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 3Q FY '22 Post Results Conference Call hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities. Thank you, and over to you.
Thank you, Zaid. Good evening. On behalf of Batlivala & Karani Securities India Private Limited, I welcome you all for Escorts Limited Q3 FY '22 Results Earnings Conference Call. I also take this opportunity to welcome the management team from Escort Limited. Today, we have with us Mr. Bharat Madan, President Finance and Group Chief Financial Officer and Corporate Head; Mr. Shenu Agarwal, President, Agri Missionary and Concession Equipment business. Mr. Ajay Mandahr, Chief Executive Officer; Agri Business India; Mr. Sanjeev Bajaj, Chief Executive, Escorts Construction Equipment; Mr. Ankur Dev Chief Executive, Railway Equipment Division; and the Investor Relations team at Escorts Limited. We will start the call with a brief opening remarks 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 call will be forward-looking in nature and are subject to this are outlined in the annual report and investor releases of the company. At this point, I would request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Jayaraj. Good evening, ladies and gentlemen, and thank you all for joining us on the earnings call for the third quarter and 9 months ended December 2021. We trust each of you and your families are safe and healthy. I would like to present few highlights of company's stand-alone performance for third quarter ended December 2021 as follows. Revenue from operations during the quarter at INR 1,957.5 crores went down by 3% as against INR 2,017.4 crores in previous fiscal. This is primarily due to drop in tractor and construction dip in volumes. Tractor sales volumes came down by 19.8% to 25,325 tractors as against 31,562 tractors last year same quarter. Construction equipment volume went down by 8.2% to 1,151 machines as against 1,254 machines last year same quarter. EBIDTA for quarter ended December 2021 at INR 264.6 crores, down by 27.3% as against INR 364.1 crores last year same quarter. EBIDTA margin for Q3 stands at 13.5% as against 18.05% last year same quarter. Margins have been adversely been affected by steep inflation in commodity prices as well as lower sales volume in both Agri and Construction Equipment segment. Company continues to be net debt free disruption available liquidity for growth. PBT at INR 368.8 crores as against INR 376.5 crores last year same quarter. The net profit stands at INR 201.5 crores as against INR 280.7 crores last year same quarter. The stand-alone EPS at INR 15.33 as against INR 21.28 last year same quarter. The consolidated EPS at INR 19.76 per share as against INR 29.21 per share last year same quarter. With this, now moving on to segmental business performance, starting with the Agri Machinery business. The domestic tractor industry volume went down by 13.5% to 2.24 lakh tractors as compared to 2.59 lakh tractors from last year same quarter. This is primarily attributed to late monsoon rain, delayed harvest of Kharif crops impacting rural cash flows and coming over high base of last year. Our domestic sales volume at 23,321 tractors went down by 22.4% as against 30,072 tractors in last year same quarter. At this time, we are highly focused on supporting our channel profitability, which is under pressure because of frequent price hikes which this industry is not used to. And also because the slowdown in the industry resulting in less volumes for dealers. Among other measures, we have reduced our dealer stock in this quarter to reduce the working capital cost of our dealers. We might continue to adopt these measures for another quarter or so, or dealer inventory level in terms of number of days of sales continues to be lower than the industry average. As far as the inflation is concerned, we are seeing some signs of this peaking out. However, since in most cases, we pass some inflation towards suppliers with the lack of a quarter, we might still might see some inflation in Q4 of this fiscal. And we are watching the trends, we hope we may not see significant inflation from Q1 FY '23 onwards. However, some more size increases are imperative in the next fiscal year to be able to pass on that complete effect of inflation to the market. Industry of Indian tractor exports was up in this quarter by 29.3% to reach the level of 34,000 tractors as compared to level of 26,000 tractors in last year same quarter. Our Export volume went up by 34.5% to 2,004 tractors as against 1,490 tractors in the same quarter last year. This is driven by continued success of new products launched by us in the last few years, as well as by our expanding distribution network. Sales to Kubota's global network is also gradually picking pace. Agri segment revenue went down by 8.9% at INR 1,505.6 crores as against INR 1,652.7 crores in corresponding quarter previous fiscal. EBIT margin for Agri Machinery business stood at 15.8% as against 20.1% adversely impacted by steep inflation in commodity prices and lower volumes. Q4 FY '21 saw a huge increase in the tractor industry to a level of 63% over Q4 FY '20. Because of this high base, we expect industry volume to continue de-growth in Q4 this fiscal year. On a full fiscal year basis, we expect FY '22 industry -- Indian tractor industry to degrow by 4% to 6% as compared to record industry volume of FY '21. Coming to the Construction Equipment business. Our served industry comprising Backhoe loaders, Pick n carry cranes and Road Compactors went down by 36% in Q3 on Y-o-Y basis. Our total volumes went down by 8.2% to 1,151 machines as against 1,254 machines in last year's same quarter. Our performance is better than industry resulting in market share gain of 510 basis points in Pick n carry crane segment. 80 basis points Backhoe loader and 600 basis points in Road Compactors segment. Construction Equipment segment revenue went up by 12.9% at INR 276.2 crores as against INR 244.7 crores in the corresponding quarter of previous fiscal. EBIT margins were at 2.5% as against 7.5% in corresponding quarter in previous year, adversely impacted by steep inflation in commodity prices. Given high base of last year's Q4 on account of prebuying caused by addition of changes, we expect single to low double-digit growth in FY '22 for our [ wallet ] construction different segments. With COVID-19 related restrictions easing out and encourage to air pollution but with the announcement with major customer infrastructure, we expect overall industry demand to improve from next fiscal. Lastly, on the Railway Equipment Division, revenue for the third quarter went up by 48.1% to our ever highest ever quarterly revenue of INR 173.9 crores as against INR 117.4 crores in the corresponding quarter. Sales from New Products now contribute 64% to total division sales as against 69% last year corresponding quarter. EBIT margin for the quarter ended December 2021 stood at 14.3% up by 164 basis points as against 12.7% in corresponding period last year. We are witnessing good traction in tendering process as Indian railways has started gradually recovering to a pre-pandemic level and long-term growth drivers remain attractive. Order book for the division at the end of December 2021 stood at more than INR 400 crores. For FY '22, we expect Railway Equipment segment to grow in mid-20s, and margins for the segment are likely to be maintained around 15% to 16% lower. I request the moderator to finally open the floor for Q&A session.
[Operator Instructions] First question is from the line of Gunjan Prithyani from Bank of America.
Just a couple of questions. Firstly, on the Agri segment. If you can give us some more color on what has led to this ASP improvement? Because if I recall last quarter, you all had mentioned that we are not holding off the price hikes because this is season and we evaluate it later. So just the ASP improvement and what led to this margin quarter-on-quarter margin improvement in the Farm segment?
I would say one thing, obviously, I think we've taken the price increase from first of December, so a significant price increase, which was taken close to 3% increase which happened now. So that is one of the factors because the price increase taken in the earlier quarters, the full impact came in this quarter and also the mix side, which happened. So obviously it happened after the festive season was over, so which is why you're seeing the overall relations have been coming better in the second. And other than that, I still like to know there's a lot of discounts and [indiscernible] scheme which is running, which are more retail less schemes, which also was slowdown -- lower retail. So there are also some intake, which came because of the lower incentives at that time, so which also added back to the top line. So that thing is affected in the overall average increase in the ASP side which you're seeing on these tractor volumes.
Okay. And on the RM side, we are pretty much whatever increases that happened in the industry were pretty much covered up now?
We're still carrying some lag from the last quarter. So as you know, I think the commodity price side softening up from November onwards. So we still had some patient til October. So we're still carrying versus we pass on the impact to supply to the lag of a quarter. So there's some impact from last quarter, we get caution in this quarter. But overall, lagging from November onwards, we've seen the price hikes have started stabilizing a bit in November, December, so marginal pick ups have happened in the seed prices. So you expect the prices to stabilize, but obviously, there's still a lag which we're carrying from the last quarter, which is not fully passed on. So maybe there will be another price increase which will happen sometime in Q1, maybe next fiscal, which will likely more or less absorb whatever the iteration margin there. And after that, we hope the commodity prices steplike for the individual asset.
Okay. But it's not a very meaningful under recovery. Any number?
Yes, it's likely to be adding in 2% to 3% range, depending on how the numbers look like for this quarter inflation.
Okay. Got it. And the second question I had was on the industry now -- nearly this year, now we all understand high base and the season is pretty much behind. But anything structurally you want to call out that things are pretty slow underground and what is -- if we have to think for F '23 anything to keep in mind in terms of the only ground fundamentals? And inventory, you call that inventory is lower than the industry. But when I look at Escorts' number versus the industry, the decline is much more steep and there clearly seems to be some corrective action, which has been taken on the inventory side. So if you could just give us some sense where are we? How much more correction needs to be taken on the channel sense?
Okay. Gunjan, this is Shenu. I will take your questions. So firstly, on the industry side, of course, as we said, last year was an abnormal year. I mean we know that the industry in FY '20 was close to 708,000 tractors and it jumped to nearly 900,000 tractors. So one biggest factor is that we are operating this year on a very, very high base. Now also, we know that the growth in the industry last year happened not in Q1 because Q1 was really bad because of the COVID. So it happened mostly in like Q3 and Q4. So for example, Q4 industry growth last year was 63%. Now the other point is that this year, we have also seen some constraints in the rural cash flow, mainly we think because of the delayed monsoon and therefore, the delayed crop cycle. So for example, the cash from the paddy crop is still not in the hands of the farmers yet. It is still trickling down just because of the late harvest, right? So these factors are mainly temporary because of the delayed monsoon. And I think we will recover over these by end of this year. So -- but fundamentally speaking, nothing is going wrong as far as the industry because otherwise, I mean from 708,000 to 900,000 jumps and coming down only by let us say, 50,000 tractors. So fundamentally, industry looks okay. Now when I say fundamentally, I mean the crop prices are holding up more or less. Actually, some prices are very promising. Some crop prices are very promising. Also, the production is very good. The recent rains, we were worried that they might have a damaging impact, but they did not, but they have not so far. So retail finance availability is not a problem, but just because of the delayed cash flows in the rural market, there was some caution, which was very temporary from the retail finances in the month of October, November, December and is still continuing to some extent, right? But as I said, these are temporary factors. I think fundamentally, the industry factors, economic factors are quite strong. So we are quite optimistic right now. Of course, quarter 4, we will see a drop.
Just the inventory number, and I'll pull back in the queue. I mean, just where are we in terms of channel inventory?
Yes. So as Bharat said in his opening remarks, the season did not did not perform as good as we were hoping because of all these delays in the crop cycle and delays in the monsoon, et cetera, right? And at the industry level also, there was some buildup of stock because of this reason. Now there are 2 factors which are really affecting the morale of our dealer network and their profitability. And we are quite focused on improving on those or supporting our channel network for the last 3 to 4 months. And I think for one more quarter, we will have to kind of support our channels in abnormal ways. So one is that their profitability is suffering because of the frequent price hikes in the market. As Bharat also mentioned, our industry is not used to so many price hikes. At best, we do like 1 or maybe 2 price hikes totaling like 2 or 3 percentage over a year. But this time, you can see, I mean, there has been massive price hikes almost every quarter except for the peak season, where we delayed the price hikes by a couple of months. Now the prices -- the dealers are facing a challenge, have been facing a challenge in establishing these frequent price hikes within the market. So customers, especially we are from a rural area. And it is very difficult to sell a tractor INR 20,000 more expensive in the same village 3 months hence. And therefore, that problem dealers are facing. And we have been trying to support them. The other is that since there was some kind of inventory buildup, we decided that we'll lower inventory -- the dealer inventory as we go along. So Yes. So our inventory level when we say is lower than the industry, our dealer inventory level is roughly around 30 to 35 days, and we believe the industry average levels are more than that.
Okay. Just Bharat sir, last question, if I can squeeze in on the time lines for that tender, where are we versus the earlier guidance of finishing the open offer by [indiscernible]?
So Gunjan right now, as you would have seen that in the maybe the CCI approval has come. We also received RBI approval now. So last slide which is pending is come to steady approval, for the letter offer, where we are expecting the observation that should come any day. And then these from final approval pending for 1 of our broking company, which is on e verge of being sold out. So for which approval is coming from SEBI. So we expect thing should happen soon maybe within a few days' time. And after that, to really go with the process of iteration allotment to Kubota post this the [ liquor ] offer will get this price to shareholders. So maybe you can say tentatively, I think the offer should open some around this month and should maybe close before the end of March -- I think it should be concluded.
[Operator Instructions] Next question is from the line of Hitesh Goel from CLSA.
My question is on the same tractor industry. So basically, you're saying that because when we see the Kharif output growth, that is quite robust. I'm not talking about only the volume growth and value growth like you said, Y-o-Y, the crop prices are at quite high level. So -- and the farmers would be start realizing this Kharif benefit now, right? So are you saying that because inflation in the prices have been quite high, their billing purchase? And what happens if, say, for example, for the industry to pick up, could you -- when the raw material cost starts coming down, would you correct prices for the volume to pick up? So what is the way forward to get the industry on track?
Yes, Hitesh, if I understood your question right, I mean, definitely, there is an impact of the increased prices on the market. right, not especially on the first-time buyers, not so much on the replacement buyers but especially on the first time buyer. So first time buyers have been dillydallying around the kind of whether to purchase. It is more of I mean, it is more of a psychological factor really than financial or economic factors because you know that I mean, factors, most of the factors are financed, especially for the first time buyers and the margin money required is hardly 10% to 15%. So even if the prices go up by let us say, INR 50,000, INR 60,000 actually, the margin money that is required for them to go ahead for the purchase is only INR 5,000 to INR 6,000 to INR 7,000 more, right? So more than an economic factor, it is more of a psychological factor because people -- I mean, it's hard for customers to digest such an increase of prices. So I think it takes like a little bit of a time for such acceptance to happen. So every time we increase the price, it takes about 45, 60 days, and that has an effect on the industry in pushing the industry forward or out. So yes, so I think now since we are expecting that the inflation might be peaking out. And there is only kind of a small gap that is left between inflation and the price hikes we have made, which we will cover up hopefully by mid of April or April sometime. So I think the situation would start easing out on this path from Q1 onwards.
So basically...
As I said other macroeconomic factors are good and are good and they are in place.
So is the need of tractor arises because if monsoon is expected to be good, at least the indication from Australian weather department is at this time also did the La Niña. So do you think that the industry can still grow next year from this base? I mean, is it just a temporary correction because of the second wave hit COVID pretty badly and the inflation prices were quite steep in the short period of time? Would that be the right reading?
Yes. We would like to -- yes, that reading would be right. We would like to give a confirmed estimate for the next year industry maybe sometime around March when the IMD predictions may also be out of this prediction, right? But yes, right now, we are optimistic about next year's growth, next year industry, and we think there will be some positive growth.
Next question is from the line of Amyn Pirani from JPMorgan.
My question was actually on the Construction Equipment business. I'm sorry if I'm repeating it. my line was not clear in the beginning. So this quarter, you have seen a significant decline in profitability, even though on a quarter-on-quarter basis, revenues are actually up. So can you just help us understand what is happening on that front?
Thank you for your question. Yes, you're right. So I think it is largely to do with the inflation. And although we have increased the prices as for the inflation is happening, but then recovery of those prices from the market is difficult. We have gained on the volumes, but then the inflationary pressures have decreased the overall margin. If market is still not accepting the pricing. It will take some more time when the demand picks up, and then the expectation means that the pricing will again be recovered from the market. And that is the challenge right now for this quarter.
Okay. Understood. Understood. And on the volumes itself, I think last year, your volumes are flattish, even though I think industry has grown. And this year, you are growing ahead of the industry, but the industry continues to be quite substitute if I look on a 2- to 3-year basis. So is the pricing the main reason for the industry volumes itself to not come up? Or is there a lack of activity? What is your reading on that front?
See, there are ample implications in the current edit as well as in last year also we were entering opportunities from the industry to grow. Unfortunately, because of the price hike in the last 5, 6 months, the retail customer has not been in the market very aggressively and he has been very skeptical because his hiring rates have not increased. And because of the frequent lock down, the retail customer has been very skeptical. We believe that now COVID impact is over and the projects are opening up and government is spending a lot of money on infrastructure. So we hope that this condition will reverse starting from Q1 of next year.
Next question is from the line of Mitul Shah from Reliance Securities.
Sir, my question is on the tractor side in terms of the regional growth. Sir industry declined by 13% during the quarter, wherein North decline was 10% and Central was just only 2%. So higher decline is mainly from the South side. And despite we are stronger instead of increasing market share, we lost market share despite the growth parameter on the regional side was in favor of Escorts. So can you explain this, sir?
Yes, Mitul. So you're right, quarter 3 was favorable for us but we still could not increase market share. In the first 2 quarters, scenario was quite opposite whereas South and West market was growing much more than the North and Center. Now, of course, as we have explained, we are quite focused on our dealer profitability, dealer viability, and we are making, taking some extraordinary steps to support them, especially on the inventory side and even other measures. We have done a considerable stock reduction. You can see our stock, as I said, is roughly right now in the range of 30 to 35 days, while the industry is still sitting at a higher stock in our view. So we are very conscious of the fact that market share is important, but the dealer viability, profitability and comfort is also important. The main issue is -- with the dealers, there's not so much with stock right now, but it is mainly with the acceptance of the price. Now acceptance of price, we can hardly do anything. I mean we have no option to increase the price and hope that in 45, 60 days, the prices would settle after the increase has been made. But then definitely, whatever revenues are present to us in helping dealers win through this period of frequent price hikes. So we are doing that. So we are trying to balance both, Mitul.
Okay sir. Secondly, on the inventory side, industry-wide inventory during Q3 might have declined marginally. Can you quantify approximate number for the industry?
Industry-wide inventory, no, no, Mitul, I mean I would -- my guess would be as good as your guess in that case. But yes, you know that there was a drop in the industry in October and November inventory at industry level in October and November, but then some more stocks were pushed in December because of some season in the South, right? So it's hard to -- as I said, it's hard to say what is the final drop in the inventory, but we know that the industry inventory levels are higher than normal.
Same is the situation in January also?
January, we believe some stocks have been reduced in January. We don't -- we can't say with surety what is the quantum, but some reduction has happened. And I think some reduction would continue to happen at the industry level, I'm saying in February and March as well. Now you know that April -- 2nd April, we have an official period starting in next fiscal. So it is hard to say which manufacturers will adopt what policy, but let us see. But overall, I think there should be some further reduction.
[Operator Instructions] Next question is from Nishit Jalan from Axis Capital.
I just wanted to check on 2 small things. One, what has been the cumulative price increase in the last 12 to 15 months in the Tractor segment in particular? And secondly, you alluded to the fact that a first-time buyer demand is getting more impacted than replacement because of this price increase. Can you give some color, what is the buyer mix in the industry in terms of first-time buyer replacement or maybe instant capital buyers?
Yes. So roughly -- Nishit, roughly the price increase in Tractor has been let us say, roughly about 10% since, let us say, November, December of last fiscal. So that is the extent of the price increase. And as I said, there is still some gap that as well as the industry has in terms of inflation versus price increase. What was the other question?
So the mix of buyers in terms of first time and replacement amount?
Yes, yes. So see, the mix of buyers have been roughly around, let us say, 1/3 and 2/3. 1/3 being the first-time buyer, although the situation widely is different in different markets. So for example, like if you consider Punjab or Haryana or more developed or saturated markets, then the first time buyers are very, very small there. I mean maybe in single digits or just around 10%. Yes, in some markets, the first-time buyers ratio would be higher even more than 1/3 because these markets are still nowhere close to saturation.
Correct. Sir that's exactly the point. If it's only the first time buyer, which is getting impacted. But we have seen construction industry volume to be across states. So is there something more to this than just a first-time buyer [ feeling the french ] because of price increase and all. Are you seeing some slowdown happening on the replacement side and all those sort of things as well because we have seen a volume decline across North -- Northern States as well where the first time buyer is still very [ agreeable ].
No. I mean I have stated like basically 3 reasons. So one is the biggest reason, I think, is the higher base of last year. As I said, there was a phenomenal industry growth in -- after July, August last year. So that is the biggest reason. You will remember that quarter 1 last year actually had a drop in the industry. So when I say the industry increased from 708,000 to roughly about 900,000 last year, then mainly that entire chunk of roughly 190,000 tractor increase happened in Q2, Q3 and Q4, right? So that is one. The other is that, which is a temporary factor, which I'm saying again is this because of delay in monsoon there has been a shift in the cropping cycle. And therefore, that has created some impact on the industry as well because of the delayed cash flows. And the third factor is price factor, which is also creating a negative pressure on the market, which is mainly on the crop side on the first-time buyers, not so that the replacement buyers are not affected by it. But as I said, it is not so much of an economic reason. It is also a big psychological reason, right? It takes time for the buyers to accept such a price hike, right? I mean so therefore, they tend to kind of wait. They tend to kind of postpone their decisions hoping for a better price. So all the 3 factors are on the play, but yes, price increase factor is temporary. It creates temporary problems. It always does. But this time that temporary is, I mean, a bit longer because of frequent price increases.
Got it, sir, got it. Sir, last question is a slightly more structural one. How -- what are your thoughts on electrification on the tractor side? So I'll just give you a background -- deep background. Recently, we heard a Tube Investments talking about they acquired 1 company and they have talked about that electrification will happen quite fast in tractors, especially given that power is relatively [indiscernible] in fact that as early as July this year. So a broad thoughts on the industry on the electric side maybe certain niche segments can get electrified over the next few years and also. So some thoughts around that will be useful?
Yes, Nishit. I'm not sure if I understood you right, because your voice was breaking up. Is your question around the electric tractors like potential, et cetera?
Yes, that was my question, and I gave you an example that we recently heard Tube investments acquiring a company and they are looking to launch an electric tractor, low HP electric factor as soon as July of this year. So just wanted to understand what are your broader thoughts on electrification? And do you think any specific segment or niche application, where you think electrification can happen relatively faster in tractors compared to the overall industry?
Yes. So Nishit, I mean, we, as a company, are very optimistic about the electrification in the tractor industry. And we are very, very serious about it. And the proof of the pudding is that we are probably the first company to launch -- to commercially launch a tractor and selling in some volumes. Now we have not launched the tractor in India because of a few problems that we are still addressing before we launch this tractor. However, we have launched this tractor in outside India and Europe specifically and in U.S.A. And these tractors are under a test marketing plan right now, right? So we are shipping some tractors every month on a continuous basis. We are not ramping it up as much as we can because we still want to kind of test the market because we are the only 1 probably in the world also who have commercially launched and commercially selling tractors now to retail customers, selected tractors. So there are 2 problems that need to be addressed. Some of -- I mean, some of it we have already addressed, but we have to still kind of worry about these 2 issues. So 1 is the range issue and the other is the -- other is the issue of the cost, right? So currently, the electric tractors are costing more than the diesel tractors, and we definitely are working on bringing down the cost. The other thing is the range of the tractor itself and as compared to a diesel tractor, where we need to increase the range of the tractor in terms of number of hours, it can operate per charge, right? So on both the issues, we are working and at a fortune time, we will launch the tractor in India. Now as far as the potential of this is concerned, of course, the potential will purely depend on the economic proposition of this tractor. Now if we look at the economic proposition over the life of a tractor, it is already making a huge sense. But also what we need to do is to bring down the cost of the tractor. So a lot of initiatives are going on within the company. As we said, we are very, very serious about this. And yes. And with time, we will improve on the challenges that we have at hand, and then you will see that we are going to do much better. Right now, we have the first mover advantage in the industry, and we want to kind of make sure that we continue with it.
Just one small follow-up. Any broad numbers or range you can talk about in terms of what will be the increase in capital cost or the purchase cost of electric tractor compared to a typical diesel truck. I just wanted to understand because the price increases that you are seeing 1%, 2% price increase in the tractor industry that is impacting demand so much. So just wanted to understand the buying power when we see -- when we will see a substantial increase in capital cost of a tractor to understand the electrification story here?
Yes, yes. See, it is not so much about -- see, the cost is better and kind of in scaling up the volume or scaling up the market for electric tractors. And as I said, we are working on it, but that is not the only factor, right? When you come to electric tractors or any electric vehicles, I mean, people look at the overall value proposition over the life of the tractor or life of the vehicle, right? I mean you can imagine that 60%, 70% of the cost of operating a tractor comes from diesel only. Now diesel prices the way they are going, even at the current levels, I mean it makes a huge economic proposition for a customer to go for electric, right? Just if you consider the overall cost of operating a tractor or maintaining a tractor over its lifetime. Now having said that, I'll answer your other question also. Now see, 1 important thing in electric tractors is that you have to have a battery, which occupies a huge amount of space in the tractor. And therefore, on 1 side, while we optimize that weight, space ratio in a tractor -- in electric tractor. On the other side, with the current constraints or the current level of technology, we have to start at the lower end of the horsepower, right? So that is why the tractor that we have is equivalent to a 25-, 26-horsepower tractor. And as the technology evolves, this notion of electric tractors will move up the HP range also. But the starting point would be the smaller tractors.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Just following up on the electric tractor. So by when do we plan to launch our electric tractor in India?
We will launch but we don't have a specific time frame right now, but we will keep you updated on that.
Okay. Secondly, with respect to the exports. So can you throw some light on how is our exports on Kubota network shaping up?
Yes, Jinesh so we started last year with Kubota in terms of exports through their global channels. And at currently, right now, we are exporting to 3 markets. through Kubota channel. And as I -- as we also said last year that we want to be slow and steady in the beginning with Kubota because we want to make sure that the product acceptability is fine. So numbers are quite small. Numbers would be like less than 10% of our overall exports this year, but these numbers would continue to increase. And you know that one of our goals in the partnership with Kubota is to substantially increase our volumes and also our shares in exports out of India. So it is a game plan. that will evolve in the next 3 to 4 years. But yes, we are very hopeful that number growth would be phenomenal.
Okay. Great. And second question was with respect to the commercial segment on the tractor side. Are we seeing any signs of recovery there because that segment has been under pressure for the last few years now. And are we seeing any recovery there?
Yes, we have seen recoveries on and off because I think the market is ready, I mean, to move. But because of the COVID-led disruptions, it's kind of an on and off game, right? Now it seems that with construction market or non-agri market will come back in future -- in the near future because these restrictions are getting lifted and more and more investments are happening in construction activities.
Next question is from Sonal Gupta from L&T Mutual Funds.
Sir, just wanted to understand, one, in terms of what is the sort of -- I mean, like because last year, Q4, everybody was -- industry was having low inventory post the festive season. So everybody -- the wholesale was clearly boosted by significant inventory push and normalizing the inventory in Q4. So just trying to understand like numbers are going down like 30%, 40%. So obviously, there is an inventory impact there of last year. So what is the underlying retail trend that you're seeing? I mean what sort of declines are you seeing in retail?
Yes, you are right, Sonal that last year, 1 factor in the 63% growth in Q4 was also that manufacturers are normalizing their inventory levels because they had very poor inventory at the end of the season, end of the peak season in October, November. So some of it is that. And some of it was also kind of the latent demand from Q1, right? But overall, the rural economy was really pumped up last year. So I would say that like 70%, 80% of the demand last year can be attributed to retail. But the inventory portion would not be that much. I mean because in a 63% growth, I mean, it has to be kind of retail. Of course, there were some specific factors that were helping us in that quarter, yes. So -- yes, but inventory portion would not be that much.
Okay. So -- but this year, I mean, are you seeing underlying retail decline or retail is still flattish?
So see, on a yearly basis, if you are asking, we are saying that the industry on a year-to-year basis, this year would be down by roughly 4% to 6%, right? So now on a year-to-year basis, I think there might be some impact of inventory in this because the inventory at the end of the year at industry level might still be a little bit higher than the opening inventory, opening year inventory, right? So that the retail level, if we are saying wholesale level is 4% to 6%. So retail level may be slightly more than that, but not a huge difference. Further, I'm saying year-on-year.
Got it. You're saying for the full year basis right? On a FY '22.
Yes, on a full year basis.
And sir, I just wanted to understand also the -- like what is the demand trend on the infra and -- I mean, again, for a tractor industry from an infra and those sort of stand point construction standpoint? Because it seems like the state governments have not really been spending as much on the infra construction side. So is that also impacting demand?
It has impacted, as I said, but I think it is going to change very, very soon because we will see a lot of activity in the construction sector in times to come. And that is why even Sanjeev was quite optimistic about overall demand of the construction equipment going into next year. This will also help the tractor industry. This is one of the factors that we are also saying that the tractor industry might have positive growth next year as compared to this year.
Got it. But this year, non-agri usage would not have gone up, is it? Or is that the best way to think about it?
This year?
So for this year, would the non-agri usage for tractors have gone up as a share of the industry demand?
No, no, no. No, no, actually, it was a factor that pulled down the industry this year, non-agri.
Next question is from Chirag Shah from Edelweiss.
Sir, my first question is a follow-up on this F '21 growth. So do I understand correctly that non-agri tractor growth or contribution was mover -- because last year also, it was the case, right? As [indiscernible] also the non-agri tractor contribution was lower. And even this year, that is the case. So it is dragging down our trend on the overall growth. Did I understand it right?
Yes, yes, lastly right. Because FY '21, we had the same scenario where construction or commercial demand was not really helping us much. It was a boom in the Agri demand in FY '21, right? So most of this growth -- that the abnormal growth that we saw came from agri, actually, much more than the overall growth because construction was subcu. And similar is the case this year also, right? So construction demand or commercial demand, as we say, is down for last 2 years now.
Okay. Sir, second question was on construction equipment side. Over last 12, 15 months, what is the kind of price hike that you would have taken?
Sanjeev?
So I think Bharat will again be in a position to give that number.
I can give you the number, Sanjeev. See if you include the [indiscernible] 22% to 26%.
Sir your voice is not audible actually. Sorry, can you just repeat it again?
Can you hear me now?
Yes, better.
Yes. What I'm saying is if you include BS-IV cost and the inflation, the price hike is in the range of 22% to 26%.
15% to 16%, right?
22% to 26%.
Okay. [indiscernible].
Yes, just make sure this is inclusive of BS-IV lead price hike.
Yes. yes. And so when will the emission norm transition is likely to happen in tractor because it's not getting delayed further, right? So there is no communication of delay in implementation of this 12 months. So next year there could be pre-buying also.
Let me explain, Chirag. So the initial norms that are going into effect from April 1, 2022, are only applicable for tractors, 50-horsepower and above. which comprises of 8% of the industry, right? And the emission norms that are going to be applicable from April 2024, are going to affect almost all the tractors, which is like everything above 25 HP, right? So this time, what is -- what we are experiencing in April 2024, will not have much of a pre-buying because the impact is on a very small segment of the tractor.
Okay. Okay. And sir, there's one last clarification from you. It's very interesting that we're indicating customers are not willing to accept the price hike that has happened in tractor. So presuming that the 10% hike which has been happening in pieces. But is underlying demand cycle strong, the acceptance should have happened because -- not that the entire can happen at the same time, right? It has been happening over the last 12 months. So when -- since when are you observing these registrants because this registrants should have been that the we see the reasonable time in the market, not just it cannot be a new phenomenon. It could be there for the last 6, 8 months actually the registrants to price hike.
Yes, yes, Chirag, I think what we need to understand is the problem is not only from the extent of the hike, but also because of the frequency of the right? Because like we operate in a rural market and the rural market, the sales maturity process is quite long in practice, right? So for example, when we generate a lead, the sales closure happens in a few weeks after that. right? So in the meanwhile, if there is an announcement of a price hike, then this disturbs actually the whole sales maturity cycle, right? So that is the reason it happens because it's not just the extent of the hike, which is roughly 10% over last 4, 5 quarters, but it's also the frequency of the hike. So when every quarter, we have to increase and customers really get very nervous too. And they kind of try to make sure that, I mean, it is -- the price hike is going to stay. So they tend to kind of wait for a few weeks.
Sir last thing, what are the peak selling months generally? So generally 4 months will be accounting for like 60%, 70% of the retail, right? So if you can indicate what are those 4, 5 months, which account for the maximum retail -- it would be helpful.
Yes, it varies according to the festivals. But generally speaking, it is October, November, and then it is a period between March and June. So June being the peak.
June being the peak. Okay.
And you can -- as you can see, it is quite tied up with the stocking cycle.
Yes, yes. So there is -- we can still clear the inventory in the system in till June, there is a good amount of chance that a lot of demand could come back very on.
Yes, we are hoping for that, yes.
[Operator Instructions] Next question is from Nirmal Bari from Sameeksha Capital.
Yes, sir. My question is that generally a seasonality that we've seen with H2 being particularly strong for us in the tractor segment. So this year, since there is some postponement of demand and the cash flow issues in rural, -- do we still expect Q4 specifically March to be stronger?
Nirmal, you mean for the industry or for Escorts?
For Escorts.
Yes. So that phenomena will not wean away. I mean that phenomena will still be there. You are right that we have certain strengths when it comes to industry in the second half. So that phenomena should continue to play.
Okay. And sir, in Q3 trend between since South was the market where significant amount of weakness -- we are not so strong in South. So what explains this dip in market share and a relatively lower performance of Escorts as compared to the industry. I think, you said in part that it's due to inventory reduction at the dealer level, but is that the only thing?
No, no, that is not the only thing. I mean, that is one of the factors. But another factor is that I mean, because of the frequent price hike, we have had some issues in terms of the right positioning of the products, et cetera, right, which we, of course, I mean the same situation stands for competition also. But we have been slightly kind of ahead of competition in increasing the prices. And therefore, that poses a little bit of a challenge for us in terms of maintaining the right position. However, it is a temporary thing. We are correcting it as we go along. So yes, I mean, the main factor is we are trying to balance the dealer viability focus and the market share focus.
One last question, if I may? In the Construction Equipment segment, what is it that is leading to such -- since there's so much of construction activity that is picking up both in intrasite as well as South Indian North. And still, if you look at the industry numbers, they are significantly lower even year-on-year. And with the industry was not doing well before that as well. So what explains this weakness in the industry per se? And when do you see the industry picking up?
Yes. So I think all the macro signals are that the industry should pick up. And what we see is that -- this year, the industry actually should have picked up from the last quarter itself. And unfortunately, January has been -- again, there have been a COVID impact, but the way projects are opening up, especially on the route side and the bullet train and the expected airport projects which are coming up. So what we see is that the demand is definitely coming up. Decision-making is probably taking a little longer. But as we close this quarter, we expect that the industry will open up significantly. And we also assume that this year, another factor is that this industry, above from industries is also largely dominated by Backhoe loaders numbers. So that industry has dropped significantly, which will bounce back next year. And therefore, next year, the industry will have at least 15% to 20% kind of a growth.
Next question is from Sameer Deshpande from Fair Deal Investments.
I would like to know what is the cash on the balance sheet of the company as of today?
Sameerji, including our Escorts account, the cash is close to [ INR 2,516 crores ]. If you exclude that will be close to INR 2,400 crores.
INR 2,500 crores. It is INR 2,500 crores?
Yes, it's more than INR 2,500 crores, [ INR 2,516 crores ].
Okay. And what is the average replacement time of the tractor for a new tractor, what is the average life that is and how the customer replaces, what is the average age?
Yes. The average replacement cycle, Sameer, is going down gradually year-on-year. And roughly, we can say it has come down to roughly about 8 years or so, 8 to 9 years now. I mean if we look at 3 or 4 decades ago, it was roughly 16, 17 years.
16, 17 years. So it has almost halved during this period.
Yes, over a few decades. Now also, you have to keep in mind when you think about this is the number of hours that [indiscernible] are putting on a tractor is also now increasing.
So because of that, the life is also coming down. Okay. And this BS-IV norms will be applicable for tractors about 50 HP from 1st April '22 and from '24 it will be applicable for all tractors?
Yes. From April 2024, it will be applicable on all tractors above 25 HP.
[Foreign Language] And from '22, it will for?
Upto 50 HP. 50 HP and above.
[Foreign Language] And what was -- what is this debt for construction equipment?
The construction equipment has gone to BS-IV for about 50 HP from this year April '21. And next change will happen in 2025 April. And then even 50 HP or below will also be covered.
So they have already gone from '21, '22 for BS-IV, they have already gone for that?
Yes. So the horsepower is 50 HP and above is BS-IV now, but 50 HP and below is not covered in the BS-IV yet.
Next question is from the line of Abhinav, an Investor.
Yes. So my question is on the open offer. So as I heard in the opening commentary and participants -- some participant has also asked -- so where exactly SEBI, you said that you expect the offer to close by March. So by when do you expect this SEBI approval to come because the CCI and the RBI approval is in place?
We are chasing them every day. So we expect should happen any time.
Okay. So assuming that this SEBI approval will happen -- assuming that the SEBI approval happens today, how long will the entire payment process and everything? What are the time lines? How many days should we factor in?
So with SEBI regulation, which are in place, which talks about timing, which is required when the SEBI observation that will be issued within how many days the open of a letter needs to be dispatched to shareholders? What is the record date? And then post that, there's a minimum period after that there is an open of the process should open and there's a period for which the open offer shall remain open and there's a period for making the payment. So we expect the entire process takes more than 30, 35 days. And then -- start, say, towards probably for February, when we should actually be able to conclude by maybe 30th of March.
Next question is from the line of Krishna Agarwal from [indiscernible].
So as we can see your construction equipment numbers are good, but yet you are guiding that non-Agri segment is not doing good. So how -- so are we seeing a structural change in non-agri tractor sales or something?
No, no, I have already replied on those things. So as far as Agri is concerned, non-agri sales has been subdued this year and as well as last year. But going forward, we think it will open up. And this will be one factor that we are hoping will help the industry going into next year.
Okay. And sir, what's your view on that, we are seeing that there are many companies they are doing an over kind of thing for tractors. So like the rental basis would increase. So the ownership may reduce for tractors. So are you seeing any trend in this?
I'm sorry, Krishna, can you repeat that? What are other companies seeing?
No. So is the rental kind of business happening in tractors. So people are not buying tractors, but they're drifting to this trend for their farms. So there are some startups that are working on an over kind of model. So what's your view on that?
Okay, okay, okay. No, no, no, I don't think there is any significant trend towards that in India so far. So the rental or uberization or whatever you want to call it, I mean, has not caught on as a trend so far. Actually, it is quite the opposite. There is a huge amount of emotional appeal in buying and owning a tractor.
Next question is from the line of Vikram Damani from Damani Securities.
I just wanted to clarify one thing. In your notes to account, you mentioned that the obligation to make a mandatory open offer by the investor to the public shareholders of the company has been triggered. Could you just sort of further explain this, what this means?
So the triggering happened when the agreement got signed, which was in December. So that's why it's the active November. So basically, the [indiscernible] as you signed the definitive agreement that in the open offer just triggers and obviously the new follower process by which you get all the approvals and then you lodge the open -- so you mentioned in the note that taking has happened and the agreement cost [indiscernible]
Next question is from the line of Mitul Shah from Reliance Securities.
I have a question on the railway side. Sir, what kind of annual average revenue we can expect going forward in FY '24 onwards, maybe this year and next year because of this slowdown impact and delayed orders, revenues are slightly lower. But on a steady-state basis, what could be the yearly revenues for this segment and margin expectation?
Mitul, Ankur Dev here. So first of all, this year also, we are expecting a good growth, which will be in excess of 20% plus in terms of revenue. And in terms of growth or revenue after 2 years, we expect that we can maintain a [indiscernible] of 20% sir, because a lot of new products we will be introducing which are in field trial -- and we are working on the localization of our imported products also. So with that, we can -- we expect a healthy margins, which we can maintain. I hope it answers.
Yes. So Rowan, basically, margin fluctuation is quite high in this segment in last 1, 1.5 years as compared to earlier range of around 18%, 20%, we maintain for a longer period. So would that be again possible to maintain those level or this 14%, 15% can be a sector assumption?
I think in the longer term, we expect to -- our margin to be around 18% to 20% -- between 18% to 20% with the new product introduction and the localization of our imported products. So I believe it is very well possible to achieve those kind of margins.
And sir, lastly, on the CapEx side, what could be the range for the next 2 years in this year?
Mitul, that's a plan which we'll be working on with Toyota team. So as we told you in the last call, so there's a mid-term business plan exercise which has been kicked off after the deal conclusion happens by end of March. So both teams will sit together and work on the next 5, 6 years plan. So we get more clarity in this the annual CapEx, but normally our CapEx has been the range of INR 250 crores to INR 300-odd crores. So in the normal way that will continue. So anything which is new initially coming from the exercise. So that's something which will be traditional but that will come [indiscernible] completed. So maybe towards middle of this fiscal, maybe in June, July, I think we'll have more clarity on the exact nature than the investment acquired.
Next question is our last question due to time constraints. The next participant is Jinesh Gandhi from Motilal Oswal Financial Services.
Sir, just a clarification on the tractor business. So we said we expect industry to grow 4% to 6% in FY '22. And fourth quarter to be lower. So do we expect our volumes -- our Escorts volumes to be growing slightly ahead of the industry in fourth quarter, considering that we are done with our largely done with our inventory correction?
Yes, Jinesh, so I think you heard us right that the fiscal year '22 overall industry, we are saying will degrow by 4% to 6% over year-on-year, right? Yes. So in any case, on quarter 4, of course, there are still some focus, as we described earlier, that we will continue to put on dealer viability. But let us see. I mean, it is hard to say. But right now, we are very, very focused on balancing the both, right?
Okay. Because at 4% to 6% decline for Escorts still remaining 2 months to be marginally higher than last year, about 3% to 4% growth over last year. So you still -- Escorts also should be trending in the market industry for confidence building.
Yes we are clear as to what we want to. Yes, we are clear as to what we want to do, as I explained, but market share also depends on the actions of the competitors, right? So let us see how they react in terms of stocks and everything else.
So thank you, ladies and gentlemen, for being present on this call. For any feedback or queries, please feel free to write into investorrelation@escorts.co.in. Thank you very much. Have a good day, and stay safe and healthy.
Ladies and gentlemen, on behalf of Batlivala & Karani Securities, that concludes today's conference. Thank you for joining us, and you may now disconnect your lines.