Key takeaways of the call

Sales in India in quarter ended June 2017 grew marginally and the growth was subdued largely due to the introduction of the GST. Customers in some specific segments held back purchase decisions on expectation that prices would come down after introduction of GST. This has impacted the margins to an extent.

The performance of compressor division was satisfactory in most international markets and there are visible signs of improvement across the world. On very low base the sales growth of Elgi branded product in key markets was in high double digits in Q1FY18. General economic revival in key markets such as US, Europe, Australia have resulted in recovery in capital investment in these markets and contributed to the demand growth for compressors and the company.

The automotive division of the company has marginally de-grown during the quarter compared the same period last year on account of GST. The division is well poised to seize any opportunity that may come in the near future when demand picks up post stabilization of the GST.

The company's growth though is stronger in select key overseas markets on small base the growth in Indian market is crucial for the company as its market share is relatively larger. So Indian economy has to do well for stronger growth in India. The domestic business is expected to stabilize with the GST related disruptions settling down by the second quarter.

Globally the company can't focus on all where it has presence, the company wants to focus and put its greater resource on markets that is big and have sizeable presence. The bigger market comes about 15-16 and the company can't focus on all 15-16 but it intends to focus on handful of 3-4 markets. The company is in middle of a study that is studying what market to focus on. This study will be completed by Sep 2017.

Introduction of new ERP system has taken more time to settle down than initial expectation. Instead of earlier expectation of one week it took about 7 weeks to settle down. This has cost about Rs 5-6 crore of business.

With rollout of GST the major impact was in dealer based business. In July 2017 there was dip in sales especially those products that has MRP stickers on it. Further there is confusion in applicability of tax rate for supplies to railways. Chitaranjan Locomotives claims all supplies to locomotives come under the heading of "Parts supplied to the Railways" and thus attract lower GST rate of 5%. But the tax experts advices the industry is covered at higher tax rate as there is specific rate for compressors and that only applies. This kind of teething issues is progressively coming down and there will be greater clarity going forward in case of GST.

April 2017 was hamstrung by ERP issue but the compressor business has bounced back from that issue in subsequent months of May & June 2017. But the ATS business has not bounced back as the customers are not sure of the capex plans. July was good for ATS biz. But things are back to normal now.

All products of Rotair are doing well. US except for medical biz all are doing well. Brazil continues to be a challenge largely as its economy continues to be weak but the company is trying to minimizing the losses and bounce back when economy rebounds. Middle East market continues to be challenging. Far East is good overall. China continues to sustain at levels as planned.

GST – impact varies from state to state. Increase in net cost to customers is marginal 3.4% but now everything is creditable. Earlier in case of trading parts, now allowed to warehouse, extending the benefit to distributors and customers. Net difference is probably 1%.

Revenue of overseas business has not growth in mid twenties as arrived in deducting standalone revenue from consolidated compressor business revenue. The inter-company sales was adjusted in consolidated figures but that is part of

Consolidated sales grew by 4.5% with compressor business register a growth of 6% plus. However as significant reduction in ATS business has moderated the overall growth.

EBITDA was suppose to be Rs 39.5 crore as against actual of about Rs 32.3 crore. The company has lost about Rs 6 crore odd at material cost level largely due to product mix. Q1FY18 had more of project type sales than usual and that will get corrected going forward. Manpower cost was higher by about Rs 7.1 crore and that is largely due to salary revision, increased manpower and VRS.

The company will reset the salary in line with quality of life cycle once in 5 years for blue color employees. It has also recruited graduate Engineers and Management Trainees and that increased the staff cost. VRS was introduces and 25 peoples went out largely in blue color levels. Expect manpower cost to go up as the company has to retain manpower but the sales growth will take care. All other cost heads are pretty much in control.

Tax rate has gone up as the weightage for R&D have been reduced to 100% from 200%.

Dividend paid by Elgi ATS is about Rs 5 crore in Q1FY18.