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 Aditya Rathi from Aequitas Investments. Please go ahead.

Thank you for the opportunity, sir. Sir, my first question relates to the Red Sea crisis that is going on and the impact that it carries on the delayed shipment and cost?

I would say that right now we are just shipping the orders that we have received. Yes, our products are reaching two weeks later to our clients in Europe and if it is United States also, it would be two weeks additional time. Though the customers are complaining that it is taking two weeks longer, however, it has not seen a significant impact on reduction of orders or cancellation of orders.

Sir, does it carry any cost impact relating to it?

The cost impacts are definitely coming in. We are transferring those costs to the clients in general because considering the fact that the freight as it was being paid, it is not inclusive in the price of the gears. So, they are paying the extra cost. No one live said, but still, they are paying it.

Sir, just now you mentioned that we still hold the revenue guidance for INR2,000 crores for financial year '24. Given that in nine mo nths we have closed close to INR1,370 crores of revenue and there is a continuous decrease in the order book volume from transmission division, so do we still hold that INR2,000 crores revenue guidance?

Yes, as of now we are still continui ng with INR 2,000 crores. We are reasonably confident. However, as I have mentioned also in my speech that there are challenges because of the reduction in steel prices as well as the geopolitical situation existing today with two wars going on and the Red Sea issue. So, we are reasonably confident because we are going to try our very best to reach the golden figure of INR 2,000 crores and we will continue to strive for that.

Sir, my last question relates to the extra four OEMs that we have si gned overseas. Sir, any estimated business volume guidance for that like you mentioned for the six overseas the last time that EUR5.5 million would be coming from that?

Yes, [inaudible] we are anticipating EUR6 million of business coming in from it. However, it is difficult to say right now because right now we are in the testing phase where we would give them prototypes and they would put them on test after which the existing supplier, his scope would reduce and ours would increase. So, over a period of time, it will keep on increasing. So, it is very difficult to ascertain. However, our rough estimates are about EUR6 million.

It is all 10 OEMs to start with and then as I told you over a period of time it will keep on increasing.

Okay. And sir, any idea on when do we plan to commercialize it?

2025.

Okay. Thank you so much, sir.

In Q3 we are expected to start the commercial production. Commercial production will be in Q3, 2025. However, as I told you EUR6 million, it will take about 12 months to…

Okay. Thank you so much, sir.

Thank you.

Thank you. Our next question is from the line of Kashyap Javeri from Emkay Investment Managers. Please go ahead.

Hello. Sir, congratulations on a great set of n umbers. A couple of questions from my side. Point number one, you highlighted about the scope of work from 10 overseas OEMs that you expect at about EUR6 million eventually. In light of the fact that our guidance over the next few years is a revenue share of 50 -50 between domestic and overseas. How much can eventually this 10 OEMs add in that 50-50 target let’s say over the next about 3-4 years? Second question is, you highlighted about some of the vulnerability or volatility in terms of our overseas business. But in terms of domestic business in FY25, how are things looking like there in terms of revenues? And third question is on our MHE margins, which now are almost inching very much near to our transmission division margins. So, on a steady state basis, if there are no more write-offs in line with our strategy of not taking PSU business, are these sort of margins which are sustainable in MHE business?

You've asked so many questions. So, let me start right from the beginning. First of al l, yes, the 10 OEMs would constitute about EUR6 million to start with. Okay. We presume that we will reach that figure within 12 months of commencement of normal production after the prototypes have been accepted. And we also see a good traction among our marketing people abroad, not only OEM, but replacement business, because right now the companies do not want to invest a sizable amount in new machinery and equipment. So, they're more interested in continuing with the old equipment and still updating the m to some extent. Therefore, there's a good potential for replacement business that we see right now. So, considering all that factor, we are confident that if things go positively, we will be able to achieve our targets of INR 2,000 crores. And as long a s the material handling division is concerned; the margins are almost reaching close to the gear division. We expect those margins to be sustained over a period of time, because we are picking and choosing the customers, and we are picking and choosing orders where we get reasonably good margins. And therefore, though our turnover has dropped from the initial stages when we were doing contracting business, but we are focusing more on the bottom line. So, we believe that...

On the MHE side, are these margins a function of purely operatin g leverage, or in the market there is a demand supply mismatch also, which is helping us price them better?

No, it's not the mismatch. It is basically our business constitutes replacement, which is the after sales, as well as new requirements for new projects which are coming up. So, we are confident that we will be able to maintain those margins.

And just in continuation of the previous question about European OEMs, EUR6 million is the big order value possible, or this is w here we start and eventually this EUR6 million in OEM space can be a meaningfully higher number?

It is a starting figure. We believe that it will open up more avenues for us with the 10 OEM contracts that we have signed. Plus, it will also open up doors for their competitors to whom we can also deal with. So, all in all, we believe that over a period of time, this 6 million will expand to a reasonably large number.

Domestic market, any commentary for next year?

Domestic market, I believe, is holding grounds and the way things are going, I am reasonably positive that it will keep on growing at least at the 6 plus percent GDP growth, which we are expected to continue at least for another one or two years, if no t more. We are seeing a good amount of traction in our business, especially in cement and steel, and we believe that that may rub off to even various other industries.

Sure, sir. Thank you, sir. That's it from my side.

Next year, even sugar looks to be promising.

Okay. Thank you so much, sir. Thank you.

Thank you. Our next question is from the line of Garvit Goyal from Nvest Analytics. Please go ahead.

Hi. Am I audible?

Yes.

Good evening, sir, and congrats for a good set of numbers. My question is, do you see any headwinds or any slower growth rate in FY'25, given those geopolitical tensions you mentioned, including those Red Sea issues and falling order book in the gear division?

I have a different approach to those two things. I believe the worst has already happened and now things will start improving because if you look at the Russia-Ukraine war, how long can it further last? Okay. It can't last forever. Similar is the situation with the Hamas war, and if the Hamas war gets diluted, then the Red Sea issue also should get diluted. So, I am reasonably positive that over a period of time, we are already seeing the worst scenario. Hopefully, thin gs will improve.

Okay, sir. And the presentation, sorry, that is answered. One question is particularly on the railways and metro segment. As far as I remember, in Q1 FY'24 con call segment for manufacturing gears through global partnerships, we are trying to enter into a railways and metro segment. So, can you elaborate on the opportunities that the company poses in this partnership?

We are still pursuing. We have given trial components as well as products to the OEMs. However, the process is a slow process which is continuing. As of now, it is going extremely slow, but we are hopeful that we will be able to improve the scenario in the future.

Okay. And on the material handling equipment side, so have there been any orders from railways for product side like wagon tippler?

Yes, they happen to come in on a continuous basis from various clients which are from the cement power sector as well as steel. So, that is an ongoing product that we keep on selling.

Understood, sir. And on the export front, currently our export percentage is 27. So, and you have the guidance for export of 50% by 2030. So, to which major countries in the company are currently targeting?

It is difficult to say because as I told you, we have a focus more on the United States and Northern America. We also see a good traction in South America. Europe is also showing promise. So, it is difficult to say and it will vary from year-to-year. So, the intention is that you keep on selling products in various countries. And if you do not focus only on a particular region, it is better because that will help you hedge well against recession when a recession hits India. Because then your 40% to 50% of your turnover is coming in from exports. And hopefully, while India goes into recession, hopefully there are good times in other countries of the world.

Understood, sir. And on the order book front, currently we do have an open order book of somewhere around INR800 Cr. So, how do you see the order book shaping up in the upcoming quarters?

Normally, what happens is by the year end, you see an increase or a surge coming through. So, we are hopeful that the figures will improve in the last quarter.

That is it from my side, sir. All the best for the future.

Thank you.

Firstly, congratulations on OEM additions.

Thank you.

Could you tell us which are the sectors where we have added these four new OEMs?

So, these are from packaging, steel and plastic industry.

Okay. And apart fr om that, sir, if we add up Q2 and Q3 inflows this year and last year in the industrial segment, we see there is a flatness in the quantum of order inflow. And we also, if I can recall in this Q2, we mentioned that there is some spillover in order inflows. So, is it fair to assume that the growth in inflows in industrial segment this quarter Q3 is majorly on account of the spillover which is getting through in Q3?

Sorry, would it be possible for you to repeat that? Because somewhere down the line, we could not hear it properly.

Okay. Sir, if we add up Q2 and Q3 inflows in this year and the last year, it is largely flat. And in last quarter Q2 FY'24, we mentioned that there is a spillover because of delay in export order inflows. So, is it fair to assume that the order inflow in the industrial segment this quarter is on account of those orders coming in this quarter, like the spillover coming in Q3?

No.

These are fresh orders?

Yes. See, our deliveries are extremely fast. So, the time that we take to process and execute is very fast. So, you see a big consumption that takes place.

Okay. And similarly, there is no impact on revenue recognition also in this quarter due to the spillover impact?

No.

No, there is no.

Okay. Got it. Lastly, sir, on the market share in Q3 versus last year Q3 in the organized industrial years?

Generally, we don't do on a quarter -on-quarter basis. We work out our market on an annual basis only. Because what happens, some of the figures are not available on a quarter -on- quarter basis.

Got it, sir. Got it. And do we have the revenue mix between the customized and the standard product this quarter?

Thank you so much for this information. All the best.

Thank you.

Thank you. Our next question is from the line of Ashutosh Garut from Ambit GPC PMS. Please go ahead.

Yes. Hi. So, first of all, congratulations for a good set of numbers. So, my question is slightly broad-based. So, just wanted to understand -- we have se en the last whole decade as far as Elecon Engineering is concerned, the top line has hovered around 12.

We can't hear you now. I think you got disconnected.

Okay. Am I audible now?

Yes. Now, yes.

Sorry. I was saying that we have seen that the top line for Elecon Engineering has been hovering around INR 1,500-odd-crores or to INR 1,200-odd-crores for the whole decade. And now we have seen recent few quarters of good traction. So, just wanted to understand, yes, you mentioned some kind of caution in the near term because of the geopolitical aspects. But from the next three to four years perspective, do you think that we are really getting into a capex cycle which is much more sustainable? Because what we are seeing that even your operating margins have improved dramatically in the last two years. So, just wanted to have a broad sense on the next three, four years journey going ahead. And then maybe I can come on my second question.

See, if you look at it from where we started, we started with material handling and gear business used to be 50 -50. Okay. Today, the material handling business is hardly less than 20%. And the balance is gears. So, there has been a tremendous shift in the turnover coming from material handling as well as gears. And the gear has always been giving us better margins up till now. And in MHE, because of our change in strategy from contracting business to product selling, as well as the after sales market. So, we have been able to reduce the top line. But slowly and gradually, we want to ensure that the bottom line is extremely healthy, just like what you would find in gears. So, the whole transformation has taken place. And slowly and gradually over a peri od of time, we have been able to increase the turnover of both gears and material handling with high profitability. Going forward, the way we see it is the domestic traction plus our focus on exports. The export focus, our tie -ups with OEMs and other possi ble companies in Europe, as well as the United States, would give us substantial traction going forward. And we believe that we will be able to sustain the growth. There is a constant challenge which exists today in Europe and the United States, where thei r local costs are going up tremendously, and where they would like to offload various products to the companies in Asia. And that is where we see a good potential coming our way. And that is the reason we are confident that we will be able to sustain this growth over a period of time. Plus, we have not yet, as a company or as a group, looked at inorganic growth. There again, the potential also is high. Okay, because there are companies abroad, especially in the Western world, where they have issues of margi ns. The margins are negligible. And where, unless they bring in a foreign investor from the Far East or Asia, for them to sustain becomes difficult. So, this scenario is very favourable to us. And we see a great opportunity going forward.

Okay, great. So, thanks. Thanks for that elaborate answer. And just coming to the near term. So, when we are talking about INR 2,000 crores of our top line for this financial year. So, that actually, I mean, some of my fellow colleagues, I mean, I also want ed to understand the same thing. So, are we expecting a decent amount of execution in the Q4? Because at that run rate, we should be clocking in the excess of around INR600 crores kind of a top line. So, if you can just throw some colour on, is there some delay in execution from this quarter to the next quarter or any other aspect which is playing out here?

See, I always say that mechanical engineering companies are like the T20 teams, because the last five overs are very critical. Similarl y, Q4 for all the engineering companies, the turnover always jumps up to a large extent. So, that is the reason why we believe that, going forward, we will be able to do a much higher turnover in the last quarter.

Thank you, sir. Thank you and all the best.

Thank you.

Thank you. Ladies and gentlemen, in the interest of time and fairness to all participants, may we request participants to limit their questions to one or two participants. Should you have a follow up question, we would request you to rejoin the queue. Thank you. Our next question is from the line of Sunil Kothari from Unique PMS. Please go ahead.

Thanks for the opportunity. Congratulations, Prayasvin, for good numbers.

Thank you.

Sir, just one thing I wanted to understand, the way power sector is investing now, thermal power, government is very keenly want to expand coal mining, coal gasification. So, how internally we are prepared? Because we have stopped the EPC that I understand, but in terms of product or capability, our team building. So, on MHE, how you want to prepare yourself because the opportunity will be definitely there.

Yes, you are absolutely right, Sunil. The opportunities now are coming up and they are coming up in a slightly different way than before. But, you know, I completely agree with you that India will not be able to completely move away from coal and mining, especially coal mining. And therefore, the potential not only exists in mining coal , but also in the power sector. And we are tightening up our belts because, as you know, we were quite largely dependent on the power sector, especially in material handling. So, we look upon it as an opportunity and we are putting up a team together to evaluate and execute this as and when the opportunity arises.

And, sir, one more question is on this internal development on some different type of gears. We I think are developing speed gears. So, many internal things we do always, continuously. So, on those things, on the transmission side, if you can talk whatever qualitative aspect of Elecon internally, what we are doing?

Yes, Elecon is continuously developing not only new products, but also new lines for the future. High speed is one of them. Okay. Where we have internally put up an entire program where we had involved consultants and guides who helped us develop all this. We have successfully developed it. I cannot name or cannot give you the names, but we have successfu lly developed products for some very important customers. And we believe that will give us a good business going in the future. This is as long as high- speed gears are concerned. We have developed also very special kind of couplings, which we will be putting up in the market very, very soon. So, there are new aspects that we continuously keep on striving to develop and put them on the market, because that is the way to go forward. We have been doing this in the past and we will continue to do in the futur e. And some of the other, sometimes you hit a lottery with it, which means though the potential may be low to start with, but it gives you tremendous opportunities in the near future.

Right. Thank you very much and wish you good luck.

Thank you.

Thank you. Our next question is from the line of Akash from Dalal and Broacha. Please go ahead.

Yes, very good evening, sir. And that's a great set of results. So, my first question to you would be on the capacity utilization that we have operated at this quarter.

Capacity utilization is approximately 76%.

See, I would not put it as a cut -off area because today Elecon is doing almost, I would say 80%to 90% of the manufacturing in -house. So, if you do subcontracting, the potential would be even larger. Okay. But because of maintenance of quality, high standards, pl us, you know, our own capability to do things, we have been doing them in -house. But if you, you know, require a subcontracting, you can also increase the capacity to a very, very large extent. I would say 80 -85% would be a reasonable amount internally to pursue. And as I told you, subcontracting, even additional capex, which we are doing over a period of time, all this would increase the capacity.

Got it, sir. So, if you could give some colour on the capex that we are planning to do in the balance part of this year and in the next couple of years?

Sorry, can you repeat that please?

If you could give some colour on the capex that we are planning to do in the next, in the coming quarter and as well as in FY25.

This year, we already spelled out a capex of INR100 crores and we are just going to achieve the capex out of nearly INR80 crores to INR90 crores from this year. And if you see over the period of three years, we have spelled out our capex plan is INR300 crores in the three phases. INR100 crores, we already spelled out and we are doing now. Another INR100 crores and then the next INR100 crores will be based on the revenue estimation, we are just going to implement that. And further, we may require to accelerate that capex considering the long lead time for supply of equipment, which is a sophisticated and automatic equipment.

See, approximately, it works out to be INR100 crores per year capex for the next three years. This is going to be done fr om our own internal resources. There is going to be no external borrowing. Okay. As well as I told you, that would not only increase the capacity, but also would be to improve the quality and to sustain the productivity that we have today or even better.

Got it, sir. So, sir, out of the INR100 crores for this year, we have just done around INR26 crores for the nine months, right? So, balance is going to be done in a Q4?

Yes, some are already done and because some are given the advance to the supplier, where the machines are expected the delivery of that in this Q4 and some of them are in the next year Q1. Total, we already spent INR58 crores.

Got it. And one more question.

We request you to rejoin the question queue for more questions. Thank you. Our next question is from the line of Gunjan Kabra from Niveshaay. Please go ahead.

Ma'am, I am sorry to interrupt. May I request you to use your handset, please?

Yes. Is it fine now?

Yes, ma'am.

Yes, much better, much better.

Yes. Thanks. So, I wanted to understand that for the next year, with the current demand environment and the inflow that we see, can we expect around 20%-25% of the growth that we have been doing since last one year, one, two years and we can continue doing that with th e current capacity and the demand scenario? So, what's your take on that?

See, because of the geopolitical situation, we are assessing it very minutely and thus, we normally do this exercise in the last quarter. So, this exercise is, it wi ll be done shortly and we will be coming up with our projections for the next year and the tentative projections for the next to next year in the next con-call that we do in the last quarter, after the last quarter.

Further to add, because th is is the general election period that we are aware and considering the other geopolitical scenarios and general election in India, some, you know, the process will be slowed down administratively. We are just putting the, you know, we are fine tuning the numbers and we'll just work out with the, you know, more accurate number in our Q4 earnings call.

Okay. So, next quarter would be a better time for you to guide us.

Correct.

So, next question I had is, how much is the after -sales service in the MHE division? So, suppose if you're doing around INR200 crores, INR250 crores in a year on the MHE side in terms of revenue, then what's the after-sales that we have every year? What's the percentage of that?

In MHE, we have, you know, if you see nine months, we have 39% is from after-market.

So, 39% is after-market, but I'm asking if some, if suppose, for example, if you execute around INR250 crores of the revenue, if you do around INR250 crores of revenue in the MHE division, then how much of that revenue is after -sales that, you know, percentage of the total order that we execute comes in form of after -sales service? Is that a parameter to understand is what I wanted to understand?

Because material handling equipment, most of the things are required for the scheduled maintenance kind of activities, and we cannot anticipate what it will be? If we expect only purely on the service side, it will be 50% of the revenue over the life of the product will be after-sales market.

And just last question, I always ask you this, that, you know, in defence side, we haven't received on the marine gears because we haven't entered that. So, defence segment as a whole in the industry is doing well. So, can you expect the forecast, the number to inflow in the next year, or how do you see it, the defence segment? And also, are there any sectors where we have a high margin, where we can demand higher margin, maybe, you know, in steel or cement, or is it the same in all across the sector?

The margins vary from project to project and from customer to customer. So, it's very difficult to give you an answer on that. As long as marine is concerned, marine orders come in spots, which means they come and then after a while, there is a gap and then again they turn up. But we are hopeful that a reasonable good quantity should be expected in the next year.

Okay. And of the current order book, how much is to customize and h ow much is standard orders? Can we have a highlight on that?

Yes, 55% is coming from customized gears and the balance is coming from catalogue gears.

No, that you have done in this quarter. I'm asking for the current order bo ok of INR525 crores that we have right now. So, is it the same number that is there or is it different?

It would vary slightly. Yes, 5% is the variation that one expects from quarter-on-quarter. There could be fluctuations of those. It also depends on how much of the orders after receipts are produced in that particular quarter.

Okay. Got it. Thank you so much and good luck to you and the team.

Thank you. Thank you. Our next question is from the line of Deepak Purswani from SVAN Investments. Please go ahead.

Good evening, sir. And congratulations for good set of numbers. I just wanted to understand in terms of the export market. If you can show some light in terms of the growth in the nine months, because if I'm looking into the performance between the console and standalone in the nine months, the difference between them in terms of revenue is INR258 crores, which is 8% year on year. So, how should we look into this number in terms of the export market? I think at the beginning of the year, we were targeting somewhere close to INR500 odd crores. So, are we on track to achieve this number?

Yes, we are on track to achieve this.

So, we are expected to know some in two or three, it was due to the due to holiday period, both in India as well as overseas. And for the escalation of Israel and Ha mas, which has impacted the transport, we are expected that in Q4, we are able to achieve the target, what we have spelled out.

Growth for the export market? You want the nine months figures? Export figures for the nine months, is that what you want?

Yes.

So, we have achieved INR338 crores of our overseas business plus export from India . Again, sir, last year we did INR326 crores during the same nine months period.

And, sir, in terms of the order intake for the export market? In the current order book, how much is the order intake for the export market?

INR80 crores.

Okay. Thank you. Thanks a lot.

Thank you. Our next question is from the line of Naysar Parikh from Native Capital. Please go ahead.

Yes. Hi. Thanks for your question. The first one was…

Sir, may I request you to use your handset, please? You're not audible. Yes.

Sorry. Is this better?

Yes, sir. Please go ahead.

Okay. So, directionally, you know, we are at 25% EBITDA margin, which is obviously the highest for us. So, going forward, how do you see these margins? Do you think that, you know, we've peaked and we'll reinvest back? Or is there further scope to go up? Or how should we look at the margin trajectory?

I think between 23% to 24% is a su stainable margin going forward. 23% minimum is a sustainable margin going forward for us. And we can, you know, optimize this to 24%.

Okay. Got it. And second, just in terms of, you know, our capex plans, I think you mentioned INR100 crores each. But other than that, do we have to consider a larger capex plan, you know, in the next, taking a three, four-year horizon? And how do we think of that?

We have no other plans except consuming this INR100 crores each for the next three years.

Okay. And in that capacity, what, like, at what capacity would that leave us, generally, in terms of revenue or something?

We are expected that with this, it should take us to at least INR 2,500 crores. And if r equired, if additional resources are required, we can even subcontract.

Thank you. Ladies and gentlemen, due to time constraints, this will be the last question. Our last question is from the line of Yashi Lohia from the Microcap Minute. Please go ahead.

Thank you for the opportunity. So, I just had two questions. So basically, the recent orders that you have got from the…

May I request you to use your handset please.

Am I, is it better now?

Yes, ma'am. Please go ahead.

Yes. So, thank you for the opportunity. I wanted to ask you the recent orders that we have got from MHE division. INR134 crores from the steel sector and INR39 crores from the cement. So, does our current order book include these or when are we expecting it to realize?

No, that last order which we received in January, which is of INR83 crores, is not included in our order book, open order book portion of INR791 crores as of 31st December 2023. If we include that, my total order book portion will be INR874 crores.

Okay. And so, when are we expecting it to realize?

When are we expected to? Sorry, can you repeat that again, please?

When are we expecting it to realize?

Realize.

When can we expect --, yes.

So, it will be realized by Q3 next year.

Okay. And like if I see the gross profit margins this quarter, it has decreased by 110 basis points year-on-year. So, is this because of the -- Can you share some light on why had this happened?

It is because of the product mix. Because we ar e -- due to change the product mix, 100 to 150 basis point will be always a plus or minus. We always get the guidance on the average out based on the annualized basis.

It will even out before the end of the next quarter. It is just that it depends on what orders you have executed and what equipment’s are being manufactured, which varies the margins.

Okay. Thank you so much.

Thank you for participating in this call and expressing your interest in our company. We are strategically positioned to leverage opportunities in the domestic market and are actively exploring avenues internationally. As we progress on our path, we aim to reach new heights and achieve significant milestones. If you have further questions, please feel free to reach out to SGA, our Investor Relations firm, or our CFO, Mr. Naras imhan Raghunathan. Your participation is greatly valued. Thank you.

Thank you. On behalf of Elecon Engineering Company Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.