ELGI Equipments released the transcript for its Q3 FY25-26 earnings call, where management confirmed sales grew by 18%, though EBITDA was impacted by employee and fixed costs due to restructuring and strategic investments. Key updates included strong growth across geographies except Southeast Asia, progress on cost optimization in Europe, and successful mitigation of the 50% US tariff impact via price increases and internal efficiency measures. The company remains cautiously optimistic about the Indian economy.
Q3 FY25-26 Performance Overview
Management highlighted that while sales grew by 18%, EBITDA lagged expectations, primarily attributed to increased employee costs (driven by global increments and reorganization costs in Europe) and other fixed expenses. The company confirmed that gross profit margin remains strong. A significant focus this quarter involved investing 1.5% to 2% of top line into go-to-market digitization, cost optimization, and finance transformation initiatives.
Geographical Sales Analysis
Revenue growth was observed across all geographies except Southeast Asia, where new leadership has been appointed to revitalize presence over the next 2 to 3 years. In contrast, the US business performed well across industrial, medical, and portable segments, despite challenges in owned distribution operations (Pattons and Michigan Air). Management expressed confidence that Q4 performance will be better than Q3.
US Tariff Mitigation Success
Regarding the US tariff, management confirmed they successfully more than recovered the impact of the 50% tariff through an outstanding effort to compensate for the tax. This involved price increases, including a forthcoming 6% to 7% realization gain expected over the next 6 to 7 months as older inventory bleeds out. The company views the tariff situation as a positive opportunity, navigating it to emerge “very, very strong.”
European Operations Restructuring
European operations continue to be a challenge, particularly due to tariffs on portable compressors shipped to the US. The focus has shifted from a growth-based P&L to a cost-managed P&L, with a significant cost optimization program underway. Management confirmed they have moved past the break-even milestone, and while Q3 and Q4 will reflect reorganization costs, the cost structure for FY27 is expected to be significantly lower, targeting profitability, not just break-even.
Inventory Management and Cash Position
Cash flow remains strong, but inventory levels globally have been a challenge, partly due to salespeople’s historical optimism. The current target is to reduce finished goods inventory from 6 months down to a normal level of 3 to 3.5 months by Q3 of next year. Management is implementing a new inventory planning system across subsidiaries to gain better control.
Product Strategy Updates
The launch of the low-cost screw compressor range, branded as Demand=Match for stabilizers, is key. The stabilizer product has seen outstanding customer response, achieving energy efficiency gains of 6% to 17%. The launch of the new compressor range might slip slightly from Q1 to the second quarter of the next fiscal year. Furthermore, motor technology remains a strategic pillar, involving investment to reduce dependence on China and developing a new motor design that does not use permanent magnets while maintaining efficiency.
Domestic Market Outlook and Competition
Management believes the steady-state growth for the Indian market will be low double digit, contingent upon stable global conditions regarding tariffs and conflicts. Regarding Chinese competition, imports are estimated to be 25% to 30% of the market volume, targeting customers sensitive to low upfront capital costs rather than energy efficiency. ELGI plans to counter this by emphasizing its inherent quality, reliability, and service proposition.
Emerging Technologies and Raw Materials
ELGI is not currently venturing into green hydrogen compression, stating they need more clarity on the efficacy of the hydrogen economy before engaging. On raw materials, while price increases (especially copper) are a concern, management is handling it operationally by selectively increasing prices and focusing on internal cost reductions, avoiding the crisis-level spikes seen post-COVID. The company confirmed it is number 2 in the domestic market but declined to provide exact market share percentages due to competitive sensitivity.
Source: BSE
