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 Earnings Conference Call hosted by Spark Capital Advisors India Private Limited. [Operator Instructions]I would like to add that some of the statements that we make in today's discussion will be forward-looking in nature.I now hand the conference over to Mr. Mukesh Saraf from Spark Capital Advisors India Private Limited. Thank you, and over to you, sir.
Thank you, Mallika. Good evening. And on behalf of Spark Capital, I welcome you all for the Escorts Q3 FY '21 results conference call. I also take this opportunity to welcome the management team from Escorts Limited.Today, we have with us Mr. Bharat Madan, Group CFO and Corporate Head; Mr. Shenu Agarwal, CEO, Agri -- Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division; and the Investor Relations team.We would like to start the call with some brief opening remarks from Mr. Madan. Sir, over to you, sir.
Thank you, Mukesh. Good evening, everyone, and thank you all for joining us on the earnings call for the third quarter ended December 31, 2020.We trust each of you is safe and healthy. I'm pleased to share with you our Q3 stand-alone performance that also happens to be our best ever quarterly performance so far.Turnover during the quarter was up by 23.5% at INR 2,017.4 crore as against INR 1,633.4 crore in previous fiscal.Agri Machinery and Construction Equipment segment continued to outperform, segmental revenue growing by 28% and 13%, respectively. And Railway segment revenue, down by 5.7% on year-on-year basis.Tractor sales volume went up by 25.7% year-on-year to 31,562 tractors, our highest ever quarterly volumes. Construction Equipment sales went up by 20.1% year-on-year to 1,254 units.Highest ever quarterly EBIDTA (sic) [ EBITDA ] at INR 364.1 crore, was up by 71.5% as against INR 212.3 crore last year in the same quarter. EBIDTA (sic) [ EBITDA ] margin is now up by 505 basis points. It now stands at 18.1% as against 13% last year same quarter.The company continues to be debt-free with sufficient available liquidity for growth at almost INR 2,700 crores as of December 2020.PBT at INR 376.5 crores, is up by 79.8%, as against INR 209.4 crore last year same quarter. Net profit, up by 83.4% year-on-year to INR 280.7 crore, our quarterly ever highest as against INR 153.1 crore last year same quarter.EPS stands at INR 21.28 as against INR 12.81 last year same quarter on a stand-alone basis.Now moving on to segmental business performance. Starting with the Agri Machinery business. Domestic tractor industry volume went up by 26.8% to 2.6 lakh tractors as compared to 2.04 lakh tractors in last year same quarter. The on-ground demand remained positive across states and a lot of pent-up demand from lockdown period, favorable macroeconomic factors resulting in strong rural cash flows and continued government support in agri sectors.Our domestic volumes went up in Q3 by 24.2% at 30,072 tractors, as against 24,219 tractors in last year same quarter. Despite full capacity production, the demand outpaced supply resulting in all-time low stocks during the peak festival time. However, as demand subdued post the festive season, inventory was built back.About 60% of our domestic sales came from above 40 HP tractors resulting in significant model mix gains during this period. Export industry went up by 27.8% year-on-year in quarter 3 to 26,400 tractors, whereas our export volumes were up by 67.4% Y-o-Y to 1,490 tractors.EBIT margin for Agri Machinery business went up by 564 basis points to 20.1%, as against 14.5% last year same quarter, our highest ever. While the operating leverage helped, we maintained huge focus on cost efficiencies. With continued efforts around channel expansion, the total dealer count is now close to 1,090.Although pent-up demand is more or less over, the industry macro factors continue to support the industry growth. Good and uniform availability of water, better retail financing penetration, the start of commercial use demand, record crop production along with holdup of most crop prices are factors helping continued industry growth. Coupled with the low base effect, these factors should propel industry further in Q4, making this fiscal a record year for the tractor industry.Going forward, while we do not expect any significant supply demand gaps, the rising inflation continues to be a cause of worry and is likely to impact Q4 margin this year despite a partial pass on to the market.Coming to the Construction Equipment business, our served industry, comprising backhoe loaders, Pick n carry cranes and Compactors, grew by 14.5% in Q3. Crane industry grew by 28%, but due to COVID-19 and cash flow issues in market, the Pick n carry crane industry has shifted to price-sensitive Hydra segment. The Compactor industry grew by 27% and backhoe loaders grew by 11%.Our total volumes manufactured as well as traded products combined went up by 20.1% to 1,254 machines, as against 1,044 machines in last year same quarter. And sequentially, it's up by 52.7% as against 821 machines.Revenue for the quarter at INR 244.73 crores, correspondingly up by 13% and sequentially is up by 56%. During the quarter, we sold 58% of total Pick n carry from Hydra category with lower margins as compared to previous fiscal when it was 45%. EBIT margin for the quarter was at 7.5%, an expansion of 270 basis points year-on-year, an expansion of 580 basis points quarter-on-quarter.This strong performance was matched by our various operating metrics and cost control measures that we have spoken about many times in the past. Looking at good traction in quarter gone by and along with green shoots of economic revival, increased order flows, we expect same momentum to continue for medium term, at least for the next 4 to 6 quarters.Coming to the Railway Equipment Division, the revenue for the quarter ended December 2020 was at 117.4 crore. During the quarter, we have executed 69.2% of total orders from new products category with more import content in lower margins as compared to previous fiscal when it was only 44.2%.EBIT margin now stands at 12.7% in quarter ended December 2020, as against 18.4% in last year same quarter, impacted mainly due to volume, product mix and one-off provisions towards GST rate differential in respect of orders executed post September '19 after due dispatch date from GST rate underwent revision.Indian Railways is still not running its full operations due to unprecedented COVID-19 pandemic situation and has done revision in the production plans, affecting fresh order tendering and order inflows. Order book for the division at the end of December 2020 was more than INR 330 crores that would get executed in the next 6 to 8 months. We have seen good pickup in the order inflows during December 2020 and expect that tendering process will get back to pre-COVID levels by end of Q4 of current fiscal.For FY '21, we now expect Railway Equipment revenue to be flat as that of last year, and margins for the segment are likely to be closer to last year's levels.Now I request the moderator to open the floor for Q&A session.
[Operator Instructions] The first question is from the line of Mukesh Saraf from Spark Capital Advisors.
Sir, my first question is regarding your market shares. You see that -- I mean in this quarter, our overall market share has gone up. But we also see that the 30 to 40 HP segment has seen a higher increase, sequentially, I'm looking at between 2Q and 3Q.Could you give some sense on this because in general, the industry was shifting more towards a 40 to 50 HP. So is it just a mix because of the regional kind of exposure we have or something related to seasonality? Or have you taken some actions in this segment? Could you just give some sense on that?
Yes. So this is Shenu Agarwal. So thank you for the question. Let me just say on the market share overall and also on the segmental market share that a lot of this has been driven by the availability of products and by different supply chain issues that we faced, not just in quarter 3 but also in the whole year so far, right?So it is not a true reflection of the things, of the demand or of the strength of our company in the market. It is more of a reflection of what we could make, at what time. So it's something back to that extent. If you see our YTD market shares, segmental market shares, you will see a definitive upward trend in 40 to 50 HP market share and actually a degrowth in 31 to 40, right?So now overall, of course, we have degrown in market share by about 40, 50 basis points on YTD level. But we have increased in 40 to 50 HP. And that was our goal from last many years, as we were churning out more and more higher HP products.
Right. Right. And my second question is, if I look at the consolidated numbers, I see that there is an income from either associates or JV to the extent of INR 7 crores this quarter. Could you give some sense on that because we haven't seen that high a number in the past?
So Mukesh, as you know, we had done the acquisition of 40% stake in the sales company of Kubota in India, called Kubota Agri Machinery India. So this -- basically, it affects the profitability because agri being the part of the tractor industry, and you've seen the tractor industry doing extensively well in this period, especially in this quarter.So the acquisition happened only in the first week of October. So this agri number basically is coming from the consolidation of that JV in the annual accounts.
Okay. But you also have, say, probably the initial losses of the plant which is started, the 40% stake in that JV as well?
Yes. So that, obviously, right now, is in losses. So we've not really started making money there. So the sales have started there. So we had good sales in this quarter in that plant, too. But most of the supplies there are being sold to the sales company. So really, you could look at the integrated margin, which is what has been getting reflected now because in both the companies we own 40%. So the impact what you see here is the combination of both of this together.
The next question is from the line of Hitesh Goel from Kotak Securities.
So my first question is the tractor business. You said that inventories are back into the system. So can you get -- give us some sense on the retail demand and how they're panning out in January, per se? And what is the inventory levels?And second question is also related to the commodity cost. What is the kind of pricing you've taken in January? And what is the cost pressure that you're seeing right now?
Hitesh, forecast on the retail momentum and the inventories. As we have seen month-on-month for the last several months, the retail momentum has been very, very strong. And of course, some inventory buildup has happened in December and January, not just for us but for all the players, because December, January is not as strong as September, October, November peak. So most of the players got a chance to kind of build back some inventories.But overall, the retail momentum has been extremely strong, right? So even if you discount December and January growth to some extent for the buildup of inventory, although the inventory at the industry levels are still not at the pre-COVID levels, they are still below that. But still, we have, like at the industry level and also at Escorts level, we have a healthy inventory right now, right?So yes, retail momentum is strong. All macro positive factors are in place. As Bharat said, going forward, we do not see that pent-up demand a factor to support the industry because most of it, we believe, has already been covered so far. But despite that, the macro factors are extremely, extremely positive. And the rural cash flows also are very, very strong right now. So we think that the momentum will continue.Coming to pricing, we had taken a price increase to partially offset by inflation that we had so far and also the expected inflation in future. So we had taken a price increase in middle of November in advance of other players.So on a quarter 3 basis, more or less, we were covered with inflation. But quarter 4, the inflation is still going rampant, and there will be some pressure this quarter on margins because of the inflation because we are not in a position to do a successive price increase so soon, although we are planning for a price increase in early quarter 1 next fiscal.
So January, we have not taken any price increase, right?
No, we took one in middle of November. So most of the industry players took price increase in either late December or January early, but we took it in middle of November.
Okay. And what is the kind of cost pressures you are seeing? So I mean my question is, how much can the tractor margins fall to in fourth quarter?
Bharat?
So Hitesh, overall, looking at the commodity price inflation and the estimate is the -- overall, it can be -- on the sales side, it can be anywhere between 4% to 5% cost escalation that's going to happen.And so for the price increase, which we've taken in November, it's about 2%. So there could be 2% to 3% pressure on the margin is going to happen in this quarter. Also we will be watching the industry closely and if the competition takes the price increase during the quarter, so we can also take the call. But yes, this is the sort of situation where we are today, unless the prices on commodity side start softening, which doesn't apply as of now.
Okay. But they have taken a 5% import duty cut, right? So steels price should come up?
Yes. Well, it's a very small component. So it's not a major component for the steel industries.
The next question is from the line of Gunjan from JPMorgan.
Just a follow-up on the margin. Just to get this clear, you said 500 basis points is the incremental impact. And the price increase taken is about 200 -- 2 percentage points. So net-net, 200 -- net of 300 is yet to come in the Q4. Is that understanding correct? Or 500 basis points is completely incremental?
No. So 500 is the total for both the quarters combined. So like you are saying that 2% has been passed on so we can quickly address the inflation, which was there in Q3. So Q4 is estimated as of now that can go up by another 3% but we're not sure.So whatever actually happens, but as a sort of estimate is you're seeing the pressure on the prices today, so the margin impact can go up to that level. And obviously, it will actually depend on how much the inflation actually happen in the quarter.
Okay. Okay. Got it. And just in -- just on the margin perspective, we were expecting some of these reversals on the fixed cost also to happen in the second half of the year because first half was quiet in a lockdown, so we were cutting down on a lot of spend. So is all of that reverse normalized, so will incrementally the only adverse factor is commodity? Or is there anything else that we should keep in mind when we are making our numbers?
So I think on the fixed cost side, as you said, institutions start going back to normal, so the costs are also starting to come back. So most of the costs, which likely get reverse during the lockdown period, so we've seen that Q3 has seen a lot of pressure of these costs again coming back to the system. So which is reflected in those numbers also.So I think as the demand -- the pent-up demand subdues, likely there will be pressures start building up and this other costs probably, too. So I think it'll be a good area to consider at the same level like FY '19 numbers, maybe there's some momentum over that because of the higher volumes.
Okay. Got it. Okay. The second question I had was on the export. So we are consistently seeing this 500 units a month volumes on the export side. Can you talk about it? Is this only -- is this anything to do with the Kubota JV? And overall, how should we see the whole export business scaling up once the incremental capacity comes on stream?
Yes. So -- this is Shenu. So on exports, we have a very strong order book as of now. And the order book has been there for the last many, many months now. But because we have not been able to produce to the demand, at least until middle of December. So we have not been able to fulfill all the demand, right? But still, I mean we have been prioritizing or balancing the priority between domestic and exports all through the last 5, 6, 7 months.And -- I mean we have been able to do better on exports than last year. But still, our order book is very, very strong. So as we start producing more as the supply chain issues start getting sorted, you will see a considerable increase in the exports numbers.
Sir, anything you want to talk about the order book or the -- once the new capacity comes on stream, how much scale up can happen on the export side? And I just need a clarification. Is this under E Kubota brand or these are normal Escorts-branded exports that are happening?
So far, everything is more or less under -- directly under Escorts. The E Kubota shipments have started, but nothing significant as of yet. But of course, in future, they will be quite significant. But a lot of actions or a lot of efforts are going on, on kind of making those products available and doing some minor engineering changes, et cetera, et cetera, right? So E Kubota so far has not been a factor, but in future, it will be a factor.As far as overall export numbers are concerned, we are going to do significantly better than last year. Yes. And then next year also, we are taking a pretty aggressive number as our goal because next year, some volumes would start creeping in from E Kubota as well.
Okay. Got it. Just last one from my side is, any clarity on the cash usage or incremental discussion with Kubota how we are taking forward the whole association?
So Gunjan, I think we will get more idea on that by March because they had actually delayed the overall plan for India in their discussion because of the COVID situation in Japan. So they are working on this, and they will come back to us by end of February, and we expect to take it up to our Board sometime in the month of March, and then the deal also we will let you know another time how it's going to be used.
The next question is from the line of Mitul Shah from Reliance Securities.
Sir, congratulations on a very strong performance. Sir, I have a question on inventory level. Industry-wide tractor inventory totally remained in the range of 80,000 to 90,000 pre-COVID level on an average basis. Now after this festival, inventory fell down to roughly 45,000. And again, it is coming back close to like 60,000, 65,000 right now.So still, it is 20,000 below the normal level. So do you see any change in the dynamics of the industry in terms of this as a new normal for inventory, means lower working capital and lower interest outgo, similar to other OEMs and other tire companies are indicating? Or do you think that then people will start pushing more inventories in coming months?
Yes, Mitul, so -- I mean, directionally, it is right that there have been a lot of learnings on the -- especially on the inventory side or the working capital rotation side for all the tractor players, and people have been much more cautious about not keeping unnecessarily high inventories. Yes. So a lot of changes have happened. A lot of internal systems, internal outlook has changed on this issue, as you have seen at Escorts as well.However -- I mean the situation is different with different manufacturers, and different manufacturers will have their own kind of policies or outlook on how they want to deal this issue in the future. But more or less, on an aggregate level, I would say that we will see some reduction in inventory levels in terms of number of days going forward.So earlier if the inventory used to be, let us say, at whatever, like -- let us say, 35-day level, then I would think that it might come down to like 25- to 30-day level, right? We don't see a drastic reduction in the number of days, but yes, some reduction in the number of days we do see at the industry level.
Sir, second question is on the tractor industry growth for coming next year or coming 3, 4 quarters. For current year, YTD, South has outperformed strongly, roughly around 46% growth for South and nearly 25.5% for West. So these 2 regions, where we are slightly weak, have outperformed. So for next year, do you think it to reverse or this trend will continue and we may see market share pressure on this front?
Yes. So see, Mitul, in the long term, we all know that South and West will grow more than North and East, because of the fundamental reasons of just tractor penetration or tractor horsepower per hectare or other factors, right?So in the long term, that is true that South and West is going to grow. And that is why Escorts, few years back, had taken a kind of a call to double, triple our efforts in these markets and try to gain our market share in these markets, which is definitely helping us now.Of course, our market share overall in the first 9 months had dropped, but that is more of the issue of the gap between supply and demand. I mean our stocks have been very, very low even in the peak festive periods and therefore, we lost significant amount of sales.However, yes, for next year, I think the gap between Southwest versus Northeast will subdue a little bit because not many states are showing very, very good signs of recovery and industry growth. For example, Rajasthan, MP and Gujarat and even to some extent, Bihar and UP, right?So I think that gap will reduce for the next year at least. But in the long run, yes, South and West will continue to outgrow North and East.
My last question on Construction Equipment. This level of volume, roughly 1,200, 1,300, we have done 7% plus EBIT margin. So if we assume this as a more or less quarterly average of around 1,200 to 1,300 units, do you see margins to grow double-digit, roughly 10%? Or if yes, then what else can be done in terms of either cost saving or pricing power or a product mix? If you can highlight that.
Yes, this is Ajay. So basically, we are looking in the cost side. We have worked on the pricing side also, along with products and the fixed cost reduction. So that was all being run in-house. But even with the kind of the inflation that we have seen play on the strong side. So giving that in this kind of margins are quarterly, I think that will depend on what kind of inflation that we pursue going forward.And if you look at the loading, we should be comfortable as long as the inflation is under control.
Sir, but in terms of my question is related to pricing power, how this industry-wide situation on pricing power front, sir?
Very difficult to say because you see up to December, mid-December, the inflation, in fact, on the machines was about 6% to 10%, if you look at the steel and other commodity inflation. Even after that, there has been inflation on the steel side.
sorry to interrupt, sir. One participant is signaling saying that they are unable to hear you clearly. I would request you to repeat the answer.
Sure. On the inflation, see we have inflation rate about 6% to 10% if you look at the machines that we are talking about. And this kind of price increase, flexibility is not there in the market because the contractors are not getting increased rates on these machines. So even if we increase, many of the manufacturers have not been able to increase the price, but we have gone ahead and increased the price, passing on the inflation to the market.So I would be caution on the fact that these percentages of margin, which is basically a combination of many things, but inflation does play a very big role on this. The customer base is not in a position to absorb all the price increase that is happening in the market.
[Operator Instructions] The next question is from the line of Amyn Pirani from CLSA.
Sir, my question was on the supply chain constraints that you talked about. And this has been a problem for other players as well. So at this stage, are there specific components which are still causing a problem? And how do you see this situation improving over the next few quarters?
Yes. Amyn, this is Shenu. So -- see, supply chain situation was bad, I mean, until about middle of December. And it was not just bad, but it was very complex because we would see like something or else going wrong in some part of the country or some particular supplier. And we were just kind of juggling around with lot of issues. But the situation now has been -- is much better.So largely, like most of the supply issues have been sorted out. I think the constraint now is more or less limited to a few suppliers. The one -- biggest one of that is for the fuel injection pumps, where we are still not being -- not able to get the required quantities that we want. And -- but I think more or less, everything else is quite on track, right? I'm not saying we will not get any surprises in future. But the possibility of that is quite low now.So just speaking for Escorts, we have been producing more than 10,000 tractors consistently, right? But you know the demand in the peak season is much more than that for us. And therefore, we went literally out of stock. But now, since the demands have -- demand levels of industry levels have subdued as compared to the peak season, so now we are fine as far as the total number of tractors we need and then we have been able to fill back some stocks also.
Okay. Okay. That's helpful. My second question was, I think in the initial remarks, you mentioned that I think the nonagricultural usage or sale of tractors has also gone up, unless I'm mistaken. So what are the trends you are seeing there? And do you think that the thrust on investments in the current budget has -- increases the probability of such use going higher in the coming few quarters?
Yes, definitely, because see, in the COVID times, the demand for non-agri usage was actually very, very low and most of the demand came from the agri side. But going forward, already, we are seeing the demand coming back on the commercial usage side. And going forward also, this demand will be much higher.And we think at least for the next 3 or 4 quarters, this demand will be actually more than what we used to have in the commercial side because of just the pent-up recovery has not happened on this side, although pent-up demand has fully recovered on the agri side, but not on the commercial side yet.
Okay. And can you share some numbers like on a steady-state basis, how much is commercial impact, is it 15%, 20%? And where would it be today, if you can share some numbers?
Yes. It widely ranges, I mean, from state to state, but I think on the country level, it should be somewhere between 25% to 35%. But in some of the markets like Bihar, Andhra Pradesh, even Madhya Pradesh, this could even be as high as 40%, 45%.
Okay. Okay. But right now, we are lower than this number across all the market?
Yes, yes, right now, we are very low. Yes. For the first 9 months, we are like probably like half of that.
The next question is from the line of Prateek Poddar from Nippon India.
Sir, 2 questions. One is, could you -- I mean I didn't catch that, but could you just talk a bit about how -- what are the growth rates in retail demand for the month of December, Jan, for the industry, per se?And second is for the upcoming rabi season, how is the farmer sentiment? And what kind of growth at the retail level can we look forward to or you are expecting?
Yes. So as I said, there has been some inventory buildup in December and January from all the players, more or less. So the numbers that you would see on the wholesale side are a little bit -- on the retail side would be a little bit less than the numbers you see on the wholesale side in terms of growth, right? But it is not like a hugely major factor, because the retail demand is still very, very strong.And as I said, we think it is going to be strong for some time to come, at least, because the macro factors are very, very positive. Although -- like I said, although the pent-up demand recovery has happened on the agri side, but the commercial side will present new opportunities going forward, right?So yes, I mean, I can't give you a kind of exact number for how much was the growth on the retail side, but I don't think it is very far off from what you have seen on the wholesale side.
Got it. And the rabi season and expectations for the upcoming rabi season from a farmer sentiment perspective?
Yes. So I mean, rabi season is going to be quite strong. I think as strong as the kharif season last time because the sowing has been very, very good, and the prices are holding up. I mean -- and the MSPs are also very, very strong.So yes, I mean -- so rabi is going to be tremendous. The commercial demand is going to come back in months to come. So yes, we see a strong outlook. At least for, I mean, this quarter, we see a very strong outlook.
And sir, just lastly, not getting into the numbers, but the growth rates in retail would mirror the wholesale growth rates that we have seen in the month of October -- I mean, December and January, is that a fair understanding?
No, it will be slightly less than the wholesale number. So for example, like the industry grew 46% in December, roughly, and probably, I think, 33%, 34% in January. So retail numbers would be slightly less because some of the stock has been built back by almost all the players.Yes, but it is still very strong. I mean it's difficult for me to give you an exact number in retail. But yes, it is still like quite strong. It's not that there has -- there is like a big difference between wholesale and retail, although there is some difference.
The next question is from the line of Vikram from Maybank.
Sir, my first question is on E tractor. I mean the immediate first question to that is we are sure we are going to go ahead with E tractors in India, right? Or that itself needs to be discussed in March?
Sorry, Vikram, can you repeat that? E tractor, you mean electric tractor?
Yes, yes. E Kubota -- I mean, E Kubota tractor. We have noted that we are planning to -- yes, we are certain we are planning to introduce that in India, right? Or that also needs to be discussed?
No, no, no. So Vikram, there is no strategy to have a combination of our brands in India so far, right? So E Kubota is a brand that is destined for outside India only, right. In India, we are going to compete with each other with our own brands.So for example, we have 2 key brands, Powertrac and Farmtrac, and Kubota has Kubota, right? So all 3 brands would be present independently in India. But outside India, we have created a brand called E Kubota, where Escorts tractors redesignated with some -- of course, some engineering changes as well, some changes in styling, et cetera, and they will be exported through Kubota network. So that is what E Kubota is about.
Yes. But the recent news that you've got some certificate from one of the institutes regard -- and you being the only tractor manufacturer who has -- who is the first one to get the certificate. I wanted some color on that one.
Okay. So now that is a totally separate issue that has got no relations with Kubota, right? So what we did was we developed an electric tractor and we were the first in the world probably to have an electric tractor commercially rolled out about 2 years ago.We started exporting to Europe first and then to many countries. We have recently started exporting to USA as well. Now we are planning for a launch in India. But for a plan -- for a launch in India, we require Indian certification from Indian authorities. And that is what you have seen in the news recently that we were the first company in India to get electric tractor certified from the Government of India.Last year, this is certified and we are now able to sell, then we are now planning to launch it in India.
Okay. By when? Any idea?
Yes. We are still making some plans. It will be soon. It will be within the next 3 to 6 months, but we haven't finalized the exact date or the method yet. So we'll come back to you as soon as we have those plans finalized.
All right. Actually, my other questions have been answered, but let me take the opportunity to ask this. This farm protest that we are seeing has been in and around some of your key markets. Any chance the -- because -- and this protest has been on for the past couple of months at least. So any chance that has had an effect on retail sales or your sales numbers?
No, no, no, not at all, not at all. So no effect of the protest as -- at all on tractor industry. I mean if you look at Punjab and Haryana tractor industry in January, you will be like surprised by the kind of growth they have achieved.
The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
Yes. On the construction equipment side, per se, given there is a good momentum in terms of the road construction and other activities that are announced by the government recently. I'm just trying to get your perspective on how do you see the industry going forward? Typically, what is the lead time for equipment mobilization ahead of the start of the project? And are there -- the customers still facing any financing challenges when they buy the construction equipment, per se? That's the second question. The third, with all these for FY '22, for us, can we expect volumes to be around 8,000 odd units between the cranes, backhoe loaders, compactors, all put together? Is that something which is possible?
[Operator Instructions]
We will agree with you. See the potential for construction equipment, besides these other investments if you look at the government's plan to recover by creating demand and creating employment, I think infrastructure is the best way forward, and that has been realized by the government also. So a lot of investment during the COVID time also was happening. Now the demand side will further strengthen with the capital allocation that the Ministry has talked about yesterday in the budget. So I think there would be continuity of growth in construction equipment. The numbers, I'm not sure. At this point in time, it can be confounded numbers. But going forward, the position that is coming from ICEMA and other related bodies, remember could be pretty high and maybe next year will be as big as 2019 -- fiscal year 2019, so that is possible. And what was your second question -- first question? I think I have answered your second and third, I think.
I will repeat. So I was trying to say, what is the typical lead time for equipment mobilization ahead of the start of the project. I mean how does the equipment -- construction equipment buying purchases with respect to the project start, what is the lead time, just trying to understand that dynamic, sir?
There is no specific lead time for the construction equipment. The construction is announced for the projects, you have the earthmovers ready. So the constriction equipment cost is very little. Once you start on a project and you also get a green signal and you have the go-ahead clearance. So it's a continuous process to receive clearance from different places at different times. So we have taken -- we have 3 segments with us, which is the earthmoving segment, the road construction segment and the material handling segment. So we -- our aim is [indiscernible]. So I don't -- there is no amount of specific lead time for equipment to getting book. Yes, there is already a demand that has been created because a lot of investments in the previous years have gone into infrastructure. So there are new projects, which are at different stages of construction.
The next question is from the line of Abhishek Jain from Dolat Capital.
Sir, despite a strong growth in higher HP segment, your realization just grew 2% Y-o-Y in third quarter, even down 3% quarter -- quarter-on-quarter. So can we assume that discounting is increasing in the higher HP segment?
No, no, please do not assume that. Discounting overall is at very low levels right now in the industry as compared to usual discounting. And -- I mean, as I said, it is just -- it is not a reflection -- good reflection of the market or of market shares. It is -- since we were going through a lot of supply chain challenges, so it is more of a reflection of what different players could build or could make. And everything that anybody could make, got sold, right? So let us just wait for a better time to make a judgment on the market shares on different segments.
So what was the region of this 3% quarter-on-quarter down on average realization despite the price increase taken in the mid of the November?
Pardon?
So what is the region of this 3% mix... Hello?
I am explaining. So obviously, one is the product mix. If you look at the split -- can you hear me?
Yes, yes.
Yes. One is the mix which we had. So as we mentioned, more than 40 HP segment in Q2 was a very strong number. We had almost 63% of our sales coming from higher HP tractors, which has come down to 61% now in Q3, which is also the trend we've indicated will start coming in while the commercial demand start going up, the move will happen very slightly if you look at HP tractors compared to what we are seeing in the second quarter. So that is a swing which has happened. And then also within Farmtrac and Powertrac also, there's a swing which has happened, more in favor of Powertrac in this quarter. So this has related into some adverse mix in this quarter. So even though it's better -- much better compared to last year, whereas swing is almost positive on the higher HP side by almost 7% even now. But in Q2, the swing was almost 10% positive compared to last year. So although -- even though compared to last year, we are still better in mix, but quarter-on-quarter, major difference has happened to mix under 3%.
Okay. Sir, in third quarter, we have seen a significant growth around 60% Y-o-Y in Southern market, and market share has also improved to the 4.5% to 6.5%. So can you give some color, is it because of this inventory refilling or network expansion?
Sorry. Sorry, can you repeat the question? I didn't understand it very well.
So in Southern market, we have seen a significant growth in third quarter, around 60% growth on the volume front. And the market share has also improved from 4.5% to 6.5%. So just wanted to understand, is it because of this channel refilling or your network -- it is because of your network expansion plan?
Okay. Okay. It's relating to South. So yes, I mean, we started our journey like 3 years ago in South and since then we have been continuously growing. It's like a major white space for us, right? So I think it is a result of that. It is not just results of any one thing. But overall, our actions in South, which include channel actions, which include product actions, which include various projects that we are doing, which place us -- which place our band very differently in the Southern market. So it's a combination of all that. And it's going to -- I think, we will continue to see that growth in South because we haven't touched the desired levels yet. We want to go to a double-digit market share, which we haven't so far, but we have done quite well in last 2 years.So yes, I mean, it's a result of everything.
The next question is from the line of Raghunandhan from Emkay Global.
Congratulations on stellar numbers. Sir, my first question to Shenu sir. FY '21 industry growth can be as high as 20%. On this high base, how do you see FY '22 growth outlook for the industry? And what are the incremental growth drivers that you are seeing?
Raghu, thank you for the question, and thank you for your comments. It is slightly early to comment on FY '22 because we have to see a few things that are not yet on the surface, especially the predictions on the monsoon, although the first -- I think the first unofficial or official, I don't know but first kind of -- some kind of prediction has come from the Australian weather office about FY '22 monsoon, which seems to be normal, but let us just wait for this. But other than monsoon, of course, there are a lot of positive things that are happening in the industry, whether you talk about crop production or crop prices or the government schemes and the availability of water, availability of retail finance. So all that is positive. I think the only worrying factor is how the monsoon is going to go. And the other one, of course, is that we are sitting on a very, very high base after having gone to roughly 20% increase this year. So let us just wait and see -- wait and watch the monsoon predictions and then we should be able to give you a better estimate for next year. But I think it should be -- it should -- right now, we can say that it should be better than this year, how much better, I think we will be able to say something by March of it.
And all the best on that. My second question is to Bharat sir. Every year, company has been generating strong cash flows. What are the thoughts on increasing dividend payouts ahead?
Thank you, Raghu. I mean you have been very supportive all this while. So we will take this matter to the Board now. We'll see. Everybody is looking at the building up of this cash kitty within the company and then company has been generating good free cash and it looks like the momentum will continue. So definitely, I'm sure that Board will take liberal view so -- but how much and what, we don't know. So I mean, we leave it to the Board's discretion to decide that.
Yes, sir, hoping for that increase. My last question to Pankaj sir. On the railway side, with the tendering coming back to pre-COVID levels, how do you see the growth prospects going ahead? And also, Bharat sir, referred in the initial comments about margins going back to the normal levels. So on both these factors, if you can elaborate and take us through how we should look at it from the next 2, 3 years, it will be helpful.
Yes. Thank you for the question. I mean as Bharat, I think, in his opening comments mentioned that railway as an industry was going through almost a subdued outlook because of, I mean, the main passenger segment not running much, except for a few -- obviously, the freight train was running, but that also was not running properly, except for the essential services. But now what we see starting from December, we see the overall tendering run rate improving a lot. And we are pretty hopeful that in the -- this particular quarter, we should be having a significant amount of tenders coming out to build our order book for the coming quarters. And we should be back again to our -- whatever growth percentages we have been growing for the last 3, 4 years. You would have seen our growth. So we should be back again to our growth percentages. And the other good positive driver is that we had a very positive budget for the railways, where people are talking about INR 30,000 crores, INR 40,000 crores in the rolling stock investment. So if the rolling stock investment does happen, we see a huge amount of growth for the component industry like us.
The next question is from the line of Kishan Gupta from CD Equiresearch (sic) [CD Equisearch].
Yes. So basically, I want to understand, have you people seen any change in the cyclicality of the tractor industry over the last few years?
You mean cyclicity of the tractor industry in the last few years?
Yes.
Not really. I mean, if you just analyze last several years, like 20 years or so, you'll still find some trends on cyclicity, right, which have not changed drastically. Of course, there is some change from cycle to cycle. So that will always be there. But nothing of major significance.
So considering that the cyclicality of the industry has not changed. So how much is that business, specifically the tractor business scalable?
That's kind of a wide subject and very debatable. But I think some of the experts have said that tractor industry could saturate probably at the level of 1.2 million to 1.5 million units a year, right? I mean we are quite far away from that. So we shouldn't be worrying about that too much right now. Yes. But I think we are far from saturation because, I mean, if you look at just tractor penetration per household or just per acre or you look at power available in the farm per acre, I mean we are nowhere near the world's best or even the world's average. So the upside is quite large.
Okay. And is there any sort of integration between your different business units, like agri, construction and railway.
Bharat?
Yes. So -- there are some synergies in the back end operations. So like we have a common team now for the back end for agri and construction equipment business. But both have different front end structures and then railway is totally different business. So to some extent, between agri and construction, yes, maybe if you look at the larger global players, most of them have both the businesses together because of the common back end chain which operates. But front ends are both different for both the businesses.
And what is the raw material procurement? Is it -- is there some commonality?
Not much. So except this, we have some common supplies coming from the tractor business to construction, like transmissions or some of the engines which we supply to them. So that's sort of the back end side, there's some integration, but the other component what they buy are different from what we use in the tractor industry.
The next question is from the line of Chirag Shah from Edelweiss.
Sir, just 1 question. You indicated you need a 5% cost increase over Q3 and Q4. So that reflects to what, 15% increase in your commodity basket?
Sorry, come again?
So the 5% increase that you referred to, cost increase that you need to pass on would effectively mean a 15% increase in your commodity basket?
No, no, not 15% increase. It's 4% to 5% on the sales line and commodity will be almost 2/3 of that. So effectively on commodity price, I think there was were 6% to 7% increase.
Okay. But in RM, everything is not commodity, correct? There is a lot of value add. Pure commodity, how much that would be as a part of RM for us?
But in our products, if you look at the major products, our products' major part is commodity only. If you look at it, it's basically steel. It's casting, forging, sheet metal and rubber. So these are sort of 4 basic component, which essentially is part of commodity, 90% is commodity here.
Okay. And sir, your comment on the industry growth for FY '22. Just 2 questions. One, the trend between different HP. So is it also a north-south or a regional mix issue that the HP mix is very different, point one? And second, assuming monsoon outlook is normal as of date, can we expect a double-digit growth in FY '22?
Okay. On the HP side, I mean, it has been a trend for last many, many years that the higher HP tractors are going faster than the smaller HP. The very, very low HP, which is like some bit of a specialty tractor segment. And that trend is going to continue. The reason that we saw an extraordinary increase in 40 and above HP segment this year as compared to the normal trend was that the commercial demand was very subdued while the agri demand was quite high, right? In agri, normally the farmers are switching to higher HP. The commercial demand is still most of it, I mean I am not saying there is nothing in higher HP, but most of the commercial demand by volume is more towards smaller HP or the lower HP. And that is why we see an extraordinary rise in the higher HP share. Going forward, as the commercial demand comes back, the higher HP shares will reduce from the current levels, but it will still stay higher than the previous years, right? So that is my response on the HP shares. On FY '22, as I said, let us just wait until March, April and then we will be able to give a better estimate on what we think FY '22 would be. Right now, it seems that it will be better than FY '21 as I said, but how much, we will have to wait and watch.
Sir, one last question if I can squeeze in. In a normalized year, generally tractor sale -- the retail sales happen largely in 4 months, right? The 4 months would account for like 60% of retail sales. That trend would have changed currently given the way the pent-up demand has come. So next year, the retail should again have a normalized pattern. Is that understanding correct?
Yes, yes. Yes, that is right. So next year the retail sales would fall in the normal pattern. So this year was extraordinary event because of the pandemic; therefore, we say very high sales in July, August, September, et cetera, also, which is normally a weak season. So yes, you're right, next year it should normalize to previous year's levels, the distribution of sales in various months, I mean.
The next question is from the line of Nishit Jalan from Axis Capital.
Most of my questions have been answered. Just 2 small questions. Firstly, on capacity side, can you share your plan in terms of -- our plan and time line in terms of capacity ramp-up over the next 1 year? And secondly, can you talk a little bit about your our medium-term plans on the export side, especially once we start integration with Kubota and that kind of ramps up. So I'm not looking at the near-term numbers, but at least from a 3-year perspective, how should we look at exports in terms of volumes?
Yes. So on the capacity side, we are pumping in investments within our existing premises. Most of these investments are on the machining side and as well as on the supplier side because on assembly side, we have no constraint in making more tractors. And we are hoping that by middle of next year, we'll be able to get to somewhere around 12,000 to 13,000 tractors a month of capacity. Now I'm not talking about theoretical capacity, we're talking about actual production that we can channel, right? And going further, we are also ready with next level plan, which we will put in action as we see how the industry behaves and how our volumes behave. But we are ready with that blueprint as well within the same premises. Yes. So that is on capacity side. And your other question was?
Medium-term export plan.
Right. Yes. So export, as you know, we have very aggressive plans. We have invested a lot of money in last 3 or 4 years, both in -- on the product side and on the market side. So product side, we have churned out products now, all kinds of products in different HP ranges, up to about 110 HP. On the market side also, we are putting a major effort on market development. We are already into like some prestigious markets like Europe now and very successfully exporting there for the last 2 or 3 years now. The plans are very ambitious. We want to at least triple or quadruple our current levels of exports in the next 7 to 8 years. And the association with Kubota will help us significantly in achieving that kind of a goal.
And sir, if I can squeeze in just 1 other question. Just wanted to understand, have you -- farm implements as an industry is still very, very small in India, have you started to see any pickup on that? Any -- if you can share what are your revenues or industry revenues in that segment? How have they done this year than last year, that would be very useful?
Yes. So you're right, farm equipment other than tractors, like implements and attachments, there is a great future in India because there is a huge upside available. If you look at any world market outside India, especially in the western countries, you will see that implement and attachments industry revenues are very, very high as compared to what they are in India or even if you look in terms of the ratios of the tractor top line revenues at industry level. So India has a lot of potential. Now we know that this sector was totally left as unorganized sector until about 3 or 4 years ago. And now every organized player in the farm equipment sector is trying to set up business around the farm implements and attachments. And so in this spot, we started about 2 years ago, and we are already started distributing small bouquet of products through our existing channel. And we are going to spend or invest more and more into this side of the business, which is Farmtrac -- farm implements and attachments. The upside is really, really large, but let us just wait and see how this develops over the next few years before kind of putting a number as to what kind of business India could have on farm implements. The opportunity is tremendous.
Sir, just 1 follow-up on this, what according to you needs to fall in place? Or what are the key leading indicators you are watching out for to see before we start seeing a meaningful realization of this opportunity? This opportunity has always been there. But so far in India because of fragmented landholdings or whatever reason, we have not seen this translating into real opportunity. So what needs to change, per se, to actually we start seeing this in terms of numbers around this?
Yes. So there are 3 steps. The first one always starts with the customer. So I think the Indian farmer is realizing more and more as the farmer is getting more educated and aware and is focusing more on kind of commercial aspect of farming. That a great -- a good tool behind the tractor would actually help the former raise the productivity levels. It's not the tractor. Tractor is just a prime mover. Of course, the tractor plays a very, very strong -- a very, very important role. But it is ultimately the tool behind the tractor which actually helps in the right kind of farming practice, right? So that awareness is very, very high right now. Now if you look at the penetration of various new implements and attachments in the country in last 5 years, I mean, it is probably like -- I mean it is like 30, 40, 50x more than what we had seen in the previous 5 years, right? So the awareness is now there. The pull is now there. The second thing is that -- the second thing is the technology, right? So we have to have the right technology for India, and it is not just a question of getting the technology from overseas countries. But it is also the question of getting the technology right for India for the reasons that you just mentioned because of land hold, different land hold -- landholding sizes, et cetera, right? So that is, I think, where the industry is taking some leap steps right now. So a lot of product development is in the offing as we speak by many companies. And the third step is, of course, to scale it up, right, to find the right business model to scale up because, as you have rightly said, everything and anything cannot be sold in India, the way it is sold in the western countries. Because, for example, if you want to sell a very sophisticated harvester, the price of that harvest could be anywhere in the range of INR 20 lakhs to INR 40 lakhs or even in some cases, in some crops, it can go up to like INR 1 crores as well, right? So on both the manufacturing side as well as on the market business model side, there will have to be some new solutions that have to appear. And that journey is also on now. So there are different models being tested, being experimented in the country right now. So I think it will all come together because the opportunity is there and the will is there now and awareness in the customer is there. So I think it will all come together in the next 3, 4 years, and we will see a major uptick after that in this sector.
[Operator Instructions] The next question is from the line of Jeetendra Khatri from Quantum Advisors.
Yes. Sir, I just have 2 questions related to implements. Sir, what percentage of your revenues would be coming in from implements, like Rotavator, Harvester, et cetera? And what would be the margins there?
Okay. So it is very, very insignificant right now as it is for most of the companies, as I explained that we have just started on this side of the business, right? So right now, it is extremely insignificant. But in future, yes, we are -- we have good plans to increase this side of the business. And margins also, I mean, we shouldn't worry about right now because it is kind of right now a mix of trading versus manufacturing type of a setup. But in future, I think this business has potential to have at least 15% margin.
Okay. So structurally, it is margin accretive, right?
Yes, yes, yes. Structurally, it is, but it will take a few years to reach to those levels as we mature both the technology and also the manufacturing setup.
Okay. Okay. And sir, second is, what would be the product life cycle in a typical saturated market like Northwest and a new market like Bihar or UP or Central India, which have more of budding markets. What would be the life cycle of the average usage?
You mean life cycle of the parts?
I mean, average usage, like for how much time the first buyer will be using it and then he would be passing it on and so on and so forth?
Yes, I'll give you some estimates around that. So there are 2 typical trends that we are seeing. One is that life cycle is getting reduced as the tractors are being used for more and more number of hours, right? So now you can see a proliferation of tractor usage quite a bit. So when we were like kids, we wouldn't use any -- we wouldn't see any tractor on the roads or on the construction site, right? Now you see many enterprising farmers in India, who would not just do their own job, they would also kind of rent the tractors to others to do their jobs and also sometimes take it out to the construction sites and road sites, et cetera, and make income out of the tractor, right? So as that proliferation is increasing, the number of hours being put on the tractors are getting higher and higher. And therefore, the life cycle is getting lower. Also, the return on investment in a tractor is getting better because of the higher usage. So the trend that we are seeing is in some markets where the average replacement cycle used to be 8 to 10 years or even more, has even come down to 3 to 4 years in some cases, right? But it depends on various factors. So it varies from market to market quite a lot.
The next question is from the line of [ Kishore ], an individual investor.
Sir, I just wanted to know the R&D spend that we did for the quarter on -- from the sales mixes?
Sorry, Kishoreji, can you repeat? I could not understand it very well.
Like what is the R&D spend from the overall revenue? What is the percentage of R&D spend?
Okay. Okay. Bharat, would you like to respond to that?
Yes. Kishore, so generally, it remains in the range of 2% to 2.5% for us, which includes the revenue as well as total spend on the R&D by the company.
[Operator Instructions]
So I have already responded. So I think Kishore was asking something. So maybe you can unmute him and let him ask.
Nothing, like in your R&D -- like any aggressive plans on R&D because we can see there's competition in the market and like newer products are also being released by the competitors and all?
So I think as mentioned by Shenu also, I think we have increased our spends on the R&D in the last 4, 5 years. If you look at the last 5, 6 years, the kind of money which Escorts has spend on the product development side, especially on the R&D side, has been used, almost running into INR 400 crores, INR 500 crores now. So I think it's an investment which will start paying back now going forward. But from our perspective, we continue to pay a lot of focus to the R&D side, and there's also working a lot really on the innovation side to the R&D. So it's not just credit business what we are really looking at, but also what future can hold for this industry. So I'm sure, I think, we are willing to put in the money as is required to be put in there. So there's no restriction as such on that. But so far, I gave you the range, which is what we are spending so far in this range, especially looking at the Indian context, the quantum looks quite good as of now.
The next question is from the line of Mitul Shah from Reliance Securities.
Sir, I have a question on railway segment side. So what do you see for next 2, 3 years point of view, do you think that 10%, 20% CAGR would continue? Or it can be even higher?
Thank you, Mitul, for the question. We are confident that we will continue with our CAGR, what we have been maintaining in the next 2, 3 years or beyond that as the overall industry opens up and the amount of budget allocation, which is happening to railways and also particularly to the rolling stock sector. We are pretty confident that we should be doing better, if not much better than what we have been doing for the last 4, 5 years.
Going forward, the contribution from new products would continue to increase, right, directionally? And these are relatively slightly lower-margin products. So do you think margin territory, which was around 20% EBIT would come down now and settle around 15%, 16%?
Actually, the new product initially when we introduced, that was with a lot of import content. We have developed our whole localized products. We are just going through the approval process. So another 6 months or so once the approval is obtained from railways, then we will be back again to those EBIT numbers what you're talking about. We don't see a decline of the EBIT numbers going forward. Rather, it should be better if -- I mean, the same, if not better, at least from 18%, 19% or better.
And last question on the CapEx for next FY '22, sir? And what is our thought process on such a high cash? We are now building any aggressive dividend policy or anything on that front?
So Mitul, dividend policy is already there labeled on our website. So like, no, I think we did that. So it only defines some maximum cap what we can distribute in terms of dividend. But on the CapEx plan, the company is in the process of doing the budgeting exercise right now. I think the numbers are to go to the Board sometime, maybe towards end of this month or the ending of next month. But the indication is, I think with the kind of spend which we were doing earlier, we'll continue in the range of INR 200 crores to INR 300 crores sort of cash. But this year, due to the COVID situation, the spend level had been lower than what we planned, which is about INR 250 crores. So actually may not be to that extent, and some of it may get spilled over to next year. So let's see, I think this is one of the topic, which is being, I mean, raised by a lot of analysts, investors and going to be again discussed by our Board. I'm sure, they will take cognizant of this fact and also looking at the free cash flow the company really generating year-on-year.
And sir, Kubota plant is already operational now and ramp-up would also happen by this quarter also. So next year, there want to be any major investment in that JV or still it will continue?
You're right. So this year, I think there was a lot of rain, which led to very healthy cash flows this time. So that may not be the case going forward, too. This is the first time where you've seen agri economy has again gone back to the negative working position over the last 2 quarters. But I think as the tractor demand goes down and you go back to the normalcy, maybe things may not remain as cozy as it is today. So I think we'll keep the situation on the watch. But having said that, still I think the company's ability to generate free cash and meet all it's requirement definitely is there. So definitely, there will be good liquidity, which will be at a level for distribution of the company.
Thank you. As there are no further questions, I would now like to hand the conference over to the management, Mr. 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, and stay safe and healthy.
Thank you. On behalf of Spark Capital Advisors India Private Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.