Good evening, everyone. Am I audible, Kamlesh?
Yes. Yes, please.
Good evening, everyone. I am Indranil. I am the CFO of Elgi, and apologies to all of you. Really sorry. Dr. Jai is trying to get in the call still, but he has requested us to go ahead, so I will be initiating the presentation. Can we move to the next slide, please? Yeah. As we start the year, we have had a good quarter. Our growth over previous year is at 17%. Out of the 17% growth, about 4% is driven by foreign exchange. The EBITDA, and consequent to that 17% growth, our EBITDA has grown year-on-year by 28%. Can we move to the next slide? This is our sales mix. Compressors kind of continue to drive 92% of our overall revenues. Mix has not changed.
When it comes to India and ROW, in particular in this quarter, India has overperformed over ROW markets, and that is how you see a mix of 52% and 48%. I will talk through a little bit more around that in my subsequent slides. If you take a look at the geographical sales trend, India has shown tremendous improvement both year-on-year and sequential quarters. So is the case with North America. Sequentially, we are able to maintain a higher trajectory of revenue, and there has been significant growth over previous year. Europe, both our industrial business has seen growth year-on-year, but our portables business in Italy has seen muted performance, and we have seen because of economic downturn in various markets of Europe. As far as Australia is concerned, we have seen good growth in our units business, whereas service has remained slightly muted.
Can we move to the next slide? This is our EBITDA reconciliation. If you start with the reconciliation, due to the volume growth of 17%, our EBITDA should have gone up by INR 650 million. We have seen an impact of increase in material costs throughout the year, and it started progressively going up in the Q2 of the year, and that is how you see an impact of INR 170 million in spite of increase in volume. The resultant contribution is worse on the EBITDA. We have benefited exchange compared to our results of the previous year. Exchange has both in terms of INR dollar and INR euro has remained positive. That has given us a positive benefit on the bottom line.
We have had increase in other expenses, as we have mentioned, which comprises of increase in employee cost and increase in other fixed expenses in relation to our overall business. This has landed up as in our overall EBITDA of INR 1,850 million. Moving on. This is the overall performance for the P&L for the quarter, starting previous year and sequentially the previous quarter. If you largely see, the EBITDA has actually grown from 14.9% to 16.3%. We also had called out earlier during the quarter that we will be receiving a tariff refund from the U.S., and that is something which is baked in here. Overall, after considering the impact of that, we have landed up in an overall PBT of 15%. Our net cash continues to grow.
This quarter, we have added around close to INR 100 million of cash. Of course, this is a quarter in which we also paid out dividend, so excluding the impact of dividend that is seen on the right-hand side. The cash profit from April to September has been healthy INR 337 crore. We have invested in net working capital, which is largely on account of inventory. We continue to pay taxes largely in India, and our CapEx program is in line with our MK2 program that is ongoing. With that, we would like to end the presentation and then open the forum for Q&As.
Thank you, sir, for your comments. I will wait for a minute for the question queue to assemble and then probably open the first line.
Is Dr. Jai able to join, or Anvar is able to join? Can you check?
Just a second, sir. Sir, Anvar sir is there. I don't see Jai sir yet. Sir, should I take in the first question?
Sure.
Participant, please restrict yourself to two questions each. Probably if we have time later on, we will probably allow more questions. Sir, first question is from the line of Mr. Harshit Patel. Harshit, you may unmute yourself and go ahead with the question.
Hi, am I audible?
Yes. Yes, Harshit, you are audible.
Thank you. Sir, last quarter, Jairam sir had mentioned that you had assumed about 9% rise in material costs for FY 2027 and said that the price corrections would mainly show up towards the end of 2Q, and the effect will be fully visible in the Q3. We have seen that the gross mar- Hello?
Harshit, you can continue. Can you start with the question?
Harshit, you may continue with the question. Jairam sir also seems to have joined the call.
Yes.
Okay, perfect. Hi, sir.
Hi.
Sir, last quarter.
I apologize to everyone for this technical issue. I am a bit in a remote area. I am just having some issues. Sorry about I apologize.
No problem, sir.
Go on, Harshit.
Sir, last quarter, you had mentioned that you had assumed a roughly 9% rise in the material cost for the full FY 2027, and you had also said that the price corrections would mainly show up towards the end of 2Q, and the effect will be more pronounced in the Q3. Now, we have seen that the gross margins have recovered about 60 basis points on QoQ basis to about our usual range. Would you be able to share how much of the planned price corrections are now in the market, and where do you see the gross margin settling in the second half of the year?
Harshit, it's a fair question. I'm unable to give you a very clear answer, but I will attempt to give you an answer which, as we are looking now. Even as we speak, our metal commodity prices are continuing to increase. What we are doing is continuing to react to it, but unlike a consumer product where we can increase prices immediately and see the results very quickly, we are not in that situation. The price increases that we experienced up to, let's say, August, July, August, when we had our Q1 sales calls, we had pushed that all in. But subsequently, there have been further increases, and that we have also made some corrections in those prices. We expect to see some of that coming in the Q3.
Whatever we had an issue in the Q1, what was visible, we have been able to absorb and correct in the Q2. But what happened in the Q2, we have not been able to reflect in our Q2. Does it answer your question?
Yes, sir, that does. Thank you. Thank you for that. Sir, secondly, you had guided Europe to be profitable, marginally profitable in FY 2027, and with breakeven as the worst possible case, and also expected Australia to be back on track by Q3 or Q4 after the reorganization that we are doing right now. Where do these two things stand currently, vis-à-vis the update that you had previously given?
I continue to maintain that we are on track for whatever we had guided. As far as Europe is concerned, we will be marginally profitable. Breakeven is the worst case, but we are quite confident that we will have some profit. That is provided there are no further geopolitical conflicts and disruptions that happen, because Europe seems to be the most affected when these conflicts come in. And the same thing with Australia. We have done our reorganization. We are putting it back in place. Things are moving up. We are quite confident that it is on track. Q3 and Q4, we will see some good results.
Perfect. Sir, just a small bookkeeping question. I think, going by your press releases, you have announced tariff refunds of about INR 40 crore received in August as well as September. How does the accounting of these refunds work, where we have accounted for them in our P&L?
I will let Indranil give you the details of that.
Yes. At a directional level, around 50%-60% of this has been recognized in the current quarter, and balance is still lying in inventory, because as we sell the inventory is when we will realize them in Q3 and Q4.
Understood. These are directly booked in our revenue, this 50%-60% of INR 40 crore that you have mentioned?
They are booked as a credit into our material cost.
Understood. Perfect. Thank you very much for answering my question.
Yes. To that extent, you should normalize the material cost reduction from Q1 to Q2.
Understood, sir. This is well understood. Thank you very much.
Thank you, Harshit. Next question, we will take it from the line of Ankur. Ankur, you may unmute yourself and go ahead with your question.
Yeah. Hi, Dr. Jai. Am I audible?
Yeah, Ankur. You are.
Yeah. Thank you, sir. Thanks for the opportunity. My first question on the revenue growth side. India saw a very good sort of jump in this quarter, continuing the trend what we saw in Q1. If you could highlight, this is largely the benefits of Demand=Match there, and parallelly, how is the feedback on our new launch on U.S. side? What's the feedback there on the ground?
Multiple things, Ankur. The growth has been one. Definitely Demand=Match has increased our conversion ratios when we are in front of the customer. That's definitely contributed. The second is, we started a go-to-market project about two and a half years ago, and it got fully crystallized only in this financial year. And the effect of that is also more, our inquiry levels have gone up by virtue of being able to cover a lot more customers as part of that go-to-market process. And the third, of course, is the buoyancy in the Indian economy itself. The demand patterns have gone up, have been very positive. I'm not able to split this into these three buckets, but all these, two of them are internal to the company and one is external to the company, and all have contributed.
Sure, sir. Thanks for that. Secondly, on the global markets, how is the outlook there, especially in Europe, given our expansion there in Germany? Will we be using the same distribution network, or there will be further investments in creating that network, which may result in some overheads increase? Parallelly, your thoughts on the gross margin or the EBITDA margin to the global markets, Europe and U.S. specifically. Thanks.
Okay. Europe is not going to be a short-term play. It is going to be a medium-term play. The economies are in pretty bad shape. All the countries are in pretty bad shape. Even though we are entering Germany, German economy is also in not so good condition. But the fact that we are zero in Germany is going to give us some sort of a growth overall in that context. In terms of increasing cost, we are not increasing a cost. Whatever cost is required to do business in Germany is already baked and is reflected in our current P&L. We don't see any great increase in cost. If at all, there will be certain revenue-producing roles that will get added, but not anything of significance. In terms of EBITDA margins, in the U.S., it is very healthy, especially for our industrials.
I don't want to talk about EBITDA broken up into our four business verticals that are there. But if I focus on industrials, which is really what the core business of Elgi is, it is a very positive, very strong EBITDA that we have, and we expect that to continue to grow both in the U.S. and in Europe, because increasingly, we are getting more and more of our revenue from aftermarket, which is more profitable. As we get more machines installed in the field, the aftermarket becomes more robust for us. So, I think overall, there is a positive outlook for EBITDA. But having said that, the commodity price challenges continue to remain. West Asia conflict cost, I mean, the conflict is causing an escalation in cost.
These are something that we have not baked into, but we have stepped back and taken a larger view of it, and we are creating some initiatives within the company to really take cost out, both in our material and variable cost, but also on some of our fixed cost, to be able to protect against any further unforeseen cost escalation. Excuse me. Yeah.
Sure, sir. Just as a follow-up to that, if I do a consol minus standalone P&L working, the subsidiary EBITDA margin has improved significantly this quarter. Is this a benefit of those initiatives that you highlighted that we have taken, or those are yet to play out?
No, those are yet to play out. Definitely yet to play out. The percentage increase is a more of volume-driven contribution, Ankur.
Sorry, this also has a bit of tariff refund baked in in the subsidiaries.
Yeah. Yeah.
Sure. Indranil, if you can just highlight what could be the tariff allocable to the, let's say, international markets or—
I mentioned about 50%-60% directionally.
Okay. Sure.
I would not like to call out the overall number, but 50%-60%.
Sure, that's helpful. I'll get back into the queue. Thank you.
Thanks.
Thank you, Ankur. The next question we'll take is from the line of Paresh Chaudhari. Paresh, you may unmute yourself and go ahead with your question.
First of all, congratulations on a good set of numbers, sir.
Thank you.
My first question is with regards to oil-free segment. We mentioned in our annual report that we had a strong order book for FY 2027. Given that we are in the middle of the year, how do you see the incremental demand, and are there any particular end segments which you would like to call out which are driving the demand?
Oil-free is primarily, sorry, driven by pharma, food processing, the very specialized industry verticals that have a demand for oil-free machines. All of these verticals are doing well in terms of their investment plans. We expect that there will be continuing support for our oil-free machine. In addition to that, we have carved out oil-free products as a separate vertical in our sales organization to bring more focus to it. We expect that that will continue to push and provide that kind of attention to that product.
Yes, sir. My second question would be on our MK2 campus. First part of it would be the updates on the progress, and the second part would be, sir, what would be the top-line benefits? Do we intend to do more localization post-campus consolidation?
Paresh, the purpose of MK2 is twofold. One was to move our city campus progressively to our main campus outside the city. We had earmarked about INR 600 crore over a period of four or five years. What we have done is the first phase is moved, created a facility for our global parts service, what we call as our Global Support Center, which is a fully automated parts warehouse that serves all our operations globally. That has gone on stream even as we speak, and that was the first phase. The second part of Phase 1 was to move our diesel machines, portable compressors from our city factory to that. The basic work has started. We have got all the approvals, and that will be completed by the Q1 of 2028 calendar year. Then we will look at the rest of it being invested in.
Thank you so much, sir. I'll fall back in the queue.
I apologize for my throat.
Thank you, Paresh, for your question. Participants, if you have any other question, you may please assemble in the queue, or you may drop it in the chat box. We'll take it from there. The next question is from the line of Manish. Manish, you may please unmute yourself and go ahead with the question.
Yeah. Thank you so much, sir. Sir, couple of ques— Hello, sir. Sir, Mr. Sen alluded in the opening remarks that in Europe, Italy has been facing challenges. Probably what I see is for last two years, Italy operation has been incurring minor losses. Earlier, they were doing extremely well. Was it also due to there was some change where we stopped exports to U.S. and then it has taken much toll on it? Maybe you can clarify that, number one. And number two, we have purchased the land in Italy. What is it pertaining to? And if you can clarify that. That was first set of question. Then U.S. seems to be doing well, and you did mention profits are growing. How should we look at that? U.S. has compounded more than 15% for last six, seven years.
We expect it to continue at that run rate and probably see better margins because I think Elgi USA is profitable, but I am not sure about Pattons. That was first set of questions.
Yes. Indranil referred to Italy for the industrial side. What you are referring to is our Rotair operations, right? The Rotair operations is the one that got challenged because of export to the U.S. and the tariff that got imposed on the products that were going out of Rotair to the U.S. market. On the industrial side, Italy was never a problem, but the overall economies of various countries in Europe are under challenge. That is the reason why we are facing it. It is a trickle-down impact of the economies impacting investment, and investment onward affecting the procurement of compressors. That is why I said Europe is a medium-term thing in terms of waiting for the economies to improve.
Having said that, we are working on specific initiatives because our share of the market in most of these countries is so low that even if the industrial activity is weak, there is opportunity for us to grow, which is really what we are focusing on. Coming to the U.S., U.S. has been a very strong story. Yes, you are right, the positive aspects of our North America operations is our industrial business. Pattons is still a challenge, but it is slowly and slowly coming out of the woods. We are beginning to see service incomes improving. We are beginning to see equipment sales going up. We are quite confident that our distribution operations, it is both Pattons as well as Michigan Air, doing well in the not-too-distant future, they will be in a very good situation. That is what our expectations are.
Okay. On the profitability, sir?
On the profitability of Europe, we have done quite a bit of restructuring. We have taken a lot of cost out. We are looking to be profitable this year. As we grow our top line in Europe, our profitability will increase, our aftermarket will kick in. Overall, I do not see any challenges to our profitability in the current cost structures that we have. The same thing I would say in North America. We do not see any margin-driven either profit increase or compression, but we see a volume-driven profit escalation that we expect in the future.
Okay, sir. And sir, there was a couple of clarification. One on the standalone, in the current Q2, we see that standalone other income is INR 47 crore versus INR 24 crore, while in consol, it is lower at INR 21 crore versus INR 51 crore. There are two things. One is last year, what I see in annual report, there was a gain on sale of property of INR 39 odd crores. Was it there in Q2 of last year, and that is why the other income was there entirely in Q2? Then second question, why the other income is high in standalone and lower in consol?
I will let Indranil answer that.
Yeah. Your understanding on the first part on last year is correct. We had sale of property last year. This year on standalone, we have dividend from our subsidiary, which gets eliminated in consol. That is why you see it in other income in standalone.
Okay. Also on, maybe I had sent some queries from the annual report. This was pertaining to some intercompany charges or like royalties charged to subsidiaries and market development fees paid to some subsidiaries. Maybe if you can reply to that query or if you want to take it in the call, I am okay with either of the two.
We can respond to that separately, but for the benefit of everyone, these charges are in line with our overall transfer pricing arrangements vetted with tax laws of both jurisdictions. I will respond to you separately.
Okay. Sir, last question on the VAYU launch in India. This is the one we were targeting for the smaller compressors and probably competing with Chinese imports. Is this one we were targeting? How do we see the progress post-launch, sir?
You are right. This is VAYU is our brand to take on the low-cost compressors that have come in from China. As per our plan, we were to do close to 35% coverage of the geography by September, which we have accomplished. Our plan is to do the complete coverage of the country by end of January and February, January, February timeframe. We are on track to making that happen. The initial launch has been outstanding. The order booking and the sale has been far higher than what we had anticipated. We are going in the right direction there.
How big is the market, sir?
I do not want to talk about the value, Manish, but in volume terms, it is about 25%-30% of the numbers in oil-lubricated screw compressors.
Okay, sir. I have few more questions. I will come back in the queue, sir. Thank you so much.
Participants, if you have any question, do keep a raise hand option up, or you may drop it in your chat box and we will take it up from there. Sir, we will wait for a couple of minutes for the queue to assemble.
Sure.
Sir, we have a follow-up question from Ankur. Ankur, you may please unmute yourself and go ahead with your question.
Yeah. Hi, sir. Thanks for the opportunity. On the global markets, if I look at Q1 and even Q2 numbers, others which I believe includes Middle East here, the growth has been slightly softer versus what we had seen a much sharper ramp-up in the earlier years. Is this largely because of the disruption here? How do you look at the growth here within Middle East, which has grown well, and any other global markets wherein we are looking to ramp up our operations?
Ankur, if you, at a very broad level, half of our revenue is outside India. If you look at that half, there are four geographies that are primarily, or three geographies that are primarily driving that 50%. It is North America, Europe, and Australia. If you look at these three geographies, compared to the prior years, both Europe and Australia have been a little subdued. That is one reason why you are seeing a certain sluggishness in the global markets. If you go to the second-tier markets, which are contributing to that 50%, you will see Brazil, and you will see Middle East and Africa as two large contenders in the second tier. Brazil, compared to last year, even though it has grown well, but compared to last year, was a bit of a bonus year.
By virtue of all the elections and everything that has been, there has been a certain pause there. That has been lower than what we had last year. Better than planned, but lower than last year. The same thing if you come to Middle East. Africa has done very well. Certain parts of even Middle East has done well, but of course, the disruption and the war has definitely put a kind of a dampener on the thing. That is the reason. Once these things are getting cleared, I think those markets will come back.
Sure, sir. Just a follow-up. From a margin perspective, do these Tier 2 markets, how do they stand versus, let's say, a U.S. or a Europe? Europe, obviously, we are not making as much money there, but let's say versus U.S., will they be largely in the similar ballpark?
At a gross margin level, these countries are very similar to India. I do not want to get into very specific percentages, Ankur, but the price points in these markets are not as high as Europe and the U.S. or Australia.
Sure, sir. That's helpful. That's it from my side. Thank you.
Thank you, Ankur. Sir, next question we will take is from the line of Vipul Kumar. Vipul, you may unmute yourself and go ahead with your question.
Hi. Thanks for the opportunity. Sir, my question is regarding margin for our VAYU range. Will it be converging to our traditional range, or it will be higher or lower when it reaches certain scale?
At a gross profit level, Vipul, it will be lower than the Elgi range, right? That is to be expected. We have kept that in mind while architecting the overall cost of the operations and that business as a vertical. Once we get the planned volume, at an EBITDA level, we may not be as high as the standalone market, but definitely not very far away, especially when the aftermarket kicks in and the profitability of the aftermarket gets reflected in the business. I think it will not be as profitable as Elgi, but definitely not too far. The gap will not be very high.
Okay. Thank you, sir.
Thank you, Vipul, for your question. Participants, in case if you have any more questions, you may please use your raise hand option, or you may drop it into the chat box. Sir, I see no further questions being up there, so I would open the line to Kamlesh Ji. Kamlesh Ji, you may please have the management speak about the closing remark.
Manish, you had some questions as follow-up?
Yes.
Manish? Go ahead.
Yeah.
Hi, Manish. You can unmute yourself and go ahead with the question.
Yes, I will go ahead. Just one question, sir. In our go-to-market strategy, what probably is reflecting in terms of expenses from what we see in annual report is information system expense have in standalone doubled last year from INR 15 odd crores to INR 32 crore, while in consol also it has gone up to INR 42 crore. Is it pertaining to only go-to-market strategy and/or it is also to do with our IT system which we were probably implementing across and maybe having a Global Support Center as well? How should we look at it? Because these are kind of large, the number seems to be large and increasing. Second also, sir, I will take that liberty on legal and professional charges are also increasing and it is now INR 78 crore on consol basis.
Just as a, because both put together are quite substantial numbers, INR 120 odd crores. How should we see to it going forward?
I will answer the question on the IT and then I will let Indranil supplement it. As far as IT expenditure is concerned, it is across the board on multiple areas, Manish. One is, the biggest one is cybersecurity. It is an increasingly a big threat and this is something that we need to invest in, not just in India but across the world. That is one layer of cost, and that is a recurring cost. I mean, there are certain licenses that we need to incur, and there are certain audits that we have to do to ensure that our systems are protected. That is one part of it. The second part of it that we did was to do consolidation of all, as part of the security as well as standardization, we consolidated all the services that were being provided.
Each country was doing it differently, so we have brought that in. The third is, we have invested in sales, like CRM, not only in India but also in the U.S. and in Australia. These are all costs that have come in. So, earlier these costs were sitting under various categories and buckets. We have now brought them under one, right? So that's also a factor. And certain things, they were capital in nature, we have now brought them into a revenue in nature. Like for instance, our hardware has gone into a leasing module instead of in buying our own. So, there's a multiplicity of things, and they are all modern practices that we have brought into the company as far as IT is concerned.
As far as the consulting is concerned, there are multiple things in different parts of the world, not only pertaining to business consulting, but accounting, taxation, and all that. I will let Indranil give a brief on that part. Those are what the main elements are. You unmute yourself, Indranil. You unmute.
I'm sorry.
You're muted.
Your question is. Yeah, sorry. Your question is with relation to legal and professional spend increase in FY 2026 from the annual report, right? So last year we had a higher investment on account of the GTMs, and that's what is coming out in the previous year. Current year, we have not incurred any major spend on GTM consulting yet. So, the legal and professional spend is stable.
Sure. Thank you so much. Thanks, sir.
Thank you, Manish. Participants, is there any other question? I don't see any other questions. Kamlesh, you may please go ahead with the.
No, that's it. So, Jai, any closing remarks you want to make?
Yeah. I first of all want to apologize to everyone for the little bit of technical challenge that I had connecting. I'm sorry that I had to keep you waiting and we had some disruption. I apologize for that. I appreciate your patience. I think on a closing basis, what we want to say is there is continued positive sentiments as far as the growth of the business is concerned, but the concern that are there in our mind is the inflation in metal commodities and inflation in certain other fuel prices and all that is what we are concerned about. We have taken some proactive steps.
It will take us maybe six to nine months to put together a plan because this is something that we need to dig deep and take some cost out in the company without affecting the business, without affecting quality and the service to our customers. But we collectively as a team, we realize that there are possibilities to do this. We have kickstarted it. We will be able to give you more clarity by the end of, I mean, the Q4 end, we will be able to tell you exactly what we are moving towards. But overall, I think we are confident that we will be able to mitigate any cost increases. So, everything looks quite good at the moment. So, that's my closing, Kamlesh. And thank you again to Asian Markets Securities for hosting us for this quarterly call.
Great. Yeah. So with that, we conclude the call. Thanks to everyone for joining in. With that, we can log out and wish you all Happy Diwali greetings.
From my side too, thank you very much. Happy Diwali.
Thank you. Thank you so much, sir.
Thank you.
Thank you.