Full Transcript of the Q3FY20 Earnings Call, Elgi Equipment

Opening Remarks

I know the results on paper look quite gloomy. But I’m sure that with my explanation at the end, you will realize that the story is not so bad. When I’ll take you through the reconciliation of the EBITDA between this quarter and the prior year quarter.

Starting with sales, we did 463 crores at a consolidated level, as opposed to about 470 crores last year. Against the contribution margin of 39.4%, we have improved it to 40.6%. So, taking these two sales numbers the EBITDA, assuming fixed costs and people costs are at the same level as last year, our EBITDA should have been about 530 million, 51 crores against that it’s approximately 30 crores. So, I am going to take you through a reconciliation for almost this 22 crores of reduction in EBITDA. So, the biggest cost that has hit on our EBITDA is people cost.

And I would like to dissect the people cost and explain to you, out of the total people cost as you know as I’ve explained in my past calls, we have embarked on a strategic initiative in Europe, towards that we have been building our team in Europe. I would like to now step back and give you a little bit of visibility into what our initiative in Europe is: We are growing through an organic growth model in Europe.

Our plan is to add close to 70 people to our team in Europe and we are entering all the markets in Europe except Germany and towards that end over a three year period including, starting from 2021 including this year 2021, 21, 22 and 22, 23 our loss that we expect out of Europe is close to about  Euro 20 million that converts to about 160 crores. Now against this investment I call this loss and investment, against this investment of Euro 20 million approximately 160 crores, we expect a top line in the fifth year of close to about Euro 75 million or close to Euro 80 million.

Now, if I look at this growth and compare it with an opportunity which is an Euro 80 million inorganic opportunity. At the current valuation, roughly similar to what we did for Michigan Air. The price that we would have had to pay would be about close to anywhere between 60 to Euro 80 million. Now against that our investment is going to be Euro 20 million and in the fifth year, by the end of the fifth year, we would have recovered with investment. And this plan has been done with high levels of diligence, right down to each market at each distribution level.

So therefore, we are reasonably confident considering the success that we have had in Italy, that we will be able to execute all this plan. So, this is the context of our larger European plan. We’ll talk about this later. Now, if I funnel that plan into the into the Q3 results, we have had close to 55 million in people cost, which is additional specific for the initiative in Europe. In addition to this 55 million, we have had close to about 100 million of additional people cost and this has been primarily one of the biggest challenges, biggest investments in people has been in India to the extent of almost 35 million. And this we did last year, in anticipation of our continued growth of the economy. We have already started working towards rationalizing these costs. And I’m very confident that in 2021 we won’t see this. I don’t anticipate these costs to be continuing on the same trajectory for 2021. But this is an investment we made anticipating that we will be growing India to the extent of almost 18% but what is actually happened is a de-growth to the extent of between 4 to 7%.

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