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 Q4 FY '18 Earnings Conference Call hosted by HSBC Securities and Capital Markets (India) Private Limited. [Operator Instructions] Please note, this conference is being recorded. I now hand the conference over to Mr. Vivek Gedda from HSBC Securities and Capital Markets (India) Private Limited. Thank you, and over to you, sir.
Thank you, Vikram. Good evening, all. On behalf of HSBC Securities, I welcome you all for Escorts Limited Q4 FY '18 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 Chief Financial Officer; Mr. Shenu Agarwal, Chief Executive, Escort Agri Machinery; Mr. Ajay Mandahr, Chief Executive, Escorts Construction Equipment; and Mr. Dipankar Ghosh, Chief Executive, Railway Equipment Division; and other management, along with the Investor Relations team. We will start the call with a brief opening remarks from the management followed by an interactive Q&A. At this point, I will request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Vivek. Ladies and gentlemen, a very good evening to you all. Thank you all for joining us on the earnings call for fourth quarter and financial year ended 31st March, 2018. A snapshot of company's stand-alone annual performance is as follows: turnover at INR 5,016 crores is up by 20.4% against INR 4,167.6 crores in previous fiscal, led by volume growth across all segments. Tractor volume is up by 26.1% to 80,417 tractors as against 63,786 tractors in previous fiscal. Construction equipment volume is up by 35.3% to 4,486 machines against 3,315 machines in previous fiscal. EBITDA at INR 557.2 crores is up by 72.1% as against INR 343.7 crores in previous fiscal. Margins up by 334 basis points now stands at 11.1% as against 7.8% in previous fiscal.Finance cost went down by INR 2.5 crores to INR 28.6 crores as against INR 31.1 crore in previous fiscal year. The total debt outstanding as of March '18 is INR 50 crores, which is down from INR 263 crores in March '17 without the previous working capital. Net debt continues to remain negative. PBT from continuing operations and before exceptional items stands at INR 515.5 crores, up by 88.9% against INR 272.9 crores in previous fiscal. Net profit at INR 344.7 crores as against INR 160.4 crores end of previous fiscal. The board are excited that they recommended a dividend of 20%, and that is [indiscernible] per equity share for the year ended 31st March, 2018, against that of 15% in the previous fiscal. Now moving on to company's quarterly performance. The turnover at INR 1,436.1 crores is up by 37.6% as against the previous INR 1,043.9 crores in previous fiscal. Tractor volumes are up by 57.5% to 23,568 tractors as against 14,978 tractors in quarter ended March '17. Construction volume is up by 48.6% at 1,541 machines as against 1,037 machines in quarter ended March '17. EBITDA is up by 133.7% at INR 173.8 crores as against INR 24.4 crores at quarter ended March '17. Net profit for the quarter at INR 112.5 crores is up by 89.2% as against INR 59.5 crores in for previous fiscal same quarter. Now moving on to segmental business performance. Starting with the Agri Machinery business, domestic tractor industry volumes is up by 22.2% to 7.10 lakhs tractors as compared to 5.8 lakh tractors in previous fiscal. Our domestic volumes went up by 25.1% at 78,446 tractors as against 62,699 tractors in previous fiscal. Industry in our strong markets within the North and Central India grew by 22%, whereas industry grew by 42.5% and is almost similar number in opportunity market in Southern and Western India. In line with our Vision 2022, we have gained market share across all the industries, so our market share in strong markets is up by 10 basis points and our opportunity market is up by 250 basis points, resulting in overall domestic market share of 11% as against 10.8% in the previous fiscal year. Market share for the quarter ended March '17 at 13.5% is up by 110 basis points as against previous fiscal same quarter of 12.4%. On export side, industry up by 8.4% to 86,000 tractors as compared to 80,000 tractors in previous fiscal. Our export volumes went up by 81.3% to 1,971 tractors as against 1,087 tractors previous fiscal, driven by new growth in production and market penetration. EBIT margin for year ended March '18 now stands at 13.6% as against 10.3% in the previous fiscal.In Q1 FY '19, domestic tractor industry is expected to grow by 15% to 18%. On full year basis, domestic tractor industry is expected to grow between 9% and 11% depending upon how well the monsoon fares and how distribution is. Coming to the construction equipment business, construction equipment industry grew by 27% in FY '18 with respect to FY '17. All business segments have seen a positive moment. Our served industry, especially Backhoe Loaders, Pick ‘n’ Carry cranes and compactors, went up by 31.3% in FY '18. Materials has been the biggest gainer in FY '18 with the growth of 82.1% followed by Backhoe Loaders that grew by 25% and compactors that grew by 15.9% in FY '18. Our total volumes manufactured and traded products went up by 35.3% to 4,486 machines as against 3,315 machines in the previous fiscal. EBIT margin for the year ended March '18 stands at 1.9%, up by 440 basis points (sic) [ 420 basis points ] as against the negative volume of 2.3% in previous fiscal. Moving forward, we expect that our served construction equipment industry will continue to grow at 16% to 18% [indiscernible] growth for the next 2 to 3 years, and we're launching new innovative products and volumes [indiscernible] this growth.Coming to the railway division, the revenues at INR 286.6 crores is up by 18.2% as against INR 242.5 crores in the previous fiscal. [indiscernible] for the previous year [indiscernible] then the growth would be close to 35% on the railways side. EBIT margins is up to 13.9% as against 12.7% in previous fiscal. On Q4 FY '18, revenue went up by 14.2% at INR 76.02 crores as against [ INR 166.6 crores ] previous fiscal. EBIT margin is up to 15.9% as against 10.8% in the same quarter of last year. Order book for this division stood at approximately INR 350 crores which will get executed in the next 12 to 13 month period. Going forward, we expect railway equipment segment to grow at 18% to 20% this year.Now I request the moderator to open the floor for Q&A session, please.
[Operator Instructions] We have the first question from the line of Hitesh Goel from Kotak Securities.
First of all, can you just shed some light on the Construction Equipment improvement margins. I can see that revenue increased very sharply on a Q-on-Q basis and Y-on-Y basis. Is there any one-off in these margins? Or is it just operating leverage which is showing in these levels?
Yes, I think that's lower operating level, so these lower operating numbers. So I think we said that in the numbers margins to be in the lower [indiscernible] positive momentum. We saw number volumes really [indiscernible] too. So [indiscernible] numbers.
There is no VRS or anything in this quarter which [indiscernible] the number?
Nothing.
And similarly, in the -- this railway segment, so basically, the railway revenues have not increased much on a Q-on-Q basis, but margins improved. So can you tell us what has happened there?
Again, in the railway side [indiscernible] last year. So [indiscernible] impact [indiscernible] on the top line, too. So that's why the numbers, which we're mentioning for the last 3 quarters, are not really comparable, and that's a good pattern. But again, depends a lot on the mix where we are selling in the railway period, so we think that [indiscernible] and on this quarter [indiscernible] it's very good, especially that margins [indiscernible]. And we expect that we end up margins to be in this range again next year in the 2019.
And my final question is on tractor side. Basically, the kind of ramp-up you are expecting on the export side has not played out to that extent. So what is happening in exports? Can you give us some detail on what's happening on global exports and to exports?
Well, I think we had given the guidance for export [indiscernible] 2,000 tractors, which is almost 100% growth to other previous year. And we're actually closed to that [indiscernible] tractors [indiscernible]. So I think we are pretty much close to the number this year we are guiding for. For FY '19, we again are looking at over 50% growth over the last year's numbers [indiscernible] in FY '19.
Your next question from the line of Raghunandhan from Emkay Global.
My question was on the tractor side. They have gained market share in east and west regions. But if I look at south region, there seems to be a slight drop in market share for the full year FY '18. One of the product which we were considering for the south region was [indiscernible] express lift tractor. Any time line for that launch of that product? And how do you see the market share increasing in the south region going forward?
Now this is Shenu Agarwal. So in the south, we talked about these new product launches in the last call, I think. And so most of these products have now been launched in the south and the western markets. So there is one tractor which is [indiscernible] special, which has been recently launched. The volumes are very, very small right now because we are still testing the market with some small number of volumes. And in this quarter and the next quarters, you will see quite a big ramp-up on that. Also the other tractor, as we talked about, was a compact tractor, which was mainly for orchard segment in [indiscernible] Maharashtra, Gujarat and some parts of the south. So that tractor is also being launched in the previous quarter, and again, after testing the market for a few months, we'll back it up in the following quarters.
So would it be fair to assume that now there are no product gaps and everything has been filled?
Yes, more or less, I think so. I mean, except for some very tall machines that we are working on, on product development specifically for south and west. The gaps have now been filled.
And for like your strategy to further improve share in the south region, one, as I understand is the new products. Apart from that, anything on the distribution network expansion?
Well, yes, if you look at our state-wide market share, you will see that we have grown market shares in almost all the place, especially in the opportunity markets, which comprises of south and east and in some parts of Maharashtra. Our market share in the last fiscal had actually gone -- had improved more than what we have improved in the South market. And that is what we have been seeing also that it may take some time for us to improve market share in the opportunity markets. In the last fiscal, we improved market share by about 60 basis points in the opportunity market and 10 basis points in the stronger markets. So I think we will -- you will see that incremental better growth in the opportunity markets going forward also.
And [ select ] -- there was a slight dip in the 40 to 50 HP segment market share, although all other segments, we have gained. Any reason for this dip in market share in that segment?
Yes, it was mostly temporary, and most of it happened in Q4. And I think we are able -- we will be able to regain it in this quarter and the next quarter. We had launched some new products in the lower cost power segments because we didn't have those products like one was this compact tractor, and also we've launched a new Champion series in the Farmtrac range in 31 to 40 HP. So probably, that had a little bit to do -- when you look at the billing numbers, that have a little bit to do. So when you launch new models [indiscernible] new model. And therefore, existing models [indiscernible] kind of balance out. But when you look at the delivery of the retail numbers, this is not really the situation. So you will see that in this quarter and the following quarters, you will see a change there.
Can you share Farmtrac and Powertrac mix for FY '18 and FY '17?
We don't have the exact numbers right now, but it is roughly 60% for Powertrac. I'm talking about FY '18. 60% for Powertrac and 40% for Farmtrac. And in the previous year, it was 58% and 42%.
Got that. To Bharat, sir, I had a question on a quarter-on-quarter basis, there has been an increase in the raw material cost as a percentage of sales. What do you attribute this to, sir?
There are 2 reasons. One is [indiscernible], which we saw in the last quarter as we have introduced [indiscernible] delivery. So especially the platforms have come in the competitive [indiscernible]. So we are -- our margins are basically low so for this segment and also in the 30 to 40 segment. We introduced backhoes and compact then, which typically finds intensity. So again, the margins are even lower. So this is another key reason and secondly the inflation [indiscernible] 31% in Q4 [indiscernible] that's what they're telling you if you're taking now. So that effect is also coming. So that is a combination of work, which is impacting [indiscernible] forecasted in Q4 [indiscernible] increase.
Sir, related to that, what is the price increase, which we have taken in these April, May months? And also, would it be possible to share volume for the compact tractor if you have it handy? Otherwise, it's okay?
[indiscernible] the last quarter [indiscernible] 15-months period to full last year. But this quarter, we're expecting the [indiscernible] business to close to 4%. And again, [indiscernible] business, which we've taken so far, including the [indiscernible] lagging at about 1% [indiscernible] on the costs pricing on the market, and that is the lag which you talked about will pass on with the lag on following quarters so that will get to the next quarter. So [indiscernible]. On the contract [indiscernible] we are [ still ] close to 260 [indiscernible] tractors, so which includes the new compact tractor, which is about roughly more or less than 100, I would say [indiscernible] first quarter of launch, and that number is growing [indiscernible] more impact on the [indiscernible] going forward, too. So [indiscernible] segment, we will also see the volumes going down.
[Operator Instructions] Your next question from the line of Jinesh from Motilal Oswal Securities.
My first question pertains to -- if I look at your factory realization purchase declined almost 7% on Q-on-Q basis. Is it just an effect of mix or is there anything beyond that?
So 7% [indiscernible] so 7% [indiscernible] were taken in the price [indiscernible] which are labeled [indiscernible] last year [indiscernible].
Sorry, but I'm looking on [indiscernible] third quarter.
So it's a good third quarter. I just answered in the -- here, the response with the mix that you have in this quarter just slightly lower in the selling toward the lower HP capital. So if you look at typically up to 31 to 40 [indiscernible]. So we are [indiscernible] in the lower HP category and the compact tractors unit [indiscernible] so that is impacting the overall mix, which is driven by [indiscernible] driven by margin and the real costs [indiscernible] and margins we don't exactly.
Right, right, right. And this mix of Farmtrac versus Powertrac, 60-40, you expect this to further go in favor of Farmtrac in FY '19 considering the compact segment down at the business or you expect to stabilize at around these levels?
I think these are temporary, which is [indiscernible] compact to these tractors. And also the 31 to 40 HP segment, we will not [indiscernible] segment, too. Now in going forward, we are transporting Farmtrac and Powertrac in that sort of margin [indiscernible] so [indiscernible] even though the ratio [indiscernible] earlier, but now I think going forward may not be particular [indiscernible] so whether you say 60-40 or 70-30, I don't think it will have [indiscernible] impact on the margins going forward [indiscernible] forecast that now.
Okay, okay. Understood. And lastly, in terms of your market share for FY '18, can you give us market share in strong versus opportunity market?
So strong market on a full year basis on FY '18, we had 15.3% market share. And then the opportunity market, it was 5.7%. So overall [indiscernible] [ 11.05% ] distribution size of the overall market share. But in Q4, if you look at our numbers in Q4, we had 20.3% market share in the stronger market, and in the [ REIT ] market, we had 6.7% market share. So overall, 13.5%.
Right, right, right. Okay. And last part of our market share gain going forward also would be -- it's really opportunity market, right?
Yes, it will -- it remains slightly more towards the opportunity market. But as we have been saying that opportunity markets, we need to do some very basic fundamental work both in the product and distribution side, right? So last [ 2 ] projects that we have completed that work in most of the markets, and therefore, we'll see some better growth coming market share growth, coming from opportunity markets also. But until a few years back, most of our growth was actually coming from strong market only, but that's an area we should change now.
Understood, understood. And last question is on railway business. We have order book of about INR 350 crores. This order book would be very executable on FY '19 or would be just held on a couple of years?
And so we say 12 to 13 months, so yes, primarily in the next year.
[Operator Instructions] We have the next question from the line of Mitul Shah from Reliance Securities.
So first question I have on the construction equipment. Current quarterly average of around 1,500 vehicles, there is 500 per month. Is this sustainable? And how do you see margins going forward in case if we witness 20% growth?
The market share mix -- this is Ajay Mandahr. I will talk about the number that we're talking when we talk about 1,500 [indiscernible] market growing 16% to 18% up and [indiscernible] launches. I think this number will be sustainable quarter-on-quarter [indiscernible] increase by [ 3,000 ] [indiscernible]. On the other side, I think the margin, more or less, as -- like I said, is sustainable. So we will sustain these from the margins and [indiscernible] which becomes [indiscernible] improved that we will get no [indiscernible]
So given the current quarter margins for this segment, is there anything to do with the highly different product mix in terms of -- compared to Q3 or whether this is a onetime or just kind of product mix we expect for full year FY '19, '20?
I think so. As go forward, what we started last year was basically [indiscernible] but the returns [indiscernible]. So we are mixing and matching. Basically, we are increasing our play in [indiscernible] products, where we have contributions, good contributions. So that mix has been a deeper goal, and we continue to do well, I think, next year and also on the [indiscernible] products [indiscernible]
You'll translate into higher margin than current quarter going forward?
So when you look at the trend with the level [indiscernible] segment, the second half is very strong. And on the March quarter, we see very strong numbers. So that doesn't really get to break from the first half. So roughly, you have [indiscernible] margin. But if you look at the quarter-over-quarter, and we see that quarters in the first half normally will be lower margin, but now we are [indiscernible] very strong market. But overall, our full year business, we think, will be able to sustain these levels.
Okay. But which won't change much?.
Which one [indiscernible].
And second question on the tractor side. Sir, we are expecting around 8% to 10% growth for '19. What is our estimate or any indication for FY '20 considering the overall penetration level is already going up from 25 to around [ some ] 40 tractors per 1,000 tractors agreeable area in the last 3, 4 years on those [indiscernible]. Do we see growth in FY '20 also?
Okay. Mitul, this is Shenu here. It's very difficult to emphasize what will happen in 2020, and we know that it is a cyclic market, and we do see some downward trends after 3 or 4 years. But right now, we think that for the next 12 or 18 months, the fundamentals are very, very strong, right? Although, the tractor penetration had gone up [indiscernible], but there is still modernization that the country needs. So right now, things are looking polished. For this year, we are doing a projection of about 9% to 11% for the year. And we think that 2020 may also be good. We don't see any negative signs, but it's difficult to see what -- specific number or anything.
[indiscernible] where do you see more growth coming from next 1 to 2 years?
The -- it depends on where you track the [indiscernible] and some other factors like monsoon, et cetera. But definitely, we think that the growth will be higher in the markets which are not so much saturated right now. So these could be like Maharashtra, the markets in the south and definitely the eastern [indiscernible], northeast [indiscernible] continent to visit. So these will grow better than the rest of the country.
My last question on the railway side. Any new products we are introducing for the metro?
This is Dipankar, metro we are actually still in the development stage. In the coming years, this particular financial year, we do not have any product coming up for the backhoe because all the products which are in the developmental stage now.
For the FY '18?
Yes.
For FY '20, are we expecting any sizable revenue in the future from this metro segment?
Yes, we are expecting a sizable revenue not only from the metro but [indiscernible] metro stream. I see from many of the [indiscernible]. There, we are -- we see a very high sense of an increase [indiscernible] we see a sizable growth particularly.
Your next question from the line of Nitesh Sharma from PhillipCapital.
Sir, to begin with the tractor segment. Given the [indiscernible] government construction activity, are we experiencing any strong signs of demand for tractors coming from the Construction segment?
Yes, that is true that when the construction segment started growing than the tractor development department council along with it. So last year, you saw when the market grew by 22% and a significant part of that was from the construction sector also.
Can you give us some ballpark as to how much percent of industry sales would be construction in the last 3 quarters?
Well, it's very difficult to say that because as we have explained in the past also that [indiscernible] construction [indiscernible] is quite rare in the backhoe industry, so it's multiple use, right? So there are very few people who just buy a tractor only for construction or transportation purposes, right? So but now people who are willing to buy a tractor for their own land, they pay [indiscernible] they're willing to buy a tractor instead of [indiscernible] on the construction site. Because that [indiscernible] customer tractor and [indiscernible] construction site to buy early, right? But roughly, in terms uses of a tractor, anything by about 30% to 40% is used in construction or transportation-related activity, and the rest is for agriculture machine.
Got it. And on the Railway segment, I wanted to check with Mr. Ghosh. Where are we in terms of localization right now? Have we achieved what the expected level of localization level? For FY '19, we will see more localization going through?
Our localization for the action model is we have actually the localization, but as [indiscernible] in the railway business, 50% with the localizing, another 50% approval partly localized to that. So we are still working on the approval for the localized product, and you can see this in the next [ few ] quarters we [indiscernible] a response from our main customers, [ VIP ] [indiscernible] waiting for the approval [indiscernible] with our localization for our asset [indiscernible].
Okay. And we were also looking at some inorganic growth opportunities in the segment. So any update on that?
We're actually working on it. We have a target, but because it involves [indiscernible] responsibility, we have not really reached the time to actively talk about this. We are still in the process.
Your next question is from the line of Vaibhav Jain from Crédit Suisse.
Sir, my question is around realization. Earlier, I think you explained the earlier fact that realizations were lower this quarter because of the product mix. Sir, if you can really throw some light as to how do you see the product mix in the entire FY '19. Will it go back to earlier levels? Or this kind of product mix will continue? And so we should be kind of expecting similar realizations? So that will be my first question.
Going forward -- I did mention that usually, in the first -- if you look at the sort of first quarter and [indiscernible] tractor and the [indiscernible] and also of the farm [indiscernible] brand and depending on the [indiscernible] so for the training, [indiscernible] quarter low. But also going forward, we mentioned lower [indiscernible] mix not really go down what it had been last year. So we believe that it will go down. So if you look at the last quarter also, our ratio [indiscernible] 53%-47%, that used to be almost around almost 50-50. So going forward, we expect the mix will go down. I think we will end up with [indiscernible] 55%-45% ratio, wherein [indiscernible] CapEx.
Okay, okay. That's very clear, sir. And sir, if you can comment on the margins on the Agri business as to how do you see it. You spoke about your price hike, the potential price hike that you will take to pass on price pressure. But if you can give a composite number or some sense on that.
Yes, the guidance earlier that we 100 basis points improvement in the margin in FY '19 over FY '18. So if you look at [indiscernible] also on a full year basis, we are gearing EBIT margin of about 13.6%. So next year, we're looking at 300 basis point improvement of the [indiscernible] margin too, [indiscernible] all the inflation [indiscernible]. But that really [indiscernible] our calculation because we are passing on the cost [indiscernible] [indiscernible] with [indiscernible] that's what happened this year. But we expect that international [indiscernible] in the first half on a [indiscernible]. That is ideal. [indiscernible] So even now, we expect the pressure stabilize a bit. And that will be [indiscernible] margin and also our overall numbers for [indiscernible].
Great. And sir, lastly, if you can talk about the CapEx plans near to medium term, specific numbers on FY '19 and how do you see CapEx in each of the segments?
So CapEx for this year, so we have for [indiscernible] figure of about INR 200 crores, which is [indiscernible] in our CapEx [indiscernible] and then another INR 100 crores planning for the capacity expansion [indiscernible] 30% capacity utilization on tractors last year. And [indiscernible] almost close to the 100% mark [indiscernible] this year. So we [indiscernible] investing now [indiscernible] in the capacity expansion side. So we are coming up [indiscernible] So probably there's another INR 100 crores, total CapEx for this year is close to INR 300 crores. And the capacity expansion will be computed only next year [indiscernible] INR 250 crores [indiscernible] capacity. And next year again something similar to our INR 225 crores to INR 250 crores [indiscernible] capacity. So the [indiscernible] will next year. So within this year, [indiscernible] and next year again, it's something similar to what our INR 200 crores to INR 250 crores [indiscernible] next year too.
And sir, fair to assume that the capacity will come sometime in first quarter of next year or will it take more time?
It may not happen in the first quarter but [indiscernible] capacity [indiscernible] end of this year or by the first quarter of next year. But we are [indiscernible]. That will happen maybe sometime in Q2 or Q3 of next year.
[Operator Instructions] We have the next question from the line of Mayur Milak from IndiaNivesh.
Sir, well, just [indiscernible] FY '20 and just a bit. So we've seen [indiscernible] 24% growth, and you're hoping this year, we may talk about 9% to 11%, so that will lead [indiscernible] market like plus kind of units, based on that unit map. But do you really see a need -- significant macro change which suggests that we may really not look at the cyclically [indiscernible] going into a flattish or a 0 or a negative growth in FY '20? Something that has still changed strategically in the last 10 years that you may see that this growth is sustainable?
At a very fundamental macro level, we don't see any negativity in the market at least for the next 4 or 5 years, right? So all the macro factors are in favor of market. The basic factor is the labor availability is going down every day, and therefore, mechanization has to come back. And India is not a very mechanized country as compared to the Western world or the Southeast Asian countries. And therefore, mechanization has to be there. I mean, the tractor is only like the starting point of mechanization. And then the mechanization story goes very deep and wide beyond tractors also. The other factor that helps long-term industry growth is also availability of retail finance, and retail finance is doing very well. We have seen a few new players actually entering the segment in tractor retail in the last 2 years, right? So there's talks like that. This is an attractive area to be in for a lot of financial companies, right? So the only problem that we're seeing is the sensitivity of the industry, right? So it largely depends on monsoons. So that is -- so it's difficult to forecast what will the monsoon be like for the next year. But normally, what we see is that if you have a good monsoon in a particular year, even if we have a bad monsoon next year, it doesn't hurt -- it doesn't hurt the industry. So it starts hurting only like 2 years later, when we have a bad monsoon, right? So the monsoon projection this year is going to be announced, right? So we think not only this year but next year should also be fine right now.
Okay. And these -- we've been hearing a lot of these farm dealers that have been coming to areas on garments -- [ still ] garments. Do these really have any kind of bearing impact on the tractor demand or that has really to do with the basic growth on crops?
Yes, I think farm loan waivers, I don't think they're really after the demand. Actually, it creates a temporary gap in the market. And some of the people who have outstanding loans, they just kind of stopped having -- we've talked about government schemes they implement which may take normally a lot of time. But other than farm loan dealer, we have a lot of forecast the government is providing, which is really helping, right? There are a lot of states which are coming up with subsidies, which are very different from a farm loan dealer. So subsidies, different state governments, they house different levels of subsidies to promote mechanization in the country in different farms. Most of it is like offering subsidy on a tractor or some other part of the [indiscernible] machines. And that sometimes it is through some custom, high incentives, et cetera. But I believe they have -- so even last year we think that subsidy business had a big role to play in that 22% growth, and it will continue for the next 1 year until we see the general elections.
And quickly, just the last thing, sir. Just help me with this subsidy part. We've been -- this could be a driving factor, and definitely looking at this year and the election year and the benefits really to continue to be farmers. So do you think that could also play an effective role in FY '20 once you're past the election, and then you're really just hoping that they will continue to go and care about the Agri income doubling by 2022?
Well, we think so. We think so. We're confident that whatever schemes are announced this year, that they are not really implemented this year. So they will have a lag effect on the implementation, and therefore, we should keep on driving this year, next year, the next years also.
[Operator Instructions] We have the next question from the line of Bharat Gianani from Sharekhan.
My question is really concerning on [indiscernible] for the last 2 years. And also, we have a projection of a strong monsoon this year as well. So do you foresee any upside risk to your projection of 9% to 11% growth for the tractor industry? I mean, what I'm trying to understand is given that strong base of good growth, will it be significantly low in what you are predicting for FY '19.
Right now, our estimate stands the same, which is 9% to 11% growth per year, and that will change, I think, because of different factors that we cannot foresee right now. But our projection is 9% to 11%, which is [indiscernible] factors.
Okay. And your earlier -- in the earlier call -- in the earlier [indiscernible] you elaborated back there, that is 100 basis points margin improvement expected for the Agri Machinery segment, so that will basically bring the margin to about 14.5% kind of a range for FY '19. I'm just trying to understand in FY '20 if the tractor volumes remain well, then will you be able to reach your guidance of -- I think you have pointed out an EBIT margin of about 15%. So would you be [indiscernible] as well if the tractor EBIT remains strong in FY '20? And obviously, on back of [indiscernible] products, you will have gained market share as well?
[indiscernible] margin remains in the inflation rate [indiscernible] I think that's one of the factors that [indiscernible] the margin [indiscernible] of tractors. That obviously will remain [indiscernible] margin. That is [ 100 ] basis point improvement if you look at the last 2 quarters' inflation too. And then the gross margin is in the range of [40.2% ] [indiscernible] that we're actually leading the year with [indiscernible]. So definitely, it is growing to this level [indiscernible] an improvement. It looks [indiscernible] to us, and yet the market is [indiscernible] but you'll see more industry growing beyond [indiscernible]. And we [indiscernible] where the margins will go.
Your next question from the line of Naveen Kumar Dubey from Narnolia Securities.
My question is on the average [indiscernible]. We have seen some 24% year-on-year increase in other expenses. So what is the reason behind that?
That was all [indiscernible] in the direction. If you look at the [indiscernible] it's still early [indiscernible]. That is a number which [indiscernible] So most of this [indiscernible] freight cost, logistics, [indiscernible] transporting of materials and the boarding costs. [indiscernible] in the other costs. It should be [indiscernible] But I think [indiscernible]
Okay, okay. My other question is on the EBIT margin on the Agri business side. So are you seeing this base margin level or do you see further headroom [indiscernible] as the EBIT utilization increases?
If you look at the last quarter numbers, stand-alone basis, so if you analyze that number, we already claimed about [ 92 ] [ 93 ] so we expect that level. [indiscernible] [ 15% ] operating margin of that number. So which is why I said we still believe that [indiscernible] 100 basis points improvement. Penetration is one factor, which obviously will affect the margin [ diversely ]. So that's why [indiscernible] 100 basis points [indiscernible] over the last 2 quarters. We have seen much better margin on the tractor side. So keep that thing in mind. I think[indiscernible] on us. [indiscernible] Otherwise, I think that [indiscernible]
And I was looking at this 15% in this quarter, I think we have 15.1% EBIT margin. So is this going to increase going ahead or the annualized number, annualized margin of 13.5%?
Well, I think that's the kind of level this year, but I think for next year, we think [indiscernible] 13.5% on average, [indiscernible] it can go either way depending on how our situation evolves.
[Operator Instructions] We have the next question from the line of [indiscernible] from HDFC.
Sir, can you comment if you see agri dealer level. Actually, the tractor industry is very competitive. The dealers work at very thin margins. So what kind of actually support do we provide for the dealers compared to other competitors? What is our strength in that segment? Even if you say that dealers won't sustain for more than 5 years, very, very few dealers have a presence of more than 5 years kind of the dealer field. So what is the reason why they're lonely? Because of the thin margins or is that because of the competitive pressure? I just wanted to understand on that segment.
So if you see what we consider internally as one of our very great strength, it's the [indiscernible] and the stickiness of our dealer network with our brand. I mean, we have dealers who have stayed with us for generations, so we have like a lot of dealers who are, I think, in third generation with us. Of course, the competitive pressures are there as new players have entered the market in the last 2 years. But we have a very robust dealer development policy, where we look at dealer margins and leader returns on their investments [indiscernible]. And I can say that our openness and transparency in the business was actually better than some of our competitors. And we have a very open dialogue in various forums with dealers to make sure that the dealers, they can make sure the dealer is an expert in the industry. So we are in actually a better condition than the industry.
One more thing, sir. Coming to the subsidy part, so yes, what were the allocation [indiscernible] that is from the central government that is disposed to state governments, subsidy allocation? So even in FY '18 a couple of state had a subsidy -- more number of subsidy involvement compared to a few other states. So is that because of the change in government, where there is central -- one government and state instead of different governments? Is that the reason where that states have the [indiscernible] government subsidies? Is that a correct understand, sir?
I cannot comment on exactly what happened, but I think concerning the state subject, right, so it's actually up to the state whether to allow for subsidy and to use it as a tool to promote mechanization or not. But it's also true that center allocates a lot of funds to the states wherever the request comes up. So for example, if you look in the south, like there is a lot of subsidy playing out in the south right now, and also, there's a lot of subsidy playing out in the east, right? So central, I think, publishes -- the central publishes some guidelines as to where they want agriculture mechanization to grow more depending on various data points. But then, it is really government matters. It's very difficult to talk. But we know that in terms of state subject, and the state makes the call and then the central supports.
We have the next question from the line of Sameer Deshpande from Fairdeal Investments.
I would like to know if the calculation of earnings per share for the stand-alone [indiscernible] at [ 20.85 ] and for the consolidated [indiscernible] for [ 21.6 ], is it because of the treasury stock investment?
Yes, that's right.
And so actually, the treasury stock is about INR 3.73 crore shares.
Yes, [indiscernible]
EBITDA?
[indiscernible] within the consolidated financial [indiscernible]. [indiscernible] 70% to [indiscernible] annual ratio.
We have the next question from the line of Sumit Mangal from Goldman Sachs.
I have one question. If you look at your last 3 quarters, if you exclude the impact of [indiscernible] in the second, your average margin is 15.1% and the average revenue has been around [ 21,000 ]. That's even if you [indiscernible] for the inflation last year, the inflation [indiscernible] in terms of volume. [indiscernible] mix quarterly average of around [ 21,000 ] tractors -- 21,000 to 22,000 minimum. So are you comfortable that you [indiscernible] [ 13.5% ] because if you look at the last 3 quarters have been [ 15.1% ] operating margin. And on top of that, you have employee cost upgrade and then you have [indiscernible]. So are you comfortable that you will continue [indiscernible] the [13.5%] operating margin in the tractor side?
I think with the results, obviously in the past, [indiscernible] if you look at the operating results. [indiscernible] last numbers last quarter. But if you compare it to the financial numbers result in December quarter to March quarter,[indiscernible] have been significant, which went up almost from.
19,000 to 22,000.
[indiscernible] starting to [indiscernible] not [indiscernible] so the [indiscernible] introduced into this quarter. They're not really paid out fully in this quarter numbers. So going forward, if you look at the mix [indiscernible] good market share growth. The overall number [indiscernible] in the past. And [indiscernible] inflation [indiscernible] because of the inflation. [indiscernible] our contribution and [indiscernible] last year. This has been the guidance [indiscernible] for 2 or 3 quarters.[indiscernible] cost front. So we're not really counting on the external factors [indiscernible] plays out well [indiscernible].
What kind of price increase will be included in the numbers [indiscernible]?
[indiscernible] increase of close to about [ 1% ] close to [indiscernible]. But if you look at the last 15-month [indiscernible] combined, so for FY '18 [indiscernible] in the first quarter of this year. So [indiscernible] material cost increase I think going forwards on [indiscernible] around 3% of the market. So [indiscernible] on the P&L. So this variation can then pass on the subsequent quarters. So that [indiscernible].
We have next question from the line of [indiscernible] from Bonanza Portfolio.
My question in regard to projection for your Construction business for financial year '19, the group projection.
We are looking at the industry to grow at about 15% to 18%, and our growth will be in the same ratios. The only thing is we have improved [indiscernible] going forward. We think [indiscernible] last year. So we are choosing more contribution than the market share.
And what about the growth projection in the Railway business?
[indiscernible] are you there?
Yes. I'll repeat the question. What will be your growth projection in the Railway business?
For the Railway, [indiscernible] 20% growth.
[ 20% ] growth.
We have the next question from the line of Hitesh Goel from Kotak Securities.
Just a follow-up question on the employee cost. [indiscernible] the employee cost has come down. Is it because of some bonus during the last quarter?
I think it's currently more than our operating levels. So I think if you look at the volumes, it's almost double from the last year numbers, which is quarterly, you're seeing an absolute number from the other quarter, it's gone up from INR 94 crores, it's gone up to INR 109 crores, and this about 15-odd [ crores ]. So yes, it is presently going down because the operating leverage is [indiscernible].
Bharat, I'm talking about Q-on-Q, actually, the employee costs were around INR [ 117 crores ] in 3Q FY '18 which has come down to INR [ 109 crores ] in the 4Q FY '18. So any color on that?n Or can you give me just the cause why the employee cost has come down.
Q-on-Q also from [indiscernible] INR 109 crores.
We have the next question from the line of Raghunandhan from Emkay Global. --
On the [indiscernible] announced that BLL credit tie-up that we have, what is the share of financing done via a BLL credit?
BLL, we've rebranded it as cost credit. And this cost credit has an inflation of roughly about 12% to 13% now on our overall sales. This is given the fact that they are not present in the entire country right now. So they are present in about 5 or 6 states as of now, and there is an expansion plan that is already done for them to enter the other markets, right? So as we go along, the inflation in our business will be up and down.
And your targets, sir, for the Pan-India like availability of Escorts credit?
Yes, our aim is to get an inflation of about 14% for the top 7.
This is for FY '19?
It won't happen in FY '19 but I think it should happen by end of FY '20.
Got it. And when you spoke about the tractor specialist -- I mean, paddy specialist tractor, in which HP is this product?
[indiscernible] our product is in the 47 horsepower. And lastly, the market for paddy or paddy specialist tractor is between 42 and 47. So we are playing at the higher end of the HP.
And is there -- so more variants are possible in the future?
We will bring more variants once we have established this one and those we will have more horsepower capability.
And one of the related -- on a related area, like do we track growth in tractors used in non-Agri segment for Escorts? What will be the growth in FY '18?
Well, like as I explained earlier, it's very difficult to kind of categorize a customer as Agri or Production. It just depends on how much usage a tractor is -- how much usage is happening in Agri versus non-Agri. So our estimate of the industry and machinery products is that between 30% to 40% of the usage of the tractor is in commercial activity, and the remaining, about 60% to 70% is in the Agri-related activity. But it's very difficult to categorize the customer as either an agri person on average or a construction or a commercial person.
One query on the Construction Equipment side. What is the progress of -- like the tie-up with Doosan Infra?
We really have -- actually, [indiscernible] also. We have a distributional tie-up with them exclusive for India. So the business is doing really well.
And how big is it, sir?
It's not very big in terms of the volume that we talk about in Construction Equipment. It's basically a premium product. 100% imported as of now, and we are looking at 1% of the market, isn't it?
We have the last question from the line of Naveen Kumar Dubey from Narnolia Securities. Ladies and gentlemen, that was the last question. I now hand the conference over to Mr. Bharat Madan for closing comments. Over to you, sir.
Thank you, ladies and gentlemen, for being present on this call. For any feedback or inquiries, feel free to log in through [indiscernible] Investor Relations and [indiscernible]. We'll meet again in the next quarter. Thank you very much and have a very good evening.
Thank you very much, sir. Ladies and gentlemen, on behalf of HSBC Securities and Capital Markets India Private Limited, that concludes this conference call. Thank you for joining with us. You may now disconnect your lines.