Elecon Engineering Company Limited analyst Q&A

Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Kashyap Javeri from Emkay Investment Managers. Please go ahead.

Thank you very much, sir. I have a few questions. The first one is on our revenues from exports as well as overseas operations, which has seen a fairly strong growth this quarter. If I look at our annual report, last year we had seen quite a bit of growth probably only coming from our UAE subsidiary. What is driving this growth in the fi rst quarter and what is about 34% contribution this quarter? Where do we see it for the full year? Should I go with all the questions right now or…

Kashyap, can we go one by one so that it will be easy for us to remember the answer specifically? If I give the answer about from which territory we are getting the growth, we are getting the growth from presently if you see in Q1 FY '25, the growth is coming from Middle East and USA and the same is also supported by Nordic and the European countries also. And for the full year also we are getting the same growth momentum from these three territories where we are quite confident to grow.

The questions that we had about some of these economies not doing well, is that sorting out now?

If we see our market share in the global market, our business share is very low, we can say it is minuscule. So far as the other territories are concerned, mainly on account of Europe, so Europe itself is struggling from supply chain management issues and because of that they are looking for the China plus one kind of things and that is where we are getting the traction.

Second question is on the margin. If I look at our overseas subsidiary margins for FY24, we have seen quite a bit of expansion coming from our UK as well as US operations. In fact, if I look at the Elecon drive system, the margins are almost about 28% in FY '24 from the annual report. So what is driving that? And in light of expansion in overseas margins also expanding, for the full year will we do better than FY '24 in terms of overall margins?

As we also last time also discussed, we are also present on the growth move and for that we have to incur the cost on account of brand building and also strengthening our business development team. Further, this time also we are having the business from OEM also. So considering that, we sustain the margins which we already did last year, and we are thinking that the same will continue also.

But what is driving this margins of about 28% in US and in fact UK also saw margin expanding to almost about 16%?

Sometimes this happens. There is some one -off kind of orders where we will have a better margin also. So it is not that every time the same kind of margin will be there. Definitely, we will have a sustainable margin which we already spelled out.

Okay. And the last question is on the divergence in growth. In the press release as well as in the previous conference call, you had mentioned that elections will drive some slowness in the order intake. But the same kind of impact is not visible in MHE which is also dependent on the capex as well as some of the PSUs also being our large customer. So why that dichotomy? One has seen growth in orders as well as revenue, but the other division probably has struggled this quarter?

So in MHE division, we got an order from the private sector. So that was already rolled out capex plan of the customer and that is what we got it also , w hereas here in Gear division, sometimes it may come positive. We are working with some conservative approach.

Okay. Sorry, just one last que stion from my side. We ended March with about cash and cash equivalent of about INR460 crores. But our overall other income for the quarter is just about INR4.5 crores which is running to just about less than a percentage yield for the quarter or annualized about 4%. Why would that be so?

I don't think – I think our other income is also I think this time for Q1 is also good amount. It is now INR14 crores.

Sorry. No, no. Okay. My mistake, my mistake. Sorry, sorry, sorry. It is a bout INR14.5 crores. Sorry.

Yes. Correct.

Okay. Okay. I am done. I am done. Thank you so much, sir.

Okay. Thank you, Kashyap.

Thank you.

Thank you, Mr. Javeri. Our next question is from Mr. Harshit Kapadia from Elara Capital Please go ahead, sir.

Yes. Hi. Very good afternoon – very good evening to everyone a nd just a few questions from my side. We do understand, the election has led to the r esult slowdown or order -in-force slowdown. But let's say in Q2, the INR400 crores run rate which we had been inching up from last year onwards, do we expect that to exceed to INR 450 crores per quarter? Is that something which is visible considering you would be – you would have applied for a lot of tenders and probably you may be getting some of them. So based on that sense if you can give us an idea?

Yes. Q2, yes – generally, if you see, historically, Q2 and Q4 are always better compared to the Q1. Q1 is always lowest as a quarter because it's just starting the end of the year. The new quarter is there. So it is always lowest. Then the peak is coming up from Q2 onwards. So we see a good traction from Q2 and also the Q4. And we believe that the same process will continue in this year also.

Okay. And on continuing with the order -in-flow part, we have seen a lot of orderings being happened on the power equipment side for the thermal power projects. So when do you think some of that will get flow down to Elecon Engineering? Will it happen in this year, or do you expect it to happen in next year, both on the products that we have?

Normally, the time period taken is between 12-to-18 months. So we are expecting that it would materialize into an order for Elecon next year by the first half or maybe beginning of the second half.

Okay. And would it be fair to say, since this is a segment where a lot of other players have exited, so the chances of winning for Elecon has increased?

Yes, definitely so.

Okay. And you had also mentioned that you would be changing your strategy on MHE from EPC to product and then you will also be looking to tying up with an EPC company, so you don't completely miss out on the opportunity size. So has that JV or that collaboration with the EPC company started or are we in the process of selecting an EPC player and then trying to bid for the projects there?

See, normally the EPC company with whom you tie up varies from project-to-project. It is not a general tie up specifically for all the projects. So i t will be based on case-to -case basis. As and when an opportunity arises, we would be ty ing up with such kind of EPC contra ctors. Making sure that we have favourable payment terms and conditions in such a way that we don't get tied down in the entire execution.

Understood. And I am very surprised and positively surprised to see the MHE margins now inching above 25%. Just wanted to get your feedback, sir , i s this number which would be sustainable or there could be some high value execution which you would have done and possibly the reason why this number was higher for this quarter?

So we already sp ell out the 20% plus margin for MHE sustainability. So it's all based on the product mix and the revenue mix also, which will have that positive or otherwise impact on that. So far, the margins are concerned. But I think as far as the MHE is concerned, 20% plus margin is quite sustainable and we are optimistic to do better than that.

Our next question is from the line of Nirmam from Unique PMS. Please go ahead.

Thank you for the opportunity, sir. So some more questions related to the Material Handling Division. So we have seen very good order inflow numbers. So when do you think that this division can achieve a INR1,000 crores revenue mark? And assuming that our demand is there, how prepared are we to operate at those levels?

If you remember earlier, we were operating at a turnover of almost INR 600 crores to INR700 crores a year. So as far as we are concerned, we are fully geared up because we have got large manufacturing facilities and we have the potential to scale up reasonably easily , okay. This is also not considering the fact that we can also do a large amount of subcontracting. So the potential is great and if the opportunity arises, definitely we can scale up to that extent if required.

Okay, sir. And just second part related to this. So, are we seeing any export opportunities in this division and are we willing to pursue export opportunities here?

While we talk, we are expecting an order from the African Continent, okay, which should be in our hands hopefully by tomorrow. Okay. It is not a very large order, but just to say , it is for exports. We have also given reasonably good offers in the Middle East territory of ours for Material Handling business and we expect that a good amount of these would be converted into orders.

Okay, sir. And, sir, another question is the government's focus on the inland waterways and the marine sector. So do we have the capabilities, or do we have a partner for marine gears and how big can the opportunity be?

We are right now pr oducing gears for inland waterworks , as well as other similar kind of requirements for a European company and that same products can also be utilized locally if there is an opportunity, and we will definitely do so.

But sir, any number on how large the opportunity can be in India?

It all depends on how much of investments come through and how much of investment would lead to ships or boats being built for that requirement. So it is difficult to ascertain as of now, but we are keeping our eyes and ears open.

And this also depends upon the government policy, how it is able to expedite all the processes.

Yes, sir. Got it. And, sir, one last question related to the capex that we are putting. So the INR200/250 crores capex that will do – will we purchase the machineries outright or will we be leasing them, if you can provide some sense here?

So, we are having the options open available with us to do either the leasing or we may go for the supplier's credit or maybe the ECB, though we don't need a fund. We are having sufficient internal accruals, but considering the interest arbitrage available because we are at the peak level of interest period, and we are expecting that there will be a reduction in the interest rate will be there. So, we would like to take an opportunity for that on a conservative basis.

Okay, sir. That's it from my side.

Our next question is from the line of Akash from Dalal & Broacha. Please go ahead, sir.

Yes. So, just to follow up your earlier question, sir, that INR200/250 crores capex will be doing this year?

Yes, we are completing – because we have spelled out INR 300 crores capex on a three-year basis in FY' 22. And we are completing that capex cycle of INR 300 crores in this year, which will be to the tune of INR200 crores.

Okay, sir. And most likely that will be funded out of debt?

No, that will be funded. I think we are having sufficient internal accruals, but to some extent, we may avail the ECB because we are having the natural hedge against that. We are at the peak, that's what I just explained a while ago. We are at the peak level of interest, so we would like to take an arbitrage of that.

Got it, sir. Sir, my second question will be the MHE order book that we have, in how much time do we expect to execute the same?

Normally, the typical execution would take place between 12 to 24 months.

12 to 54 months?

12 to 24 months, depending upon what product it is. 12 to 24.

Got it, sir. Also, sir, how much would be the replacement revenue that we must have done this quarter?

Pardon? Sorry, I can't get you.

How much would be the replacement revenue that we must have done in years?

In Q1 FY'25, my replacement, I mean the after-sales revenue is 34% of my console revenue.

Okay, but that will include MHE as well, right?

Yes, both. That's what I said. It's the console revenue. 34% of my console revenue.

For gears, it would be?

So, I don't have the figure. Gear would be to the tune of nearly 25%. And MHE will be to the tune of 34% to 38%.

Okay. And what would be the percentage of customized to standardized gear this quarter?

Okay. And, sir, one question from a long -term point of view. So we saw around 18% to 20% growth in exports this quarter. Would it be safe to assume that pace of growth to continue for at least next couple of years because our long-term vision is getting to that 50-50 between domestic and overseas?

Yes. So, here, yes , we are quite confident that we will have good growth from the overseas business. Let me just clarify here because in one of our OEM customers, which we last year we spelled out of 11, of which one customer has started sourcing from India from us. Instead of export directly to my customer based out of Europe, we are supplying to India. So that will be considered as my domestic revenue, not my export revenue. So from April to June, that is in Q1 FY '25, that number is INR 4 crores rupees. And we are expecting that for the full year, that will be to the tune of nearly INR50 crores plus. So though it is an export, but here that company has established one subsidiary here for sourcing of material from Ind ia. And accordingly, they are consolidating that requirement and exporting to their parent company.

Got it. So that INR 50 crores revenue shift will be there from our export segment to domestic. But overall, I mean, we can grow at a 15%-20% rate in terms of exports, right?

Yes. That is 15% plus, because this quarter we did 18% growth. That also without considering this INR4 crores of supply to domestic though ultimately it is getting exported.

Got it. And one last question, sir. Our gross margins almost touched 49%-50% this year, 49.8%, I think. So would those margins be sustainable?

45% gross margin is quite sustainable. So it is all dependent upon the product mix. So accordingly the gross margin varies also.

Okay, sir. Thank you.

Our next question is from Nirav Vasa from ASK Investment Management. Go ahead, sir.

Hello, sir. And thank you very much for the opportunity. So we are having an order backlog of around INR950 crores end Q1 FY'25. I just wanted to check what can be our bid pipeline. If you can state that number, it would be really helpful.

Sorry, I did not understand your question properly.

Sir, the confirmed order backlog that we have is around INR950 crores rupees end Q1 FY'25.

Correct.

Would it be possible for you to prescribe any number to the live inquiries, which are either at tendering stage or at negotiation stage?

It will be difficult to just spell out that number because sometimes what happens, I do have the inquiry available. But some of them, it is only on the budgetary level only, at the customer level which may take its own time to reach to a conclusion level from the customer side. So even if I give you any number that would not be so much fruitful to give you any judgment or any estimations about the revenue or the order inflow for us.

Got it. Thank you very much.

But all I can say is that there is, afte r the election results, we are seeing a very positive traction and a good set of order inflow plus inquiries have been generated.

Thank you, sir. That is really helpful.

Thank you. Our next question is from Khushbu Gandhi from Share India Securities. Please go ahead.

Firstly, on the export front, we have been quoting that we have already been signed prototype orders for 11 OEMs, of which you have given a clarity on one of the OEMs. So can you give us any further details about the 10 OEMs where we have been supplying the prototypes? Are the products been approved or are in the final stage of approval?

It is -- we can give you the information, but generally speaking, all I can say is that those are under process right now. Majority of them are being executed, okay, where the first prototypes are being built, tested within our company, before we give it to the customer to actually put it to use in the field and then get a response from them, after which the normal deliveries or regular deliveries will start off. This is a period which normally takes one year to 18 months approximately to finish or to start the supplies, the regular supplies. And we are today probably six months away from that in most of the cases.

If I further add here, in two of the cases we started the commercial production and our sales to this OEM from Q1 is INR12 crores, which we have exported from India. And for just what I just said a while ago, INR4 crores of that order we have executed in India for that OEM supplier -- OEM customer, sorry.

Sir, and all these OEMs are from the same sector, or they are from different sectors?

No, they are from different sectors.

Sectors in what sense you mean to say?

So as in the industry like sugar, cement etc..

No, this is the industry to which we are supplying normally.

No, they are from different sectors because what she means is steel, cement, rubber. Am I right?

Yes, so can you just give us a detail like which of the industries are from OEMs?

Yes, so can you just give us a detail like which of the industries are from OEMs?

I can give you the industry from rubber, plastic, steel, pump, packing, gas, and energy. These are the sectors and the commercial sector.

Okay. And now since the election has ended and we are seeing good traction in at least the orders from the domestic side, can we expect good order inflow in the second quarter?

I would say that the real effect should be coming in the later part of the second quarter or the third quarter.

Okay, sir. And are we being conservative on giving the guidance because last year the way we have delivered and with th e export and the MHE now gaining the traction and e lections being ended, still we are focusing on only 15% guidance. Are we being too much conservative on that side?

No, we will continue with our guidance which we have given. If we will try our level bes t to surpass our guidance also, but presently it is quite premature for us. Yes, we can give the clarity by end of Q2 when we have the Q2 earnings call.

Okay. Thank you, sir and all the best, for the future.

Thank you.

Thank you. Our next question is from the line of Garvit Go yal from Nvest Analytics Advisory LLP. Thank you.

Hi, sir. Good evening. Am I audible?

Yes absolutely.

Congrats for good set of numbers, sir. My first question is on the recovery part. Like you mentioned in the presentation that from Q2 we will see some recovery in the domestic market. So, what are the key indicators or the factors that are leading you to anticipate a demand uptick in remaining say 9 months of FY 25? And apart from this polit ical angle, is there any external factor that could influence the demand in the near future, sir?

Right now the sectors which are showing traction or extremely good traction are cement, steel and power will come into limelight in the third or fourth quarter. And we believe that sugar also has a potential this year to give us good healthy number of orders.

Understood sir. So these are the sectors that will basically drive the demand for the rest of the year?

Understood. And sir you mentioned to the earlier participant like domestic order flow will be starting from Q2 end or Q3 beginning. So what will drive our demand for Q2?

There are large amount of inquir ies which are at present likely to get finalized within a month or so, month or maybe two months. And that is what we are banking on . As I told you that the inquiry levels have impr oved after the election results and going forward with the slowdown that we were seeing would further reduce as soon as the budgets are announced very shortly.

Understood sir. And sir secondly, on the export side. So currently we are into export of INR500 CR, if you analyze the numbers and our top line target for FY30 is 10,000 CR of which we are looking for around 50% is from exports. So looking at the traction in the export this quarter is it right understanding that this year is going to be the point of inflection in exports for Elecon?

I'm sorry, I didn't understand the last portion of your question.

So, I'm saying looking at the traction in exports this quarter, is it right understanding that this year is going to be the point of inflection in exports for us?

Point of attraction.

Inflection.

Inflection okay. What I feel is next year sounds to be more attractive. Okay there are various reasons for it. First of all we believe that the momentum that we gained this year will continue in the next year plus we are expecting a large quantity of orders coming in from the marine sector next year. So I believe that we would be having a very healthy inflow coming next year beginning or mid next year.

You mentioned you are expecting large orders from the marine sector, so is it outside India you are talking about?

No, it would be with the defence sector.

So that is not a part of exports?

No, that is not part of exports.

Understood sir. And lastly on our margin side, so in terms of competition like we are looking for sustaining our margins at these higher levels. So do you think like targeting such a higher margin can bring a situation of losing on the market share to the competitors or can it be a reason for our slower growth due to higher pricing?

See up till now we have been able to slowly and gradually increase our market share then reduce the market share. Okay the increase in market share is microscopic, b ut that also tells you that we have been able to sustain our market share as well as we have been able to sustain our margins. And we intend to do so because our strategy as well as the kind of services that we render and the quality that we give to our customers, the customers are satisfied with our performance.

So going ahead also we are focusing on sustaining our market share or slightly increasing our market share while sustaining our margins. Is that understanding, correct?

Yes, I would say domestically we are not keen to increase our market share beyond a certain limit because that would mean that there would be a street war with the competition whereby our margins would deplete. And that is not what we would try to do. So the intention is that we grow, and we grow more in the export area, in the marine area, as well as we have identified other segments like high speed, etc. where we would like to grow further so that we are able to maintain our margins and still have a reasonably healthy growth rate.

So from your commentary I think it is understandable for the next two to three years the export and the marine are the two areas that are going to drive our growth?

Yes, but there are also other areas too. So, we are riding on very many horses. But these two, as you rightly said have a very good potential. And our intention, as I said is not only to grow but to make sure that we are able to maintain our margins that we have earned up till now. And go further ahead maintaining this over a period of time.

Understood, sir. Thank you very much, sir and all the best for the future. Thank you.

Our next question is from Mr. Mayank Bhandh ari from Asian Market Securities. Please go ahead, sir.

Thanks for the opportunity. Sir, would it be possible for you to share the breakdown of the order book in terms of end markets?

So, our end markets are generally from steel, power, cement, material handling secto r, sugar is also there then rubber and tyre and plastic. These are the sectors in which we are getting our orders.

So, percentage wise is it possible to share?

Yes, we will share that also. We will share through our SGA.

Okay. Thank you, sir. On the high -speed segment, what is the progress that we have made particularly from, I mean as we know that there is a niche market in export also. So, can you please elaborate on that?

We just checked on it. We have received our order on high speed from a large OEM, whereby we believe the potential is large and we are expecting that the orders will flow in for execution in the next calendar year.

Okay. Sir, lastly, can you share the numbers for Radicon and Benzlers subsidiaries also, if it is possible quarterly numbers?

Numbers means revenue and the profit margin numbers?

Yes. Sure. We will do that.

Sure, sir. Thank you.

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

Hi. Good evening. So, can you talk about what will be the key success f actors in the export market, will it be price, distribution, brand, etc.?

Sorry, can you repeat it? Because unfortunately I am not able to hear you very well.

So, my question is, what will be the key success factors for the company to grow in the export market? Will it be on price or distribution or brand?

It would be none of the above. Because see pricewise, we do not create an impression with the client that we are the cheapest and therefore you sho uld buy from us. Because then they would perceive you to be like the Chinese manufacturers who sell on price. On the other hand brand, we have not established ourselves as yet especially in the western regions like Europe and America. Our name brand is not that well established. So, basically, our intention is to give a proposal to the customer by understanding his requirements. So, there is a very high concentration on supplying a solution to the customer for his needs for power transmission. The advantage that we have is we have a very large variety of products in our basket. And therefore we can give him a solution which exactly meets his needs rather than trying to give him a product which we have. It is selecting the right product from our basket for h is requirement. As well as back it up by a very strong after sales, which is after sales service. We also provide free installation to the customer if the requirement is for large size gear units. Because we believe that , that way we are able to see to it that the installation is very smooth, and it brings a tremendous goodwill with the customer. So, there are a lot of things that we do by providing special services to the customer. Whereby, the customer is happy, and you would be happy to know that almost 70% of our customers are repetitive. Domestically as well as in the international market.

Got it, sir. That was quite helpful. And briefly, if you can talk about how the competitive intensity is right now for the export market and maybe nam e some of the competitors or if not just talk about how the competitive intensity is relevant at the global export stage.

See, right now our market share is microscopic in the international market. Even if you look at sectors where or in territories where we are right now operating. Barring Far East as well as barring Middle East. If you consider Europe and America as I told you, our market share is negligible. And therefore, competition in those countries is not very price sensitive. It is more related to the support, delivery of the goods in time and a proper execution of the order. So these are the things that the western market demands. And it is not very price oriented.

Got it, sir. Thank you. That's it from my end.

Thank you, Mr. Chheda. Our next question is from the line of Niraj Mansingka from White Pine Investment Management Pvt Ltd. Please go ahead, sir.

Thank you for the opportunity. A few things, all related. How is the OEM expected to scale up? What is the potential that you see in the scale up of the OEMs from Europe that you are talking of the 11 OEMs?

It varies from OEM to OEM. But all I can say is that normally an OEM will keep minimum two suppliers. That is the general trend. And therefore, the intention of ours would be that going forward, we grab a larger market share from the competitor of ours with the OEM and are able to bring in more business.

Any numbers on any one of them or a few of them on average would be useful?

So, for the OEM business we got, we are estimating that there is a 10 % to 15% of the total requirement of gearboxes. And that can go up to 30% to 35% plus.

Okay, that answers one side. The other thing is, you said two things in the past about Russia and Indian Railways, that Russia is looking at India for gearboxes and Indian Railways also you are trying to give products for component trials to OEMs. Can you give the colour on both of them?

Russia, because of the Ukraine-Russia war, they have been sourcing these kind of equipment’s from Europe, which right now because of the ban put in for supplies to Russia by Europe, the potential has opened up where Russia is trying to source heavy machinery and equipment’s from either India or China. They have been scouting around in a lot of situations. They are not very happy with the Chinese product and therefore they are banking on India to supply these. We see a great potential not only in gears but also in the material handling sector for this going forward. And we have established good contacts in Russia whereby the inquiry levels have increased, and we are hopeful that we will be able to back healthy number of orders in the future.

However, we would like to go cautious with Russia considering the trade restrictions, how it will spell out in the future. And accordingly we are just going with our policies to get the order from Russia.

And the Indian Railways?

Sorry, and?

The Indian Railways, you are giving them some trial for components?

Yes, Indian Railways, our pursuit is carrying on. We have not only given offers but apart from that we are also dealing with a company abroad who is supplying to the railways globally. So with both of them we are pursuing. There are trials that are being conducted and a few supplies have gone through, and we are waiting for some major orders to come.

Okay, thank you very much.

Thank you.

Ladies and gentlemen, due to time constraints that was the last question. I now hand the conference over to the management for closing comments.

Thank you all for joining this call and showing your interest in Elecon Engineering. We are at a pivotal moment of transformation driven by our continuous investments in technology and innovation. Our commitment to staying at the industry's forefront is unwavering. This quarter marks the beginning of our ambitious plan to significantly expand our international revenue share, paving the way for a brighter future for our organization. With this I would end the call. Should you have any additional inquiries, please feel free to reach out to our CFO, Mr. Narasimhan Raghunathan or SGA, our Investor Relations firm. Your participation is greatly valued. Thank you all.

Thank you. Ladies and gentlemen, on behalf of Asian Markets Securities Limited, that concludes this conference. Thank you for joining us and you may now disconnect your lines.