with 74.1% [Phonetic] and the growth in the profit after tax is close to 130%. During this quarter, company issued 53,500 equity shares during the — that to be under the employee stock option program. Consequently, paid up share capital has increased to INR12.9 crores, compared to INR12.89 crores at the beginning of the year. Our basic EPS improved to INR2.52 per share on INR2 per share for the quarter one, compared to this INR1.10 in quarter one on the previous year. With about 95%, it remains the only reportable segment and the segment earned a profit of about 15% in the current quarter, more or less, at the same level of the previous year when we earned 15.2%.

With the increase in volume, we are confident of achieving the annual EBITDA, annual profit margins for the segment close to about 18% to 19%. Order booking during the first quarter was close to about INR250 crores as a result, company has an order bank — order book of INR1,225 crores, previous year we had INR1,265 crores — previous year we had INR1, 265 crores. Capital employed in the compression segment remained at more or less, at the same level, at the beginning of the year and was at about INR280 crores. As indicated earlier, during the quarter, about 65% business was from the projects and balance for the products.

I think with this, I would like to end my submission to the audience. And we can now open the question-and-answer session.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] The first question is from the line of Kashyap Javeri from Emkay Investment Managers. Please go ahead. Mr. Javeri, you have been unmuted now. Please go ahead with your question.

Kashyap Javeri — Emkay Investment Managers — Analyst

Hello, am I audible?

K. Srinivasan — Managing Director

Yeah, yeah.

Kashyap Javeri — Emkay Investment Managers — Analyst

Sorry. Congratulations for the good set of numbers. And thank you for the opportunity. I have three questions. First one is about our target of INR2,000 crores of revenue in next three years. I understand from your annual report that the domestic market is roughly about 4%, 4.5% grow kind of market, then there has to be a fair degree of contribution coming from the export side, which for us last year was the first year where we won a decent size order. But over next few years, how do you scale up? What would be the drivers of that INR2,000 crores of revenue both product as well as geography? At least in terms of geography, what could be the risks, which are there including probably lack of product approval or something like that? That’s the first question.

Second question is on the raw material cost. I understand that we have a fairly short cycle projects or fairly short cycle delivery times, it ideally should have been slightly easier for us to manage that raw material cost. However, we have seen some gross margin contraction. So going forward, are we looking at any strategies to manage that. And the third is from one of the earlier calls also, had this question, but again, the cost of repetition we had this free — leasehold land, which was converted into a freehold land any particular reason why we could not have continued with it being a leasehold land and continued with our expansion? These are the three questions, I have.

K. Srinivasan — Managing Director

Thank you, Kashyap. To answer your questions, exports would constitute between 15% to 20% of our overall sales going forward, this is our objective, currently, this is below 10%. We hope to get it nearer to 10% during this year, but longer-term target would be to take about 15% to 20%. That’s our objective. Our primary addressable market for the immediate future, the Middle East and Southeast Asia, the primary range of products that we proposed to export also would be primarily projects, which we call actually. Let’s say equipment packaged and sold on sets. So these are the ones that we will look for, because there is an element of engineering and approval.

Now, we mentioned in the beginning of the call that we have had acceptance. We have executed a fairly large package roughly a value of about INR35 crores during the first quarter and we now have the required approvals to execute projects of significant size in this. This is actually gone into the gas gathering station, which is what is called as an upstream project. This is the first level. Now if you get in there, then your easier into the other stages. So we are there and that is an important part of our acceptance in this market, overseas market MSA.

As far as the raw material cost is concerned. Yes, this is an area that we continuously work on, there has been some moderation in the increase in prices of commodities as you would have seen. Our project cycles, our equipments are sold between 12 week lead time. Projects are anywhere between six to nine months lead time. We do factor in price corrections that are expected during this horizon. Extraordinary situation does come when these price corrections are significantly out of what can be prioritized and packaged. So there have been one or two exceptions, but generally, we are able to plan this cost increases in advance.

As far as the freehold land to leasehold land — leasehold to freehold is concerned, we did have these land initially given towards as a grant land for an earlier project. For us to hold on to it for an indefinite period to meet our longer-term growth requirements, we did need to convert it into a freehold land. We had gone ahead and done it. As we had mentioned in an earlier call, as well as the AGM today, we are executing growth projects in this land and we will see how we can utilize it going forward.

Does it answer all the questions, Kashyap?

Kashyap Javeri — Emkay Investment Managers — Analyst

That’s really helpful. Just one last question, in connection with the first part, so as of now, this is application in oil and gas. Eventually, the other products that we also have, including the air compressor use in the industrial part, how difficult would it be to get to that product also through in that particular market and beyond then Middle East moving more west words. Is there any plan for doing that also?

K. Srinivasan — Managing Director

I think we did explain some time back, see each of the business will have a different kind of product profile and market requirement. The packages that we sell for oil and gas and for refrigeration, we do have refrigeration orders that we are executing in Middle East as well. These are projects in the sense they are what I call is a global business. You can manufacture it anywhere, but executed many other part of the world, whereas equipment sale is generally a local business, the air compressors, you need to have marketing presence in the markets that you seek to address. So you will have to have service centers, distribution and a whole lot of things to be setup. We do not aspire to be a large player in this markets going forward, at least in the immediate future.

Just one minute. We have Suhas to add a little bit of color in the raw material cost side.

Suhas S. Kolhatkar — Vice President & CFO

Yeah, Mr. Kashyap, I did speak about the composition of our total projects in the first quarter being mix of product and projects and we also spoke about our major strategic export order to ensure the entry in the overseas oil and gas space. I would like to draw your attention that if you ignore this order, our project our raw material cost would be about 53% which is low, which would be lower than the previous quarter and also the whole year of FY’22. So we have been able to look at our raw material costs. The short cycle delivery items are only in case of product sales. So for us project sales are concerned, our delivery times ranging from six months to even up to 12 months or beyond. And in that case, there will be certain impact and that is what we have felt in the first quarter in terms of our strategic export order. So we are confident that we should — we will be able to get the appropriate mix to ensure that our overall material cost remains at historical levels, if not better.

Kashyap Javeri — Emkay Investment Managers — Analyst

Sure. That was really helpful. Thank you so much.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Vishal Biraia from Max Life Insurance. Please go ahead.

Vishal Biraia — Max Life Insurance — Analyst

Hello, thank you for the opportunity, and congratulations for the great set of numbers. So I mean, first question is on the demand outlook. So metals, cement, textiles are some of the key industries that use our compressors. So could you elaborate a bit as to what is the outlook currently for this industry’s? Thank you.

K. Srinivasan — Managing Director

Yeah. Thank you. The demand from metal, textile, etc., are primarily for the oxygen compressors, the oxygen — sorry the air compressors. The air compressor business for us is roughly about 25% of our total business. The demand for this is, as we see is muted. There is a sudden slowing down of finalization of orders. There was a lot of inquiries. But the finalizations are now being delayed. We are not expecting any major impact coming out of this to us at the moment.

Vishal Biraia — Max Life Insurance — Analyst

Is that because of orders from other segments grew faster?

K. Srinivasan — Managing Director

Yes. Because we — like I said, this is only 25% of our total business. The other segments are growing much better, particularly the oil and gas segment as well as the refrigeration, which addresses petrochemicals, fertilizers, etc., So diary and a whole lot of new product that’s coming in. So for us the demand seems to be holding on for our objective.

Vishal Biraia — Max Life Insurance — Analyst

Okay. Okay, fair enough. And the launch of the new air screw compressor. So what kind of targets you would have set for revenue from this particular product?

K. Srinivasan — Managing Director

The new screw compressors would address the refrigeration screw market currently being serviced by import. The current import of this product in India is roughly about INR100 crore and that’s addressable market that’s available to ask. We will have to see how we scale up and take this market.

Vishal Biraia — Max Life Insurance — Analyst

Okay. Okay. You will too launch air screw compressor for — I think you have launched screw compressor across CFC also like [Indecipherable] for food and pharma applications, so which is also being met by imports? So this is the same Q&A [Phonetic] screw compressor or this is a different product?

K. Srinivasan — Managing Director

This is the same.

Vishal Biraia — Max Life Insurance — Analyst

The same. Okay. Okay. Okay, thank you. Thanks. I’ll come back in the queue.

Operator

Thank you. The next question is from the line of Suraj Nawandhar from Sampada Investment. Please go ahead.

Suraj Nawandhar — Sampada Investment — Analyst

Hi, sir, good afternoon. Sir, what would be the opportunity sites for the new competition that we have launched? You spoke about to one. What about the other one?

K. Srinivasan — Managing Director

Yeah. So the Q&A screw, we spoke about that from the refrigeration space. We had — did mentioned today morning as well about the hydro booster compressor. This goes on the oil and gas stations, which are not connected to the gas network. We have already talked about in terms of the number of compressors and the size of this opportunity in the 11 round of biddings. So roughly about 6,000 compressors the market opportunity in the next three to five years and we will have to see how this is paid out.

Suraj Nawandhar — Sampada Investment — Analyst

So can you quantify it in amount terms 6,000 compressors?

K. Srinivasan — Managing Director

We said that these compressors than that amount INR45 lakhs to INR55 lakhs each. So if you take it as about 6,000 compressors we talking about, roughly about INR3,000 crores slightly, it’s a mix shift.

Suraj Nawandhar — Sampada Investment — Analyst

Okay. Okay. And sir, is there any seasonality component in the Q1 results?

K. Srinivasan — Managing Director

Sorry come again.

Suraj Nawandhar — Sampada Investment — Analyst

Is there any seasonality in Q1 in our company moreover Q1 is usually weak in terms of revenue?

Suhas S. Kolhatkar — Vice President & CFO

Well, not really expect that the export order opportunity, which we have. Otherwise, everything was a growth coming from the standard products.

K. Srinivasan — Managing Director

If your question saying that why Q1 normally a smaller quarter compared to other quarters.

Suhas S. Kolhatkar — Vice President & CFO

No. INR272 crores is higher than INR170 crores. Why there — okay, something like that. That’s what I understood? Am I right, Suraj?

Suraj Nawandhar — Sampada Investment — Analyst

Sir, my question is that, if I look at last two to three years, the Q1 revenues are always lower and the Q2, Q3, Q4 are higher? Is there any —

K. Srinivasan — Managing Director

That is normal many capital equipment cycle. You see generally at the beginning of the year, till budgets are allocated and orders are cleared. Q1 historically tends to be low and most of the projects and other things tend to get completed during the end of the year, and this is a normal thing across this industry. However, this year we have seen a far more orders in Q1 compared to many years and this I believe will start changing over a period of time that orders become much more smoother as we have more of products that are not really packages or projects but equipment sales.

Suraj Nawandhar — Sampada Investment — Analyst

Okay. And sir, what would be our bid pipeline currently?

K. Srinivasan — Managing Director

The order on hand, like we said, we already has about INR1,225 crores. The inquiries, we have not been talking about, because this doesn’t make sense. Generally, we talk of finalizing in many parts very roughly about one in three order we finalized. So our hit rate is about 30%. So we have significant orders under discussion.

Suraj Nawandhar — Sampada Investment — Analyst

All right, thank you, sir. Thank you very much and all the best.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Kunal from B&K Securities. Please go ahead.

Kunal — B&K Securities — Analyst

Thank you for the opportunity, sir. Sir, my question is pertaining to the competitive intensity. Are you seeing any major change in comparative intensity or comparative intensity becoming higher or it remains more or less status quo?

K. Srinivasan — Managing Director

This is something which we have to see it evolve. Logically, the comparative intensity should decline with imports becoming that much more expensive with the depreciating rupee, increasing logistic challenges, etc. However, on an immediate basis, we do see that there is a higher level of comparativeness in the market to finalize ordered because the number of orders getting finalized has declined in the first quarter. So consequently, we do see that the comparativeness in terms of people wanting to pick those orders are higher.

Kunal — B&K Securities — Analyst

Okay. This is more related to slower market than anything else?

K. Srinivasan — Managing Director

We have to wait and see how this plays out. We believe that the comparativeness of competition has not really improved. So they cannot be more comparative by advantageous. This is really a current market condition where people who’d like to pick whatever orders are being finalized.

Kunal — B&K Securities — Analyst

Sure. And sir, your comment on order finalization being slightly slower, so what is the sense that you’re getting from the customers that you’re talking to? I mean, if anything transitionary or is there anything that is more structural that is worrying the customer. I mean, is it waiting for commodity volatility to settle down? Anything specific that you are picking up.

K. Srinivasan — Managing Director

Well, all what you said is playing in the minds of people. See today, there is a certain level of uncertainty in demand, uncertainty of commodity prices, expectation that it could moderate, with all these playing up people are delaying the decision to make a commitment as long as they can. But that also puts opportunities that, as when they convert the orders have to be executed quickly. People with shorter cycle time, shorter lead time, this is exactly what happened in the oxygen compressor story, people with value chain within India would all the better placed to pick up orders as and when this cycle plays out. And that’s where we hope to benefit from.

Kunal — B&K Securities — Analyst

Sure sir, thank you. Thank you so much and best of luck for the future quarters.

K. Srinivasan — Managing Director

Thank you, Kunal.

Operator

Thank you. The next question is from the line of Anurag Patil from Roha Asset Managers. Please go ahead.

Anurag Patil — Roha Asset Managers — Analyst

Thank you for the opportunity. Sir, in hydro booster segment, who are our closest competitors?

K. Srinivasan — Managing Director

See the hydro booster compressor has been around in a low key for a long time now almost four to five years. There are about 14 or 15 local players. There is no one major large company in this space. So there are local players who are delivering. The reason for us to get into itself is the fact that all the major gas companies have been pushing us saying that there is no one big player. They would want one large organized company to get into this space. So to answer your question, plenty of players, but no real big player.

Anurag Patil — Roha Asset Managers — Analyst

Okay. So any market share target we have set for this segment in the coming years?

K. Srinivasan — Managing Director

Suhas could talk about it at this stage. See, like I said there, a lot of small players, this has to evolve and we have given the size of the market. We are the only large player to enter it. Let it play out.

Anurag Patil — Roha Asset Managers — Analyst

Okay, sir. And sir, on the import side in the presentation. You have mentioned that we were at some beneficial stage compared to peers. So do you think this benefit will continue in the coming quarters too?

K. Srinivasan — Managing Director

I think so. See, if you look at our major competitors in India, they all playing what is called as an efficiency volume gain. They have to make large numbers of standard products to be efficient and comparative. We clearly are playing a value-added engineered product game, wherein we do a lot of customization, lot of engineering, taking up a lot of difficult special products and executing it quickly. So as markets go the way they are, we believe there is a new space for us that will blossom and grow going forward. We expect to benefit from the changing conditions in the market and the competitive landscape going forward.

Anurag Patil — Roha Asset Managers — Analyst

Okay, thank you very much. That’s it from me.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Balasubramanian from Arihant Capital. Please go ahead.

Balasubramanian — Arihant Capital — Analyst

Hello, sir. Am I audible?

K. Srinivasan — Managing Director

Yes, Bala, go ahead.

Balasubramanian — Arihant Capital — Analyst

Thank you so much for the opportunity. Sir, in the order book side, also INR1,225 crores, could it be backup industry-wise?

K. Srinivasan — Managing Director

Sorry.

Balasubramanian — Arihant Capital — Analyst

Order book industry-wise —

Operator

Sorry to interrupt, Mr. Bala. I would request you to use your handset while asking a question. As you are not audible?

Balasubramanian — Arihant Capital — Analyst

Sir, right now, INR1,225 crore.

Operator

Yes, please go ahead.

Balasubramanian — Arihant Capital — Analyst

Sir, INR1,225 crores of order book, could you please break out industry-wise?

Suhas S. Kolhatkar — Vice President & CFO

Breakup was in ratio.

K. Srinivasan — Managing Director

We were not able to hear you Bala clearly. Are you referring to the breakup of total order book of INR1,225 crores?

Balasubramanian — Arihant Capital — Analyst

Yes, sir.

K. Srinivasan — Managing Director

Yeah, so it more or less remains in the same range about 25% from the air about 30%, 35% from the refrigeration systems of the refrigeration compressors and balance about 40%, 45% from the gas compression.

Balasubramanian — Arihant Capital — Analyst

Okay. Thank you, sir. Sir, my next question is in the export side, what kind of — like you are experiencing in freight cost? Let say, it is remain elevated or are your like some kind of moderation?

K. Srinivasan — Managing Director

At the moment, all our major package exports are FOB premises are worse up inspection. So consequently, we have not applied our mind too much on freight cost going up, but it is a fact that not only has there been a huge escalation in freight costs we realize it from our imports, but also we maximized in terms of timely arrival of ship and etc. is becoming a challenge. So logistics overall is a challenge. Mercifully, for us our exports are FOB. So we are not arranging this and the customers are taking care of this.

Balasubramanian — Arihant Capital — Analyst

Okay. Thank you, sir. Sir, my next question, in terms of market share CNG systems and oil and gas depreciation like let’s say, as per kind of market share in those segments.

K. Srinivasan — Managing Director

So question which is difficult to give one answer. Because, see, we are looking at now the refrigeration market as well as the gas compression market for India, Southeast Asia and Middle East. So then consequently what we can look at an addressable market has expanded with that our market share seems to be moving down, which gives us more headroom for growth. But generally, I would say that our market share in the addressable market is about 25%.

Balasubramanian — Arihant Capital — Analyst

Okay, thank you. That’s it from me.

Operator

Thank you. The next question is from the line of Vishal Biraia from Max Life Insurance. Please go ahead.

Vishal Biraia — Max Life Insurance — Analyst

Just one follow-up, is there any pickup in opportunity from the biogas segment and how is the defense segment doing? Is there a significant pickup there? Thank you.

K. Srinivasan — Managing Director

Yeah. Just to quickly talk about the biogas, there has been a huge pick up, again order finalizations were taking time. But that is definitely far more traction on the biogas. It was actually picking up very rapidly before this war did disrupt, because this is all driven by ESG funding availability. So biogas, there is a lot of interest, lot of inquiries. But we’re not seeing as many finalization as we would have hoped for. On the defense, there is a lot of inquiries, again, and a lot of discussion happening for us and for others this is around the AatmaNirbhar Bharat thing. We have to wait and watch how this finalization happened. There are quite a few finalization coming up in Q2, Q3. Here, there is no hold. They’re finalizing pretty quickly. We will see how this plays out.

Vishal Biraia — Max Life Insurance — Analyst

Thank you. Thank you very much.

Operator

Thank you. The next question is from the line of Akshay Kothari from Envision Capital. Please go ahead.

Akshay Kothari — Envision Capital — Analyst

Yeah. Thanks for the opportunity. So just wanted to know, while we do have some idea on the competitors on the air compressor side, who would be our competitors on the gas and refrigeration compressors side?

K. Srinivasan — Managing Director

See, these are like I said, global businesses all the major global players are our competitors.

Akshay Kothari — Envision Capital — Analyst

Okay. Okay, thanks. And you did mention in the opening comments that there were some weakness in demand on the compressor businesses, so what could be the reason for slowdown in demand in this sector?

K. Srinivasan — Managing Director

The equipment sale as we call as the reciprocating ammonia compressors primarily used for the cold chain, cold storages, etc. There is a reluctance of finalization of orders. We expect this should actually correct in Q2, Q3. We’ll have to wait and watch. We think this is coming out of two things. One is, there is a certain level of hesitancy to quickly place orders expecting that the prices are likely to moderate or could moderate, but I think that expectation is definitely falls, simply because of the fact that the depreciating rupee imports are going to be even more expensive. So we will see how this plays out. Hopefully Q2, Q3 it should pick up.

Akshay Kothari — Envision Capital — Analyst

Okay. And lastly, more on the cash segment front compared so India is currently in developing stage of gas market where in capex has been planned? So compared to our developed gas economy like — in the developed gas economy how they manage it — how are they managing things like. Do they have this hydro booster sort of system over there as well?

Most of the developed

K. Srinivasan — Managing Director

Countries would not have hydro boost as a part of the vehicle filling processes, they would have a few boosters and very remote areas of our particular industrial requirement. The extent in which hydro booster is being planned in India is very unique to developing economies. Hilly regions areas which were pipelines are still not available or it’s too expensive to lie. So this is something which is unique to India. And that’s the reason why you realized from our side, there was a very strong hesitancy from our side to get into it till about two years back.

Akshay Kothari — Envision Capital — Analyst

Okay. Okay, that’s it from my side, and all the best. Thanks a lot.

Operator

Thank you. The next question is from the line of Mansi Desai from Dalal and Broacha PMS. Please go ahead.

Mansi Desai — Dalal and Broacha PMS — Analyst

Hello, sir.

K. Srinivasan — Managing Director

Yeah. Yes, Mansi, go ahead.

Mansi Desai — Dalal and Broacha PMS — Analyst

Yeah. So my question was in regards to the order book trajectory that we have. So if you see last quarter versus this quarter. The order inflow has been in the obviously INR250 crores to achieve the target that we have INR2,000 crore, when do we start seeing the order book courtesy significantly going up?

K. Srinivasan — Managing Director

That’s really a tough question to answer. I wish it was too easy. But see what we need is, we do not need too much of a large order book we need a combination of short cycle orders, which will allow us to be executing it and within 12 to 14 weeks and then we need these long project orders. So for us, this INR1,225 crore is good enough to meet our this year’s plan. We would meet this year’s plan requirements, but we need to get large orders in well in advance, so that we have enough of these package of project orders for execution in the next year. Now, like I said, we are in the midst of finalizing some of these orders, finalizing has been taking more than the normal time because of the hesitancy of customers to commit. We hope to see this uncertainty playing out and have orders finalized during Q2 and Q3.

Mansi Desai — Dalal and Broacha PMS — Analyst

Okay. And to my second question was on the exports side of the business, now export means generally sell packages like you mentioned even if yes, equipments and opportunity also and will the higher in the export market versus what you have right now?

K. Srinivasan — Managing Director

I couldn’t hear you very well, but I think I understood what you’re trying to ask is really saying that we are still going to focus only on packages for exports and the market that we have selected for that in the first phase is going to be Southeast Asia and Middle East because this is happening market reachable and we can have the engineering capability to deliver and commission projects there, directly going to address. Equipment sales, yes, we do have some equipment sale happening to Southeast Asia. We will continue to do that and with the newer products like the Q&As crews and others developing hopefully in the future. This business also will grow, but like I said, we will take this as a second phase of our export growth.

Mansi Desai — Dalal and Broacha PMS — Analyst

Yeah. Okay. [Technical Issues] Hydro booster compressors that we have you mentioned that there are 14 or 15 more brokers there. What should be their capacity versus our capacity?

K. Srinivasan — Managing Director

This is something difficult to answer because see, the market is still developing now. There is not very large number of installations and there are installations in different areas, few of them. Consequently, local people have been making and delivering two or three in a month or even less. So this is tough to answer, because they all small more data available straight away.

Mansi Desai — Dalal and Broacha PMS — Analyst

And then just part of the hydro booster compressors also, hence there been opportunity of selling this in the export market as well?

K. Srinivasan — Managing Director

No, like I said, the booster is a very unique product for the developing part of the world. There is no big market for hydro boost overseas in the developed countries or even in Southeast Asia or Middle East. So there are a few opportunities in North Africa. But we are not really looking at this as an important part of our export strategy.

Suhas S. Kolhatkar — Vice President & CFO

Mansi, can I just add something to what Srinivasan said. The concept of booster compressor — hydro booster compressor has been there in India as India has a very large geographical area to get covered by the gas, the city gas distribution scheme of PNGRB. Now, the availability of the main station or what we call is that mother station depends upon the pipelines spread, which is done by the GAIL. And wherever there is no pipeline available which carries a gas, where the GAIL is yet to lay the pipeline and there are difficulties in laying the pipeline, particularly in the hilly area or Northeast area.

The concept of this booster compressor has come up, because in such cases, what happens is cascade or a cascade of cylinders is filled with the gas from the main station and these stations on a truckload are carried to the various booster, various station — gas stations at the hilly areas. Now these cylinders are the Cascades are already at a certain pressure. So you need to pressurize to fill the vehicles only marginally. And that is where the booster compressor comes in. So if the pipeline is there, then you have a very little pressure in the piped gas and that needs to be moves — that needs to be pressurized with our main station. So the idea of the situation we believe has come more or less in India more than the developed countries. So we’ll find little opportunities for exports though there will be certain some cases, however, we need to get established in Indian market first before we can look at this export market for the booster compressors.

Does that answer you?

Mansi Desai — Dalal and Broacha PMS — Analyst

Yes, sir. So it’s basically more than and maybe other emerging markets where there could be an opportunity?

K. Srinivasan — Managing Director

Yeah. Hilly area, I’d say the terrain of the region is also important because there is no gas pipeline, you will need a booster compression because there you will carry the gas in the cylinders and it will be marginally pressurized to fill in the vehicles.

Mansi Desai — Dalal and Broacha PMS — Analyst

Thank you so much.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. [Operator Instructions] The next question is from the line of Sonali Shah from Emkay Investment Managers. Please go ahead.

Sonali Shah — Sonali Shah — Analyst

Yeah, hi, thank you for the opportunity. I wanted to understand what percentage of our current order book is on fixed price basis?

K. Srinivasan — Managing Director

Please come again.

Sonali Shah — Sonali Shah — Analyst

What percentage of our current order book would be on fixed price basis?

K. Srinivasan — Managing Director

Subsidiary of the order book and fixed price, mostly on, Sonali, all our orders are on fixed prices. We have very few orders, which has got escalation clauses.

Sonali Shah — Sonali Shah — Analyst

Got it. So I am actually coming from the perspective, I wanted to understand judging by the export order that we executed in this quarter, which had an impact on our gross margins there, how many of our current orders in our order book are to see a year old, a little over six months old, which could potentially impact my gross margins going forward.

K. Srinivasan — Managing Director

Yeah. So how we work on this is like this. There is where the orders were for longer execution, like we said six to nine months. We do two things. One is the plan for this and price our products accordingly, based on a certain expectation of inflation, the more important thing is we have a significant amount of advanced stage payments that come in, you see that the advance that we hold at any given time now was almost about INR100 crores. So back to back, we make commitment to buy all key inputs, which are being put into this material. So material cost is secured on a back to that basis to ensure that our budgeting is within the cost that we have put in. In spite of it has been numbers are terribly different than it can change. But at the moment, we expect this one-off that we had in the quarter. We will be fine from Q2 onwards.

Sonali Shah — Sonali Shah — Analyst

Okay, got it, sir. And the second question is post the launch of the K series in the K series screw compressors and the hydro booster compressors, are there any other product gaps that would be left in our portfolio?

K. Srinivasan — Managing Director

There are several new products that have in the pipeline. So and I think we have to announce that as we are about to launch it or get it approved. We have like I said and we’re seeing effective approved R&D we are developing further screw compressors for different applications. We have a new range of composite compressor. So we have quite a few things that are being developed and we will announce it every quarter basis as soon as it’s clear for acceptance.

Sonali Shah — Sonali Shah — Analyst

All right. Got it, sir. Just one last follow-up to this, so based on the current products that we have and the K series —

Operator

I would request you to rejoin the queue, please. There are many other participants who are waiting for their turn.

Sonali Shah — Sonali Shah — Analyst

Sure. Thanks.

Operator

Thank you so much. The next question is from the line of Ranjit Sivaram from Mahindra Mutual Fund. Please go ahead.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Yeah, hi, sir. Am I audible?

K. Srinivasan — Managing Director

Yes, please. Go ahead.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Yeah, sir. One in macro sense, just wanted to understand, like how many of these compressors, which had been won by [Indecipherable] and all these guys. I’ve been in the process of tendering for companies like us, is there any delay in that process. The reason I’m asking is that because the gas prices have come down on the availability is an issue, we are seeing, like you said industries in Morbi and all are shutting shop, they’re going to propane and all. So in such kind of a scenario is that tendering for gas companies happening or you are seeing well and go overall activity? Hello.

Operator

Ladies and gentlemen, we have lost the line of management kindly stay connected while I connect management again. Give me a moment.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Hello? Yeah. Hi, sir. Am I audible?

K. Srinivasan — Managing Director

Ranjith, you’re audible but it comes with a lot of vibration. So I think you may have to speak a little softly.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Okay. Sir. My question is that if we are seeing a scenario in which the gas CNG industry is facing a lot of hardship in terms of higher prices availability of gas and even some of these, you said, industries majorly in Morbi and all are shutting operations because of availability of gas. So in such kind of a scenario are you any slowness in activity of IGL or other gas in terms of tendering for these gas compressors because that overall the macro standpoint, the gas availability has become a huge issue, not only in India globally also, given the Ukraine, Russia of war. So do you see any slowness in that activity in terms of tendering product?

K. Srinivasan — Managing Director

We have understood Ranjith, what you’re asking. Let me answer like this. We supply the CNG packages for the gas stations that sell gas into vehicle. These stations are available wherever there are gas, pipelines, the orders are generally finalized at least six months ahead, at least six most of the cases it’s for the full year. So we have enough orders for them we didn’t mentioned in Q1 that in several areas. There has been a delay in taking delivery of these machines, simply because either there is a shortage of gas already or the pipeline is not ready. Now this is an interim step if you look at it a little like you already mentioned, yes, there was a disruption in the gas supply chain globally, but it will play out. India will get its gas requirement from other sources. We do have various contracts and I think it will happen. There has been a bit of a delay in a few areas. But it will all come back because energy is required. Gas is better energy in terms of environmental impact compared to liquid fuel. So it is being promoted and pushed ahead of the other ones, and it will come back.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Okay. So, currently there is kind of a slowdown in activity?

K. Srinivasan — Managing Director

Not slow down as much as the disruption would be a better word.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Okay. And sir, one more question in the same lines, is that we are hearing that government is also planning to blend gasoline with ethanol and they are also going ahead and planning a Phase 2, where they will be decreasing the ethanol percentage. So that is one and another various promoting electric vehicles. So if these two things are happening. So going this cannibalize on the CNG station growth itself in the future.

K. Srinivasan — Managing Director

To answer your question, ethanol blending in fuel has been around for a long time. The percentage is being increased, that is largely to reduce import of oil. And consequently, the consumption of diesel and petrol, it will not touch the gas business. In addition, I can tell you — in addition to ethanol, which has been around for long. The new one that is being tried to be also blended is methanol. Methanol is now being, there are pilot plans to develop and generate methanol from low-grade coal. Again low-grade coal is available in India. Methanol again would be blended with the fuel, which is largely imported. We have a role in it, because we make compressors for this process. From converting low-grade coal to methanol needs a series of compressors and we already have established pilot plants for this and we are looking to scale up this as well along with partners who are in the methanol business. So a short answer, they are two completely different value chain. Gas business will continue to grow and the fuel business is some kind of an import substitution, whether it is ethanol and methanol. It is to substitute imports.

I couldn’t hear you.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

In the electric vehicle?

Operator

Mr. Sivaram, I would request you to rejoin the queue, please.

Ranjit Sivaram — Mahindra Mutual Fund — Analyst

Okay.

Operator

Thank you. The next question is from the line of Aditya Chheda from InCred Asset Management. Please go ahead.

Aditya Chheda — InCred Asset Management — Analyst

Hi, I just wanted to understand the process of sale, with respect to the CNG packages. Is it at company level or regional level or gas station? And my second question was already answered on the demand side, management.

Suhas S. Kolhatkar — Vice President & CFO

Give a minute, Aditya.

K. Srinivasan — Managing Director

You want to understand what the process of CNG compressor.

Aditya Chheda — InCred Asset Management — Analyst

So when we say CNG packages, is it like once we have, for example, on-boarded a particular company we garner most of the orders from that at a pan-India level?

K. Srinivasan — Managing Director

No, it’s a tender process, Aditya. It sale by CNG. Yeah. So there are several a lot of these companies who are the successful bidders like IGL, Irani or Torrent or MNGL or NGL also these types of companies, who are the successful bidders in PNGRB rounds of bidding ninth, 10th, 11th etc. And they close the tenders, and you have to be L1 for these tenders to be able to back the orders. Most of the time these orders are also given along with the O&M contracts, so it’s a composite orders for the supply of CNG machines, CNG compressors, as well as the operation and maintenance of those machines. The valuation, it’s generally is evaluation on the totality basis.

Aditya Chheda — InCred Asset Management — Analyst

Got it. Thanks.

K. Srinivasan — Managing Director

Yeah.

Operator

Thank you. Your next question is from the line of Ram from [Indecipherable]. Please go ahead. Mr. Ram, your line has been unmuted.

Unidentified Participant — — Analyst

Hello?

Operator

Yes, you’re audible. Please go ahead.

Unidentified Participant — — Analyst

Congratulations for the good set of number. Sir, my first question is at back of the order book we have, what is the proportion of project based — project compressors in your order book and non-project based compressors? Question is with respect to Europe region that we — last con call that you mentioned that you would be planning to go for Europe region in exporting in Europe region. Can you give any outlook on that?

K. Srinivasan — Managing Director

Mr. Ram, I couldn’t hear you fully. But the orders placed on the order bank is roughly 60/40, 60% project-driven, 40% equipment, shorter cycle orders. Exports, we did say that we will focus on Southeast Asia and Middle East. We have no immediate objective of exporting anything to Europe. We do export of bits and pieces, but we have no specific target strict there.

Unidentified Participant — — Analyst

Okay. Thank you.

Operator

Thank you. The next question is from the line of Kashvi Dedhia from Centra Advisors. Please go ahead.

Kashvi Dedhia — Centra Advisors — Analyst

Thank you for the opportunity. Sir, can you give us the bifurcation between products and projects like, what does it include and other EBITDA margins different for them.

K. Srinivasan — Managing Director

You mentioned that the split is roughly 60/40. 60 is projects, 40 is products. I must qualify again, what we call as projects are basically packages on kits with engineering, customization, it’s not whether we go and do site work and do some fabrication, commissioning, installation, etc. at the site. These are completed kit mounted packages that are shipped out to different sites. So that’s the first qualification. The split is 60/40. The margins by and large for the compression segment as a whole is roughly about 18% is what you expect for the full year and that is what we have been delivering for many years now. You have seen some softer margins in the first quarter that will correct going forward.

Kashvi Dedhia — Centra Advisors — Analyst

Okay. And to reach our target of INR2,000 crores, what will be the segment wise breakup like it will be the same as it is currently or it will be the different?

K. Srinivasan — Managing Director

Yes, madam, it will be the same. But what we’ve been saying, roughly 25% coming from air compressors, roughly 30%, 35% from refrigeration. 40%, 45% from the gas compression business.

Kashvi Dedhia — Centra Advisors — Analyst

Okay, thank you. That’s it from my side.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Digant Haria from GreenEdge Wealth. Please go ahead.

Digant Haria — GreenEdge Wealth — Analyst

Yeah. Hi, sir. Sir, from your comments, the brightest spot for the current quarter was the upstream oil and gas, so if you could just explain a little more as to what is happening in that space, like are there new wells being dug up? Or are the oil and gas companies are they using record profits to upgrade their old kind of equipment? And how long do you think this demand from this upstream oil and gas can remain strong? Any color on this would be good, sir.

K. Srinivasan — Managing Director

See the packages that we have done and several that we’re doing at all going into exports, Middle East, North Africa, these are really some kind of express projects that they would like us to believe, where they want to do as much quicker. And we are all negotiating finalizing these. Generally, there is a demand to have some of what was not seen as viable or worthwhile gas collection stations all started up very quickly, one in areas where we have soar gases and gases that not very high quality of pressure, they still want to start them up. There are areas where they’re using this for ingesting that means the gas itself still will re-ingested back into the well to get more oil out. There is a certain level of projects that are getting quickly clear in these areas. That is largely around Middle East, North Africa with whatever is happening in the world that we all read about. There is a demand pick up and consequently the ability of companies which have traditionally been executing these orders predominantly from Europe or a few from America would find it extremely difficult to compete and do this in the time that they want it to be done. So that allows us a competitive space that you’d like to maximize on and that’s what we are working hard on.

Digant Haria — GreenEdge Wealth — Analyst

Okay, sir. Sir, then second question is, the Petroleum Minister recently that we are going to put 3,500 CNG stations in the next two years. Now we have done that — we have done 3,500 stations in last seven years to get there, and if we have grew 3,500 in just the next two years. Are we as a company, ready to supply whatever will come our way, if these 3,500 stations become a reality in the next two years?

K. Srinivasan — Managing Director

We will be able to deliver all the gas stations that the country would require between the two of us, largely two of us. We would be able to meet all the country’s requirement. So that’s not an issue of capacity, not an issue of capability. Our ability to do what exists, it should not be a problem.

Digant Haria — GreenEdge Wealth — Analyst

Okay. Okay, sir, all the best and thank you for the opportunity.

K. Srinivasan — Managing Director

Thank you.

Operator

Thank you. Due to time constraints, that was the last question for today. I now would like to hand over the conference to Mr. Amit Shah from Antique Stock Broking Limited for closing comments.

Amit Shah — Antique Stock Broking Limited — Analyst

Yeah. Thanks, Michelle. Thank you everyone for joining the conference. And I also like to thank the management for giving us the opportunity to host the call. Sir, would you like to make any closing comments.

K. Srinivasan — Managing Director

Just to say thanks to all of you. I know it’s been a period of high expectation and we hope that going forward we would meet these expectations and probably exceed them. Thank you all very much and good luck.

Operator

On behalf of Antique Broking Limited, that concludes this conference. [Operator Closing Remarks]

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