The Hindu Business Line : Elgi Equipments to re-focus strategy with export thrust

COIMBATORE-based Elgi Equipments Ltd had a dream run last year with its sales turnover touching Rs 290.52 crore, an increase of 30.7 per cent as against Rs 221.39 crore in 2002-03. The company had been riding the crest of an extraordinary demand for rig compressors used for drilling wells.

But this year's performance so far has rather been sedate. Ironically, it is the good monsoon witnessed across the country that has slowed down the demand for rig compressors. The expectations are that the top line would almost match last year's performance. But the company's Managing Director, Dr Jairam Varadaraj, remains unfazed. He asks, in an interview to Business Line, not to look at the immediate future but take a long-term view since the company is in the midst of a transition and is gearing to re-focus its strategy with greater thrust on exports. Excerpts.

You had a dream run last year but have not been able to sustain it in the current fiscal. Why?

Growth in business has to be in a technologically focussed manner and unrelated diversification is not the right engine for growth, at least for Elgi. This implied that Elgi should grow in the international markets.

Looking at the performance of the company in the present year, I think we can say unequivocally that we are marching in that direction. Our international sales are growing almost at the rate of 100 per cent. We have revenue coming from 42 countries and it is not a vulnerable business portfolio.

If we talk about borewell compressors, I think it just trivialises the existence of a company. We can't take a hard position on that and analyse it in such great detail to lose sight of the overall context in which Elgi Equipments exists. The overall context is to grow the business internationally. The idea is to build businesses independent of such cyclical factors.

In the process of making the transition, there will be some disruptions, as is evident in Elgi's financial performance in the first six months of 2004-05. But this is temporary because the context is much larger. If you take a qualitative validation, I think qualitatively Elgi is doing exceedingly well. Quantitatively, because of the transition, that is not getting reflected in the numbers, whether in sales growth or the bottomline.

When do you expect to cross over this?

This year and good part of next year would be the transition period. While evaluating a business, you look at the numbers. If the trend is healthy, you can reasonably conclude that the business is okay. But if the trend is not good, you need to look behind the trend. Behind it (in our case) is an extremely positive evolution, which augurs very well for the company. It is a longer, harder battle than trying to push the envelope in the local market to hitch your growth. We are transiting from a prominent dependence on the Indian market to a significant diversification of geographical portfolio. There is no fundamental competitive collapse or market collapse now. It was a seasonal thing, we rode the wave on and the season went away and we have taken a hit.

Are you confident of riding over the blip?

Yes. It was a segmental drop. But if take out the rig compressor business and look at our other segments, we have grown by 35-40 per cent, such as industrial compressors, automotive equipments, diesel engines, etc and in exports, we have notched up a 100 per cent growth.

You are largely known as a compressor maker. Are you consciously trying to move out of that or reduce your dependence on that?

No, not at all. Around 80 per cent of our dominant business is compressors. Obviously, we get labelled as a compressor company. But the origin of the company was not compressors, it was automotive equipment in which we are a very strong player nationally and in neighbouring countries. These are two strong businesses in which we are in and we need to grow, and that's what we are doing.

You had spoken about acquisition abroad. How close are you to achieving it?

We are definitely looking at acquisition as a way of growth. We had a couple of offers but they did not have a strategic fit. Fundamentally, before Indian companies buy assets abroad, they should create capabilities to operate anywhere in the world. The competitive advantage is not internal to the company but because of the country (India). We are competitive because our cost is low. If the same company re-locates, say to Germany, could it do business worldwide? I don't think so. We need to build capabilities to transcend boundaries and compete.

Can you give details of the planned a capex of Rs 18 crore for the current year?

Primarily, the investment will go for plant and machinery, upgrading the plants, expanding and refurbishing them. We have invested in cycle management software that makes the product development process very transparent and tight.

You have indicated that the net sales during this year would be around Rs 290 crore-Rs 295 crore - almost same as last year's Rs 290.5 crore. How do you expect 2005-06 to be?

I think next year's growth would be close to 25-30 per cent.

Are you looking at any major capacity addition in the near future?

We will continue to make investments in the Rs 12 crore - Rs 18 crore range annually. Probably, a big round of investment will come in 2007-08 when we may look at the need to increase the capacity significantly.

Are you looking at any strategic investor - either financial or technical partner - as some Coimbatore-based companies are doing?

We are in the middle of fine-tuning our plans for 2015. When we look at the first cut funds requirement, it does not look like we need to go outside.

What steps have you taken to increase your exports?

We have six people at the managerial level exclusively involved in developing the export markets. In eight countries - in Indonesia, Thailand, Malaysia, Bangladesh, Sri Lanka, West Asian region , Nepal and South Africa — we have full time staff and we are continuing to increase the number. We are planning to have full time employees in Kenya and China. The best talent from domestic sales is drafted for duty abroad that reflects the importance we attach to exports.

Our international sales would grow every year by 100 per cent for the next three years. By then our export earnings would grow from Rs 60 crore from current year to Rs 240 crore. They will not cannibalise our domestic sales.

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