Building a Globally Competitive Business
05 December 2024
Following a robust financial performance in the second quarter, ELGi Equipments Limited is all set to build on the momentum. Niranjan Mudholkar of โThe Manufacturing Frontierโ recently caught up with Dr. Jairam Varadaraj, Managing Director, and Anvar Jay Varadaraj, COO, in Coimbatore to understand whatโs driving ELGiโs remarkable growth story.
“Building something globally competitive requires a long game. But the way our economy works, is a short game. Companies respond to immediate and quick opportunities, right. How do you address it? Well, it has to be done by individual companies who recognize the global opportunity and are willing to put in the effort and perseverance to pursue that opportunity.” Dr. Jairam Varadaraj
“Dealing with supply chain disruptions is a challenge. But we are a little more vertically integrated than most of our competitors. In some way, it was an opportunity for us in the US during the Covid where we could build up some strategic inventory and we got some opportunities to cater to businesses where our competitors were not as quick to respond.” Anvar Jay Varadaraj
Air compressor manufacturer ELGi Equipments Limited posted a robust growth for the second quarter reflecting a healthy and well-directed performance. Its consolidated sales for the quarter of โน869 Crore as against โน806 Crore in the corresponding quarter in 2023- 2024, representing a growth of 8%. The standalone PAT for the quarter was โน97.9 Crore as compared to a PAT of โน83.3 Crore in the same period in 2023-24, representing a growth of 17%.
Growth in the Indian market was in line with the overall industrial growth. Middle Eastern market continued to perform well. And although ELGi has been witnessing some momentum in Europe too, performance in the US, Australian, Brazilian and South-East Asian markets was subdued.
On this occasion, I had the privilege of visiting the state-of-the-art foundry and air compressor plant (ACP) of ELGi Equipments in Coimbatore. The idea was to understand how despite challenging market conditions, ELGi is able to perform well due to its unwavering focus on manufacturing excellence. It was truly awe-inspiring to witness the precision engineering and cutting-edge technology at work at both the locations. On both visits, senior team members accompanied me to provide in-depth information as well as to answer the smallest of my queries. These visits also showcased the solid expertise, immense experience and firm commitment of ELGi team members, the people behind ELGiโs quest of getting โAlways Betterโ.
The subsequent meeting with Dr. Jairam Varadaraj , Managing Director, and Anvar Jay Varadaraj , COO, was quite thought-provoking. It was indeed inspiring to understand how Dr. Jairamโs visionary and yet grounded leadership, along with Anvarโs progressive and practical approach are driving ELGiโs remarkable growth story.
Speaking about the financial results, Dr. Jairam Varadaraj called it โoverall a good quarterโ. โIt is a very good performance since we have had growth in both top line as well as bottom line. Anvar too described it as a good thing because โoperationally the core businesses, the industrial business, the distribution businesses are actually quite strong. Indiaโs business has grown wellโ. Of course, while I wanted to know more about the business performance, but I decided to go back in the time to understand how Dr. Varadaraj started his journey.
From teaching and research to building a global organization with presence in multiple industries and geographies, how do you look back at your journey with ELGi over the last three decades or so?
Dr. Jairam Varadaraj: Well, teaching and research was for a very short period. For me, the critical piece from that period is my thesis where the question that I was trying to address is why are Indian companies not competitive globally. This was in 1986! It was a wrong question to ask at that time because India was very insular and protected. And it was all India business. Nobody worried about global business! Nevertheless, I had discovered a point of view that there is an opportunity. From that seed, it came to โhow do you build a global businessโ. I would say that itโs been probably a little too long. I should have done it faster.
Are you content with whatever you achieved?
Dr. Jairam Varadaraj: No, not at all. If you are content, then it is a problem. I feel we should have probably done certain things differently. Maybe certain things faster. But overall, I think we did ok.
Where is the challenge when it comes building a global business for Indian companies?
Dr. Jairam Varadaraj: There is a bit of a dichotomy here. Building something globally competitive requires a long game. But the way our economy works, is a short game. Companies respond to immediate and quick opportunities, right. If you look at our budgeting system at the country level, we look at annual budgets. Sometimes those budgets can change direction quite drastically. So, when you donโt have that consistency, everyone is responding to short term, especially SMEs because they donโt have the depth of capital or the patience to play the long game. So, if there is an opportunity to make a little bit of money quickly, I would rather do that; rather than make a lot of money, over a longer period. So, that dichotomy exists. How do you address it? It has to be done by individual companies who recognize the global opportunity and are willing to put in the effort and perseverance to pursue that opportunity. Itโs not going to come easy.
Anvar, you transitioned to the ELGi Board in an executive position in 2020. Incidentally, in these last four years, the world has experienced extremely volatility with Covid, geo-political unrest and rapid digitalization. How has ELGi been dealing with these situations while also focusing on business growth?
Anvar: From a macro perspective, the various disruptions in the different regions has sort of served as a natural hedge for us. In the early days of Covid, India was disproportionately hit, whereas America not quite so much. So, during that period, you could really see the impact of this overall thesis that if you have a globally spread business, you have a natural hedge against any single situation.
With regards to digitalization, at a fundamental level our business is a little bit more conservative and thus a little bit slower to adopt some of the latest in digital initiatives and technology thatโs out there. I think part of it is also because our products are not involved in direct production of profit and revenue; they are supporting assets similar to a generator. As a result, you only notice it when thereโs a problem. So, a lot of our digitalization efforts in terms of the product is directed at how do we get better visibility into failure prediction that can then go and inform our quality processes. For the customers, we think about things like energy efficiency and so on.
Going back to the macro factors, we are insulated in some way from the broader factors in the international markets where our share position is quite low. When you have 4-5 percent share in larger markets, it doesnโt really matter whether there is recession or growth. But we can still go for the low hanging fruits by finding a new distributor in geography thatโs growing. Of course, with India it is different; we look at how the economy is growing and by our product segmentations.
How have you been dealing with supply chain disruptions?
Anvar: During Covid, it was quite a challenge. But we are a little more vertically integrated than most of our competitors. In some way, it was an opportunity for us in the US where we could build up some strategic inventory and we got some opportunities to cater to businesses where our competitors were not as quick to respond.
Now, some of the challenges that we face are the Red Sea crisis, where the lead time to Europe has gone up. So, naturally the amount of cash that you have locked up has naturally gone up. In the US, there was some threat of the dock worker strike that we had to deal with. Also, generally, the cost of containers has gone up and down. Some of it we can explain, some of it we cannot. So, one of the biggest opportunities we have is how we can have more cash in the system by managing that entire process much better.
Since 2012, ELGi started making its international acquisitions with Italy based Rotair and US based Patton. Post that you have been aggressively expanding into newer markets via various acquisitions. How have you leveraged these different acquisitions so far?
Dr. Jairam Varadaraj: Thereโs always a room for improvement. For the next round of acquisition, we need to build capabilities. For example, a distribution business does service of all brands of compressors. They canโt do service only of ELGi. Their entire business is on service of any brand. Now if we want to be an owner of a business like that, we need to build that capability to be able to support that. Right now, we have three distribution companies that we are acquired. They all service all brands of compressors. But in India, we service only ELGi. So, how do you build that capability? Or should you build that capability? And, if so, how? Therefore, you build the platform by which you can acquire another distribution company and make it more efficient.
I have a question more on the manufacturing side. I have been to your foundry as well as to the ACP. The overall focus on excellence and efficiencies at both the facilities is quite impressive. My question is more specific to you winning the Deming Prize in 2019. How significant is that achievement for you from business excellence point of view?
Dr. Jairam Varadaraj: To be honest, we were not pursuing the Deming. We have been following TQM since 2007. So, for 12 years, we just kept improving. We were using those tools to improve quality and to improve efficiency to build a globally competitive company.
Our Japanese consultant, who was working with us through this, asked why are you not going for the Deming prize. He said that we have got all the ingredients required for it. So, reluctantly we said, okay; because sometimes we are a little worried about doing things just for the sake of the award. Thatโs how we did it. And has it helped us? Yes! Well, not many in America or Europe know about the Deming Prize. But in India, they know. In Southeast Asia, they know. And the Japanese companies have factories in India. So, in these locations it helps.
Could you share something about your CK2 business plan?
Dr. Jairam Varadaraj: Well, CK2 is about the year 2035-2036. We are going towards that in increments of three-year programmes. So far, we are on track towards that. But the heavy lifting will happen in the next six years; thatโs when the curve has to go up. We also need to incubate a lot of opportunities like the vacuum business to be able to hit those numbers in 2035-2036, which we are doing. We are also building a new team of people, who will help us go there.
Your focus on manufacturing excellence is also reflected in the fact that you have your own machine building department that builds special purpose machines called ELGi LOCUS (Lobe Cutting System). Tell us a little about this initiative.
Dr. Jairam Varadaraj: We were an unknown brand with a โMade in Indiaโ label. We were always aware that we were not going to get premium pricing. Thatโs fact number one. Fact number two is that 80 percent of the market, worldwide, is in the premium segment. The discount segment is only 20 percent. If we have to grow then we have to be part of that 80 percent. To design and build products for that 80 percent, you cannot do that without a certain level of investment. We can make that investment but the price we get as a company may not justify that investment. So, we have a chicken and egg problem. How do we break it? If you look at the compressor, 30 percent of its cost is the air end โ the heart of the machine. In that, 90 percent of the cost is that of the two rotors. In that, 90 percent is the cost of machining the rotors. Then, we asked ourselves how could be compress that cost without compromising on the quality. Thus, we decided to use our own engineering talent to build the machines at one-fifth or one-sixth the cost. And thatโs how we build world-class at a low cost and go to the premium segment, still be able to offer a lower price and yet be profitable! Thatโs the logic for having the machine building department. Same logic goes for motors. Motors is not a cost arbitrage but a performance arbitrage. So, itโs not just one piece that you move but multiple pieces that you need to move to get the complete picture in place. Like I said in the beginning, it is a long game!
