Elgi Equipments Q3FY18 Concall Summary

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Financial Highlights

  • Sales has increased by 25% from 3325 million to 4154 million
  • EBITDA increased by 71% from 278 million to 474 million
  • The company by virtue of the increase sales should have had a higher EBITDA to the extent of 370, but the material cost is higher in the current quarter compared to the previous quarter and that has taken away close to 26 million in revenue for the company.
  • The biggest incremental cost that has hit EBITDA is labor cost that is increased across the world with the biggest chunk of that coming from India.
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Domestic Growth Scenario

  • Company had growth across all the verticals of our businessin India
  • Industrial compressor business has been good, but the biggest growth came from construction and mining in terms of percentage the biggest growth was in construction mining
  • Company had seen growth in the railways, but not anything significant.
  • Overall India’s performance has been good across all the business verticals
  • 2018-19 to continue to move on the same trajectory as seen in the last two quarters
  • Reasonable contribution from the steel and power segment only if they start reviving . Not much expectations from power sector due to the many number of stressed assets and even in steel all the delinquent assets are being auctioned.
  • In terms of revenue split-up India is about 7072 and the rest of the world would be about 4300 ( in millions)

International Market Highlights

  • The company has done well in Australia, continuing to grow, profitable and expect to see some good initiatives there in the coming years
  • Southeast Asia has been a bit of a challenge so far; it is marginally better than last year, but nowhere near the targeted numbers
  • Middle East has been a challenge, but things are beginning to pick up now hence,fourth quarter should be better for Middle East and 2018-19 should be better.
  • Europe has done very well. Both Rotair products sold worldwide as well as ELGi products sold by Rotair in Europehave done well
  • America continues to be strong for the company;  growth seen across all all the verticals in America
  • Brazil has been a challenge though the economy seems to be coming back and the company has done reasonably well in terms of ensuring that no money is losing out and sales has been lower than last year.y
  • The company's primary focus is Europe, America and India is the high priority geographies. The second level priority is Australia, Indonesia and Thailand

Long-term Growth perspective

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  • The company has identified specific products and specific geographies that they want to focus on and have just initiated the search process for inorganic growth opportunities in these key markets
  • The company feels that it needs to first have a strong leadership team in place before venture into inorganic opportunity
  • In the next three to four months’ time, at least in the key markets the company will have all the resources in place to be able to pursue this opportunity.
  • 2018-19 could be at least minimum we should be able to do 15% without any inorganic growth opportunity.

International markets

  • Margins in international markets are expected to be affected by two things - One is the present stage of the price and cost structure
  • Marginal opportunities may be to increase prices and marginal opportunities to reduce cost
  • The country level risk where the company has been struggling two areas where there is a continuing kind of challenge one is China and the other one is Brazil
  • In China , the company has decided to scale down the operations but not exit since China is the largest compressor market in the world. The company is committed to remain in a hibernated situation in China and plans to go back to the drawing board and build a product strategy for China.
  • Until that period there are expected to be some marginal write offs that the management has decided to take in China.
  • In Brazil, the company growing, the company has restructured the business and has stopped making losses
  • The growth rate for Q4 and most certainly for 2018-19 is sustainable with the international subsidiaries and especially Europe and US

Impact of Increased domestic wages

  • Increased the headcount as part of our various market initiatives
  • Moving compensation towards the market level but doing it in a phasely manner.
  • Pressure on people cost to remain for the next few years at least

Oil Free Compressors

  • Already been rolled out for validation, got machine running in the field and have a detailed plan worked out.
  • Global launch will be probably in 2019, but India launch will be probably in the second half of this calendar year
  • Product can serve both very effectively, so to that extent there will be an expansion of opportunity rather than the market
  • Price difference between oil free screw and oil lubricated pistoncould be anywhere between double to 250 tons, 200 to 250% for oil free screw

Net Debt position

  • Net debt as of December was about Rs.180 Crores, debt position to be around Rs.115 Crores by March 2018
  • Plans to  bring it under control by March to the level of about Rs.115 Crores

Market share in the air compressor market and automotive equipment

  • In the compressor market, it is probably 30% and in the automotive equipment, it is about 40% to 45%.

Road construction, Railways

  • Railways has grown, but it is not a big number, it is a single digit growth
  • Double digit growth on a road construction business and general other road and dams and other construction
  • Presence in railways is more on the intercity and the goods railways.

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