Elgi shows resilience amid disruption

by Sricharan R 19 Jan 2022


Few companies and captains of industry would have been prepared to handle the disruptions that kicked off in 2020 — the global health pandemic, state- and country-wide lockdowns and fast-rising commodity prices that increase input costs. These, among a host of other challenges, can derail many a well-chalked-out company strategy and also impact the growth plan.

Many firms and some leaders struggle to handle major disruptions, as seen in the past 20-odd months while a few persevere, shift stance and keep batting with no knee-jerk reactions in a what is a massively changed business environment. One could apply this to the Coimbatore-based Elgi Equipments, India’s leading air compressor manufacturer, which aims to be among the top three global players in this industry.

Building vertical excellence
Recognising the magnitude of the disruption early in 2020, Elgi says it adopted a management philosophy that builds vertical excellence in each operating function and customer-centric horizontal excellence across the business, operations, and support functions. Given that the automotive industry, to which Elgi is a major supplier since all manufacturing plants — OEMs and component suppliers — use compressed air for a multitude of operations.

The company’s product portfolio includes a comprehensive range of solutions including oil lubricated and oil-free rotary screw compressors, reciprocating compressors and centrifugal compressors, to dryers, filters and downstream accessories.

“When the whole thing hit us, then there was a lockdown. We had two big concerns — employee wellbeing in terms of both health and financial wealth. None of them were let go and we paid the full salary. Second, we did all the possible scenarios that could come out of it on whether this could last a year or years?

We started preparing the balance sheet of the company to prepare for everything,” says Dr Jairam Varadaraj, Managing Director, Elgi Equipments (pictured). As a result, there was no downsizing of staff nor were their salaries cut.

Commodity price hikes hit margins
By end-2020, when India and the world had more or less handled the first wave of Covid-19, and was getting ready to do business, commodity prices began increasing rapidly. “We could not react to it. We have not seen such an increase in price. We rode the wave like everybody else but it hit us. We have to keep resetting the prices every now and then. Costs were going up drastically. We went through that crisis management and it continued in May-June of this year. Things have stabilised for the moment but prices is still high,” remarks Dr Varadaraj.

“The margins in the first two quarters have definitely taken a hit but there's nothing we can do about it. Prices are changing every week. We are not in a B2C market, where we can change the pricing overnight. We are in capital goods which is B2B and quotation is valid for some time. We have done 4-5 price corrections in the past year. Things seem to have moved back but it will take another quarter before reaching an earlier level,” he states.

Dr Varadaraj points out that the company is looking to reduce its variable cost and is three months into the 10-month programme. “Hopefully, in the next 6-7 months positive results can be seen,” he adds. Sharing his view on the business de-risking strategy, the MD points out that Elgi has already proceeded on this front by globalising its business. When India was hit by the second wave of Covid-19, sustained global demand for air compressors kept Elgi ticking. “It is not a response to Covid, but an overall aspiration. If the pandemic keeps happening like it did in the first wave, we could do nothing to de-risk. So, if you look at our growth, we have grown in all markets that we are present in,” said Dr Varadaraj.

North America, USA, Australia, Indonesia, Thailand and India are Elgi's six strategic growth markets. At present, the revenue split between India and the rest of the world is 50:50 albeit this ratio keeps oscillating. “We have to grow our share in verticals we are present in India. In some areas, we need to be stronger and we have to be more customer- centric,” admits the Elgi boss.

Taking on multiple challenges
Like the rest of the auto industry, and other industries, Elgi too was adversely impacted by the mega disruptions in the supply chain, which affected a number of its suppliers. The company also had to contend with sharply increased shipping freight costs as well as container shortages. “Container shortages is an issue that everybody is facing for both imports and exports. It is improving but not at a pace we want it to. The freight cost is also high and we are paying 3-4 times more of what it was earlier,” confirms Dr Varadaraj. That’s something which continues to worry all CXOs.

On track with Mission Conquer CK2
However, despite all the disruptions, Elgi’s Mission Conquer CK2 — to be one of the top three global air compressor manufacturers — remains unchanged. In fact, it says it will achieve this by 2035. At present, it is at sixth position in the global scheme of things.

Elgi, with a net worth of Rs 540 crore, posted Rs 57 crore standalone profit in Q2 FY2022 and recorded a surge in business performances. Sales of its automotive business bounced back to pre-Covid stage and increased by 45 percent. Strategic investments in the global market have helped because the bulk of its growth is coming from North America, Europe and Australia

“As a country, we have learnt a lesson from both the waves. The third wave would not have that much effect as before. Because many have been vaccinated and the government is much more ready than it was before. At Elgi, we did well during the first two waves of Covid-19 and this will continue now too. We are in good shape,” says a confident Dr Varadaraj.

He adds, “With the world coming back to normalcy, people are beginning to spend on the services they had previously stopped. Besides, people have exhausted the additional consumption of physical goods. Both of these and the impact of inflation of personal income will cause the manufacturing economy to correct itself. With this, there would be a trickle-down effect of capacity build-up also slowing down. It would be wise to brace for this levelling of activity and focus inward on productivity and cost optimisation.”

This feature was first pubished in Autocar Professional's December 15, 2021 issue.