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Escorts Kubota Ltd
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Ladies and gentlemen, good day. And welcome to the Escorts Limited Q3 FY '20 Post Results Conference Call hosted by IndiaNivesh Shares and Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayur Milak from IndiaNivesh Shares and Securities Private Limited. Thank you and over to you, sir.
Thank you. Good evening. And on behalf of IndiaNivesh Shares and Securities Private Limited, I welcome you all for Escorts Limited Q3 FY '20 Results Earning Call.I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us, Mr. Shailendra Agarwal, Executive Director, Escorts; Mr. Bharat Madan, Group CFO and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division and the Investor Relations Team at Escorts Limited. We will start the call with a brief opening remark from the 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. Thank you.
Thank you, Mayur. Good evening, everyone, and thank you for joining us for our Q3 results earnings conference call. Moving on to the quarterly standalone financial performance for the period ended December 2019. Turnover at INR 1,633.4 crores against INR 1,655.1 crore last year is down by 1.3%. This is primarily due to drop in tractor and construction equipment volumes. Tractor volumes went down by 2.5% to 25,109 tractors as against 25,743 tractors last year. Construction equipment volume went down by 26.1% to 1,044 machines as against 1,413 machines last year. EBITDA at INR 212.3 crores against INR 200.5 crores last year is up by 5.9%. EBITDA margin now stands at 13% versus 12.1% last quarter -- last year same quarter. This is the highest-ever quarterly margin earned by the company in at least last 15 years. Finance costs went down by INR 1.5 crores to INR 2.9 crores as compared to quarter ended December '18. The total debt outstanding as on December '19 is INR 9 crores, down from INR 277 crores March '19. Net debt continues to remain negative at INR 718 crores. PBT stands more or less at same level at INR 209.4 crores against INR 210 crores last year same quarter. The company's stand-alone PAT improved to INR 153.1 crores versus INR 140.1 crores last year, up by 9.2% due to company opting for lower corporate tax rate from this year. PAT margin now stands at 9.5% versus 8.5% last year corresponding quarter. EPS stands at INR 12.81 as against INR 11.72 last year same quarter. Now moving on to quarterly segmental business performance, starting with the Agri Machinery business. Industry momentum has improved on quarter-on-quarter basis. In Q1, industry de-growth was 15%. In Q2, industry de-grown by only 10%, better than Q1. And in Q3, the domestic tractor industry volumes are down by 6% to 2.04 lakh tractors as compared to 2.17 lakh tractors in previous fiscal same quarter. Against 6% industry de-growth, our domestic volume went down only by 2% at 24,219 tractors as against 24,720 tractors in previous fiscal same quarter. Industry in our strong markets in North and Central India de-grew by 4.2%, whereas industry de-grew by 8.1% in the bustling 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 11.9% for the quarter ended December '19, up by 47 basis points as compared to previous fiscal same quarter. Our exports, however, during the quarter went down by 13% to 890 tractors as against 1,023 tractors in previous fiscal same quarter, mainly due to lower sales in neighboring countries like Nepal. At industry level, tractors exports out of India fell by 3% in quarter 3. During the quarter, Farmtrac to Powertrac brand ratio improved to 39:61 as compared to 36:64 last year same quarter. Also, our product mix has improved towards higher HP tractors with more than 40 HP proportion improved in this quarter to 54% against 47% in corresponding quarter last year. EBIT margin are up by 22 basis points, now stands at 14.5% against 14.3% last year supported with softening of commodity prices. On channel front, we added 20 new dealers in India during the quarter. Total dealer count now stands at 970 plus. Going forward, we'll continue to expand our dealer network in both strong and opportunity markets. The current channel inventory at the end of December 2019 stands at comfortable level of around 3 to 4 weeks, which we believe is probably the best in the industry. As guided during the last earnings con call, we expect H2 domestic tractor industry to fare much better than H1. In Q4, we expect industry to grow by low single digits. Coming to the Construction Equipment business. In our served industry, backhoe loaders volume went down by 5.1%. Pick-n-carry cranes went down by 29.7%, and Compactors went down by 20.8% in third quarter FY '20. Our total volume, including manufactured and traded products in the quarter ended December 2019, correspondingly was down by 26.1% to 1,044 units as against 1,413 units in previous fiscal same quarter. Despite volume drop, EBIT margin improved by 133 basis points to 4.8% as against 3.5% in previous fiscal same quarter, led by cost optimization measures, reduced commodity prices, improved product mix and pricing increase carried out by us. Construction equipment industry continues to see some slowdown on account of financing issues and delayed payment for ongoing infra projects. The new emission norms coming into effect on 1st October 2020, may also, in the short term, affect the demand scenario in the industry. However, in the mid to long term, we expect that our served construction equipment industry will grow in high single digits. Coming to the Railway division. Revenues at INR 124.4 crores went up by 28.8% as against INR 96.6 crores in previous fiscal same quarter. During the quarter, we have executed 44% of total orders from new product categories with more import content at low margin as compared to the previous fiscal when it was only 24%. EBIT margin for the segment now stands at 18.4%. Order book for the division is more than INR 450 crores; that will get executed in the next 12 to 15 months. For FY '20, we expect Railway Equipment segment to grow by 25% plus and margins for the segment are likely to be maintained around these levels. Now I request the moderator to open the floor for Q&A.
[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal.
Sir, my question pertains to tractor realization. So if we see, there is a Q-o-Q improvement in realization in this quarter as well. So is there any price increase which we have taken? Or it's due to mix as well as share of nontractor further going up?
This is certainly due to mix. So nontractor proportion compared to last year remains same at about 10%, 10.2% though compared to the last quarter there is some improvement in the nontractor sales by almost 1%.
Okay. So it's largely mix. We haven't taken any price increase?
No price increase in this quarter.
And in Jan, have you taken any price increase?
No, not yet.
Okay. Okay. Secondly, with respect to Kubota JV, so we have indicated that exports have started under E Kubota brand from 3Q. So can you give some flavor on what products are we exporting? Which markets are we targeting under that?
Yes. So we have started sending some shipments on E Kubota brand. So these tractors are basically Escorts tractors, but painted in orange color under E Kubota brand with slight changes in specs and also in sidings and going into Kubota channels, global Kubota channel outside India. So yes -- so it's just a start. Of course, this relationship is a long-term relationship, and we are expecting some significant growth in our export volume through Kubota channel worldwide.
Okay. But this would be what, 30 to 40 HP tractors or...
No, no. This is the entire range. So like we start with compact tractors. The compact tractors are about 25, 26 horsepower, and we go up to high HP also, which will be up to 90 HP.
Okay. Okay. And this will happen over the next 6 to 9 months in terms of entire range being prepared?
Yes. So we have started with a couple of models right now with 1 or 2 countries, but every quarter we'll add up countries and add new models to this channel. And you know that Kubota is very, very strong outside India in many countries. And therefore, this is definitely going to help.
Okay. And if I may ask, particularly for 50 HP and above, how would our product portfolio compare with Kubota in those markets? I'm presuming they'll also be selling similar spec tractors, though it might be premium than what we might be offering. So how does we -- how do we position E Kubota versus Kubota brand in local markets?
Yes. So see, Kubota is a very different kind of -- as far as the product is concerned, very different animal than what we do in India. Our tractors are mostly very fuel efficient and very rugged, right? So they last for long. Kubota tractors are very different, like other MNC tractors outside India they have built. So these tractors are like more performance and feature-oriented, better on aesthetics, ergonomics, driving comfort, et cetera, right? So they are very, very -- they serve like very different customers. So we don't have a major overlap or any conflict in the positioning of the 2 products, yes. So we -- but we will, of course, make sure we go to the right market and address the right customer base.
Understood. Understood. And in terms of domestic market, you indicated fourth quarter to be low single-digit growth. Any sense on FY '21? Could it see a good recovery with high single-digit or double-digit growth?
It's a little bit early for us to comment on that. But definitely, we think it is going to be a positive year for tractor industry. It's not going to be negative. Now to what extent the recovery will happen, because this year, of course, we will end up in a negative -- whole fiscal year basis, we'll end up at a negative growth in tractor industry. But next year, it should be positive. And the year after that, we are thinking that the full recovery should happen. Next year, how much it will happen, it's a little bit early to say. But not -- but we know that not full recovery will happen next year. So the full recovery will take one more year.
Understood. And lastly, a question to Mr. Madan. What would be your CapEx for this year? And any indication for next year?
So this year, we expect to do about INR 250-odd crores CapEx. And as of now, we are looking at probably something similar number for next year, too.
The next question is from the line of Raghunandhan from Emkay Global Financial Services.
Congratulations for a good set of margins. Sir, firstly, on the margin front, can you give some more details, like the margin expansion has been strong on a Y-o-Y basis. And like how would you attribute it to the commodity benefit and other factors?
So if we compare Y-o-Y, it's not really very strong. If you look at the tractor business margin, it's only up from 14.2% to -- 14.3% to 14.5%. So I think marginal improvement and essentially led by the commodity prices softening in this quarter compared to the last year. And railway, obviously, some base bottom construction. There are 3, 4 factors like we mentioned. So there's obviously the cost measures that the company is taking there and also the deflation on the commodity side and some price increases, too, and, obviously, some better product mix. So I think all 3, 4 factors have led to improvement in the margin over there.
And how are you seeing the commodity benefit coming in the coming months? I mean steel prices have been recently going up. So how do you see Q4 margins to pan out? I mean I just wanted to understand how sustainable do you see the gross margins going ahead?
Yes. So I think we are also getting those feelers from the market. The price of steel has been going up. So it will have definitely some impact on the Construction Equipment margin. On the tractor side, normally we have in contract with a lag of a quarter. So in Q4, for tractor, we don't see major impact on the inflation -- on the deflation side. The inflation will start hitting only from Q1 of next year over there. So Q4, we still expect that we will be able to hold on.
Understood. And sir, like -- to Shenu, sir. How are you seeing the performance in agri and nonagri segments in tractors? And generally, what is -- directionally, how do you see both these segments going forward?
See, for the year, for the whole fiscal year ending 31st March 2020, I think the industry will be like maybe probably 7% down for the whole year. And I attribute most of this decline actually more to infra rather than to agri because a lot of projects got held up because of several reasons that we know, elections and other things, right? And even today, not all infra projects are up and running at full steam, right? Of course, there is a positive momentum we have seen in the last few weeks and maybe a couple of months, but nothing in the order of what we have seen in the past. Right now, that situation is going to improve as we go along. So that is why we'll see some positive movement in Q4 and then maybe a little bit more positive going forward.
So I mean, on the agri side, you have support of the rabi and farm crop output prices. But on the infra side, are you seeing any improvement? Or would you say that recovery would still take time?
So we are seeing improvement. The situation is not as bad as it was in the first half of the year. But nothing like what we have seen in the past, right? So it is recovering, but recovering very, very slowly. But agri -- of course, agri will remain positive. Agri has been positive for last 2, 3 months now after the positive sentiment built up after the rainfall, after the monsoon. And that will continue to improve because we have a fabulous crop in the field right now and very good prices.
And can you roughly indicate that 7% fall, how would you break up between agri and infra?
I'm saying this roughly right now, but maybe I can give you more exact figures later on. But I would say about 70% because of infra and 30% because of agri.
Understood. And recently, there seems to be an improvement in the South region performance. December volumes were positive for Karnataka, Andhra, Tamil Nadu tractor volumes. Would you say that South is seeing a recovery? And would that mean that, that would lead to some kind of market share risk for Escorts? What I was trying to drive at was, going forward, what would be the focus areas for further market share gains for the company?
Yes. So I mean, if you look at South, I mean, we are actually doing extremely well in South for last 18 to 20 months. Every quarter, we are increasing our market share. Our market share in all the 4 states is on the rise of the South, AP, Telangana, Karnataka, Tamil Nadu. Kerala is not much of a tractor market, right? So we are not as concerned about South now since we are growing faster than the market there. We are not as concerned about South as we used to be. The same goes for Maharashtra and Gujarat. I mean, in some of these markets, our market share is inching up to like close to 10% now, right? So yes, so first of all, it doesn't worry us that much as it used to. Secondly, South, of course, the recovery happens first when it comes to water. So if the downfall is because of water, and the water is sufficient, then South recovers very fast because South is totally rainfall dependent or mostly rainfall dependent, I mean, in relation to North and East and other parts, right? So -- but the good thing is since rainfall is pretty widespread and adequate, although late, but still adequate and widespread, so recovery should happen in rest of the country also.
And the market share gain strategies which you will be focusing going forward?
Oh yes. That is clear. I mean this is not a quarterly strategy. I mean we have put in place a strategy that will work for next 3 to 5 years. And we are very, very focused on that strategy. And just to recall just a couple of broad points is that on the channel side or the brand side, we are going to invest in both our brands. And we are going to create separate distribution channel for both the brands. Then in the South, we are running -- in the South and other, some big markets, we are running some very, very unique, special projects, which are very unique to the industry actually and creating a buzz around our brands. And the third is that on the product side, we are -- step by step, we are covering all the white spaces that we used to have. In our product penetration, our product coverage as a portfolio was only about 60% about 3 years ago. And now I think we are at like more than 90%. Right? So all 3 fronts, we are very, very focused. And of course, some other enablers like finance and stuff like that, that also we are working. So we have a good mix going on right now.
[Operator Instructions] The next question is from the line of Gunjan V. (sic) [ Gunjan P. ] from JPMorgan.
I had 2 questions. Firstly, on the inventory levels, if you can talk where we are right now? And how does it stand for the industry as well?
Yes. As I said, the dealer inventory is pretty much in control. I think -- I mean although farm data is not available, but just knowing from the market, our stock levels are probably the best in the industry. So we are at about 3 to 4 weeks of dealer stock right now. And if I'm not wrong, the industry could see kind of upwards of 5 weeks, right? So we are very comfortable on this. Our deliveries or retails have actually been higher than what number we report in billing. So that is -- and despite that, we are getting right market share quarter-on-quarter. So that is very comforting for us.
And on the financing side, how have things shaped up in the last couple of months? Are you seeing that there is more willingness? Or in terms of rates, has there been any benefit?
Yes, yes. So see, financing was actually not a major issue for tractors. I mean of course, in our Construction Equipment business, it had a huge impact. But tractors being priority sector lending, we didn't have much of a problem. Of course, there was some problem. But starting the Diwali season, I think lot of -- all the banks and NBFCs that came back, and they were actually pretty aggressive. So we had some very, very good tie-ups for the season with most of the big banks and NBFCs. And the situation right now is pretty much in control. So like all the banks are willing to lend.
Has there been any change on the LTVs that you've seen? Because I think that is where some bit of pain point was that, given the cash flows last year was bad, it was difficult for farmers to bring in the upfront money. Has there been any change on the LTV norms that you've seen in the industry? Or anything that you are working with the dealers to make buying more easier, so that when the cash -- when the crop comes in the rabi season, it becomes easier for them to pay down? Any kind of changes in the schemes that you've seen?
So actually, in our case, in tractor industry, the LTV has never dipped, right? So what happened actually was the customers had no margin money, right? So we had to work with banks to actually enhance the LTVs for the season period, which is like September, October, November, right, which they did. So actually, we passed that phase very well with the support of banks. Now LTVs have come back to normal, right? So we never had kind of an LTV issue really. We had a margin money issue because of which we had to work with the banks to enhance the LTVs temporarily.
Okay. Okay. And one more question on the industry growth, which you pointed 4% for Q4 and positive for F '21. In terms of regional, can you give some sense? Do you think that North -- sorry, South and West can see sharper or good bounce back given the water table issues are lesser of a concern now and these have been the markets which haven't been doing well also for last 2, 3 years?
Yes. So recovery, as I said, will happen first in South and West, but I think North and East and Center would catch up very, very soon. Because, as I said, the monsoon has been very, very widespread. I mean there are hardly -- I mean, other than a few pockets, there are hardly any areas where we don't have good water level right now. So -- yes, so it's just a timing issue, but I don't think North, East and Center are too far off.
Okay. And lastly, any guidance on export volumes that you can give?
Guidance, I mean, this year, we are -- we will probably grow our export volumes by about, let's say, 20% to 25% as compared to last year. Now this, you have to keep in mind that, particularly this year, the overall exports out of India as an industry is way down. I don't have the number right now, but I think it is like minus 15% or so in the first 9 months, right? So as against that minus 15% at the industry level, we will be up by about 20%. Of course, we have a small base also. So percentages don't matter so much. But yes -- but we are...
And similar scale up next year as well or...
Yes, yes, similar or better, yes.
[Operator Instructions] The next question is from the line of Riken Gopani from Infina Finance Private Limited.
Sir, first, just a small clarification. So the growth that you've mentioned for the last quarter is a low single-digit growth for the industry, right?
No, no. So growth in Q3 was minus 6% at the industry level. But what we were -- I think what Bharat was saying in his opening address was that quarter 1, the industry de-grew by 15%, de-grew. Quarter 2 was minus 10%, and I think quarter 3 was minus 6%. So he was saying that the momentum is improving. The industry momentum, which was like at minus 15% or so has now come down to minus 6%. And now Q4 may be a low single-digit growth, actually.
Okay. And you expect Escorts to continue to outgrow the industry? Or you expect it will...
Yes, with your blessings and good wishes, yes.
All right. Sir, the first question that I had was with regards to the point that Mr. Madan alluded in the opening remarks regarding the mix of volumes being higher in the higher HP segment. If you can call out any particular reasons for the higher growth there? And any specific trends that you can highlight for the period going forward?
One second. Oh, you were talking about the segment-level market shares, et cetera?
More so regarding the growth call out that the growth in the higher HP segment was higher, which has supported realizations as well. I'm trying to understand was there some...
Yes, so there are 2 things happening. One is that the industry itself is shifting to higher HP, which is helping actually the -- every -- all the players in the industry for better realizations, right? So that is one. The second thing is that we are actually improving in higher HP more than the others, right? So for example, for 9 months of this year, 41 to 50 HP industry was last year 47% or 47.5%. And this year, it is touching about 48.5%, right, 48.5%. So this is like the contribution of 41 to 50 actually in the total industry, right? So this itself is improving. That is one. And then our market share is improving further in 41 to 50. So we are doing much better than we were doing in the past, right? So first 9 months, our market share in 41 to 50 is now 10.5%, which was 10.2% last year in the 9 months. And before that, in 9 months it was 9.8%, right? So we are continuously kind of growing in higher HP now.
Okay. And you expect this trend to continue?
Yes, because this is based on some structural changes we have made, both in terms of channel and also in terms of products.
Sir, one question related to the growth outlook. The industry also must have faced significant de-growth on the subsidy-based tractor sales this year, correct me if I'm wrong. And do you see any trends of that reversing? And any outlook on that for the next year?
Yes. So you are right. I mean subsidy sales was -- at an industry level was much lower as compared to 2018, '19. Now there is some positive movement that we can see there. So there are a couple of states where some new subsidy schemes have either been recently announced or will be announced soon, right? So we are also expecting a little bit of addition to our normal volumes in Q4 because of subsidy sales.
Understood. That is very helpful. And just one last thing. I noticed that compared to Q2, the order book on the Railways division was relatively lower. Is this specific to some, say, patterns of ordering? Or anything you want to call out regarding growth in Railways for the next year based on the order book accretion?
I think it is more of a sporadic event that -- I mean there were some issues. The railway was going into a huge restructuring exercise, as you may have read in the news. So the tenders and everything are -- were not being decided. Things have now started improving, and we hope to see a much more better order book in the coming quarters.
Understood. So the growth momentum for next year, we should read -- should continue for Escorts in the Railway Division?
Yes, yes. The growth momentum continues in the next year also and next to next year's also.
The next question is from the line of Mitul Shah from Reliance Securities.
So congratulations for very strong performance across segments. Sir, I have a question on Construction Equipment. We reported close to 5% EBIT margin despite volume decline. So this is due to some product mix change also, as you highlighted in past quarters. So what would be our new breakeven point in terms of volume?
Breakeven points are much lesser. If you see, we are 30%, 31% lower than last year on the breakeven point. And so 300 -- all 300 machines for breakeven point. Earlier, it used to be much higher.
Because in last con call, you highlighted roughly 750 to 800 would be quarterly volume required for breakeven point. Now still we are saying 900 units per quarter.
That was the target what we are looking at. So 250 to 275 number is what we're looking at. I think with all the initiatives which really will come in, maybe next year we'll see that number. Certainly, we'll be able to achieve if the trend continues like this.
And any further details in terms of new products and how the margin would pan out with the product changes in this segment?
Yes, we are -- next quarter or the next quarter plus the first of next fiscal year, we are going to launch some new products. We will not give you details at this point in time because of competitive information. And I think with the kind of products that we are talking about, we are only trying to play in the high-value segment, where we have better contributions. The volumes will be lower, but the contribution levels would be much better. So it plays exactly the same that we are going to work on the profitable growth irrespective of -- not getting into too much of market share kind of business.
My second question is on the tractor side, sir. We are highlighting that infra was a main issue this year. And again, if you look at the crop pattern as well as showing last year monsoon deficit was close to 10%, previous year I'm talking about. And subsidies were also very low in this year. So if all these 3 things pan out well, as we noticed that monsoon is already surplus, subsidies should increase at least from this level and infra projects are also improving. So next year would not be very strong and even FY '22 recovery would come in FY '21 itself?
Yes. Mitul, it is quite possible. As I said, it's like too early to predict exactly what will happen. But we think -- we are thinking internally that probably it will take more than a year for a full recovery. So next year would definitely be positive, but maybe not to the extent that we can call it full recovery.
Because sir, Central has already reported very strong growth in 9 months, it is close to 9.5%, so that is already growing. And South and West started recovering.
I hope you're right, Mitul. We are all set. We will be all prepared for a great recovery, if it happens. Because as you know, we have been growing market share for many quarters now. And if we continue to achieve better market share with a better recovery, then we will be -- we will have a home run.
Sir, last question. In this Q4, you highlighted low single-digit growth. Does that factors in the announcement -- possible announcement of the government subsidies? Or excluding that, we are saying that growth? And if those will come, growth would be much higher?
Yes. So we are not yet kind of predicting what government will say for next year in the sense of the subsidy, right? But we definitely have some idea of like normal subsidy schemes that are direct on equipment, right? So those we know. So those we have already factored in our current estimates. But maybe when we speak after the budget or maybe March, then we will give you a better estimate for next year.
The next question is from the line of Mayur Milak.
So just wanted to have the update on our investments. So we were trying to set up a 50,000 tractor capacity in the plant, so what is the status there?
So the plant is obviously under construction right now. So the scheduled run for commercial production is somewhere in Q2 of next year, next fiscal. So we think we are on track. So things are happening. Some installation has already happened. So the plant will go live for commercial production in Q2 next year.
All right. And this is under the JV, right, if I understand this right?
Yes, this is under the JV.
So when this is under JV, all the expenses that are specifically included for this setup will be a separate JV and then you will add your share of expenses into the main company? Or how is it going to be?
You are saying for the sourcing arrangement or...
Yes, for the sourcing arrangement.
So sourcing arrangement will be obviously on a cost per basis on the JV for initial years.
All right. So the JV will have its own set of profit and loss. And then, of course, we pick up, in the end, whatever our share of profit is from the JV.
Yes, it will be loaded on the product which is sourced from that.
All right. Secondly, on the RMC, sir. So basically, we all know now that the anticipation for rising steel price is pretty much there. We made the strong gross margins during this quarter. And even if we presume that it comes with a 1-quarter lag effect, is the industry and Escorts both in a position to really pass on even if, let's say, we have a 4% or 5% or 10% kind of steep hike, we'll be in a position to really pass on this and still maintain our gross margins? Or there could be some pressure in the near term?
See, I can speak of tractors. See tractor industry normally hasn't had any difficulty in passing it on, right, any kind of inflation. Now as far as emission norms are concerned, I mean, we are affected -- tractor industry is only affected above 50 horsepower because that is quite a bit of cost increase that we will have to pass on to the market. Now -- but the thing is that the problem is very limited because in our case, tractor industry, it's only 7% of the industry which is greater than 50 HP, right? So only 7% of the industry will be affected. And these are also buyers or farmers who are like more progressive and more wealthier and that have larger pieces of land, right? So affordability is not like huge concern with them. So I don't think it will have a major impact. If there is some regular inflation, we should be able to pass it on.
All right. And do we have a real estimate or a tentative estimate as to how much would be the hike for this upgrade into norms.
Yes. This will be somewhere between INR 1 lakh to INR 1.5 lakhs, depending on the size of the tractor.
The next question is from the line of Bharat Gianani from Sharekhan.
Congratulations for a great set of numbers. I had 2 questions. One is, in your earlier remarks, you pointed out that FY '21, you expect the tractor industry to recover, but not fully, and you expect a full recovery in FY '22. So is my reading correct that FY '21 may see a positive, probably a low single-digit or a mid-single-digit growth? And then in FY '22, the growth will accelerate to 8% to 10%. Is that the right way of understanding? Or am I missing something in that?
So I would say, directionally, it sounds okay. But as I said, we'll be able to give a better estimate in March -- towards March, especially after the budget is there. But yes, definitely, FY '21, as you said, it will be positive. And FY '22, should be more -- should be better than FY '21, right? So I think it will take some time. I think next Diwali season should be actually quite good, right? So if we see some major momentum developing from, let us say, October or November, then you will see a full recovery happening in FY '22, right? So that is why I am just saying because maybe -- I mean, maybe it takes a little bit of a time for things to improve, and probably FY '21 is therefore going to be a kind of a turning point and FY '22 should be quite good.
Okay. Fair enough, sir. And sir, my next question is on the Construction Equipment side. Because in the earlier remarks, you pointed out that the financing issue is still -- and a lot of infrastructure projects are stuck up. So the Construction Equipment, obviously, the -- that is visible in the numbers. But then any outlook for FY '21 you would like to share, like how the -- depending on how the financing situation is panning out currently, it's obviously improving. And based on government's thrust on infra, what is your outlook for FY '21 for the construction equipment sector?
We expect -- see, recovery is going to happen because the kind of projects that have been given or build out are much higher than the previous years, we are going to look at. So I think the government is working on it. They are working on various schemes for infrastructure projects. We are in -- we are trying to get into this project. So I think there will be some that we will see next year. Thus, what has happened is that in the recent times, the contribution of banks...
Sir, sorry to interrupt. Sir, you're not quite audible.
Now can you hear me?
Yes, sir.
Yes, sir. It's much better.
Okay. Now what has happened in the recent past, and I would say, 2 months, last 2, 3 months, banks have started participating well in equipment finance. That is good for us because earlier NBFCs were more active. If you see the ratio, 60:40, 60 NBFC and 40 for the bank. Now it has switched to 65 from the bank and 35 from the NBFC. So bank is taking active role now in financing. And I think with some structural correction and some things coming out of the budget, probably things will improve.
Okay. So basically, we're like expecting some growth in the Construction Equipment segment in FY '21?
Yes, next year for sure.
Okay. Okay. And sir, my last question would be, can you highlight the products that you're going to launch in both the construction and railway equipment because we had plans of introducing new products progressively because of modernization of railways and obviously to increase our portfolio in the construction equipment. So anything you can highlight.
Yes. But I cannot tell you right now. We have 3 portfolios, existing portfolios. In each of the portfolios, something is going to come. Thus, we are working on the expansion of the business also. The work is in progress. So it is not the right time to announce or to say anything about it. So we will come back to you later as and when we finalize.
And sir, anything on the railways you can highlight?
New products, there are a lot -- I mean in this year itself, we have got approval for 3 new products. And we have few more in the pipeline for FY '21. And our primary growth in the coming years will be to the new product because as you would have seen in the media, railway is going in for new type of coaches and new type of locomotives. So that's the -- our primary growth will be through new products.
So basically, this will be the existing range of products in the modern coaches and locomotives. Is that right way of understanding or...
Not really, not really. The existing range of products in existing families will be there, like brake systems will be brake systems. But it will be much more different brake system from a simple brake system to a much more complex axle-mounted brake or a locomotive brake electronic, something of that sort. Same for the couplers and the dampers and all the stuff.
[Operator Instructions] The next question is from the line of Pravin Yeolekar from CGS-CIMB Securities.
Sir, my question was basically on the wage negotiation. Actually, if I'm correct, we are due for the wage negotiation for this year. So can you just highlight what kind of impact will be on cost increase in employee cost, what all the progress on...
See right now, the negotiation on the financial front has not really started. So I think there's some legal issue, which has come up with the union. As a result, they are not -- the body is not really in a position to negotiate with us for the time being. I think as and when it happens, maybe when the talks start again, that does leave us in a better position to indicate. But looking at the historical change, I think normally they've been in constant rates of about 6% to 8% on an annualized basis on the previous 3 years setting when this happens. And we expect, I think it will be somewhere around that only at this time.
But on top of that, the majority of the impact will be in the FY '21. Is that understanding correct?
So the negotiation -- the due date for that was the 1st of November of this year. So normally, when things begin, really it comes for a discussion. We also expect something to happen from the due date. So there'll be some lump sum payment value, which will come in whenever this amount gets finalized. So that at this point, we don't know. So obviously, for that impact, all will really flow in, in maybe FY '20, if the discussion were to happen in March.
Okay. And sir, the second question was on the Escorts, DLL partnership. So how is that ramp up going on? And what is the current penetration?
Yes, so the ramp-up is going on as per plan, more or less. So 2 years ago, we ended around 4,500 to 5,000 tractors. Then last year, we did about 11,000. And this year, and I'm going back to when we announced, so this year meaning 2019, we did about 14,500 -- or 14,000 to 14,500, right? So in 2 years, we have kind tripled the volume. The penetration is at all India level. Roughly, it is around 16% to 18%. But if we exclude areas where Escorts Credit or DLL is not present, then that penetration is close to 27%, 28%.
The next question is from the line of Shashank Kanodia from ICICI Securities.
Congratulations on good set of numbers. Sir, just wanted to check what's the working CapEx position is of date because the last time we checked the year gone, couldn't get inventory as well as the dealer network right.
So the working capital, right now, has been quite decent, if you look at the cash position also of the company in the first 9 months of this year. So we believe there was INR 300 crores plus of working capital from what the level was, I think, in the beginning of this year. So overall, at this point in time, I think the cash flow is pretty decent. And we don't see any concern on the working capital side with the way we had seen this actually in the last few years. So basically there are 2 reasons for that. One was from government-based programs in which we participated and some money got stuck and the GST refund which was one of the key issue. So this year, we got some -- good amount from the GST refund also from the government, both for export as well as for the inverted duty system for tractors. And also the money which was stuck with the government earlier now has got released on quite a bit. So there's very small amount which is pending. So those concerns have been addressed. And inventory was corrected in the first 6 months, you have seen the results in the first 6 months. So we had cut down on the production drastically over and above the sales volume degradation which happens when the industry [ delay ]. So all those questions have already been addressed and taken care of now. So going forward, we don't expect degradations will be there.
If our estimates go right, you will generate free -- in excess of INR 500 crores of free cash flow this year, right?
Sorry?
As per the prudent that you have mentioned, the points, you guys generate in excess of INR 500 crores of free cash flow this year, right?
Yes, that's right.
So what's the plan of distributing? I mean, can we see good amount of dividend payout, any special dividends for the shareholders?
If you look at, I mean, the cash flow also, I think in the first 9 months. So like we started the year with a huge debt position of almost INR 277 crores, which was the first priority, which the company has now repaid. So as of December end, we are only standing with a debt of about INR 9 crores now. So I think going forward, depending on how the quarter ends really, typically in this particular quarter, in March, there'll be some requirements for working capital as the volume is expected to be good and only margin is not from a season perspective. So it probably will take some working capital. Broadly, as the things improve, we will look at the next year's cash flow and then really the Board will take decision on the distribution strategy also.
And sir, lastly, we have good amount of treasury shares in the company's books, right? So any plans to monetize them in the near future or any transfer being done back to the promoters or anything else?
Well, I think, as of now, there's nothing, I think, in the pipeline. But if some development happens, definitely we'll come back to the shareholders and investors and keep you in the loop.
[Operator Instructions] The next question is from the line of Ankit Suchanti from Axis Securities.
Congratulations on a good set of numbers. This is -- most of my questions have been answered. The one question that I had was on the Railway Division, where you've been mentioning that new product have -- new product market share -- sort of share of breakup in the new product is increasing and that has a lot of import content, which is affecting margins. So I want to understand what is the import content right now in terms of percentage? And what are the plans of localizing that going forward? And a stable -- what will be the stable margin that can be assumed for the Railway segment?
Generally, in the new product for railway segment, the import content is as high as 40%. And [indiscernible] is not really the content, this -- the planning for those imports is not really in our control. So -- which is why -- this is in the government side, the tenders is -- basically tender is raised through government, but these actually are borne by the external price, but the input costs are not within your control. So that typically will be certain bit of challenge. So I think there, we are finding it slightly difficult in valuing it for the short term. So I think once the entire thing gets indigenized or localized, then the margin improvement will be much better there.
Yes. And the localization is already set in. But as you would appreciate, this being a brake system, a safety item, railway has their own time frame of 1 year to 18 months for the testing and validation. So that -- we are in that particular testing phase, which will take some more time to complete. And we have our own local systems for that, where the margins will again be back again to what we have seen.
Okay. So FY '21 will grow...
FY '21 will be -- we will have to -- because the trial, as I said, takes 1 year to 18 months, so FY '21, we may not be seeing the benefits of localization. But obviously, FY '22 will we see them.
Okay. And growth will be in that of around 25% -- 25% to 30%.
It will be more than 25%.
The next question is from the line of Amyn Pirani from Yes Securities.
Actually, my question was on the infra side of tractors. Now first of all, I want to understand, are tractors bought exclusively for infra? Or is it mostly that they are bought for agri purposes, but in the off season, they are used for infra? What has been your experience in that?
The latter is more common. Exclusively, we think there are like very, very few people who buy exclusively for infra projects. But normally, tractors are mix use. So in the agri time, they're used in the fields. And then rest of the time, they are taken to infra side and used for income generation.
Yes. So in that case, so say, even if you have a pickup, say, in infra projects and the usage of tractors next year, I mean, how should we look at the capacity on the ground as of now? Because can it happen that initially the tractors which are not being used right now, they may -- I mean they may be picked up earlier and hence, the growth in the volumes may not follow the infra pickup next year? I'm just trying to understand what is the already idle capacity on the ground. I don't know if you have a sense of that.
Yes. It's difficult to say. But normally, from our experience, we can tell you that there is a lag between the start of the project and the start of a new sale -- new tractor sale, right? There's a small lag. Now it just depends how much that lag is based on like what kind of projects we are talking about, like rather -- right now, most of the problems related to infra, we are feeling like most of the regions like Bihar, Eastern, Central UP, also in Eastern MP, so that belt we are getting most of these. In other areas, there is some small movement. Yes -- so yes, so your assessment is right. I mean there is -- there would be a lag, but not a huge lag because these infra projects drive a lot of purchase decision making. So it's like a guy who is actually -- he wants to buy a tractor for mix use and he doesn't see any infra-led income, then he may even postpone his purchase. He wouldn't buy it. So as soon as those projects are announced, he would rush to the dealership and start making the purchase, even if he knows that the infra income will appear later.
Understood. Understood. But in any case, you are also guiding for a very moderate recovery next year and a bigger recovery in FY '22. So I think that also is in line with...
That is right.
The next question is from the line of Sameer Deshpande from Fair Deal Investments.
Congratulations for the very good results. And this -- regarding this budget, which is around the corner. So what are the expectations of experts for -- from the budget relating to tractor and construction equipment industry?
Yes. I mean no real specific expectations. I mean we just want this sector, this whole agri rural sector to be given more attention because it needs attention. And it's a large part of the country's economy and country's population, right? So -- but no real expectation. I think we are good. I think the direction is already set by the government. We are not expecting any positive or negative big surprises also. So yes, as long as the direction is maintained, we are all set.
And this -- the GST, I think, for construction equipment continues to be at 18% only, no?
Yes.
And for tractors, it is at what rate?
12%.
12%. And -- but some of our input components used to have higher duty of some 28%, no, GST?
Yes, that's right. So there are certain components, which are common with the auto industry. So the rate is 28%.
So is there any possibility that -- or any recommendations have been done?
So unless they are able to identify those spots specifically for tractors, only then the government really will be in a position to reduce the rate. So from the Tractors Manufacture Association side, there's a representation, which has been given to the government, and we've given some options for them, including the option like reducing the input taxes on the tractor components, specifically marked for tractors to a figure less than 18% to 12%, so that no accumulation happens. So that is one of the scenario which was represented to them. And second option is to maybe expedite the entire refund process where in a lot of cases, where the accumulation has been happening. So we're still sitting on -- I mean even today, at end of December, we have accumulation of INR 200 crores, and we've got application of the file, and we started getting money, but still the process is very slow in terms of government perspective. So we have been lobbying with the government, but since the government collection itself is not really up to the mark, so we don't expect any significant relief will come in, in terms of -- from those.
So if that is, then that will be a positive?
Yes.
That's fine. And what are the cash equivalents as on 31st December?
Cash?
Net cash equivalents.
So net cash equivalent is INR 718 crore, excluding the escrow account.
INR 718 crore, excluding?
Escrow account. So there's another INR 140 crores in escrow, which we can't access since this whole is matter in litigation.
So INR 850 crores is the cash available equivalent. In the next year, our tractor industry, you mentioned that it will be single-digit growth for the -- lower single-digit growth for the next year?
Now that we mentioned for Q4. For next year, we said there will be a growth, but the extent is, it's too soon to say how much it will be.
That will be post March, that is...
Post March, we will be able to give you a good estimate.
The next question is from the line of Mitul Shah from Reliance Securities.
One clarification. As we shared that single-digit growth for Q4 and, probably, we would grow our market share, that last year base for Escorts was very high. In fact, market share in the month of March was close to 18%. So do you think you would be able to outperform the industry in Q4 as well?
Yes, Mitul, it's kind of a phenomena or a trend for us. Because in Q4, of course, last year, Q4 market share, I think, was close to 15%. March was higher because of certain reasons, but Q4 was 15%. And if you look at previous years, our market share in Q4 has always been about 2% to 2.5% better than the rest of the quarters in the year. Now you know why this is. I mean, because some of the players play some stocks in the beginning. And then in the last quarter to address the balance sheet concerns, they take the stocks down, right, in March, right? So it's -- I mean, it's always that phenomenon. Like, we don't normally do this unless there are some seasonal requirements, right? So our market share appears higher in quarter 4 and appears lower in quarter 2 and 3 -- sorry, quarter 1 and 3, right? So yes, so it's not like something we have -- we are doing great on the ground in quarter 4 as compared to quarter 3. But it's just like that the industry moves, yes. So I think if you understand that, like that phenomenon, and it continues, then it shouldn't be a problem beating last year's market share.
Even if the South and West recovers, we are not worried or we don't find any threat of losing market share?
Well, like as I said, South and West -- actually, most of our growth right now is coming from South and West, right? So since we are growing, I mean, really fast as compared to industry, so that concern is a little bit less as we go forward.
The last question is from the line of Mumuksh Mandlesha from Emkay Global Financial Services Limited.
Sir, Raghu here from Emkay. Sir, just wanted to understand the progress on the rice specialist tractor. How has been the pilot run been? How is the acceptance? What is the plans there to launch more products? And what kind of volumes are we currently seeing?
Very happy with both the rice tractor and also the Compact tractor series. These are like to our landmark product launches that we have done in the recent past. Now as far as Compact is concerned, that is focused mainly on Maharashtra and then some parts in Gujarat and Karnataka. We are -- I have been telling you in the various conference calls that we wanted to go slow with these products because we wanted to ensure that we have the right mix available in the market and the right support system and the right level of product performance, right? So on the Atom, we are now through that stage, and we are ramping it quickly. We have started ramping it quickly now, right? So I think this year, we'll sell about 15 -- maybe 1,500 to 1,800 of those. As far as [ C45 ] or the rice special is concerned, that tractor, we are still keeping under observation, although it has produced fantastic results for us in markets like Orissa, Chhattisgarh and some pockets of South, but we will keep it under watch for another maybe 3 to 4 months before we start scaling it up. But no problem so far, product is performing well, customers are happy.
One last query to Bharat sir. Last few years, Escorts has been quite successful on the cost reduction initiatives. Just wanted to understand that incrementally what are the, like, triggers or catalysts available on the cost reduction side? And what could be the quantum?
This year also, as I did mention, I think there's a lot of cost optimization measures which are going on, I think, including on the raw material cost side. So if you really compare, we said, with the best benchmark in the industry, we still see there's a scope of maybe 300 to 400 basis point gap from where we are versus what is the best benchmark level today in the industry. So obviously, those are the targets for us. So I see this is a continuous exercise, which will continue in future too. So we are working, as of now, very strongly across all divisions at least now with cost initiatives. This year also we have taken good improvement, and we're taking a very good target for next year too for the long tail side. And as those efforts continue, I think as long as we don't see any obstructing trend in the industry, we think the profitability should continue to do better.
Any targets would you like to share for FY '21?
No target as of now. I mean we don't know, we don't share those numbers. But yes, I think, let's say, in terms of overall margins, what we are looking at from this year, it will definitely be better than this year.
And there are no further questions. I would now like to hand the conference over to Mr. Bharat Madan for closing comments.
Thank you, ladies and gentlemen, for being present on this call. For any feedback and/or queries, please feel free to write in to us at investorrelation@escorts.co.in. Thank you very much, and have a good evening.
Ladies and gentlemen, on behalf of IndiaNivesh Shares and Securities Private Limited, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.