Driving Innovations in Cutting-edge Compressor Technology
26 October 2024
Elgi Equipments Limited is a global air compressor manufacturer renowned for its extensive range of innovative and technologically advanced compressed air systems. Committed to maximizing customer productivity and minimizing ownership costs, ELGi offers customers a comprehensive range of compressed air solutions designed to enhance energy efficiency and deliver superior performance. Its product offerings span oil-lubricated and oil-free rotary screw air compressors, oil-lubricated and oil-free reciprocating air compressors, centrifugal air compressors, dryers, filters, downstream accessories, and IOT solutions for 24×7 remote monitoring. With a portfolio of over 400 products, ELGi caters to a wide spectrum of applications across industries worldwide. The recent financial results signify its planned, steady growth and its leap towards realizing its global aspirations. Engineering Review interacts with the effervescent COO Anvar Jay Varadaraj to capture the spirit of innovation ELGi is spearheading in a technology-driven,yet price-sensitive global market. Excerpts:
Q. ELGi recorded consolidated sales of Rs.3218 crores for FY2023-24 marking a notable performance. What strategic moves helped you drive this growth, especially in key regions like India, Middle East, and Australia?
We are still sticking to our strategy that we set up about two years ago, and that is essentially to focus on the Middle East, India and Australia as our prime product market segments. We focus on our industrial screw air compressors for which we have strong demand in India and the Middle East across sectors. In Australia, we maintain our business and market share. So yes, we certainly grew, but not necessarily in line with our aspirations. However, what was very encouraging is that we were able to disproportionately grow our profitability, especially on the back of our strong cost reduction initiatives.
Q. You posted a PAT of Rs.72.8 crores on a revenue of Rs.801 crores for the 1st quarter of FY24-25, registering a growth of 20% over the corresponding period in FY23-24. What were the primary factors contributing tothis profitability, and how do you plan to sustain it moving forward?
The current year has been very good for us, especially as we’ve seen very strong demand in places like India and specifically in water well segment which is dependent on the monsoon, and it has been very favorable this year. And yes, of course, the demand can be there, but execution is also very important. In the last two to three years, the water well compressor team has done a marvelous job of staying on top of customer needs and coming up with an absolutely fantastic product range that is best-in-class and fuel efficient. So we’ve been able to convert a lot of customers to our fold. And so we see a lot of machines running in Bangalore and other places, in Karnataka and even Northern India. We’ve received strong feedback and we’ve also seen growth in our core industrial customers’ equity, both owing to demand and our strategyof identifying those customers who are not aware of our brand. We are very purposefully targeting them to bring awareness to our brand. And of course some of that activity will convert in the future, but we’re able to see some benefits in the short term as well. The current year is much stronger compared to last year.So I feel quite bullish both in terms of conditions and also our ability to execute. Cost-wise, we are staying quite competitive. This means that a lot of incremental sales growth will come and will drive higher profit margins Structurally, we have quite an advanced program of cost optimization, both on fixed costs and also variable costs. So we are constantly looking at how we address design, procurement of the components of our air compressors and the design of our air compressors to offer the best possible value proposition on cost. So we expect an annual improvement in our overall cost base, and then finally we expect to sell more value.
So the more and more innovation we bring, that brings about better reliability, which in turn means we can give better warranty programs. It means we can give higher quality of airand all of that we expect to be able to translate into higher pricing in specific segments – of course not across all the segments. When we say that, we must realize the fact that we are in a very competitive market. It’s really about how you can offer more value for the existing price where you keep your costs the same or have a program of reduction.
Q. Despite global challenges, Europe showed growth in FY 23-24. So how did you navigate the softening demand in Europe and manage to remain in positive momentum in this region?
We stick to our commitment, especially to the investor and the general community that Europe will be profitable this year. It’s part of our overall goals within the country. So we’ve taken a really hard look at all of our costs, while continuing to invest in our strategy. We have a purely distributor focused strategy, and we believe that even when demand is soft, there is a lot of opportunity for a smaller brand such as ours to go out and find quality distribution. Our ability to find quality distribution is very high because our product set is very competitive from a performance and reliability perspective. And we offer very compelling price. We understand that especially in markets like Europe, price does need to be an attractive tool for conversion. So when you have a great product supported with good customer service and the price value proposition is great, we believe there’s still opportunity in a challenging market for us to close a lot of distribution gaps. So we are continuing to invest in finding new avenues for distribution for our products
Q.With strong growth in the automotive sector and the rise in opportunities in automobile recycling, how is ELGi positioning itself to capture further market share in these areas?
Indeed, we have a high market share in this segment. We are positioning ourselves to enhance this share further in the growing automobile sector. So we try to basically stay on top of mind for our customers. And we are also trying to de-risk our reliance on internal combustion engines. Therefore, many of our core products such as lifts and service equipment are directly linked to the number of cars going into service. We believe that opportunity may not be as high going forward. So now we are pivoting to other areas that are independent of internal combustion such as washing equipment, wheel aligning equipment, and paint booth equipment.. The general philosophy is how you bring in products that are less labor dependent, more energy efficient and use less water. So the automotive business is not a strategic business for us, but it’s something that we continue to innovate on to ensure that we stay on top of mind for customer knowing full well that tomorrow’s business has more to do with electric and less with internal combustion.
Q. So what are the other market dynamics and how is it going to impact your growth and the revenues?
We’re generally very excited for the market globally for a number of reasons. One is we now have a strong foundation in a lot of large markets such as Europe, North America, India, of course, and Middle East. Southeast Asia is also something that’s going to be growing for us. So with this foundation, we see a lot of opportunities within specific sub-geographies in these areas and we see a lot of white space for growth. But we also see a lot of opportunity in some of the emerging sectors that are coming in for growth. So for example, semiconductors require both vacuum technology as well as compressed air technology. We are now investing in vacuum. We already have a very strong air compressor line. So we feel quite bullish about the opportunities that our markets will give us and we have to remain resourceful to take advantage of the opportunities.
The market is getting increasingly price competitive. We are seeing a lot of Chinese competitors entering the market with very aggressive price points. We have to be able to bring in products that address customers who want that price point. We’re actively working on that. We will also need to have a channel strategy that addresses that customer segment because those customers may not buy in the segment in the channels that we are currently catering to. So that also gives us an opportunity to experiment with some new segments. And then we need to continue to increase our share in the top of the value chain. You’re seeing more and more customers with sophisticated needs in food and beverage and pharmaceutical industry. Sophisticated for us means higher demands, more rigorous standards in terms of the quality of the compressed air, energy efficiency and so on. So we are investing in improving the range and efficiency of our oil-free portfolio while also bringing the cost down. So effectively it’s going to be a product strategy that addresses the increasing commoditization and price driven segment of the market and also addressing the value proposition driven segment of the market.
Q. What are your most recent market driven product innovations leading to significant energy gains and reduced lifecycle cost?
The one product segment that I’m really excited to talk about is our super premium series. It’s part of our ELGi global series. Structurally how it’s different is it has a two-stage air end. Two-stage air end basically means you have two engines. The air end is an equivalent to an engine for an air compressor. So you have two engines, one for low pressure and then one for high pressure. What this basically means is for the same kilowatt of energy, you’re able to provide more air at far less energy consumption. So especially for sectors such as textiles, and cement, where you are continuously running the machines, every kilowatt of energy makes a huge difference in the overall cost of running the super premium series. This is something that will make a key difference. Now we have launched this product in the higher kilowatt segments of our product range, but our goal is to expand the philosophy to the bulk of our product range.
This is one example of a product that addresses the premium end of the spectrum where the customers really want superior performance. But we have also launched EQ series, and this is a direct drive air compressor that offers a lot of the same reliability and energy efficiency propositions of our more global series machines that are price wise much more affordable. This is ideal for customers who might be moving from a reciprocating compressor to a screw compressor; a lot of MSMEs that want quality and reliable air in their operations,
Now, outside of air compressors, as you know, we’ve started our expansion into vacuum. We are partnering with DVP, an Italian vacuum pump company to first understand the technology. So it’s going to be initially a license agreement. Eventually we want to be able to bring our own products into the market. And I believe this technology will help us gain new segments. It’ll also help improve the sales of our existing core compressed air business. Outside of rotating technology, we are soon going to launch a piping solution. We have an aluminium piping solution that’s very easy to fit. All companies or manufacturing units that have a compressed air system, need the piping for delivery. And today piping work is quite labour intensive. As labour is getting more costly, the more we can reduce the amount of labour in the design and installation of the pipe, the stronger the value proposition is for customers, especially who are setting up plants quickly or customers who are looking to expand their plants or even customers who want to upgrade their plants because they have an updated piping system that’s suffering from leak. So this is also an exciting product range for us. It allows us to get a good share of our existing customers.
Q. What’s the significance of your multi-year licensing agreement with DVP Vacuum?
This strategic move is to expand our portfolio and make a high-end growth. When you look at the global compressor market, it’s about US$15 billion in annual revenue. In the areas that we’ve looked to play in vacuum is about US$5 billion. Fundamentally, the technology is not that different from compressed air and the profit profile is quite similar. You make profit on the upfront asset and then you also make profit on the aftermarket. The customer segment and the customer behavior are fairly similar. So it’s frankly quite a move for us as we look to expand the product portfolio for growth.
Initially we are starting with a licensing agreement where we will source and sell DVP products. We are going to use some of our channel knowledge and knowledge of the Indian market. We’re mostly focusing on India. Eventually we will start manufacturing as per DVP’s design with the ultimate goal of possibly designing and manufacturing vacuum pumps at our end.
Q. We understand you are planning to invest Rs.500 crores on your manufacturing facility expansion. Could you share more details of this investment and how it aligns with your long-term growth strategy?
Our long-term growth strategy (we call it CK2 within the company) is to be amongst the top three compressed air brands in the world by 2035.That amounts to a little over 2 billion in top line revenue. Obviously that will require a sophisticated manufacturing facility that is able to cater to this demand. There are two dimensions to this. One is quality across the breadth of the products. And so we expect to deploy Rs.500 crores investment over the next five years or so to completely consolidate the manufacturing and distribution of our products parked in one location. We have over a hundred acre facility in Kinathukadavu today. This is going to be well utilized for our expansion. The goal is to basically move everything to the Kinathukadavu facility. So eventually we’ll make our motors there, make our portable air compressors, reciprocating air compressors, and industrial air compressors there and also dispatch all our parts from there. But I think most importantly, part of this transition will also mean a transition into a much more technology driven manufacturing system, which will mean that we will be focused on labour that is very highly skilled. We really benchmark the intended outcomes from our labour to those that are in much higher labour cost countries such as Europe and the US because eventually we believe that labour will be more expensive in India, and also we believe it’s the right thing to do that we need to play a part in making labour more expensive in India. So part of that transition will not just be a capacity expansion, but also a complete change in the complexion with what we produce and how we manufacture. So it’s going to be a five year process and it’s going to support a 2 billion revenue aspiration.
Q. How is ELGi leveraging digital transformation and the new technologies to ensure smoother operations and improved efficiency in manufacturing?
Where we are really emphasizing digital is on how we sell and talk to our customers because more and more of the purchasing decisions have come online. We find that the decision-makers for our products are getting younger and younger every year. So the tools that they use or that they expect for us to communicate with them are also becoming much more advanced. So most of our emphasis is there, and that makes sense.
In terms of the operational side, we are working on our own IoT solution called Air ~Alert, which will be embedded in every air compressor. We plan to give it as part of the package without any additional cost And then finally, from a manufacturing perspective, as I said, with our overall facility expansion, we’re really looking to automate more of our production. We believe that it should be a very light human touch on the different manufacturing processes. So part of that will require a significant amount of digital enablement in each of the manufacturing processes. One area that we are quite excited about is our parts dispatch system which is in the process of getting automated. A lot of AI will go into the overall logistics of parts dispatch, which will allow us to scale without necessarily having to take on non-value added manpower.
Q. As a global leader in compressed systems, how is ELGi addressing the growing demand for eco-friendly and energy efficient compressors in diverse industries?
Though I dealt with this earlier, let me summarize it again: We have two tracks. One is continuous improvement in our existing range of products, and the second one is obviously the reduction in specific power consumption, which is how much power the air compressor consumes, and also the quality of the air delivered. So we try to reduce the amount of oil that the machine consumes, and the amount of oil that the machine puts out into the atmosphere. In terms of breakthroughs, one of our long-term goals is to ensure that every air compressor that we sell does not use oil. So how do we lead the category ship for all compressors to be oil free? And then the fundamental thing that we need to address is upfront cost of an oil free machine. Today it’s still significantly more expensive than an industrial machine. Also there is a gap in reliability. An oil free machine is a much more sensitive machine, so it requires more stringent working conditions, more frequent maintenance, and so on and so forth. So now if we are not able to address both those things and the technology is not going to be accessible, there is a dilemma. So in the long term our goal is to move the category away from oil lubricated compressors to oil free, and at the same time, make the technology accessible from a cost perspective and make it very reliable so that the customer feels no difference other than just the benefit of having clean oil.
