Escorts Kubota Ltd
NSE:ESCORTS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2 701.4
4 374.7
|
| Price Target |
|
We'll email you a reminder when the closing price reaches INR.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Escorts Kubota Ltd
You don't have any saved screeners yet
Ladies and gentlemen, good day, and welcome to the Escorts Limited Q2 FY '19 Earnings Conference Call hosted by Reliance Securities Limited. [Operator Instructions] Please note that this conference is being recorded.I would now like to hand the conference over to Mr. Mitul Shah from Reliance Securities Limited. Thank you, and over to you, sir.
Thank you, moderator. Good evening all. On behalf of Reliance Securities Limited, I welcome you all for Escorts Limited Q2 FY '19 Result Earning Conference Call. I also take this opportunity to welcome the management team from Escorts Limited.Today, we have with us Mr. Bharat Madan, CFO; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division; and the entire team of Escorts Investor Relation.We would start the call with brief opening remarks from management followed by an interactive Q&A session. Before we start, I would like to add that some of the statement during the call may be -- during the today's discussion will be forward-looking in nature. At this point, I would request Mr. Madan to take this opportunity and give opening remarks. Over to you, sir.
Thank you, Mitul. Ladies and gentlemen, a very good evening to you all. Thank you for joining us on the second quarter earning call for financial year 2019.A snapshot of the company's quarterly performance is as follows: turnover up by 15.4% at INR 1,398.4 crores against INR 1,211.7 crores last year, led by volume growth in both tractor and construction equipment business. The tractor volumes went up by 3.4% to 21,039 tractors as against 20,358 tractors last year same quarter. Construction equipment volumes is up by 36.9% to 1,331 machines against 972 machines last year same quarter. EBITDA [Audio Gap] INR 157.5 crores against INR 140.9 crores last year is up by 11.8%. EBITDA margin now stands at 11.3% versus 11.6% last year same quarter ended September '17. Finance cost [Audio Gap] is INR 4.5 crores to -- with INR 3.9 crores as compared to quarter ended September '17. The total debt outstanding as of September '18 is INR 211 crores. It's gone up due to increased working capital requirement in preparation for the festive season starting in quarter 3. PBT stands at INR 154.4 crores. It's up by 33.3% against INR 115.9 crores last year same quarter. The company reported a PAT of INR 102.7 crores versus INR 77.6 crores last year, up by 32.5%. PAT margin now stands at 7.3% versus 6.4% last year. EPS is reported at INR 8.6 against INR 6.49 last year same quarter. Moving on to segmental business performance. Starting with the Agri Machinery business, domestic tractor industry did grow by 2.5% at 1.85 lakh tractors against 1.9 lakh last year same period. Yield, Escorts domestic volume grew by 3.7% at 20,553 units against last year's 19,817 tractors. Industry did grow by 3.5% in Escorts strong markets, where in the opportunity markets, industry did grow by 6.2%. In line with our Vision 2022 direction, we had gained market share across all major states. Our domestic market share now stands at 11.1% quarter ended September '18, which is up by 70 basis points as compared to corresponding quarter of 10.4%. The EBIT margin in Escorts Agri Machinery division stands at 14.7% against 13.7% last year, primarily due to operating leverage and cost reduction initiatives. We unveiled India's first autonomous concept tractor in collaboration with our technology partners. This partnership between the technology partners will help the company to develop a range of 4 machines with electric transmission, autonomous applications, remote vehicle management, data-based soil and crop management, and sensor-based guided farm applications. We expect domestic tractor industry to grow by 12% to 15% in current fiscal.Now coming to the construction equipment business. Our served industry, comprising backhoe loaders, pick and carry cranes and compactors, went up by 41.2% in second quarter. Compactors have been the biggest gainer in the second quarter with growth up to 85.5%, followed by cranes that grew by 41.6% and backhoe loaders that grew by 38%. Our total volumes manufactured and traded products went up by 36.9% to 1,331 machines in quarter ended September '18 as against 972 machines in last year same quarter. EBIT margin for Q2 ended September '18 at 0.17 -- 0.7% as against 0.5% in same quarter previous fiscal. Commodity prices inflation has adversely affected margins in the current quarter in the construction business. For FY '19, we expect that our served construction equipment still will grow at [indiscernible] 13%. Coming to the railway division. Revenues at INR 105.19 crores in quarter ended September '18 is up by 44.5% against INR 73.3 crores last year same quarter. EBIT margins are up by 375 basis points at 20% as against 16.2% last year same quarter. Sequentially, margins are down due to increased share of our new products with high input contained in the overall sales portfolio in this quarter. Order book for this division stood at more than INR 400 crores [Audio Gap] September 30, 2018, which will get executed in next 12 to 13 months. For FY '19, we expect railway division to grow at 25% to 30% over last year and in mid-term at 18% to 20% CAGR. Now I request the moderator to open the floor for question-and-answer session.
[Operator Instructions] We would take the first question from the line of Hitesh Goel from Kotak Securities.
Sir, I'm just wondering to get a sense on the festive season and demand for tractors. [indiscernible] the demand is soft. So can you just -- and you have not changed your guidance. So can you just give a color on that? Secondly, in unallocated EBIT, the -- it has increased quite meaningfully from INR 13 crores last quarter to INR 18 crores. So can you just get -- give us some sense what is happening there? And also, can you also talk about the royalty payout that is ongoing to your promoters, which we had 62.5% of sales. Any change in that, if you can highlight these 3 points?
This is Shenu. I will talk about the demand right now in the festive season. So on the ground, we are seeing very positive sentiments in the market. The crop prices are better than last year. The production is higher than last year. Even the estimates for the [ Ravi swing ] are better than that of last year. There are no problems in the financing part, liquidity part. So we are seeing that the farmer sentiment is very positive, right. So we hope that we will clock a good amount of growth in our sales in this festivity. For the other 2 questions, I'll pass this to Bharat.
Yes. Just coming on the royalty to promoters, companies with royalty remains at the same level at 12%. So there's no change in the royalty policy as of now. So it continues to be at the same level. And then on your other question of unallocated corporate overall expenses, I think there's the one event which we held in September quarter, which is this new product introduction platform, which we do every year. So this time, there's an event which was held at a slightly mega scale, the event called Esclusive, in September, 6th of September. So it's a one-off cost which has come in this quarter but totally, going forward, will not be there. So overall, there'll not be any immediate change on the unallocated costs.
So just a clarification on demand of -- Shenu, can you talk about how Dussehra demand was and any regional trends that you can share that South was better, South was strong and North or in -- regional-wise, how is the trend?
Yes. So Dussehra and Navratra demand was pretty good. Especially, the first 5 or 6 days was awesome. I mean, we had -- ourselves, we grew substantially, like, more than 30%, 40% in that range. So last couple of days, the last 2 or 3 days were still good, not as good as the first 5 or 6 days. I have no reasons for that, but I think the enthusiasm was very high. And therefore, most of the customers who wanted to buy, they came to the showrooms in the beginning itself. But overall, Navratra, including Dussehra, was very strong for us. After Dussehra, there was a kind of a lull which is -- which happens every year, of course, because Dussehra is kind of peak. Navratra and Dussehra are peak, ninth. But the sentiment is still very, very positive. So we are looking forward to another peak on [ Vanteris ] and Diwali, which is just coming up. Regionally speaking, yes, South who did not show that much enthusiasm, this time, a couple of factors. One is that there were some parts which were -- which did not have good rainfall, like North Karnataka and [ Raja Sima ] and so on. And also, South was sitting on a very high pace from last year, tremendous growth. And in 1 or 2 states, the subsidy this year was not available, which was available last year. But there was no market that did grow, I mean, pretty much. So the growth was relatively higher or lower in different parts of the country, but it was -- overall, it was [ very positive ].
We will take the next question from the line of Jatin Chawla from Credit Suisse.
You have shared the performance for the industry in the strong and opportunity markets. Can you share the same for Escorts as well in the quarter?
Yes, we have the numbers. We have to put it out. So if you have any other question in the meanwhile, you can go ahead with that.
Yes. Related question was on your market share aspirations for the year-end. So we have seen some gain that has come through in the first half. How are you looking at your market share for the full year?
Yes. So in the first half YTD basis, we are about 0.9% up from last year's first half. And we hope to at least continue this kind of an outflow.
Okay. So for the full year, broadly, under this kind of market share gain is what...
Yes, yes, it could be, yes, yes. That is right.
And then you maintained your growth rate for the industry at 12% to 15%. Would it be fair to assume that this would be within the second half more front-loaded, meaning 3Q will be the main driver for the growth and then 4Q with the strong base, we see growth slowing down?
That is right. Because Q3 would be -- I mean, we are expecting about 18% to 20% growth in the market industry in Q3. Largely -- I mean, this relation between Q2 and Q3 is largely because of the shift of the festive season and also because in last year in July, we had a heavy base. The last year, some of the sales shifted because of GST from June to July. Right -- so that's why Q2 is -- looks very subdued. But as I said, the sentiment on the ground is very positive. It's just the shifting of the season and the GST impact last year. So Q3 should be -- should cover for that because [ Vanteris ] and -- sorry, Dussehra, Navratra, et cetera, are in Q3 this time. Q4, you are right. Q4 was very, very high last year. And therefore, the growth may not be as high as we have in Q3 -- in Q4. But we are expecting positive growth, marginally positive growth in Q4 also but substantially good growth in Q3.
You briefly mentioned that financing availability is not an issue but just again wanted to crosscheck. Is that because you have your own captive NBFC? Or do you see that from other NBFCs also tractor -- funding of tractors is not a problem?
See, our captive company -- although we are very optimistic about it for the future. But right now, it is only catering to about 10% to -- I think 10% to 13% of the volume, if I'm right, right? So our dependence is, like, significant on other companies and -- yes, but overall, we are not seeing anything, any liquidity tranche or any fallback from the financing companies at all. In fact, at least in the festive season, they were in touch with us, trying to get more and more business out of our sales. And this applies to both banks and NBFCs. So we did not -- we are not feeling any crunch on -- that we are reading in the media. We are not feeling that crunch at least in the rural sector, maybe that we are a priority sector and they have to, I mean, keep their focus on this sector in any case.
Just one more question on the finances. So other expenditure this quarter seems to be on the higher side. So there's almost a 36% Y-on-Y growth as well. Any one-offs there?
No, Jatin. I think one of the reason is that we were building inventory for the festive season, for the oncoming season in Q3. So there's a lot of production. Volumes are very high in the second quarter. So we've done almost 25% more production in the second quarter to cater to the Q3 demand, and we were carrying that inventory to Q3. So obviously, that impact is there on the [indiscernible] side and back to the [indiscernible] side coming in second quarter. So the benefit will definitely improve in the third quarter when the sale happens.
Right, right. And just one more question on the finances. When I look at the construction equipment business with a very stable kind of revenue quarter-on-quarter, we have seen some decline on margins. What would you attribute that to?
So major effect at this time on the construction side is, like I said, our inability to pass on the inflation on the commodity side to the market. So that has been not only for this quarter. I think we've been seeing this trend happening in the last 3, 2 quarters now continuously with [indiscernible] significantly higher. It's [ quite ] to the fact that we've taken price increases in the last 2 quarters, but still, the price increases, which happened on the commodity side, is much more than that, much more than value what the market is able to absorb. So -- which is the impact we are seeing on those numbers now. Hopefully, going forward, [indiscernible] more price increase happening in the coming quarters. So that should address the whole number. And the guidance that we've given for this full year, like 4% or 5% of the margins for construction, we should be able to be very close to that.
Okay, clear.
Okay, Raghu, just on your first...
Jatin.
Sorry?
Jatin.
Oh, Jatin, okay. On your first question about our growth in strong and opportunity markets, so here are some data for you. For strong markets, industry growth was 8% and our growth is -- Escorts growth was 14%, resulting in a 0.9% market share increase. This is for H1. And for opportunity markets, the industry growth was 10%. Our growth, Escorts growth, was 24%, resulting in a market share increase of 1.1%, right. So we grew pretty much equally well on both strong and opportunity markets, so 0.9% market share increase in strong and 1.1% in opportunity. And the market overall also was kind of equally growing. So strong was 8% in H1 growth, and opportunity was 10%.
We will take the next question from the line of Raghunandhan from Emkay Global.
Sir, just on the tractor side, how is the export outlook for the current year?
For the current year, we had given a guidance of roughly 50% growth this year over last year. So those quarter numbers are slightly lower. There is some [indiscernible] be able to quarantine, shipped onboard so that early will ship to the third quarter. But overall, number-wise, we think we should be able to maintain some administration, which is in the pipeline, which we expect will get executed in third quarter or the beginning of fourth quarter. So overall number, we're still looking at somewhere around 2,000 to 3,000-odd tractors and then just [indiscernible]
And sir, like -- I know it's early days, but how would be the outlook for FY '20 tractor demand for domestic market?
Yes. It's actually a bit early for us to predict on 2020 -- I mean, next year. I think we'll be in a better position to give you a good estimate post Diwali maybe, after the festive season has panned out. So maybe in the next call, we can answer that.
I mean, there is some concerns in the market that now, that 3 years of strong growth has been there. Next year -- and also recently that evolving El Niño conditions and stuff is there. And generally, when El Niño comes in, the effect can stay anywhere between 9 to 18 months. So given these concerns, do you think like tractor demand can still be on the positive side? Or do you think there is a probability it can go to the negative? That is where I was coming from, sir.
Yes, I understand. See, the first monsoon predictions will start coming in around March next year. So I think we'll be in a better position to estimate that sector next year monsoon, on the next year industry at that point in time. But right now, what we are looking at the ground in terms of also macro factors, we think that we will definitely have a positive momentum in the industry at least until Q1 of next year. And as I said, beyond that, it's too early to say right now. We will have to wait for some more information to be able to predict for rest of the year. But until Q1, we see a very positive momentum.
Understood, sir. Coming to the quarterly numbers, that increase in realization for tractors on a Q-o-Q basis, wherein the realization has gone up by 3%, how much of this effect is because of the price increase? And how much of it is because of the mix?
So it's essentially because of price increase [ on your top levels ]. So we took the 3 -- 2.25% price increase in Q2. And then partly, it's also because we're executing some of the orders for the Assam government, which are the subsidy-based scheme, and there are some implements, which is the non-tractor part of the revenue, which also has been added to the top line, which is actually looking at the [indiscernible]. So that number still is about INR 23 crores in this quarter, which is [indiscernible] but overall, on the tractor side, other than the price. There's no way [ we made a change ] [indiscernible].
Okay, understood, sir. So the Powertrac, Farmtrac, what would be the mix?
So Powertrac, Farmtrac, in this particular quarter is -- do you remember? H1...
H1, yes. So for H1, Powertrac is -- sorry, Powertrac is...
39-61.
61 and Farmtrac is 39. This is for H1.
Got it, sir. And sir, on the raw material cost pressure, given this 2%-plus price hike, has it been fully passed on in the agri segment?
Yes. So in the agri side, whatever inflation was there till Q2, we have passed it on. But obviously, there's further pressure now coming on Q3 also. So earlier, we looked at some more price increase there going forward after the festive season is over.
Any sense, sir, like what kind of price increase would be required?
Yes, certainly, 1% cost pressure, we're seeing happening in Q3.
Got it. And sir, on the construction equipment side, what kind of, like, price increase would be required going ahead and to achieve that 4% to 5% margin for the full year? And would we be in a position to take it -- you said that it is in the market. It might be difficult to absorb the entire commodity inflation.
Congratulations. We have reporting of the price increases to the market, but the only thing is -- and unlike in tractors, where [indiscernible] the price increases versus the [ talk and sell ] model. And construction is typically every deal and every [ shared ] deal. So [ end up on your table ], we take the price increase. But when you add up for the negotiation and selling with the competition, there is -- some of these do happen. So we have taken price increases so far. I think it's already -- about 2% price increase has been taken in construction sector, too, in the last 2 quarters. But that -- because we also add a lot of carryforwards from the last year for the inflation part, which was not getting absorbed. So that obviously impacted [indiscernible] and second half also is very good in terms of the volume growth. So typically, your volumes will be 40% to 60%, 40%, 45% for south; and second half, it's 55% to 60%. So that also gives some operating leverage. And we have the [ varied mix. It is variable ], which is already banking upon for the second half. It should be able to give us this margin that we're looking at.
Got it, sir. And sir, on the tractor side, new products, Atom Series and the 47 HP, agri's paddy specialist tractor. So how is the, like, sales run rate? And what are the expectations ahead for these products?
Yes. The demand is very, very good. Actually, we have some customers lined up to buy these tractors because we can't produce enough right now. So we are gearing up on the production capacity on -- and also on the capacity on both Atom and 45-horsepower, 4-wheel drive paddy specialist. So January, February, March, in that quarter, we have some big plans for these 2 models. But Q3 would remain kind of -- it will grow -- the volume will grow with respect to Q2 but not significantly because of the supply side constraints.
Can you share the volume for the last quarter, Atom and paddy specialist tractor?
We don't have it right now. If you don't mind, we can send you an e-mail on that.
Sure, sir. And can I take a last question or I can come back in queue for more queries. It was on the railway side. Sir, I just missed your point that sequential margin was lower because of increased share of new products. Is that what you mentioned, sir?
Yes. That's right.
And FY '19, what kind of growth is expected in railways?
So it's 25% to 30% on a full year basis.
Next question is from the line of Chirag Shah from Edelweiss.
Sir, I had a question on industry. So any specific inputs you can give, what kind of tractors are driving in terms of horsepower mix and what kind of trends you're observing?
Yes. See, there is no big shift in the trend really in H1 so far. There is a slight increase in the 41 to 50, and also a very slight increase in greater than 50, but not very, very significant. So for example, 41 to 50 has grown from about 45.4% to about 47%, right. And this is on the expense of 31 to 40, which has then grown by about 1.5% as [indiscernible] of the entire industry.
But is this because of the regional mix, sir? Is it because of the regional mix or there is an underlying change in way of farming?
Yes, largely because of regional mix because like some higher horsepower markets have slightly grown more than some other markets, and that is why it has happened. See, any fundamental change takes over, I mean, happens over a very, very long period of time. So I mean, quarter-by-quarter or a half -- a year -- a half -- year by year, it's very difficult to see that, right. So whatever we see, slight increases of 1 or 2 percentage is only because of the regional mix.
And sir, second question on the [indiscernible] commodity side. So what kind of pressures we are further expecting? And any risk of not being able to pass on either in construction equipment or in tractors?
Yes. So like we earlier mentioned, I think it's [ early, the more ] 3%-plus increase that happened in the [ CLN ]. We're expecting another 1% cost increase in the third quarter. So overall, we hope -- I think by Q4 and is [indiscernible] happens around that. So -- and then [ festival ], I think we've been able to pass it on so far, whatever inflation is in there until Q2. And in Q3, again, whatever inflation we'll be facing, we think we should be able to take down also another price increase after the festive season. Around construction, like I mentioned, so there's a bit of pressure there, so which we had not been able to really pass on fully to the market. So one is the issue because there's a lag impact of passing on the inflation. And second, whatever inflation gets passed on also not gets fully absorbed in the market. So both the issues are there in the construction segment, which is a bit of challenge as of now.
Yes, yes, yes. This was really helpful. And just one last clarification. Sir, does -- while you indicated Dussehra sales impact. Does the auspicious day sales are very significant when you look at this season? If you look at the entire 40 days of season, is it very skewed to the festive day or it's very well spread out?
See, overall, there is balancing this time because it's not just festive season because it's also the harvest season, right. So there's a lot of cash available in the hands of the farmers. And depending on the markets, we see a lot of skewness in -- from day to day depending on whether it's auspicious day or not. So for example, if we take Haryana or Punjab market, there is not much belief in any particular day and it more depends on the harvest and the cash flow. But in some other markets, like, let's say, Bihar or UP or even some parts of MP, we see a lot of skewness on particular days, right. So for example, like -- I mean, average sales on a Navratra day for us would be like, let's say, about 1,100, 1,200 tractors, right. In a normal day, it would be about 300 to 400, something like that, just to give you an idea of the skew.
We would take the next question from the line of Mitul Shah from Reliance Securities. [Operator Instructions]
Sir, I have 2 questions. One is on the tractor and another on the railway side. Hello?
Yes.
Yes. In case of tractor, sir, we have grown -- we have outperformed the industry not -- and weaker as well as strong, both the markets. So our market share has improved not only purely because of the favorable geographical mix, but within strong market also, we are growing. So according to you, what are the key factors, 1 or 2 important factor, which is resulting into this outperformance in recent time?
So we're just working harder than the others, yes? Nothing else. So...
So there is -- is there any product change? Are we expanding any B grade dealer expansion?
Yes. So this is actually a result of our strategy, I mean, nothing that we have done in the last few months. I mean, yes, you -- as we have been telling you that for last couple of years or more, we have taken some strategic actions in the way we handle the markets. So one action is that we have separated our power Farmtrac and Powertrac distribution. Earlier, we had a situation where most of our dealers were common for both the brands, and we thought that a same dealer would not be able to do justice to 2 brands, which have different meaning to customers. So that has really helped us, especially in the strong markets, where our -- the weaker brand is also giving us some growth in volume and market share. Also, South and West have been traditionally very, very weak for us, and therefore, we have run several projects, starting with AP and then following up with Maharashtra and Gujarat and Karnataka. And now we are running a special project in Telangana right now. So those projects are now yielding results, right? So for example, our AP market share would be in the range of 6%, 7%, while it used to be 2%, 3% a few years ago. Maharashtra is also inching up towards 6%, 7% now. So those things are helping us. So -- and that's why one of the major threats with our company was that we were growing in only -- we'll grow our market share in only 1/2 of the country, and the other half of the country will lose, right, and therefore, will be pretty much [ cutting ]. The good thing is now very consistently, we are getting market share in both the strong and opportunity markets, and that is helping us build better volumes.
Excellent. And within agri revenues, what would be the non-tractor revenue? You said implements roughly INR 23 crores. So is there anything else sizable and which has been growing more -- which is noncyclical in nature to some extent?
No, I think just like our past revenue, ultimately, that has also grown, but those are in line with the normal growth rate for [ 2 years ] for tractors too. So past has grown. 9 years have grown, so overall, implement business is also now starting -- [ income now is improving ]. So I think all these [ 3 are ] actually, the [ small ] tractors, I mean, already get there on the top line.
So second question is more on Railway Equipment side. Our margins are slowly improving, and the way that book appears, so it appears that operating leverage will further increase in the second half. So do you expect margin to improve sizably from here onwards with the new products and new...
Actually, if you see, the overall margin is pretty -- I mean, the Q1, it was almost like the EBIT is almost 25.3%. There was not much of a import content. Q2, we had some import content; but Q3, Q4, we would be hovering in the range of the, whatever, 16%, 17% because it would be difficult to maintain 25.3%, of the -- whatever we had in Q1 because we have a lot of import contents. As a part of the tendering, as a part of approval process, we have to push in some of the new products, which have here import content, which we are confident that, by next year, we should be able to get our local brake systems also approved. Once we do that, then it'll again stabilize, and it'll again be improving.
Do we follow any hedging for that?
Hedging, actually, we don't follow. It all depends upon the -- how the tenders come, we have to do that. And as I said that these are few tenders, which we have already won, and we have to -- as a regulatory team, we have to supply this with the particular import content building.
So this is not really the effect of ForEx metal. I think what Dipankar is trying to say, because we have high import content, so the margins on the new work initially are going to be low. And we are working on operating margin of 8% to 10% in new works areas compared to normal gross margin of 40%. So that -- margins really improve gradually as you localize those contents. So it's not just ForEx impact which is happening. It's the overall import content is high in that particular material, which is what is leading to lower margin. But as you grow further, so obviously, they'll localized, which will happen, which will further improve the margin. So again, at a -- [ gradually in those ] time, we should be able to localize that content and usually will fall in line, and then you can see the margin improvement happening again.
And sir, last question on the Construction Equipment, what is your outlook for next year?
Industry is talking about maintaining 10% to 15% growth kind of situation even with the election here. I think we will continue -- it was expected 10% to 15% should the growth [indiscernible] impact.
We will take the next question from the line of Deep Shah from Motilal Oswal Securities.
Couple of questions. First is on the side of -- Shenu, I mean, you mentioned you guys are running special projects in the opportunity markets like southern and western. So I mean, if you can elaborate, which are these initiatives and how these help us getting more business in that sense?
Yes. I think I need more time kind of to explain you about these initiatives. But broadly speaking, I mean, this is mainly a mix of focus in creating a lot of energy in those markets. So we -- what we do is instead of going to the market [ pool hall ], what we do is select a few districts or blocks or micro markets, where we'll put these products and our distribution is the best. And then we focus on that and raise the market share -- try to raise the market share, try to develop some brand acceptance in those markets. And once we have done that for about, let us say, 6 months or so, we develop a very good amount of positivity in the rest of the broader market. So that is roughly kind of the approach that we have taken. So for example, in Telangana, we are running a project, and Telangana has about, I think, about 25 or 28 districts. And we have selected 6 districts in which we are doing something special in terms of our offering, in terms of our distribution network, et cetera. So that is what we normally do as an approach. But I'd be very happy to make a detailed presentation to you when an opportunity arises.
Sure, sure. Second question is on the Escorts Credit penetration. I mean, if you can elaborate more on the geographic coverage, et cetera. Has there been a progress in this quarter as compared to last quarter? That will be helpful.
I'm sorry, quarterly, we don't have on that right now but I can give you generally kind of more of a broader answer on this. So we have a quarterly and a monthly plan for expansion. Also, our plan for penetration within the same dealership or within the same area where readily Escorts Credit is operating, right? So we are very well -- we are very much on the mark on geographical expansion. So we are already in about 9 or 10 states as of now. And by end of next calendar year, our aim is to be in about 80% to 90% of our dealerships, right? And as we have -- now the overall penetration is roughly, I think, about 12% to 13% as our overall sales or client sales, right, which we want to take it up -- take up to about 30% by end of the next calendar. And on both accounts, we are pretty much on the mark.
Sure, sure. And last question is for Bharat. I mean, Bharat, if you can elaborate on cost control benefits, so how much it must have contributed to margins this quarter roughly?
On the cost side?
Yes.
So cost side, I think, overall indication is I think it will be closer to 0.75% to 0.9%, I think, about 90 basis points you can say. I think it's coming both from a combination of manpower cost and material cost initiatives. So both put together, I think, is what has led to this improvement.
We will take the next question from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
So typically, tractors are used for commercial applications as well as agricultural purposes. How is the commercial usage now holding up? We are hearing of some restrictions in the registration of tractors for commercial purposes. And in some states with Model Code of Conduct coming into place, we are also hearing some commercial applications coming down. With -- I mean, with this as the context, how are you looking at commercial usage of tractors over the next 6 months timing on?
Yes. So on the ground, we are not feeling any pressures like this from the commercial side also. Of course, commercial is very, very sporadic and very political and in different parts of the country and in different things keep on happening. So for example, Bihar mining, South Bihar mining will open up 1 day and will close in 3 months. And all that stuff keeps happening, right? So we have to be just agile, and we have to just know where the demand is coming from and be there at the right time. But other than that, we are actually seeing a lot of momentum in our commercial -- our sales for commercial purposes, commercial uses. I mean, right now -- even right now there are a lot of markets, which are doing very, very well on the commercial side. So we have not seen any concern over -- on that so far.
Okay, okay, okay. so you don't see that as any threat going -- over the next 6 months if at all something changes on the ground.
I think it will be for positive actually until the election at least.
Okay, okay. Sir, recently, M&M launched a slightly underpriced product under their Trakstar brand. So which geographies are more amenable for these lower priced tractors? Will this lead to a market size expansion in the sense that some new customers, who have never bought, and first-time buyers may come into the market? And to that, is this a threat for us?
I don't think -- I think our brand is a much more -- I mean, much more stable brand. It is around for 70 years now. Trakstar is a very new brand, and you know that tractor industry is a very mature industry. It's not very easy to displace its incumbents in any market, right? So it will take a long time for Trakstar to prove itself. And I don't want to comment on their strategy, et cetera, but I think, even if it is something formidable, it will take a lot of time.
Next question is from the line of Naveen Kumar Dubey from Narnolia Financial.
My question is on the tractor side. In earlier calls, you mentioned that the shift is happening towards the lower HP tractors. So how is the progress going on that side?
Yes. See, as I was explaining earlier on this call that, see, there are some fundamental different changes that are happening, which require larger tractors to be used. But that kind of a shift is very, very slow in India, and only over a period of 5 to 10 years, you can actually see that there is some significant movement across the horsepower segments. Most of the quarterly or even yearly shifts that we see are the result of the regional mix. So for example, in southern MP, there is like in [ doorbell ] . Let us say there's a penetration of higher HP tractors. And if that market blows up, then, of course, we see a shift on -- even all India numbers. So I think if you just -- if you're just looking at H1 sales, which is about 1.5% shift from 31 to 40 -- from 31, 40 to 41 to 50, that is largely because of that and not because of any fundamental changes that have happened in the last 6 months.
And the second question is on the Construction Equipment side. And sir, what is the localization content there if -- I mean, import content?
First, in construction, overall content, I think, in the transaction what we do is not much. It's only the excavator business, which we have started or the trading business, which we are in, where we're importing the products like we recently tied up with Doosan, for example, for excavators and are even doing distribution for forklift trucks and for iron cranes. So those are the products which are today imported, so obviously there, we got exposure in terms of the ForEx lift. Otherwise, on the local construction side, [ they start but the ] overall our company level is less than 2% [ of that whole content].
We will take the next question from the line of Sakshi Mahant from IndiaNivesh.
This is Mayur. Just wanted to know what are the current inventory levels in the system that is with also dealers and distributors?
Okay. Entry level is high as compared to normal, and that is, again, very normal for the festive season, and we are in the middle of the festive season. So we are still around 8 days away from Diwali. We are maintaining high stock as industry is right now and of course, we'll correct -- we'll do the correction -- some correction this month and somewhat more correction next month after the -- after Diwali is over.
Because we have done some channel checks and they were suggesting that, yes, as usual, the festive inventory is high, but we are also getting some signals that demand so far has been a little lull. And we are anticipating that probably in the next 1 week, 10 days, they should have some strong demand. So in case that happens, and I'm sure it's business as usual, but for some reason if the demand really does not come back, then do we expect a significant production cut to get -- to correct this inventory?
No. See, that question is actually, I think, a little bit hypothetical because we are only about 7, 8 days to Dhanteras and Diwali. And we have a very strong IT-based system of managing of our sales pipeline. So we have a very good idea what are we going to sell on Dhanteras and Diwali because we have the leads. We have -- we categorize the leads into different categories. We are in touch with the leads already. Many of them have deposited some booking amount with us, right? So we are in -- we can't expect the huge supplies now. So we are in a good position. We won't give you any surprise on stock situations.
Next question is from the line of [ Vak Swarup ] from [ Raj Ven Cap ].
Just wanted a clarification. You mentioned 10% to 15% tractor growth for this fiscal or for next fiscal?
No, we said 12% to 15% for this fiscal.
Okay. And what would be the outlook for next fiscal? You had mentioned around 7%, 8% I think. So that stands?
No, we did not mention anything. So we just said that we are seeing a positive momentum at least until Q1 of the next fiscal. And post that, there are a lot of factors that are to be seen, and we'll be in a better position maybe around in Q4 to get you a better -- or any number actually on the next full year.
And on Construction Equipment, what are our target EBIT margins that we're looking forward for, like, not for this fiscal, probably for -- from a medium-term perspective?
So if you look at our Vision 2022 documents, we've given [ direction ] for a high single-digit margin on the construction side. It will be roughly 8% to 9% of margins, which we think we can still drive this business at.
Right. Do we see traction coming in from next fiscal year that the margins can move forward? Or it still will take some time to get to, say, 4% to 5% of kind of EBIT margins?
So 4% to 5% is the guidance, which we have given for the current fiscal year. So obviously, if you exit the year with that sort of margins, so next year, we would think should only look better from this. So it would be gradual increase. Obviously, it's always single year we shift to the 8% to 9% growth, but that, like I said, is the Vision 2022 number what we are talking about, so still 3 years to that. So what that means is that, actually, we have about 3 years to improve the margin basically in this business.
Right. That's quite helpful. Sir, lastly, on -- how does this industry cycle work for Construction Equipment? I mean, you've seen a very long, dull cycle, and we've come up with a great [ business ] effect and we're growing at a good number. But how sustainable is this kind of growth we're looking for come 2 to 3 years' perspective?
Actually, if you look at the growth -- this Ajay with you. If you look at the growth, last 2 years has been phenomenal in terms of industry growth. I think the growth will be of not that quantum. I mean, when you look at 35%, 40% kind of growth, that is something -- is not sustainably for long. So I think the pressure is on completion of the project or the continuation of the projects, which are on. So some performance is also happening around the project side. I think from next year onwards, the normal increase of 10% to 15% that we generally look at in this industry will be there, and that will continue for 3, 4 years, I think, or maybe more.
Okay, that's great. And have you seen any market share increment in Construction Equipment division that -- in this first half?
Yes, we have improved our market share in -- because that is -- it can vary in sectors. And that, too, according to sector, there will be contributions of course. We have achieved close to 17% market share. So we are only -- we are concentrating more on the segments, which give us money. So that will be direction that we have taken now.
[Operator Instructions] We will take the next question from the line of Sameer Deshpande from Fairdeal Investment.
The results were quite good. I would like to know whether we have started selling these farm implements. And are we getting any contribution from that in a meaningful way?
The implement, which you talked about, actually is a part of the order, which we got from the Central government for the [ conceptual investing ]. So that comes as a package. So it's not something, which we have started manufacturing. So it's something that is a trading activity, which we are bundling along with our tractors and supplying to the government. So you can't look at margin in isolation. So it's an ordinary deal. So yes, on overall basis, our margins in the overall program are lower than probably what you make in the normal case in the retail operation, but the volumes are likely to be better there.
Now with this increasing raw material prices, which you have passed on in most of the cases and you may pass on going forward, do we expect to maintain the margins for the entire company at around 12% plus going forward?
We have given -- initially given guidance of 100 basis points improvement in the margin on overall full year basis. And since the first half, we had a very low base, so that's seeing a good traction happening on the margin front. But in the next 2 quarters, the basis still is very high, so -- but we're still seeing those. That's why we should be able to be somewhere around that [indiscernible] level of percentage.
And just Tadano joint venture, which we have -- we had for the higher range of cranes, when it will start the activity?
So likely to be from December. So right now we're in the process of selling the company and getting all the constraints and rules and registration into place. So hopefully, by end of November, we should have everything in place, so we should start commercial production from December time.
From December, that is from the New Year, where you may start the production for the -- January '19 onwards.
Yes, you can say that.
The company will start from that...
That JV will start manufacturing.
JV will start, right. You are 50% there, no?
Yes, we are 49%.
Oh, yes, 49%. What is the reason for this higher other income of INR 22 crores?
So this is -- basically, since we have cash on the balance sheet, so that's the investment which we've done, so at least the income coming from the investment of those mutual funds and investment category. So there's a [ grade ] which we give to the dealers, to channel partners so that their interest income comes from that. And there's also some exceptional item like ForEx gains on the export front, so we -- some income has come to display. So that's -- I don't know, I mean, that we [ want ] INR 4 crores, INR 5 crores, which is in exceptional income, which is coming out of this MTM [ equivalent ] on investment income, which may not [ be directly ] given the current situation on the net market side of the NBFCs. So -- but I think the real number, you can say, is INR 15 crores to INR 16 crores out of other income partly will be there in each quarter on an average basis.
That INR 15 crores to INR 16 crores will be a normal...
It will be a normal level, which we'll have, yes.
And wage revision, we were going to undertake in Q2, have you done that?
Not -- at Q2, no, it's is not a wage revision, so I'd say normal appraisal cycle for the managerial staff, for the white collar employees, which we follow from July to June. So that increase obviously has happened from 1st of July. For the blue collar employees, for the wages part, the settlement is due in next year, not this year. So it'll be in 2019, I think in the third quarter. So that process, obviously, will start next year. So it's not really [ in details now ].
We will take the next question from the line of Raghunandhan from Emkay Global. [Operator Instructions]
First, just can you share for this JV with Tadano how much is the investment from Escorts' side?
We are 49% partner there and 51% majority is with Tadano. So the initial capital requirement will be, I think, close to INR 60 crores, INR 70-odd crores, which in the longer period, we're looking at, say, 8 to 10 years cycle. It means that will be around 150 to 200 plus investment. Requirements will come. But initially, we are going to start at INR 60 crores, INR 70 crores [ sort of cap ].
So out of that INR 60 crores, INR 70 crores, 49% will be from Escorts.
That's right.
And sir, like, coming back to the festive season, starting from Navratri to Diwali, what is your internal expectation? What kind of growth are you looking at versus the last year festive season?
Oh, Navratri to Diwali?
Yes.
I'll have to talk to you separately on this, so I can give you some numbers separately on Navratri to Diwali.
And sir, like, within tractors, what would be the share of non-agri tractors? And what would be the growth in the first half -- first half, fourth quarter? That is commercial or non-agri. What would be the kind of -- you said the momentum is strong currently in the market.
See, right now, see, this season is actually largely the agri season, right? Of course, commercial sales happen, but commercial sales as a percentage goes down during this season, right? I mean, that is very, very normal so because there is a harvest and all people and all farmers have money coming in right now and therefore, all these additional sales or seasonal sales is largely because of the agri sector, right? So once we enter November, December, January period, then you will see, as a percentage, commercial sales will start rising again because, at that time, there will not be many farmers who will be in the market to buy tractors.
And broadly, what would be the share, sir?
It's very, very hard to say, but normally, when we are asked, we do say that, in our estimates, the tractor that are used also for commercial purposes is about 40%. We think there are hardly any tractors that are used solely for commercial purposes. I think that number is very, very low. But tractors which are significantly used for commercial purposes in addition to agri is about 40%.
And for the current year, would you say the growth will be in double digits in this segment?
Yes. We have already given an estimate of 2 months back of 12% to 15% growth in the industry for the current system. And right now...
For the commercial segment.
For the commercial segment, I think, that growth should be in the range of about 15% to 20%.
Got it. And so can you share what is the share of traded products in Construction Equipment?
Mr. Raghunandhan, does that answer your question?
One second, we are just going to provide him that number.
It's only about 3 -- less than 3% in terms of volume because I think we want it to be higher, but in value terms, volume does less than 3%.
Next question is from the line of Supratim Basu from Americorp Capital.
Apologies if you have answered this before. But just looking at the presentation, could you tell me why your debt has gone up from INR 50 crores to INR 211 crores?
So it's a working capital basically with -- you're literally in the off-season months, and we are building inventory towards the high-season months, which is happening in the segment Q3. And since obviously, we have capacity issues because we were almost running at a peak capacity level for last 3 months now, so we were not able to really push the numbers in the season time and then production that is required. So we had to build that inventory. So in September, it is situation. So in Q2, the working capital has gone up; but in Q3, we'll see the traction happening back. So by the end of Q3, we'll see that things will be back in the normal.
So both INR 91 crores plus INR 99 crores would be working capital.
Yes, the downgrade is down to roughly about INR 20-odd crores, so that level then.
And so this will get wound down by the end of the year?
Yes. So again, like I said, this is basically depending on the season. Obviously, by March again, the season starts. So normally the cash situation is good. So March to June is a good cash flow period for us, so that then we obviously follow. So therefore, 7 to 8 months where the cash flow is very positive; but 3, 4 months, where we need to [ look at warnings over there ].
Ladies and gentlemen, that seems to be the last question for today. I would now like to hand the conference over to Mr. Bharat Madan for his closing comments.
Thank you, ladies and gentlemen, for being present on this call. For any feedback and query, feel free to write into us at investorrelation@escorts.co.in. You can also log on to our website, www.escortsgroup.com for our earnings releases as well as other details. And this transcript will be available on our website after some time. You can visit our social medial pages for the latest company news, development, et cetera. We'll meet again the next quarter. Thank you very much, and have a very good evening.
Thank you very much. Ladies and gentlemen, on behalf of Reliance Securities Limited, we conclude today's conference. Thank you all for joining us and may disconnect your line.