Escorts Kubota Ltd
NSE:ESCORTS
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Escorts Kubota Ltd
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Ladies and gentlemen, good day, and welcome to the Escorts Limited Q3 FY '19 Earnings Conference Call hosted by PhillipCapital (India) Pvt. Ltd. [Operator Instructions] I now hand the conference over to Mr. Nitesh Sharma from PhillipCapital (India) Pvt. Ltd. Thank you, and over to you, sir.
Thank you. Good evening, everyone. On behalf of PhillipCapital (India) Pvt. Ltd., I welcome you all for Escorts' Q3 FY '19 Earnings Conference Call. I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us Mr. Bharat Madan, Chief -- Group Chief Financial Officer; Mr. Shenu Agarwal, Chief Executive, Escorts Agri Machinery; Mr. Ajay Mandahr, Chief Executive, Escorts Construction Equipment; and Mr. Dipankar Ghosh, Chief Executive, Railway Equipment Division, along with the Investor Relation team of Escorts Limited. We will start the call with a brief opening remarks on management, followed by an interactive Q&A session.Before we start, I would like to add that some of the statements that we make in today's discussion will be forward-looking in nature. At this point, I would request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Nitesh. Ladies and gentlemen, a very good evening to you all. We're giving the snapshot of the company's quarterly performance today as follows. The revenue for the quarter is up by 37.4% at INR 1,655.1 crore, the highest ever quarter revenue as against INR 1,205 crores last year same quarter, led by volume growth across all 3 businesses. Tractors volume, up by 36% to 25,743 tractors as against 18,930 tractors last year same quarter. Construction equipment volumes, up by 30% to 1,413 machines against 1,087 machines last year same quarter. EBITDA at INR 200.5 crores against INR 145 crores last year is up by 38.2%. EBITDA margin now stands at 12.1% versus 12% last year same quarter ended December '17. Finance costs [Audio Gap] by INR 1.7 crores to INR 4.3 crores as compared to quarter ended December '17. However, the total debt outstanding as of December '18 is INR 239 crores. It's increased due to increased working capital requirement during this high-growth festival season.This quarter, we have an exceptional income of INR 10.91 crores on the counter of transfer of over [indiscernible] Korean business to the joint venture with Masuo's Tadano Ltd. on a slump sale basis net of value of asset transferred and associated costs incurred for affecting the business transfer. PBT from continuing operations after exceptional items at INR 210 crores is up by 62.2% as against INR 129.5 crores last year same quarter. The company reported a PAT of INR 140.1 crores versus INR 92.0 crores last year. It's up by 52.3%. PAT margin now stands at 8.5% versus 7.6% last year in quarter ended December '17. Just for information of all the investor, this has been the highest ever profit the company ever achieved in a quarter in [ GST ], so that's something which is a stupendous performance. The EPS for the quarter is reported at INR 11.72 against INR 7.70 last year same quarter. Now moving on to the segmental business performance. Starting with the Agri Machinery business. Domestic tractor industry volumes grew by 19% to 2.10 lakh tractors as compared to 1.82 lakh tractors last year same quarter. Our domestic volume went up by 34% at 24,720 against last year's 18,418 in quarter ended December. Industry in our strong markets in North and Central India grew by 29%. We had our industry grow by 6.3% in our burgeoning markets of South and Western India. In line with our guidance, we have gained market share across all major states. Our domestic market share stands at 11.4% in quarter ended December '18, up by 130 basis points as against last year's same quarter. During the quarter, our product mix has been adverse, having sold more products in less than 40 [indiscernible] last year. Besides, Farmtrac and PowerTrac brand mix during quarter was at 36 to 64 against 37 to 63 last year. That has also mildly affected EBIT budget for the quarter, which now stands at 14.3% against 14.6% last year.During the quarter, we have added 47 new dealers in India, taking a total dealership count at the end of the quarter at around 920. We expect domestic tractor industry to grow by 10% to 12% in the current fiscal.Coming to the Construction Equipment business. Our served industry grew by 19.4% in Q3 FY '19 with respect to Q3 FY '18. Material handling segment have been the biggest gainer in Q3 FY '19 with growth of 35%, followed by compactors in rural segment with 36% growth, and backlog orders with 16% growth. Our total volumes in manufactured and traded products went up by 30% to 1,413 machines in quarter ended December '18 against 1,087 machines in last year same quarter.EBIT margin for Q3 ended December '18 is at 3.5%, up by 127 basis points as against 2.2% in the same quarter previous fiscal. In line with our strategy to move our products up in the safety value chain, during the quarter, in Bauma CONEXPO 2018, we launched 3 new products, namely Hydra NXT 13, the next-gen Hydra Pick And Carry Crane with better maneuverability, higher stability, durability and better visibility.EC 3664, a mini compactor in 3-ton class. A powerful mini compactor with highest credibility and sturdiness. And EC 5511, a compactor in 11-ton class. Going forward, we expect that our sale construction equipment industry will continue to grow at 13% to 15% in medium term.Coming to the railway division. Revenues at INR 96.6 crores in quarter ended December '18 are up by 34.1% against INR 92 crores last quarter same quarter. EBIT margin is up by 690 basis points at 19.9% as against 13% last year same quarter. Going forward, in current year, we'll be executing orders for new products with more import content, which may lead to some adverse impact on margins in short term, though in the medium to long term, we'll be able to mitigate the impact with better localization of these components. Order book for these divisions stood at more than INR 450 crores as of 31st December 2018, which will get executed in next 13 to 15 months. Now I request the moderator to open the floor for Q&A session, please.
[Operator Instructions] We have our first question from the line of Jinesh Gandhi from Motilal Oswal Securities.
My question pertains to 2 things. First is, in terms of our item cost, it has gone up substantially on q-on-q basis. And so apart from mix, is there any other factor which has led to this? And can you also talk about the price increases which you have taken in tractors?
So there are 2 reasons for this. If you look at quarter-on-quarter performance, one obviously is the inflation, because was what was happening is in the last one year, if you look at the kind of relationship we have seen on the material costs, that is almost 5.5% to 6% range. And we have been able to pass some time back to the market, but it will pass on an absolute amount. So that also impact the percentage of material costs. So you should compare, really, against last year, so we had an impact of almost 1.5% pricing on account of passing on the inflation, some with the lag and some obviously with a little passing on the same amount, not on the same percentages, which is impacting the margin slightly. The second effect, obviously, I like to mention is about the mix because we had some also subsidy-based orders which have been executed during the quarter, which is a good top line. Investor Relation is improved, but in terms of the margin, they are slightly lower, which is also impacting the sales obviously that means we chalked up about in terms of selling more tractors in the less than 40 [ SP ] category with track like we mentioned, we have introduced tractors in the sub 40 subcategory, which is a segment we are not operating in. So that is also impacting the margin. Besides the mix of Farmtrac and PowerTrac slightly, which is slightly skewed and also you look at quarter-on-quarter also, it's one [indiscernible] thing which has happened, which is also impacting the margin. So it will likely all these material cost increases happening if you really look at quarter-on-quarter.
Okay. And the price increase which you have taken?
So we have taken a few 1% price increase in this quarter, but that was taken after the season was over, so by end of November.
Okay. And have you taken anything in Jan?
No. So there is no price increase in Jan. So as of now, we don't see really much impact coming in from the inflation or the commodity prices softening, so we don't see really that pressure will continue going forward.
Okay, okay. And can you update us on the dealer inventory going into Jan? And the demand which we are seeing in Jan, is there any change in the trend?
Yes. This is Shenu Agarwal. So as far as dealer inventory is concerned, we have spoken about it previously. Also that, in number of days, we have substantially reduced dealer inventory in the last about 3 years. And I think right now, we are sitting at the best dealer inventory, which means that lowest dealer inventory in terms of number of days, right? So yes, so we will -- I think we will continue to kind of be at those levels. And we feel that, probably, in the industry, we should be the best when it comes to number of days of dealer inventory right now.
Okay. So dealer inventory will be ought about 4 to 5 weeks or lower than that?
No, no. It will be much less than that. It will be close to 3...
3, 3.5 weeks [ probably ].
3 to 3.5 weeks.
Okay. And update for the Jan month, has demand picked up?
Okay. So December and January are looking pretty much the same, right? So I think there will be more pickup in the demand from -- I guess, similar demand for March. But overall, this quarter, quarter 4, as we had earlier said, would be kind of 0% to 3% growth in the industry. And the main reason is because of the high base last year because last year's industry grow in Q4 by about 49%. I guess we are sitting on a high phase, and that, that is the reason that this time, we may not see that much growth in the industry in Q4.
We have the next question from the line of Hitesh Goel from Kotak Securities.
My first question is on the RM cost. Like you said, the RM cost has started to decline from December onwards. So do we see any benefits coming in the fourth quarter? Are -- and so that basically how are our contracts structured with the vendors?
Yes. So normally, we have a benchmarking which normally goes in the like of about a quarter. So any impact in this quarter will get reflected from the next quarter. So any changes which has happened in the December quarter obviously will be reflected from 1st of January, but the softening of price, this will happen in Jan to March quarter will get reflected only from 1st of April.
Yes. So December, actually, the commodity costs have declined, so we should see some benefit coming to in the fourth quarter or it should be in...
So we look the weighted average of the quarter. So if in October, November, they were in high, and December is gone down. So that many not have any much impact positive in this quarter, but yes, we expect early April onwards, it will look better.
Okay. And sir, any issues which has happened on tractor demand because of NBFC issues? Also, you know, Mahindra in the call was saying the tractor demand is very buoyant. And you are saying that you are expecting only 0% to 3% growth in Q4 FY'19. So can you shed some light what -- is there any financing issues in the industry? What is the basically the scenario right now?
Yes. This is Shenu. So I don't think there are any -- I mean we haven't felt any issues with respect to financing. I think the credit is abundantly available. There are no red signals from any financiers that we work with, and we work with most of them. So I don't think financing is going to be an issue. Yes, we also -- onto your other question about what Mahindra said. I think our estimates for the whole year are about the same. So I think in quarter 4, probably, we both are talking about the similar kind of industry goals.
We have next question from the line of from Gunjan Prithyani from JPMorgan.
I just had a clarification on this industry growth. Now clearly, when we -- when you spoke last time, you were guiding to a higher growth for the industry, and this seems to have come off in this -- the commentary that you gave now. Is there any change that you are seeing in the underlying demand? And you think F '20 growth could be pretty soft? And also, the subsidy business that you spoke about. Now are you seeing the roll down in these subsidies, which is kind of having an impact on the overall volume numbers for the industry?
All right. This is Shenu again. So see, as we explained on the last call also, I think we maintain that view, that there are no fundamental actually factors that are affecting the industry right now as far as we are concerned, right? So when we talked about availability of credit or the sentiment at the ground, these are all positives. Although there are some worries about lower swing of the [indiscernible] crop, right? But we don't think that is going to impact the industry too much at this point in time, right? And whatever negative impact has come in swing, that has largely come in the south where we traditionally have a lower market share. So at least, its costs won't get affected by it too much. So as far as the estimate for the whole year we had given earlier, that is right. We have said, we will probably see industry growth of 12% to 14% or 15% for the whole year. But now, we are saying about 10% to 12% for the whole year. So there is a couple of percentage of drop that has factored in, in the last couple of months. And that is probably because of slower growth than we were expecting in November and December. So we think that will continue. As far as Q4 is concerned, there is not a major change. I think we told -- we were -- earlier also, we gave an estimate that because of the high base last year in Q4, the industry may not grow that much this year. Yes. So we are revising our estimates to about 10% to 12% now for the overall year.
And would you share anything on the subsidy business that is that not with respect to Escorts, but industry? Because that's been a key driver for growth in last year. Do you think that there has been some roll down in subsidiaries and subsidies in certain states and that can have an implication on the growth?
No, I don't think there will be roll down on subsidies. I think that, actually, in recent -- in the near future, we are expecting -- everyone is expecting governments to roll out actually more stocks to the farmers. And therefore, I think either in the form of subsidy or otherwise, I think there will be a better support from the government side to the farming community, which will actually have a positive effect. So even in the quarter 3 ending December, there were -- the industry benefited quite a lot from the subsidy-related sales.
Okay. And last question, is there anything you would like to share for '20 growth outlook?
Yes. With that, as we said in the last call, I think we will be more -- we will be in a better position to give you an outlook around, let us say, February or March, around that, once we have some initial forecast on the monsoon coming in. So I think that would be a better time to give a forecast.
We have the next question from the line of Mitul Shah from Reliance Securities.
Sir, my question is a follow-up on the -- as you said, that FY '20 right now, you will not be able to guide. But just broadly, on the industry perspective, not from the Escorts' perspective, that monsoon deficit is much higher in south and western. And on the other side, barring just 2, 3 players, most of the players are having inventory in the range of 5 to 6 weeks. So in that situation, sir, how do you see next 1 or 2 quarter at least from an industry point of view, impact per segment?
Yes. So Mitul, from industry point of view, I think there is going to be a very positive momentum in the industry, at least in the next 6 months going up to June or July, which is the very first sign of swing season. We don't see any problems until then. The Q4 lower estimates are only because of the high base of last year because, as I said, last year industry grew phenomenally by about 49%. So on such a high base, I think it is -- we are not estimating a growth more than kind of 3% to 5% in quarter 4, right? But going forward, Q1, Q2 of next year should be pretty buoyant as far as we are concerned. Now coming to the west, south, geographical phenomenon, you are right that in the last 3 to 4 months or maybe slightly more, we have seen north and east industry growing much faster than the south and west industry. Even in December, we could -- we had the same phenomena. And the reason is, of course, the availability of water in those areas is not good. I mean there are several areas in south and west which are kind of undergoing a drought situation, and that is not going to change at least until the monsoon, far end of the monsoon, right? So Escorts is certainly going to be benefited from all these factors because the industry is going to grow much higher in areas where we are much more dominant. And therefore, I mean, we are very confident that we'll continue to grow better than the industry as we have for the last 3 or 4 quarters now.
Yes. Sir, my second question is on the construction equipment side. And I might say as we already started seeing industry declining since last 2, 3 months, so on the construction equipment side, how do we see in terms of the cyclical reversal and on the margin side outlook for next year?
Here, I think if you look at the numbers for last quarter, there was some impact which happened with the NBS issues, and then merrily went very south for us. So what -- from the last 2 weeks of December, we saw the demand again coming back. And normally, we've seen the second half is normally the strongest quarter and March typically the very strong quarter for construction equipment business. So we expect again the momentum really will continue, this quarter we steadily see strong momentum. Though, for next year, we expect them because some election coming in and there will be some stagnation which will happen for a few months, so there will be some temporary impact of 5, 6 months. But still, we expect the industry should give double-digit growth next year, too. I think on the margin front, we had given a guidance of 4% to 5% to sort of margin range for construction for this year, which we very much expect fully will be maintained. So we have seen with normally the maximum volume really comes in the last quarter, which really could be a good quarter. So all the margin will get improved, and that improvement we've seen happening in the last 3 quarters also. And for next year, obviously, the continuity into the improvement in margins will remain. We will -- as we said, we are moving up the value chain and also looking at selling the higher grain products. So that journey should continue. So obviously within the long term by a few the margin which we have given for construction business or for example, FY 2002 is about 8% to 9% sort of margin, and we are still talking about 4% to 5% this year. So obviously, there is a scope for improvement which we'll continue to work on going forward in next 2, 3 years.
We have our next question from the line of Pratik Rangnekar from Credit Suisse.
This is Jatin. A couple of questions from my side. One is, you are right now at about an 11.5% market share. What is the market share expectation you have for FY '20? And what were the main drivers of the same?
Yes, Justin. We are -- we have a few weeks to go, but we are very confident that we'll be able to achieve about, let us say, close to 12% market share in this fiscal year. We are already about 1.1% gain as compared to last month in the first 9 months, which makes us the highest market share growth player in the industry. And if we continue that momentum for the balance of few weeks, then we should be touching about 12% market share, as last year, our market share was 11% -- close to 11% or 11.1%. Now from 12%, a base of 12%, we certainly aspire to repeat the performance of this year, which is about, let us say, 1% market share gain again. So let us say it's somewhere between 12.5% to 13% is what we were -- we are going to target for FY '20.
Okay, that's good. Glad to hear that. On the question for Bharat on FY '20 margin guidance and what are the key levers that one should look at for next year. We have spoken about there being a further potential to improve margins. We just wanted to check as to how quickly you are kind of looking to realize that.
Well I think, actually, we are obviously still think that there's scope for deploying margin further. So if you look at the benchmark within the industry also, so we think there is still scope which is left on the table. So the CEO at [indiscernible] had given a guidance of them growing their margins over 200 basis points. So though this quarter has begun slightly, we think there is some issue which we had on a YTD basis, still we are better than that, and we expect by the end of next quarter, again, for this full year, we should be actually meeting the guidance. So like Shenu said, so we have an aspiration to grow our market share, as well as also improving on margin. So I think we are very much on target, I think, on those directions. We'll continue to work on that. So again, I think the plans for next year are still being finalized, so really, we can't really give any guidance as specifically. But obviously, the journey is towards improving margins further from where we are today. So that journey will continue, so we'll see improvement only happening next year too, as long as our market share gains and the volumes sustain.
[Operator Instructions] We have the next question from the line of Nitesh Sharma from PhillipCapital (India) Pvt. Ltd.
Sir, on the railways business, you have touched upon at various points that we are looking at inorganic opportunity for another leg of growth. So any update where are we on those plans?
There are few opportunities still being evaluated as of now, but obviously, nothing has been finalized so far. So obviously, it takes a longer process to really evaluate and go through the entire process. So we are selecting the options, so there are a few on the pipeline. So let's see, maybe in next 3, 4 months, if something materializes, definitely, we'll come back to the market and inform you of it.
Okay. And on the construction equipment side, can you help us with what percentage of financing in CE would be via NBFCs?
Okay. You want to get -- me to get this answer?
Yes. Yes, please.
NDFC is about 80%, 80% of the equipment financed upward by NBFC.
90%, if I hear you correct?
Yes. 80%. 80% to 85%, around that.
So 80% to 85% is solely NBFCs or it’s a mixture of both bank and NBFCs?
See basically, if you see -- ask me the -- what is the biggest, and then you have the NBFC, one in [ Shiram ]. Those are the guys who play a bigger role in construction equipment. So I would say 80% to 85% is getting financed by NBFC, as of now, as far as our equipment is concerned.
Okay. And despite such a huge chunk of being financed by NBFC, we haven't seen a major impact on demand per se as compared to something like an MSC resegment which saw a bigger impact.
Yes. We said that because there is some expense, bolt-on expense, in the liquidity situation, but they are getting outfitted by some strong player which are coming in between this and is coming in a big way now. So that is taking care of most of the small details by the player or the other smaller ones.
We have the next question from the line of Shashank Kanodia from ICICI Direct.
Sir, I just wanted to ask in terms of September and quarter-end, we had some stress to working capital cycle related in some short-term borrowing on your balance sheet. So what's the status as of date?
As what I mentioned, our total debt as of the end of December stands at about INR 229 crores, which is slightly up compared to the September quarter, because we had returned to a high festive season this quarter, where the growth was very high. We grown 34%. So obviously, the dealer working capital also is beating a stretch, so it's leading to some build up happening on the inventory and data on order books, too, which has actually impacted this, but we expect, I think, by end of March, we should be falling in line and should be back to the normal process.
Okay. So sir, what kind of short-term borrowings will end by March '19?
So by March, we expect it should be back to in the range of about INR 100 crores to INR 150 crores of range for the working capital side.
Okay, okay. So sir, then we should be generating excess of INR 300 crores, INR 350-odd crores of cash flow from operations, right, this year? So how do we intend to spend that?
I think if you look at the overall cash flow cycle, obviously, there is some CapEx also which has happened which is the loan repayment, so INR 40 crores, INR 45 crores of the long-term loan, which are getting deeper than the INR 150 crores, INR 160 crores sort of CapEx which has happened. And on top of that, there's been some major money which has gone in 2 factors. One is obviously the high tax flow, which we have which we already have been taking care of. And then they got some accumulation happening on the GST. As you know, in the tractor industry continues to be minority duty structure design where your input tax is higher than output tax, so there is some accumulation which has happened for the refund process is still on and the government hasn't really streamlined that process, so that. We also have huge [indiscernible] stuck in GST accumulation, which is -- we are waiting the refund from the government. So we expect that March -- by March, we expect that refund process to continue to start. And really, we should end up a better situation. Otherwise, if the thing gets delayed further from the government side, then obviously, there will be some pressure on the borrowings, too, on the working capital side. As of now, we got close to INR 130 crores, INR 140 crores which is due for the government as refund on our GST, so major borrowing, you can say, has been attributable to actually one of the reason is also that.
Okay. Sir, what will your CapEx guidance be for FY '19 and '20?
So FY '19, we expect the cash flow wise it will be somewhere around INR 150 crores to INR 160 crores, though next year, like I said the plans are still being formed up, but we expect it to be anywhere between INR 250 crores to INR 300 crores total requirement.
Okay, okay. And sir, lastly, about your dividend distribution policy, if you can throw some light?
So dividend distribution policy, you can look at our website. Recently, we uploaded a revised policy, only I think about a week ago, so which exactly looks at distribution improving, and there's a band which has been defined. Within that, we'll be really looking at, looking at the growth factors and other initiatives. So obviously, the idea is to improve as the cash flow improves, so that the distribution will improve, and within that, the advantage is in design and performance.
We have next question from the line of Amyn Pirani from Deutsche Bank.
Yes. Sir, so my first question is just going back to the FY '19 volume growth expectation for the full year. Now while I appreciate the fact that 4Q is a significantly high base. To be very honest, this is something which was well-known, but still, not just to you, but other participants in the market also have had to reduce their full year forecast, say, after October and November. So I mean, is it just because festive sales was not as per what earlier the growth was expected? Or is it just a marginal correction in the guidance? And my second question is, your market share gain this year. How much of it can be attributed to market share gains in individual region? And how much is it just a mix? Because obviously, I think the areas where you are weak have not grown as well. So mathematically, you should have seen a market share improvement anyways.
Okay. So let me answer the second question first. So there has been a benefit of the mix in terms of the overall market share, but that is limited to only about 0.2% or 0.25% out of total of 1.1% in the 9 months, right? So the rest of it, it has come from individual state market share increases. Now for example, on YTM basis and Haryana, we have increased more than 2%. UP and MP is more than 1%. UP is like close to 1%, so is Gujarat North East, Orissa, Maharashtra, Karnataka. So all these states, we have increased market share substantially. Most of them about 1%, and sometimes, even above 2%, right? So there are only like 3 or 4 markets or states where we have either retained or lost market share. Otherwise, in most of the markets, we have gained market share. So that is I think the answer for the second question. The first question is that -- the answer to the first question is that, see, there is no substantial change in the Q4 actual estimate. I mean, from the very beginning, we thought that the Q4 industry won't grow beyond the 5%. And right now, also, we are saying something between 3% to 5% maybe, right? But mostly, it is like the seasonal sales, which we thought will grow much more than it actually happened, right? I mean our growth was very substantial even in the season. But I'm talking about the industry right now. I mean the industry did not grow that much. I think one of the factors was also that we did not probably consider in our estimate was inventory levels with the competition, which we were a little bit surprised that they were sitting on such a high inventory getting into the season.
We have next question from the line of Bharat Gianani from Sharekhan.
My question is that you guided for CapEx of about INR 150 crore to INR 160 crore for this year. And for FY '20, you have guided for INR 250 crore to INR 300 crore, right? So what would that CapEx will lead to? Because I mean I was just trying to understand, is it through some joint venture? Or like where is it exactly CapEx going for in FY '20?
Frankly, if you look at our earlier guidance for the FY '19 CapEx, we had given a net guidance of INR 300 crores CapEx happening in this year. As always, major portion was INR 100 crores, which is going in setting of the capacity for the machining center, which is about INR 100-odd crores. So that process now, it has happened in this year, but the cash flow which is supposed to happen this year has, well, delayed to next year now, now which is a major investment, which will happen. So roughly INR 80 crores, INR 90 crores will get spent daily on that account only next year. And then obviously, going forward, we have some product development plan which are already there, so we only been getting a capacity expansion, which will be happening now. So JV, obviously, we at least expect or whatever the investment, so we already have this announced that we will have investment of close to INR 300 crores, out of it, INR [ 240 ] crores is 40% will get contributed by Escorts, which is whatever of this cap that will happen. But on the CapEx side, there are product development plans which are in place, both across all 3 segment whether it's the railway or it's a construction equipment, as well as for the Trakstar business. So we expect I think because it's below, which has happened from the current year to next year, so the CapEx overall guidance will remain in that range.
Okay. So this machining will help you to improve your margins? Is it like -- or how should we get to that?
The machining will help us in improving capacity, so I think one of the reason, which we are facing today is the working capital issue because the high inventory build up in Delhi, which we are to do to plan for high seasonality volumes happening in a few months. So for example, typically, we've seen very high volumes in September, October and November months, and our capacity was not really in line with those numbers, so we had to carry inventory for a large number of months, which actually impacted our working capital cycle, which is the same position we are fully facing now. If we were to plan for the next September, October season, which, again, we're expecting will be good. So that's something which is actually impacting us. So once you have capacity itself, we expect the production level probably will improve in those months, so we'll need to carry lesser inventory. So overall, there will be good impact on the cash flow side. Your borrowing level will likely come down, and lead to some positive cash flow happening there.
Okay. And sir, my last question is that, any update on the treasury shares you will want to give, like as for some acquisition or JV, you had in, I think, 2 or 3 quarters back sold some treasury shares. So any update on that for like you alluded to some investment opportunity in railways? So any thought on that, that you would like to share at this point of time?
I think first of all, like in this year, we announced 2 joint ventures, so one on the construction equipment side with Tadano Limited, which is for the high-end train. And second with Kubota for the tractor business. We are again -- both the JV will need additional capital of almost INR 170 crores to INR 180 crores, which obviously will go from the sale proceeds, which we have accumulated from the treasury stock, which we sold at about a year ago. And going forward, like you said, the railway, we have some deals in the pipeline, which are getting evaluated. Obviously, if the deal materializes, then there will be requirement of cash, which obviously we can use from this. And for any reason there is a higher requirement, if depending on the valuation, we'll be ready finalized for that particular transition. So there we need for further, so we expect that need fully will be addressed with the kind of accrual, which we expect will happen on the cash generation which we're expecting to happen the next year. If you don't see in the short-term there will be need to really further dilute the shareholding and sell more shares, but obviously, it's largely dependent on what sort of deal we really come on the table, so as of now, it's very difficult to quantify that amount.
We have the next question from the line of Raghunandhan from Emkay Global.
Sir, my first question was on the new products. For the last quarter, the new products, that is the Atom tractors and the rice specialist tractor, can you share how has been the sales? And how is the outlook going ahead for these products?
Okay. So for the Atom, I mean in last year, in Q3, and just upward further, the last quarter to this quarter, last year in Q3, we did not have any sales. And this time, we are touching close to 200, now, which is about 60 to 70 a month. Of course, there is higher potential. But as I explained in the last call also, that there are a couple of reasons that we are going slow with this because it's a completely new platform and a completely new kind of category of tractor that we are producing. And therefore, we want to make sure that the tractor is seated well in the markets before we scale it up. In 9 months of the year, last year, of course, we did not have any sales. And this year, we have done just over about 500 tractors on the Atom. And same situation is with paddy tractors, paddy special, that we have now spread it into about 4 or 5 states. We started with a couple of states, but there is a great acceptance of this, as well as the Atom. And therefore, we are now slowly spreading it into other markets. For example, Atom, we have also now given in [ GNK for old ships ] et cetera. Some of the tractors we have given to some old ship markets in MP. So we are moving out of Maharashtra for Atom and out of Orissa and AP for the paddy special.
Understood, sir. And what was the volumes for paddy special?
I don't have those right now. But I think maybe about a couple of hundred for the 9 months. But I will have to confirm that to you.
And sir, like, initially, we had launched it in the 47 HP segment. Any plans going ahead to expand the product range and bring in more products in that segment? Because as I understand, it's a 1 lakh unit market per year.
Yes, yes. So see, this is a 4-wheel drive tractor. The paddy special is not a traditional 2-wheel tractor. So the market that you just mentioned, it's like the total market of 2-wheel drive and 4-wheel drive. Now we want to enter the market from the top end side with this tractor. Of course, we have other 2-wheel drive tractors, the traditional tractors that we also sell in paddy markets, right? So it's not just that only with this tractor we are kind of addressing the paddy market. But of course, this tractor is much better suited for paddy, and that's why it's called the paddy special. Other tractors are like more general-purpose tractors. So the ideal tractor for paddy is about 45, 46, 47-horsepower. So right now, we'll just go over this one, and we'll not spread ourselves too thin, but try to scale this up into better volumes.
And sir, in the coming months, what are the plans on the product launch side?
Yes. So see, we have launched a few more kind of products in this quarter, but they are not kind of category creators, but they are kind of products, which have filled some minor white spaces in our portfolio or have added some extensions to the product -- current products, right? So that is one. But our major -- there are a couple of major launches that are slated for next fiscal year. There is one on the PowerTrac side and one on the Farmtrac side. I can't kind of divulge any details right now because of confidentiality, but there are going to be a couple of mega launches next year, 1 from Powertrac and 1 from Farmtrac.
And do you expect the share of PowerTrac to keep increasing in the portfolio?
Yes. See, in the last few months or quarters, actually, PowerTrac has also started growing quite a bit, especially in this last quarter, Farmtrac also had a reasonably -- a reasonable growth as far as market share is concerned, and of course, volume. So PowerTrac will for some more time grow faster than Farmtrac. And the reason for that is because PowerTrac caters to almost -- to every kind of district or market in the country, while Farmtrac is quite limited in its geographical coverage as of now. So once we start expanding Farmtrac distribution network into areas where there is no network for Farmtrac right now, then Farmtrac will also catch up with the rates of growth that PowerTrac is enjoying right now.
Understood, sir. On the agri side, we had been taking some cost reduction efforts on the raw material cost. Have all the benefits come through, or how much more is left to come on the cost reduction?
See cost reduction is quite a continuous journey, and you would have seen that in the last 3 years or maybe like more 5 to 6 years. Constantly, we have been achieving significant cost reductions in our material costs through various programs. So going forward, also, we will continue to do this. I think, normally, on an average, if you see we do guide for about a couple of percentage on the raw material cost or on sales value, right? So I think that trend, we will continue to kind of achieve even going forward.
[Operator Instructions] We have our next question from the line of Chirag Shah from Edelweiss.
Sir, I have a question on financing. Can you indicate what kind of rate increase that have happened of late because of this India fee issue, both in construction equipment and tractor market?
Yes. This is Shenu. I can't comment on the construction, but on agri, we haven't seen any shift in the rates because of this issue. As I have clarified in the previous call also, we have had no signals from NBFCs about any anxiety around tractor financing at all. I think one reason could be that it is priority sector lending for banking. And also, the other reason is that the portfolios are pretty much in good shape as far as tractor financing is concerned. So there, it has been no or insignificant shift in the rates because of this issue.
And your loan-to-value ratios would have been largely stable?
Loan-to-value ratio have been improving a little bit actually. So on [ Bihar ] like on the KYC base of financing, most of the banks would hesitate going beyond 65% to 70%. And I think slowly, we are reaching close to like between 70% and 75% now on KYC-based financing.
Good one. And on the construction equipment?
Yes. As you know, we are not changing interest. As I said, there is no change in interest. And [ LTE dollar ] same before 75% to 85% dependent on the case.
And sir, one last question if I can squeeze in, is on the replace contractor or the used tractors. We are reading that there are some issues cropping up in the used tractor market. Are there any -- seeing sign diversing or these are one-off cases? Like, the farmers that are not able to dispose their older tractors and the chain is now getting affected.
Yes. We haven't seen anything like this. I think this could be a one-off news from somewhere. In fact, our used tractors stored at our dealerships in terms of number of days is at its lowest level ever.
Okay. And just a clarification. You indicated 3.5 weeks is the inventory with dealers?
Yes, give or take, yes.
Even December? And this is a normalized...
Yes.
Is it a normalized inventory? Or it's on the lower or the upper end of the -- on the side? In that span of time.
It's about normalized, yes.
We have next question from the line of [ Prayish Chen ] from Yes Securities.
What would be the share of spares and implements in your revenues for the 9 months?
It is to 8% to 9% revenue [indiscernible] the contractors.
Okay. And could you throw some outlook on the exports for the tractor business?
On exports, like we had given the guidance that we were targeting to do close to 3,000-odd tractors this year. So it looks like we should be in line, so we should be able to release this then. And then obviously, next year, as of now, so for long term, we have given an aspiration of touching 8,000 to 10,000 tractors by FY 2022. So obviously, we are looking at good growth opportunities happening there in the next 3 years.
So which particular geographies that you're looking for growing at a much faster rate?
Also, this year for example Europe and Delhi helped us in growing our volumes, so which we -- we're showing on these new launches which we done in the compare tractor segment is helping us in getting good volumes on exports. And obviously, as geography like our focus has been on Southeast Asia, Africa and European countries, Mexico, Brazil and North America. So these are few and continent and countries that we're focusing on.
We have our next question from the line of [indiscernible] From Infina Finance.
So I just had one question. Just wanted to understand how is the discounting been typically when you have a slowdown in the growth, you see higher discounting. So just your thoughts on discounting? What has gone through in Q3? Your expectations on Q4 as well, y-o-y comparisons? That will be helpful.
Yes. So it's hard to give a generic answer to this because I mean different players have different strategies about discounting. And I don't want to name any specific players, but there are 1 or 2 who have resorted to some extra discounting in the last few months. But I think more or less, I would say the intensity, the competitive intensity is pretty much the same as we had seen in the last 3 or 4 quarters. So there is no big shift.
Okay. So for you as well, sir, for Q3 and Q4, the discounts y-o-y would be comparable and that would not have gone too much, right? Would that understanding be correct?
Yes. That is kind of right. Between Q3 and Q4. The Q4, the discounts may go up slightly with respect to Q3, but then in last year, Q4 also, the discounts were a little bit higher because of the year-end, so -- but there will be no significant shift in the results.
We have the next question from the line of Jinesh Gandhi from Motilal Oswal Securities.
My question pertains to tractors. You've talked about increasing contribution from subsidy sales in third quarter. Would you be able to quantify that, either for industry or for Escorts?
I don't think we would like to give subsidy numbers separately right now. But you know that we have not -- Escorts has not been participating in much of government-related sales or subsidy-related sales so far, and this is only the first time that we have started taking a take at it. So one of the states had a large subsidy program, and Escorts participated in that this time for the first time, and we bagged the lion's share of that kind of state subsidy net sale. Of course, subsidy-less sales comes at a slightly lower contribution of margin than our regular retail sales, but it does add to our market penetration and our market share growth and volumes.
Okay. And any reason for change in strategy on this time on subsidies, your related participation?
Yes. Part of our Vision 2022 15% market share plan. We have -- one of levers is also to participate in government-related states sale. Because if we have to go 15%, we can't leave a major chunk of the market out, and as somebody else was also saying that subsidy-related sales and absolute volume has achieved a meaningful kind of a proportion out of the total sales -- total industry sales. So on case-to-case basis, we are making our decision. We're looking at profitability that state offers in such schemes and the kind of volume that we can derive, right? So for example, we did participate in some -- in some subsidy-based scheme. And as I said, we took the lion's share of kind of that volume.
Okay, okay. But for industry, it would be a sizable chunk, or not really?
See, we think this -- for the fiscal year, it would be close to 10% of industry would have gone to government or subsidy sales -- led sales. Yes, so that is about 80,000 to 90,000. It's very difficult to kind of pinpoint a number here the order of system variety of subsidy sales, some are real subsidies and some are like very, very normal kind of subsidy programs, right? And some are directly supported and some are supported indirectly, right? But more or less, about 80,000, let us say, for the year out of 800,000-plus industry for the year.
We have our next question from the line of Raghunandhan from Emkay Global.
Last time, I was trying to understand, like on the cost reduction efforts side, any levers left on the employee cost reduction? Any plans to restart the VRS programs?
Well, I think we indicated last time after that VRS program obviously as it was put on hold. We don't really go -- want to go beyond the point that financially it doesn't really start making sense. But if you look at overall number, I think if you look in this quarter number also, I think we are [indiscernible] there. I think it's close to 7%, 7.2% sort of [indiscernible] recorded this quarter. So as we are able to maintain the top line growth, which is where I think the focus has been, so we think manpower cost will fall in line. So the efforts happened internally to obviously affect the cost of the level which we were adding more or less at the last year's level, and then we hope the same efforts will continue next year, too. So we think -- I think, the [ CRAs ] has been in the range of 6% to 7% sort of [indiscernible] and we almost reaching there now. So I think the only point it will become difficult to really squeeze it further, what we expect maybe in another year or so, that will give us another shot. And after that, we think it should get stabilized at those levels.
Sir, on the investment timeline on Kubota and Tartani, what would be the -- like investment in FY '19, FY '20? Would it be something like INR 50 crore this year, and the next year, INR 100 crore out of the INR 150 crore to be invested?
So this year, we expect like Tadano has already happened. So it's about 30. U.S. injections, which has happened there initially. And in the next 8 to 10 years plan has been about INR 150 to INR 200 crores out in this foreign JV or else our share we got 49%. For Kubota, we expect the first funding will happen probably sometime in this quarter, let's say, end of February or middle of March, so which should be initially INR 60-odd crores, and then the second round will happen in the next fiscal, in FY '20. So total INR 120 crores injection will happen there. So within these 2 JVs, it will be close to INR 150 crores, INR 160 crores investment will incur during the next year. And obviously, going forward, then depending on the requirement, on how the CapEx requirement pans out to those JV.
And sir, for like the -- what is the 9-month CapEx?
So 9-month CapEx, so far cash flow has been close to INR 110 crores, INR 115 crores.
[Operator Instructions] We have our next question from the line of Sameer Deshpande from Fairdeal Investments.
Congratulations for the excellent numbers, and you have been doing it continuously over the last 2 years. The growth has been maintained very well. And if I look at the tractor figure for the 9 months for this year, our sales have been about 25% growth over the last year. And I think it is double the industry average growth?
Yes, that's right. The industry growth is about 13%, so growth is 25% so far.
So definitely, it is commendable. And now our markets, particularly northeast and central, not affected by the range in the worse way, to a large extent. Can you help us in Q4 also, so now I heard that the Q4, overall, we are mentioning that the Q4 being a higher base, the growth may not be as high as 20%, 25%, et cetera. But if the industry is expected to grow at around 3% to 5%, if we continue with the same standard for the last 9 months, do we expect a double-digit growth at least in the Q4?
If you're talking about Escorts, per se, so I think what we're talking about really is the industry number for next quarter. So it's really like Shenu mentioned earlier, so our aspiration is to grow further our market share. So obviously, that has to happen so we had to grow better than the industry. So then the industry grows at the 3% to 5% level, obviously, we are looking at double-digit growth the next quarter, too. But obviously, so I think all our sort of growth which has been happening in the last 9 months, so that may not be possible in Q4, though I think our outlook still remains bullish for the next 6 months on this tractor industry volumes.
Understood. So but you said, double-digit growth is expected in the Q4 also. And this railway, we have order book of INR 450 crores, which is also required, if I am correct. So what is the period of timeline for execution of that railway?
So timeline, we mentioned, it's about 13 to 15 months. So this whole INR 50 crores is our order book as of 31st December, so though subsequently, we got further out, so if you look at the trend position, as of today, so they are sort of sitting at order book of INR 500 crores, more than INR 500 crores actually as of now. So the order book is pretty healthy, so we expect the execution is now I think the key. I think it will happen over next 13 to 15 months.
We have next question from the line of Shashank Kanodia from ICICI Direct.
Sir, I just want to understand the product profile in the [indiscernible] open space. So with the new H Train switch in those high-speed through, so does up and [indiscernible] per vehicle increase? Or how does it go about?
This is Dipankar. Yes, with the new H train like the train 18, if the first train 18, we do not have a product out there. But in the subsequent train 18, we do expect to have our products with a collaboration with our South Korean partner. Now obviously, this high-end trains, we have high-speed brake systems, which we have already geared up for supplying 2 railways and also to the metros.
So as we grow our product range, obviously, the idea is to have a better share of pie of the overall component industry within the space. So wagons and coaches and locomotives front. So that's what we have been working on, and that is what Dipankar have been trying to do.
Okay, okay. And sir, what's the growth rate that we can expect next 3 to 5 years, given that [indiscernible] is a big expansion CapEx-wise?
We still maintain that we should be growing at the rate of at least 20% to 25%.
Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Madan for closing comments. Sir, over to you.
Thank you, ladies and gentlemen, for being present on this call. For any feedback or queries, please feel free to write it to us at investorrelation@escorts.co.in. You can also visit our website and social media pages for the latest company news, development, et cetera. We'll meet again in the next quarter. Thank you very much, and have a really good evening.
Thank you very much, sir. Ladies and gentlemen, on behalf of Phillip Capital India Private Limited, that concludes this conference call. Thank you for joining with us, and you may now disconnect your lines.