ELECONNSEFinancial Year 2022-23November 04, 2022

Elecon Engineering Company Limited

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Key numbers — 40 extracted

27.7%

l quarters. Discussing the results at a standalone level, the total operating income increased by 27.7% year-on-year to Rs.305 Crores compared to Rs.238.8 Crores in the corresponding quarter of the pre

Rs.305 Crore

the results at a standalone level, the total operating income increased by 27.7% year-on-year to Rs.305 Crores compared to Rs.238.8 Crores in the corresponding quarter of the previous year. The EBITDA on abs

Rs.238.8 Crore

ne level, the total operating income increased by 27.7% year-on-year to Rs.305 Crores compared to Rs.238.8 Crores in the corresponding quarter of the previous year. The EBITDA on absolute basis increased by 4

47.6%

es in the corresponding quarter of the previous year. The EBITDA on absolute basis increased by 47.6% year-on-year to Rs.75.2 Crores as compared to Rs.50.9 Crores during the corresponding period of t

Rs.75.2 Crore

ing quarter of the previous year. The EBITDA on absolute basis increased by 47.6% year-on-year to Rs.75.2 Crores as compared to Rs.50.9 Crores during the corresponding period of the previous year. This transla

Rs.50.9 Crore

ar. The EBITDA on absolute basis increased by 47.6% year-on-year to Rs.75.2 Crores as compared to Rs.50.9 Crores during the corresponding period of the previous year. This translates to EBITDA margin of 24.6%

24.6%

Crores during the corresponding period of the previous year. This translates to EBITDA margin of 24.6% in Q2 FY2023 compared to 21.3% in Q2 FY2022. We closed this quarter with a net profit of Rs.47.

21.3%

g period of the previous year. This translates to EBITDA margin of 24.6% in Q2 FY2023 compared to 21.3% in Q2 FY2022. We closed this quarter with a net profit of Rs.47.6 Crores as compared to Rs.23.1 C

Rs.47.6 Crore

24.6% in Q2 FY2023 compared to 21.3% in Q2 FY2022. We closed this quarter with a net profit of Rs.47.6 Crores as compared to Rs.23.1 Crores during the corresponding period of the previous year reflecting an

Rs.23.1 Crore

to 21.3% in Q2 FY2022. We closed this quarter with a net profit of Rs.47.6 Crores as compared to Rs.23.1 Crores during the corresponding period of the previous year reflecting an increase of 106.1%. Let me

106.1%

to Rs.23.1 Crores during the corresponding period of the previous year reflecting an increase of 106.1%. Let me highlight some key points related to the results. The gear business witnessed strong de

23.7%

days. Coming to the consolidated financials of the Q2 FY2023, the operating revenues increased by 23.7% year-on-year to Rs.388.6 Crores as compared to Rs.314 Crores in Q2 FY2022. EBITDA increas

Guidance — 20 items

Prayasvin Patel

opening

“The MHE business continued to witness consistent improvement and is expected to keep up the positive momentum going forward.”

Prayasvin Patel

opening

“IMF has recently cut India’s FY2023 GDP forecast by 60-basis points to 6.8% and also reduced US GDP growth target for the year to 1.6% on the back of high inflation, rising interest rate and subdued external demand against a backdrop of ongoing war between Russia and Ukraine.”

Prayasvin Patel

opening

“Despite these external challenges, we retain our standalone and consolidated revenue target of Rs.1500 Crores and Rs.2000 Crores respectively for FY2024.”

Subham Agarwal

“Okay and finally on the MHE division, are we expected to improve the performance on this division going forward or we will maintain given the guidance?”

Prayasvin Patel

“No, absolutely, because for two reasons, we want to also increase the turnover going forward apart from that there are other measures that we are taking whereby the performance would further improve.”

Prayasvin Patel

“We are committed to Rs.100 Crores of capex which is from our internal cash generation and out of which a sizeable amount is going toward solar plant installation which will generate electricity for us and we are confident that we will be generating 70% of our requirement from renewable energy.”

Prayasvin Patel

“As you know, the RBI has increased the interest rates going forward, we need to wait and watch and see the situation how it pans out especially for the projects which are on hand, but I believe that basically people who have announced and who are committed to projects, they may consider a slight increase in cost because of the higher interest rates, but it should not have an impact.”

Gunjan Kabra

“Okay, Sir also monthly scale up the MHE division, our margins are continuously increasing, so monthly scale up what kind of margin can we expect to stabilize in this segment?”

Prayasvin Patel

“We are expected to improve our margins to about 15% to 17% going forward especially as we increase our turnover in that area to approximately Rs.400 Crores.”

Gunjan Kabra

“Last quarter, the gross margin stood at around 50%, if we exclude that Rs.7 Crores of settlements with the vendor which happened last quarter, so why is that the vendor raw material prices have decreased, our gross margin this quarter has decreased, because I understand that there is a short term cycle project where we take a high size easily it is not like very big thing for us, so why has the gross margins and how will it play out in this quarter?”

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Risks & concerns — 11 flagged

Our relentless focus on bringing down receivables has led to decline in working capital days.

— Prayasvin Patel

The company is monitoring the impact of inflation and slowdown in the global economy and is taking necessary measures to mitigate the impact of the same.

— Prayasvin Patel

Right now, it is very difficult to ascertain because the potential is tremendous.

— Prayasvin Patel

There will be a time when it would be accelerated and it would jump substantially, but as of now it is difficult to say when that would happen.

— Prayasvin Patel

As I told you it would depend on the product mix that we ultimately are able to sell out, okay, so it is very difficult to tell you, but there is a constant monitoring which goes on to see to it that we do not go below the margins that we have today, so there is a lot of balancing factor that we do; however, if the margins improve we are not going to let go of that opportunity.

— Prayasvin Patel

So basically, based on the way the Inquiry levels are coming through, we believe that reaching those kinds of numbers would not be difficult, and today we have been in this business for the last 70 odd years and therefore we have a reputation for our products.

— Prayasvin Patel

This is a very generalized statement, because you know these going to development stage and quite often they get scrapped and then there is the new development that takes place so it is very difficult to generalize but this is what we believe to could happen.

— Prayasvin Patel

Yes in last three to six months whatever you order, the cost and due to which there are some corrections in the input cost, particular steel price there may be some improvement but considering the product mix it will be difficult to spell out of what the cost ultimately it will drawn out because the orders have be executed in next three to six months.

— Kamlesh Shah

It would be difficult to say to tell you honestly I also do not know because we have so many countries so many areas that we look into so every marketing person would have those figures which we need to accumulate but what I can tell you is that the Germans has been dominant because let us say if you are talking about bottling plant then the manufacturer of the bottling plant is German, the gear box manufacturer is German so German to German the contracts are very strong.

— Prayasvin Patel

So it is very difficult for us to give you that answer.

— Prayasvin Patel

So as and when they get evaluated and are distributed they come into the financials quite often it is difficult to estimate otherwise then there is a provision which is also being done.

— Prayasvin Patel

Q&A — 20 exchanges

Thank you for the opportunity and first of all congratulation on a very good set of number Sir. My first question is related to the new product development that we have mentioned in our presentation, planetary gear and we have also mentioned that this will help in import substitution, so I just wanted to understand what is the market size and what are the application of such product and how much this can bring in terms of revenue?

Prayasvin Patel

Planetary gears are gears which are used in practically all kinds of industries we specialize in, We develop these gears especially in the larger sizes which go into cement plants, they go into windmills, they go into coal handling plants, sugar, and all kinds of sectors. You would be proud to know that apart from developing the special type of planetary gear unit for the cement, we have also developed many applications and in some of the cases we have even come up with the fourth-generation optimized gears which are extremely competitive, light weight and are able to do the work in a very ext

Congratulations for very, very good set of numbers. My first question is that how much was that increase in top line contributed the change in product mix, I mean how much was contributed by large gearbox and small gearbox in this quarter particularly?

Prayasvin Patel

The quantum of turnover from large gearboxes and small gearboxes? Yes. I would say 60% would come from small to medium and 40% would be coming from the large gearbox, this is volume wise may not be turnover wise. What should be the turnover wise? I would constitute almost 70 coming from the larger units and 30 from the smaller units, small to medium units. Okay, Sir, also when we say that our gear order book stands at Rs.602 Crores this quarter and the same was around Rs.515 Crores in the previous quarter, so if you can split from which sector are we receiving orders right now and secondly, if

Thanks for taking my question and congratulations on good number Sir. Regarding this target for exports being 50% in 2030, trying to understand what was the number in H1 and how do you see like next two to three years, how the ramp up would happen there and also some indication of initiatives you are taking and how confident you are there?

Prayasvin Patel

As I had mentioned earlier, we are trying to increase our resources, deploy more resourcing especially manpower in the marketing area. We are trying to pursue OEMs as well as projects in these countries especially where we are strategically located right now and we have also started moving into South America from United States and into Canada and we are intending to put up a robust dealership network even in South America as well as in Canada which would further enhance our business, so there is a complete strategy which is being deployed and it would help us emphasize on the global branding,

Good morning and congrats for a good set of numbers. Sir, my first question is now to achieve this Rs.2000 Crores of revenue, the growth is highest at 35%, so just wanted to understand would you be becoming aggressive in taking orders by cutting your price to achieve that kind of a growth?

Prayasvin Patel

We are interested in the bottom-line and not the topline and if you realize in material handing we have actually reduced our turnover to see to it that we become more profitable and going forward that is what we would do, but I have to also tell you that because we have one of the widest product ranges in the market and in the world, we have an advantage over the competition, because we can sell wherever there is a demand for a particular kind of application, so that is where we score over the others and that is how we believe we should be able to sustain our margins going forward. So the ques

Good morning Sir and congratulations on such a strong execution. Sir, my first question is on the capex that we have announced of Rs.100 Crores, you mentioned in the presentation, this is given the strong revenue growth that we see and the long lead time for some machinery, so just to clarify this over and above Rs.100 Crores that we have announced earlier for solar plant?

Prayasvin Patel

Sorry, Rs.100 Crores that we had announced for? Solar, for renewable that we had announced I think a couple of quarters back? It is all inclusive Rs.100 Crores out of which a sizable amount is going toward solar and the balance is going towards balancing equipment that we require in the plant. Capex for solar is Rs.15 Crores approximately. Okay, got it and Sir, second question is you have mentioned in the call today that we expect to double our MHEs run rate, our stance in MHE used to be only do products and may be some spares and services, etc, so to go from this Rs.200 Crores revenue to Rs.4

Sir, any write back, have you booked in this quarter by any chance and any scope for write back on your retention or any earlier provision taken which needs to be written back either in this quarter or half yearly, just to get a more clearer picture on the margin?

Kamlesh Shah

There is no write back or any kind of one time kind of any write back or other income also in this quarter or even in the half year also. Did you give out Rs.2000 Crores revenue number for FY2024 or it is just explanation number? We already gave out number that is our guidance, so we are working towards the same. So it is Rs.1500 Crores for 2023 and Rs.2000 Crores for 2024 and 22% margin. Yes. In this, the gear business has seen about 24% margin which is the highest, usually our margins is between 18% and 21%, is there any seeing in the product mix this quarter which needs to be highlighted fo

Good morning Sir and congratulations on good set of numbers. In the presentation in slide #23 we have mentioned about as an open order book on upwards of 700 Cr so just wanted to understand the open order book what do you mean?

Kamlesh Shah

By open order we mean that the pending order for execution we got the order which are under execution that is what we meant. Then in terms of our utilization wanted to understand the way we are seeing the demand progressing, would we be able to cater to the excess demand or we would have to select projects on which we want to deliver and some projects we let go since our capacities would almost be full. No, as I told you earlier also that we are operating at about close to 60%, 65% of our capacity utilization and this is without hardly doing any subcontracting work. If we further subcontract o

Thank you Sir. Sir you mentioned that the current utilization of our factory is around 65% so to what extent we can go whether we can go up to 85%, 95% utilization feasible.

Prayasvin Patel

See normally in an industrial sector I would say it would be peaking at anywhere between 80% to 85%. And this is based on single shift basis right sir. No it is based on three shift basis. So on three shift basis you are working on 65% utilization. Yes, between 60% and 65%. And you mentioned that we are planning to be looking into development of planetary gears, so the differential gear box comes into that domain or is it something different. No, it does not come into that. Differential gear box is where, it is a very complex gear unit and that is not what this is, this is where the arrangemen

Thank you so much for taking my question. Sir I see that the defence industry is waking up and this termed as a sunrise industry in India. Is the opportunity for Elecon equally in line with this particular size like is it equally big, how big can this be in the revenue terms for say in the next five years.

Prayasvin Patel

I would put at this way that within the growth we have put in a team of people who are exploring not only from the marine side but also from the army and the air force apart from that we are also looking at auxiliary equipments which are being provided to the defence sector and we are exploring these possibilities. We are keen that we look into niche areas whereby they are equipments or component supplies which are hardly specialized because we have very high precession machine tools in the entire group. So, we are looking for that kind of work and which I am sure that if we find the right kin

Thank you for the opportunity. What is the export revenues for the quarter?

Prayasvin Patel

It has been 32 Crores. Sir the export revenue has not yet picked up but you are seeing cash in that side. Can you share some more color on how you are seeing this export scaling up in the next few quarters or the inquiries that we get? See we have large inquiries on hand especially in the UK and United States; however because of the war that came in as well as the finance the countries are going through, a high level of inflation and the interest rates have gone up, the customers have become a bit slow in placing orders and we believe just after Christmas a lot of orders would get finalized. A

Thank you for the opportunity, Sir. Most of my questions has been answered. I have probably two questions. So, you mentioned we are operating at 60%, 65% currently and if we take a contract project it can further add to our revenues so do we have any plans to do such kind of business here.

Prayasvin Patel

See what I said was that our utilization of the existing plant is close to 60%, 65% on a three shift basis and there is a potential to go up to almost 80%, 85%. Apart from that there is a possibility of subcontracting certain components thereby it would further get enhanced. Does that answer your query? Yes, thank you and sir my second question is you mentioned we are looking to book revenues in MHE division segment. So, what kind of internal measures we are taking to like reach this 400 kind of revenue can you throw some color on that? See as I told you our intention is basically to sell prod

Thank you for the opportunity and congrats on a great set of numbers. So, I have two questions, one is going back to defence again do you have a breakdown of how much the defence segment contributes to your topline and where you see this rising over the next three, four years.

Prayasvin Patel

See in the defence sector especially the marine, Indian Navy is our largest customer apart from that we have Coastguard. They send us inquires for a particular project which is a fleet of ships which could be two, three, four, five, six so based on that we quote and if we are found competitive we get an order so it is very project oriented, up till now there were times when the demand would come in I agree three, four, five years which means you would have a turnover coming in from the marine sector and then it would go down to zero levels and then after two, three, four, five years it would a

Sir good afternoon congratulations on a very interesting set of numbers. Two, three questions. One is in terms of input cost what has been the extent of correction and to what extent does that reflects in your order backlog currently.

Kamlesh Shah

Our input cost particular raw materials will be in the same range where we are recently in Q2 so that is how we are monitoring our input cost of raw material continuously. What has been the correction will say last six, nine months sir or has there been no major change. Yes in last three to six months whatever you order, the cost and due to which there are some corrections in the input cost, particular steel price there may be some improvement but considering the product mix it will be difficult to spell out of what the cost ultimately it will drawn out because the orders have be executed in n

Thank you for taking my question. My first one is can you help with the mix between customized and standard gear boxes in this first half and also what is the mix between gear boxes of new plants versus the order placement of some of your old gear boxes.

Kamlesh Shah

The customized gear box which we say as our engineering product EP is generally consisting of 35% to 40% in this half year so which is more precise it is 37% which is there in this time and balance is catalog product which is called standard product. And between new and replacement. I do not have a figure about the new and replacement which I have to work it out. I can forward this through Binay. Yes sure, thank you, and my second question is in the past you had mentioned with regard to your exports business that you are exploring some frontend acquisitions to kind of get you closer to the cus

My question is regarding the inquiry level if you could provide a number as to what kind of increase, we have seen in inquiry level say as compared to previous year.

Kamlesh Shah

Inquiry level in the sense can you just give something detailed so that it will be easy for us to answer. What do you mean by Inquiry level? Sir the kind of inquires that we are getting, let us say last year we were getting X number of inquiries versus this year we are getting Y number of inquiries. So, what kind of increase we have seen? Generally, we do not work out a number of inquiry, generally this kind of information has already gone with our marketing department because sometimes how to spell out our inquiries, what do we mean by inquiry, that is what we are just comparing ourself with.

Most of my questions has been answered. I just wanted your views about how the domestic competition is shaping up. I mean you are growing at a pretty healthy pace so just wanted to know what kind of market share gain is present in this kind of growth rate for us on domestic front, on export fronts you have elaborated enough on how you are competitive, and you would be gaining market share but I wanted your views on the domestic market share gains.

Kamlesh Shah

Our domestic market share in the organized sector, because we are monitoring ourself through an organized sector which is ranging at 34% to 36%, that is where we are in the domestic market and so far as how we are placing out considering the numbers because our technology, our infrastructures and continued improvement on our existing product through engineering process and our R&D facility, these are our key domain through which we are positioning ourselves. The other thing is that we have the largest market share, and we are continuously monitoring to see to it that we do not lose market shar

Thank you for the opportunity. First question recently the government came with the draft policy for repowering old and low performing wind turbines. So, we do supply gear boxes for wind turbine so who are our clients for these gear boxes.

Prayasvin Patel

See we have been supplying gear boxes for the wind turbine in the past however we have slowly and gradually exited that sector especially because of the fact that it is an area which goes through wide fluctuations of demand based on incentives provided by the government. So we have exited that however our service centers that we have are taking up this and are able to refurbish gear boxes of the competition as well as our own which have been supplied in the past and that is where we score because our service centers are more or less closely located where the wind is very conducive and there ar

Thank you for the opportunity again. Sir one thing I wanted to understand according to the industry working so if there is a Capex announced by company in September 2022 suppose the plant is expected to commence in September 2024 so in this time period where this Elecon receives the order so wanted to judgment in which time period the company receive orders since the time line of the Capex announced by any user company usually like two to three years.

Prayasvin Patel

It will depend on industries which industry it is going to and it will also depend upon the kind of product that they order on us as I told you our catalog gears we are able to deliver within highest or the longest delivery would be four to six weeks for engineered products it would be anywhere ranging from four to eight months. So depending upon the convenience of the customer as to when he needs it, how he needs it, whether his site is ready to receive the gear boxes when is he going to be in a position to pay us based on all this key places an order on us and we supply. So it is very diffic

Sir just a bookkeeping question have you factored in this 200 Crores kind of revenue from maybe in your FY2024 guidance of 2000 Crores.

Prayasvin Patel

No. In your order inflows do you include sales of your standard or the catalog gears also which are basically shelf kind of product when you give the order inflow numbers. Yes. And lastly can you repeat your market share number sir. Our market share in the organized sector is ranging 34% to 36%. And what is the size I mean the share of organized to the overall market. Nearly 2000 Crores. No, 2000 is the organized market right. Yes, organized. And what is the size of the total industry including unorganized. Unorganized as they are not available but with rough idea not the ballpark maybe 2500 t

Thank you all for showing so much of interest in the company I would say that we have been performing consistently this particular quarter also our results have been fairly robust and strong and we are seeing that we would be able to perform on this basis on a continuous basis even by the end of the year and going next year. So this is where we are feeling like we have the confidence and I would say that our endeavor is always to continuously improve our performance which we are trying to do on a sustainable basis. Thank you all for showing this interest and if there are any other queries that

Management

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Speaking time

Prayasvin Patel

Kamlesh Shah

Moderator

Gunjan Kabra

Ankit Babel

Subham Agarwal

Pritesh Chheda

Karthi

Sanjay Kumar

Mahesh Bendre

Opening remarks

Himanshu Yadav

Thanks Mike. Good morning everyone. On behalf of Edelweiss Wealth Research, I welcome you all to Q2 FY2023 Concall of Elecon Engineering Company Limited. Please note the results have been mailed out to you and you can also assess the same on company website as well as on the exchanges. Before we proceed, let me remind you that the discussion may contain forward-looking statements that may involve known or unknown risks, uncertainties in the sectors. It must be viewed in conjunction with business risks that could cause a future result performance or achievement to defer significantly from what is expressed or implied by such forward-looking statements. To take us through the results of this quarter and answer your questions, we have with us the management of Elecon represented by Mr. Prayasvin Patel, CMD, Mr. Kamlesh Shah, Group CFO and Mr. Narasimhan Raghunathan, CFO. Mr. Prayasvin will give a brief overview of the quarter gone past and then we will open the floor for Q&A session. With

Prayasvin Patel

Thank you. Good Morning everyone. Ladies and gentlemen, a warm welcome to our Q2 and H1 FY2023 Conference Call. We are pleased to report yet another quarter of strong financial performance as we continue to deliver consistent improvement in our results over the last several quarters. Discussing the results at a standalone level, the total operating income increased by 27.7% year-on-year to Rs.305 Crores compared to Rs.238.8 Crores in the corresponding quarter of the previous year. The EBITDA on absolute basis increased by 47.6% year-on-year to Rs.75.2 Crores as compared to Rs.50.9 Crores during the corresponding period of the previous year. This translates to EBITDA margin of 24.6% in Q2 FY2023 compared to 21.3% in Q2 FY2022. We closed this quarter with a net profit of Rs.47.6 Crores as compared to Rs.23.1 Crores during the corresponding period of the previous year reflecting an increase of 106.1%. Let me highlight some key points related to the results. The gear business witnessed str

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