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 and FY '20 Earnings Conference Call hosted by HSBC Securities and Capital Markets India Private Limited. [Operator Instructions] Please note that 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, Stephen, and good evening, all. On behalf of HSBC Securities, I welcome you all for Escorts' Q4 and FY '20 Results Earnings 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 and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division; and Investor Relations team at Escorts Limited. We will start the call with some brief opening remarks from the management followed by 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 risks as outlined in the annual report and investor releases.At this point, I would request Mr. Madan to take -- to make his opening remarks. Thank you, and over to you, sir.
Thank you, Vivek. Good evening, everyone, and thank you all for joining us on this earnings call for the fourth quarter and financial year ended 31st March 2020. We hope during this unusual time, you, your family and your dear ones are all safe and well.Over the last few weeks, we remained fully focused on securing health and safety of our employees and all of our stakeholders. COVID-19 has impacted industry and respective business operations, and it will take some time to regain normalcy. This quarter reflects the partial impact, but we are preparing ourselves to innovate and digitize our ways to engage and connect stakeholders for the business operations ahead given that the uncertainty of affairs still exists.During this difficult time, with the support of local administration and all Escorts teams, we are running various outreach programs around Faridabad, helping local communities, and we are committed to live up to our social responsibility to prevent the pandemic spreading further while ensuring business continuity. Last week, company has received a permission from government authorities to resume its operation in single shift at all its plants at Faridabad with restricted workforce. We are aligned to government advisories and will ensure taking all the precautions and preventions at our facilities.A few highlights of our company's stand-alone financial performance for FY '20 are as follows. Turnover at INR 5,761 crores against INR 6,196.4 crores in previous fiscal is down by 7%. This is primarily due to drop in tractor and construction equipment volumes. Tractor volumes went down by 10.8% to 86,018 tractors as against 96,412 tractors in previous fiscal. Construction volumes went down by 27.1% to 4,042 machines as against 5,544 machines previous fiscal.EBITDA at INR 675.8 crores as against INR 733.3 crores in previous fiscal is down by 7.9%. EBITDA margin now stands at 11.7% as against 11.8% in the previous fiscal.Finance costs went down by INR 3 crores to INR 15.5 crores as against INR 18.5 crores in previous fiscal. The total debt outstanding as of March 2020 is INR 6 crores, down from INR 277 crores in March '19. Net debt on the balance sheet continues to remain negative. PBT from continuing operations and before exceptional items stands at INR 648 crores as against INR 710.3 crores in previous fiscal.Net profit at INR 485.5 crores as against INR 484.9 crores in previous fiscal. EPS stands at INR 40.63 as against INR 40.58 last year. The Board of Directors have recommended a final dividend of 25%. That is INR 2.50 per equity shares of face value of INR 10 each for the year ended 31st March 2020, which is same as in the previous fiscal.Moving on to company's quarterly performance. Turnover at INR 1,380.7 crores as against INR 1,631.7 crores in previous fiscal same quarter. Tractor volumes went down by 20% to 20,108 tractors as against 25,136 tractors in last year corresponding quarter. Construction equipment volume went down by 32.2% to 986 machines as against 1,455 machines in last year corresponding quarter.EBITDA at INR 194.4 crores as against INR 189.8 crore in last year corresponding quarter. Net profit for the quarter at INR 140.4 crores is up by 15.7% as against INR 121.4 crores in last year corresponding quarter.On a consolidated basis, turnover at INR 5,810.1 crores as against INR 6,262 crores in previous fiscal. And net profit at INR 471.7 crore as against INR 477.9 crore. Consolidated EPS stands at INR 55.04 as against INR 55.82 in the previous fiscal.Moving on to segmental business performance, starting with the Agri Machinery business. Domestic tractor industry volume went down by 10% to 7.09 lakh tractors as compared to 7.8 lakh tractors in previous fiscal. Our domestic volume went down by 11.9% at 82,252 tractors as against 93,323 tractors in previous fiscal. Our domestic market share stands at 11.6% for year ended March 2020 as against 11.8% in previous fiscal year.Normally, Escorts registered a considerably high market share in March and in Q4 related to the other months and quarters. However, the nationwide lockdown in March announced right before the peak season on Navratra adversely impacted our sales and market share.On export side, the industry went down by 18% to 76,000 tractors as compared to 93,000 tractors in the previous fiscal. Our export volumes went up by 21.9% to 3,766 tractors against 3,089 tractors previous fiscal, driven by new product introduction and penetration in the new markets. During the year, Farmtrac to Powertrac ratio improved to 41 to 59 as compared to 39 to 61 in previous fiscal. Also, our product mix has improved towards higher HP tractors with more than 40 HP proportion improved in FY '20 to 51% against 47% in FY '19.On channel front, we added 32 new dealers on a net basis in India during the quarter. Total dealers count now stands at 1,000 plus. Going forward, we'll continue to expand our dealer network, specifically in our opportunity markets.Overall, rural sentiments are positive because of a record output of rabi crop and a favorable initial prediction of this year's monsoon. Sale and repair of heavy machinery was exempted from the lockdown by Ministry of Home Affairs as early as 3rd April 2020, thereby helping the started take-up of sales in April. Opening of mandis, aggressive procurement across the government and timely opening of banks and NBFCs will further help in near-term demand recovery.Going forward, we expect tractor industry to recoup faster as compared to a lot of other sectors. Although it's a bit early to say, we are already witnessing pent-up demand coming from the lockdown period. We expect that this pent-up demand shall help industry to show a growth in June to October 2020 period. Full year industry estimate, though, will only be clear sometime during quarter 2.While the situation around supply chain remains dynamic, we are happy to state that we resumed production of tractors effective day before yesterday post permission from the government authorities to operate our plant on a single shift basis with restricted manpower. The production is currently at 20% of the normal single shift capacity. The situation with our suppliers is improving rapidly, and that makes us believe that we should be able to progressively ramp up production to about 50% to 60% level by middle of June. We are fortunate to have enough pipeline stocks so as not to lose any significant retail sales until the end of June. By then, our production, hopefully, should also come close to normal levels.Coming to the Construction Equipment segment business. Our served industries, backhoe loaders, pick and carry and compactors, they grew by 23% in FY '20 over FY '19. Our total volumes, manufactured and traded products, went down by 27% to 4,042 machines as against 5,544 machines in the previous fiscal. Despite volume drop, EBIT margins have remained flat at 3.6% for year ended March 2020 as against previous fiscal.Construction equipment industry has seen slowdown in FY '20 on account of financial sector rules and delayed payment for ongoing infra projects. The industry has started to recover from December '19 due to government clearance of payments and increased spending. The lockdown in mid-March '20, however, pulled down this growth momentum.The new emission norms coming into effect from October 1, 2020, also in the short term, impact the demand scenario in the industry. We expect the industry to start showing the initial recovery from quarter 2 FY '21 and clear momentum to come from quarter 3 onwards. Central government has already invested INR 1.7 lakh crores for infrastructure, and this investment is likely to kick start the economy and construction equipment segment recovery. Coming to the Railway division. Revenue is at INR 477.2 crores, went up by 21.1% as against INR 394.1 crores in previous fiscal. During the year, we have executed 38.5% of total orders from new products category with more import content and lower margin as compared to previous fiscal when it was 27%. EBIT margin was at 18% as against 19.9% in the previous fiscal. In future, though, we'll be able to mitigate the impact with gradual localization of these components.Under Make in India program, recently, we got RDSO approval for Escorts Microprocessor Controlled Electric Brake System called MCBS for 3-phase locomotives. We are the first Indian company to join the league of select few companies worldwide who have the capability to design and manufacture complex braking system. Currently, the same is undergoing field trials, and it's likely to be commercialized in FY 2022.Order book for this division stood at more than INR 400 crores, which will get executed in the next 12 to 15 months. For FY '21, we still expect Railway Equipment segment to grow by 15% plus, and margins for the segment are likely to be maintained around current year's level.Just an update on the Kubota's collaboration. So our manufacturing plant in the JV with Kubota is delayed now due to nationwide lockdown. It is likely to start commercial production now by beginning of Q3 FY '21. The preferential allotment of split shares to Kubota has been approved by shareholders, and we are currently awaiting other regulatory approvals. The share allotment process is likely to be completed sometime during June, July '21.I now request the moderator to open the floor for Q&A, please.
[Operator Instructions] The first question is from the line of Hitesh from Kotak.
First of all, I would like to mention that I hope everybody is safe and in your homes and your families. Sir, my basic question is more related to the financing in tractor segment. We have been -- whatever you have given, you have told us in the opening speech that rural sentiments, that these are quite positive with the crop. But there is also an issue of funding tractor purchase, right? So what is happening on that front? Can you give us some sense what -- how public sector banks, NBFCs, private banks are giving? And what are your tie-ups in the banking space? And are you seeing any issues in funding?
Yes. So this is Shenu Agarwal. So as everything else, I mean, the banks and NBFCs and private banks all closed down in the lockdown. But the good thing was that the government or the MHA actually exempted banks and NBFCs a little bit earlier than the rest of the things, right? So we had actually banks started opening up around last week of April to some extent. And now at the -- right now, the position is that about 60% to 65% of the banks are -- I mean banks are running at about 60% to 65% of their normal capacity already, right, which means that the branches are getting opened. Where they have branches, where they have people, about 2/3 of the people have started moving to the field for physical verification. And disbursement has started happening. I think it will take another maybe a couple of weeks for the banks to operate fully.
Shenu, my question was more related to whether you are seeing a lot of risk appetite from banks going off, especially in the tractor segment? Because what we are hearing is because of the moratorium that they have given to most customers, they are being very, very cautious unless they see what is happening to their moratorium book. Any issues in terms of customers getting credit on the tractor side? That is what my question was actually.
No, no, no, nothing at all. Of course, there is a moratorium. And of course, the collection of the previous loan portfolio had become an issue. But right now, actually we are seeing them back. They are very, very hungry, right? Because agri is one sector where they can really increase the loan growth. I mean we have been talking with all the banks during the lockdown period, even at the top levels, and we see what is their outlook. And most of them are telling us that they will focus much more on agri sector this year than other sectors because other sectors, they will not get that much of business, right?So I mean, in our case, actually, every bank is behind us to give them cases. And I think the same situation will stay. I mean the comfort the banks are getting, although -- I mean the moratorium is there, right, which I think about 40% of the customers have taken, at least in our sector. Not every customer has taken it. The comfort is that the rabi crop has been very, very good. And the prices of most of the crops is very, very good.Government is focused on saying much more on procurement. I mean you would have seen announcements from FCI. The kind of procurement they are doing is totally unprecedented. I mean they have never done this kind of a direct procurement. And yes, I mean I think the procurement is up to the level of 78 million, 79 million tonnes, what they have proclaimed, right? So if they do that, I mean, there will be a lot of money in the hands of the farmers.
Yes. That is very heartening to hear actually because there's a lot of statements on the financing side that we're hearing. Just a related question, one question, then I'll shift back to the queue. Just wanted to get a sense that on the -- how do the farmer behave in terms of -- because there are a lot of migrant labors who are going back to their villages, right? So their cost -- they don't have work right now. So their burden is also coming to the family, right? So how does -- and also a lot of labor will be now available for the farming side. So do you see that as a headwind for tractor for next 3, 4, 6 months until this migrant labor issue gets sorted out? So what is happening on the field in terms of these dynamics playing out in migrant labor?
So see, we have been tracking that issue of labor -- agri labor quite close actually. And you know that in India, most of the agri labor, it comes from about 5 or 6 states, right, and then spreads over all of the country. So since about, let's say, 30%, 40% of the agri labor has moved back -- not all. We hear all that in the news, but I mean not everybody has moved back, right? So about 30%, 40% of the labor has moved back. So definitely, there is some scarcity in some states of -- and there's a little bit of excess in some other states where they originally belong to, right?So I mean the shortage of labor is actively going to help us both in the near and the long run because people who do not have machines or equipment, I mean, they have no choice but to invest in it right now. And the situation with the cash flow, since it is really good after the record rabi crop, I mean, the sentiment is extremely positive. So the farmers are not hesitating in the machinery, right? So that is why we think there's a lot of pent-up demand that is coming up.I mean normally, you would say that if the sale is gone, I mean, mostly it is gone, right? But in our case, I think we are seeing at least 40%, 50% of pent-up demand already knocking on our door in terms of inquiries and leads and all that, right? So I think labor is only -- shortage of labor or migration of labor is only going to help the agri sector in terms of mechanization.
[Operator Instructions] The next question is from the line of Mitul Shah from Reliance Securities.
This is Mitul Shah. And congratulations for a very strong number, sir. Sir, I have 2 questions. One is on the agri side in terms of inquiry level. As you've stated, there's a pent-up demand close to 40%, 50% returning. So can you share some geography-wise color on this, how this rabi crop played out in India's key geographies and how the inquiry level variation between the North, South, East, West over stronger and weaker market? That is first question. Second question is on the railway side. We are indicating, again, growth despite the situation. So in terms of payment from the government side as well as how confident you are that order book will not get canceled or will increase. And lastly, on the Construction Equipment side, if you can throw light, despite such a high decline, you reported the same margins.
Yes, Mitul, thank you for the question. I'll answer on agri first. And yes, so see, right now, it is very, very difficult to say how this will impact the distribution of demand, right, because, I mean, still like there are some areas which are opening up. There are some local problems on the ground, et cetera. But broadly speaking, the rabi crop is really dominant in the areas where we are strong, right?So paddy -- actually, paddy crop comes a little bit later in the paddy belt, right? So right now, we -- I mean right now, the crop which has come is primarily in Haryana, Punjab, UP, Rajasthan, Bihar and MP and so on, right? And these are our strong markets. So actually, I mean, right now, in our strong markets, we are seeing that pent-up demand coming back because of the good crop and a positive rural sentiment.On rest of the markets, it will take some more time for us to determine how the demand outlook will be because when that crop gets harvested, then we will know like how it is. But I think the situation on the ground is very positive. Also because monsoon first prediction is good, and that is on top of the fact that we are already -- the reservoir levels are already very, very high, right? So there is no dearth of water actually for this season. If the monsoon goes well, then I think we are all set for at least a couple of years, if not 3 years, in terms of water availability, which is a big factor in tractor industry, right?So I think overall, it is going to be okay. I don't see any area where we are seeing any stress specifically or any crop we are seeing any distress. So I think it's quite universal.
Because of the geographical advantage, our market share should improve, right?
It shows because -- I mean because of the rabi crop, I mean rabi crop always helps us. I mean Bharat had said in his opening comment that normally in Q4 or March, our market shares are very, very high. And that is -- and the reason -- one reason of that, among others, is that rabi really helps us, I mean, relatively better than the other crop, right, because rabi is mainly dominant in North, Central and Eastern India.
On construction and rail?
Okay. This is Dipankar. Let me answer the railway portion of your question, Mitul. First and foremost, we are seeing a pretty -- very good response on railways. Wherever we have already submitted the bills and all the documents, railway has started to pay us. And the payments are coming in time and the payments are coming. There is no bottleneck for payments not coming. So we feel that once the railway -- many other offices open, we will be pretty confident about all the collections and receivables.And finally, we have been having a lot of interactions with really both senior people of Railway Board and also many other people of the zonal railways and the railway production units, who are also pretty confident about maintaining the already existing tenders and also growing in the numbers what they have projected before. So we feel that we should be able to maintain that 15% plus growth, if not more, in the FY '21.
And lastly, on Construction Equipment margins?
Yes, Mitul, this is Ajay Mandahr with you. See, what we have done in the last couple of years is that we have started chasing the products where we make money, and predominantly, our growth. If you see segment-wise also, in pick and carry, probably on the higher side of the market, where you have the right kind of margins, the volumes and the market shares are very, very phenomenal. You talk about 68%, 70% on that. And on the low end of the market, we are generally low on operations, and we don't want to operate in those markets where we don't make money and on those product segment also where we don't make money.So that structural change we have done, plus we have brought down the cost. The operational efficiency has improved quite a bit. At one side, the quality is going up. And on the other side, we are looking at cost, trying to make all your fixed cost, convert more of them into dynamic cost. So that is a benefit that we are getting on the breakeven point. If you see breakeven point, probably would have come down by 30% for us. So we are working on that direction. And I think it's basically the upturn that is going to happen on the volume will give you a huge kind of leverage in terms of margins that we'll get.As far as we are concerned, I think we are being linear. We are lean on costs and on the right products. We are doing all our product development on the right products only. We don't want to get into an area where we don't make money. So the growth will be from this and we will have profitable growth.
Your breakeven point will be around 700 units per quarter now?
Yes.
[Operator Instructions] Next question is from the line of Raghunandhan from Emkay Global.
I have 2 questions. I suppose to Shenu first. Firstly, on the demand side. How is the demand in the non-agri segment for tractors? And what would be the share of this non-agri segment? And how do you see the impact on overall demand this year? Secondly, for FY '21, which regions do you expect to do better? Like in the March quarter, South and West actually did better than the North and Central region. So what are the expectations on region-wise performance this year?
Thanks, Raghu. See, for the non-agri sector, which is the commercial sector, I mean, last year, as I have been telling you, that last year, we were facing some bottlenecks and some hurdles because the construction industry was not behaving very, very well until about December, January, right? So I mean there was a little bit of pushback in the non-agri demand. But this year, we think -- I mean -- so it started improving already in like January, February. And of course, then we got into a lockdown.But I think this year, all that demand should come back. I think the focus on -- the government focus also on construction will improve going forward, right? And most of the projects, which were banned, like mining, et cetera, et cetera, they were already opened up, right? So we are yet to see finally what -- how it will shape up. I mean it's too early to say. But broadly, I mean, thinking, I think it should be much better than last year.Of course, the contraction will continue probably in that for a longer time as compared to agri demand, right? So agri demand is already kind of -- like I said, we are already getting some pent-up demand from the lockdown period, right? So for non-agri, it might take some more time for that to happen. So that was one.The other was the distribution of demand. That is right because see, normally the last fortnight of March is extremely good for North, Center and East up to Bihar because that is the period when this rabi thing happens. And farmers already, like in March or late February, start getting a feel of how good the crop will be and what kind of prices they'll get, right? So North and Central, normally, there is a huge pickup in the demand in the last part of -- in whole of March, rather, but especially in the last fortnight of March.Now unfortunately, because that did not happen because of the lockdown, so overall, in quarter, you will see the South and West are looking much better relatively, right? But that is going to change. This whole pent-up demand that we are expecting will come mainly from North, East and Central. So I think that Q1 or Q2 scenario will be quite different than Q4 scenario.
The next question is from the line of Gunjan Prithyani from JPMorgan.
Just a clarification on the previous question. You answered that South and West did better in quarter 4. Is that understanding correct?
Relatively, yes. But overall, in quarter 4, the industry de-grew by 9%. We hoping that industry will actually grow in quarter 4 by about 10% or 11%, right? But we lost about -- let's say, at industry level, we lost about 35,000 odd tractors because of the lockdown. Also remember that Navratra was -- actually, a lockdown happened, right, for the Navratra. And Navratra is very, very strong in North, Central and East as compared to South and West, right?So there was -- I mean we were hoping for a huge upsurge in demand because everything was moving so well in quarter 4 relative to quarter 1, 2 and 3, where we were -- we actually saw negative industry growth, right? But in quarter 4, we were actually expecting the industry to grow to 10%, 11% level. But finally, it ended up at minus 9. And most of the hit that came from there was because of the lockdown in the North, Center and East, right? So that is -- I mean that is the clarification.
Okay. Got you. Now just on this point which you mentioned about Navratra, I would have anticipated that typically, this is a very seasonal demand, right? I mean right at the time of harvesting or around festive is when typically farmers come and buy. And unfortunately, the whole lockdown period coincided with that. So to that extent, do you really anticipate that the demand that we lost out in the month of March, particularly in the North region or in the region where Navratra is important, will that come back as the market relaxations happen? And also the second thing I wanted to know around your dealerships, what proportion of your dealerships are now open across India?
Okay. Yes. So I mean, for your question -- first question, yes, we think that the demand will come back because we are already seeing that before COVID coming back to us, which we could not deliver tractor during March at Navratra. So most of them, I mean, let's say, 50% of them are very, very interested in buying a tractor right now and some more are interested in buying a tractor between June and October period, right? So yes, so that -- I think that will happen, just looking at the ground situation. Sorry, what was the other question?
If you can give some sense on how much of the dealerships are open. And have you -- as dealerships open, what are the challenges you're facing in terms of like -- of course, you spoke about the financing, but are farmers really walking in given the fear of the virus? Any sense you'll give -- you can give on the dealership side?
Yes. So on the dealership side, as of yesterday, we had about 65% of our dealerships open for sale, which means that showrooms were open, about 65%. And the situation is actually improving rapidly every day, right? So every day, like another 50, 70, 80 dealerships get opened every day, right? Now that is on the showroom or the sales side.On the workshop or the repair side, almost about 90% of the dealerships are open. So these are the dealerships where they just are providing those type services to customers and providing other services on tractors, repairs, et cetera. But they are yet to open for sale because they haven't received local permissions, et cetera, for showroom opening. But as I said, the situation is improving very, very rapidly.
And footfalls, have you seen -- I mean you're not sensing any hesitant -- people are hesitant to walk into the showrooms yet because of the whole fear around virus?
Yes. So see, in tractor industry, it is a very BTL-based industry. It is not an advertising-led industry. So not many people, they walk into the showroom, right? So normally, the sale, what the reason -- I mean the way the sales happen is that our sales teams or dealer sales teams have to use their network in the villages and hunt for leads. And then they have to go to the villages and get the leads done.Now all that, I mean, is something that will change because of the current situation, at least for the next 6 to 9 months, right? So we are devising actually very innovative, new digital methods to do our lead generation exercise. I mean a lot of it is social media. A lot of it is phone calls, video conversation. We have developed some great tools that instead of a field demo, we can probably give a demo on a phone or a pad or something. I mean -- and also, we are doing a lot of partnerships with other companies, like companies in seeds and agriculture and fertilizer domain, I mean, even telecom companies and a lot of other companies, a lot of these people who are start-ups in the agri sector, et cetera, yes.So I think a sense of demand generation will be very, very different, will get changed over the next 6 to 9 months. But the fact that the sentiment is very, very high, it's very, very positive in rural India. So our leads are actually at a reasonably good level. They are not normal, but they are about 90% of the normal.
I'll join back the queue, but it's good to hear some positivity in an environment where we are only hearing negative.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.
Congrats on reasonable numbers from this kind of environment. My first question pertains on your margin performance for tractor business. We have seen a very impressive margin improvement both on Y-o-Y and Q-o-Q basis. Is there any one-offs in that? If not, what are the drivers of these margins? And how much is it sustainable?
Yes, Jinesh, this is Bharat Madan. So the one-off is in the sense that this time, we had good inventory levels in the quarter because sales are really stopped. So we actually landed with almost 4 to 5 weeks of inventory on our books. So that has led to some impact coming in favorable because some overheads, which actually should have actually got recognized when you had the sales book get booked up. But we had to reorganize the inventory. So roughly 2% of the margin actually has come from that, which will have a negative impact in the coming years. It's when you actually sell those tractors. So if you're barring that, a little less absorption of it.
Okay. Okay. That is the inventory-related cost absorption. Okay. And second question pertains to you referred to the DRDO approval for the braking system. Any sense on what would be the revenue opportunity in that? And who are the current suppliers? And how soon we can -- how soon we can expect orders on that, primarily the RDSO approval for braking?
Okay. This is Dipankar. I mean we have -- the approval has already happened. It will go for a 1-year field trial, which it will go very soon. And the market size is around INR 700 crores to INR 800 crores market size with the specific number of locomotives being manufactured in the country. But the way things are, with the dedicated fiscal law coming up, and there are a lot of other export potential being explored by the locomotive production units, both CLW and DLW. And this particular locomotive brake system can even go in for the other 2 big locomotive factories, both for the GE and the Alstom.So we see a big potential out there. But as of now, the present total market size is around INR 700 crores to INR 800 crores. And there are 2 -- only 2 multinational players, which is Knorr-Bremse and Faiveley, are the 2 people who are supplying this INR 800 crore market.
Sorry, who was the second supplier?
Faiveley. Faiveley in France. Bought over by Wabtec U.S.
[Operator Instructions] The next question is from the line of Pravin Yeolekar from CGS-CIMB.
Sir, my question on tractor segment. Sir, in the current challenging conditions, so have you seen any past trends of down-trading in the tractors in the down cycle [ of tractors ] in terms of horsepower-wise...
Can you repeat? Can you repeat the question?
Yes. My question was on down-trading of tractors, down-trading in terms of horsepower-wise, like have you seen any kind of certain trends in the past that in the down cycle, customers or farmers generally down-trade?
Yes. So you are right, actually. I mean that is what happens normally in a down cycle. That tractors -- the customers tend to migrate towards slightly lower HP. But there are 2 factors here. One is that the industry itself is on a rise, and we are also on a rise. Like you have seen, we have done much better in 41 to 50 HPs as compared to lower HPs in the last year because -- and that is on behalf of like a lot of new product launches we have done, right?So I mean there has been a launch actually in Q4, which we haven't been able to feature completely because of the lockdown. But we launched a new series called Farmtrac Powermaxx series, which we are getting actually some very, very rave reviews. And this series actually starts at 47, 48 HP and go to above 55 HP, right?So yes, I mean -- but -- so we were also doubting in the initial days of the lockdown that probably that will happen. But how it has come across now with the positive sentiment, the good cash flow in the farmers, so we are not seeing that actually right now, right? I don't think that is a thing to worry for future also because I think the farmers' sentiment is very positive. So they are not hesitating on putting another INR 1 lakh rupee in buying a higher HP tractor if they really need that.
Okay. Okay. Okay. That's helpful. And sir, second question on the dealership. How are we supporting our dealers in terms of this liquidity crunch? Any, on the financing side, we are supporting the dealer?
Yes. So see, I mean there has been, of course, a liquidity crunch, I mean, in the terms that their cash was blocked in the stocks and the tractors that they had advanced to the customers hoping for getting the loans financed, right? But since the -- I mean the agri sector was actually exempted on 3rd April, right? I mean just after about like 8, 10, 11 days of lockdown, right? So -- and the banking sector also started opening up about 10 to 15 days or so, right?So we were not hit as much as other -- some other sectors were hit because of this. But we have announced a lot of relief measures for our dealers and have given them some concession on interest. We have also given them some collection incentives. So they can, I mean, move their people and focus their people more on collection at this time to get out of any crunch they might be facing. And of course, most of the banks have given a moratorium even on working capital loans, right?So I mean the situation is not that bad. And of course, wherever it is, we are working very closely with the dealers to support them in whatever way we can.
Okay. And my last question on Kubota. So have we finalized a plan to monetize the deal? So anything to highlight here? How are we going to utilize this money?
Yes. So I think the business plan between the 2 companies is still in the finalization stage. So I think it will take maybe another 2 or 3 months before they have the entire 5-year road map laid out. And that road map will also have the investment details where this money is going to be utilized. As of now, we are not ready with that, but it's a work in progress.
The next question is from the line of Siddhartha from Nomura Securities.
My first question is on, sir, on the margin side. So you have indicated that close to 200 bps will be from the -- due to higher inventory, but gross margin improvement seems to be pretty high, mainly up double digits. So anything else which is benefiting margins in the quarter or...
So like you mentioned in the product mix also, there's also the -- some value addition which happened and some cost initiative on the material cost front and also the deflation in the commodity prices, which has helped in this quarter. So the material cost actually has improved. And on a year-on-year basis, you've seen the improvement is 2% to 2.5%. And in the quarter, obviously, significant. Even if you remove that 2% impact from material costs, still with a 2% drop on a sequential basis. So that's a benefit which is material.And right now, I think in this current situation, we also don't see major inflation pressures that will come in until the time you see anything material happening on the production side. So I think the market looks like soft as of now. So the things will continue. So the margin trajectory should continue.
Okay. So partly the impact from the product mix, can you indicate that?
So as you mentioned, the product mix has been favorable. Like we said, the Farmtrac to Powertrac ratio has also improved by almost 2%. So the Farmtrac typically, like Shenu mentioned, we had not been fully able to still realize the potential of the new launch we did in Q4. And also, our sales has shifted more towards the higher HP segment, which is 40 HP, which is typically, normally high-margin product range. So that's something which is still going to benefit in the long run, too.
Understood. And second question is on the financing side. Again, sorry for coming back on it. So we were hearing some news from dealers that the banks were lowering the loan-to-value ratios for most customers due to the moratorium and funding issues. So have you heard nothing on that front or the loan-to-value continues whatever it was earlier?
Siddhartha, that is very, very sporadic. I mean that is happening only in a few areas, where still there is -- kind of areas where there is kind of a red zone, et cetera, where the movement is not very sharp. But those are very, very sporadic and limited. But in most of the other areas, the banks have -- actually, a few banks, on our requests, have actually enhanced the LTVs because they want to be very, very aggressive and they want to increase their market share in tractor segment because they are getting hit in other segments like auto and bike and even trucks, et cetera, right?So I mean, most of the banks are actually eager to support the agri industry right now. But yes, I mean, you are right. I mean in some very sporadic cases, it might happen, that the LTV might be reduced. And even in those cases, LTV reduction is very, very small, like 5% or so.
[Operator Instructions] The next question is from the line of Prateek Poddar from Nippon India.
Sir, just one question. Today, in your view, is supply a major constraint? Or demand is -- what are you more worried about? Would it be supply or demand as we speak today?
Right now, we are more worried about supply because supply chain is a complex mechanism. And our vendors are spread throughout the country. And if a tractor has 3,000 parts, we have to have all 3,000 to be able to produce even a single tractor. And of course, we had some inventory in hand. And so we have started production, as Bharat mentioned, the day before yesterday, after taking all the requisite permissions from the government.Yes. But supply chain is definitely going to be a challenge for at least next 4 weeks, right? So I mean right now, I mean, we have started production at a very, very low level. But we hope that we will reach to normal -- to about 50% of normal production level by mid of June. And by beginning of July, we think we should be very close to normal production, right? So supply chain, we all -- we did anticipate that it will take a few weeks.
But what steps are you taking to mitigate this? Because as of now, the red zone, green and amber is so dynamic. I was just thinking about what are mitigating steps you are taking because if one of your suppliers is asked to shut down, and you said there are 3,000 parts in a tractor, you will not be able to supply a tractor. So could you just talk a bit about the supply chain rationalization or circuit breakers which you would have in place so as to what fallback options which you would have in place so as to not lose sales because of the lack of production or because of a vendor?
Yes. Yes. So 2 or 3 things, Prateek. One is that we are working very, very closely with our vendors. I mean almost dialoguing on a daily basis. We are trying to help them like all the vendors in the -- like all vendor community in Faridabad, we are actually trying to directly help them with resuming their operations, even to some extent, helping them getting permissions from the government authorities, et cetera, right? So that is one.The other thing is that, I mean, most of our parts, if not all, we have alternate source, right? So I mean to some extent, like even if for the particular part, one vendor cannot operate, we can actually start with other vendors, right? And that is why I said that even by middle of June, we are hoping for only 50% of the production because some -- even if like some vendors can close, the other vendor cannot supply us the whole quantity, right? At least they can provide us probably half the quantity or something like that, right?So that is the kind of mitigation already built in, in our structure -- supply chain structure. Yes. I mean, we cannot change the structure of the vendors or supply chain at this moment in time. That is a long drawn process. It's taken about 6 to 9 months at least to develop a vendor and do all that stuff. So we have to work with the vendor that we have right now. There is no 2 ways about it, right? It's just that the more we collaborate with them, the more we discuss with them, dialogue with them, the more we can help them, probably we'll be able to get back to normalcy faster.
And lastly, sir, what about efficiency at the plant level, sir? If you could talk about throughputs. Because of these social distancing norms, do you believe there could be an impact in terms of labor efficiency?
Yes. Yes most of our -- yes. So most of our labor -- can you hear me, Prateek?
Yes. Yes. Go ahead, sir.
Okay. So most of our labor -- so we are not having a problem because of the migration of labor because most of our labor is local. The second thing is that we are -- I mean right now, we are operating at about 20%, 25% of the labor, right? I mean it has been just 2 days that we started the plant after requisite repair, maintenance and all that stuff, right?So labor is not going to cause a problem. I think the main challenge is going to be all the social distancing in plants. We have already received permission for 75% labor that we can bring in our plants of normal times, right? We have -- of course, we have spent a lot of effort and time and energy and money to make sure that everything is safe and social distancing norms are met. And there are like thousands and thousands of markings on the floors, ensuring that people do not move from their space, they -- I mean, they maintain all the precautions, right?So labor is not going to be a problem. As I said, we have already received permission from the government for going 75% of the labor, and we are just working with 10%, 20% because we want to correct the supply chain first. But supply chain, you're right, I mean, we are hoping that it will be okay by July sometime. But yes, I mean there could be some surprises here and there because the situation is quite dynamic.
[Operator Instructions] The next question is from the line of Ankit Suchanti from Axis Securities.
This is Ankit Suchanti from Axis Securities. My question is again on the demand front. So when you're saying that the demand -- there's a lot of pent-up demand as well as the production would be close to normal by July, do you expect a year-on-year growth in your numbers coming from Q2 itself? Or do you see that coming from Q3? And similar question in the Construction Equipment division. And do you see a year-on-year growth coming in FY '21 given that FY '20 Q2 was also weak?
Yes. So see, I think Bharat mentioned about it briefly, that the lockdown happened right before the Navratra. And therefore, for Navratra, we had actually pumped up our pipeline of stocks, tractor stocks, quite a bit. So at the time of the lockdown, we had actually kind of 3x of stock that we normally want to keep because Navratra is such an upsurge in the demand, right?So fortunately or unfortunately -- I mean unfortunately because we did not see the Navratra at all this time, but fortunately because we have a huge pipeline of stock, right? I mean we have kind of, let us say, I mean -- yes, I mean dealer stock is normal, but the depot stocks are quite high, right? So right now, we are thinking that it will take us through the end of June, right, with some share there. But we will not lose any significant sales until end of June.And from July, as I said, we are hoping that our production will come to mid. And also the fact that July and August are not big ones, so I think we will not lose sales in July, I think, because July and August are actually the weakest months of the whole year for tractor industry. So I think to that extent, the timing is okay, I think the stock availability in the pipeline is actually helping us. And I think -- I mean yes, if we can meet our plans or what we are thinking, we should be okay.
Okay. And on the Construction Equipment, similar, what time lines do you see on -- for year-on-year growth given that, again, Construction Equipment was -- close to 25%, 30% decline in FY '20?
Yes, Ankit. This is Ajay Mandahr. What happened in March was 50% reduction basically in the volumes that happened for that particular month. Typically, if you see in Construction Equipment, H2 is much more heavier. You generally tend to get 55% of your sales towards the H2.Now what -- when we discuss the people in the Construction Equipment, talk to the government, we are getting an impression that the tempo should build up going forward, maybe the quarter 2 onwards. But then the monsoons will start. So there would be demand, but there would not be that great, big pickup over the last year. And from quarter 3 and quarter 4, we expect the market to recover.Overall, we don't expect market to be growing by leaps and bounds, which used to happen earlier. Still, I think plus/minus 10%, I would say, 10% minus over this year should be something the market should look at.And again, having said that, you are in an uncertain world. Basically, we don't know how much money is put on to infrastructure. If the money that is put on to infrastructure is much more of a bigger quantum, then doubling the growth can happen much faster than the -- there will be much substantial growth.
The next question is from the line of Bharat Gianani from Sharekhan.
Just one clarification. This is in continuation to the question -- to the answer given to the previous participant. So all in all, in FY '21, because of the statement that you made that you have sufficient inventory to cover the demand, I mean, you'll not lose out on demand because of the sufficient inventory that you have in the system at the depot level and assuming that you reach normal production by July. So for the year as a whole, FY '21, you had, earlier in the call, given a guidance of 5% growth. So I mean what is the kind of number you are looking at now? So that would be my question.
Sorry, I don't think we gave a guidance of 5% growth for FY '21. I think Bharat, in the initial comments, said that it is too early to say anything about FY '21. But at the same time, we do feel strongly that from June to October period, I think the industry growth would remain positive in the tractor market, right? Of course, April, May would be bad. April, I mean -- yes, April was like, let's say, 10%, 15% of the demand, normal demand. May, probably we are looking at about 50% of the normal. And June would be somewhere close to normal, right? And then from probably July onwards, we'll -- I think we'll see some positive growth, at least until October, right?But it will take us a few more weeks to ascertain all this because this is just our kind of intelligent guess right now based on the situation on the ground, right? So in another few weeks, we should be able to kind of reconfirm this aspect and maybe have a better look at better guidance for the FY '20.
Okay. Fine. And assuming that the monsoon is normal, so what's directionally your view on FY '22 for the tractor industry? Would you like to share any thoughts on that?
Yes. So I think I think FY '22, depending on the water situation, I think the initial prediction has already come. I mean the more confirmative prediction will come in a few days, right? But yes, reservoirs are already very good. And I mean there has been a couple of disruptions in the recent past in the tractor industry, which is like last year overall, I mean, in FY '20, overall, we were down. And then this lockdown period has put some further restrictions on the demand recently, right?So I think there will be -- there will continue to be a lot of pent-up demand, right, in the market. And FY '22, both because of these structural situations and also because of monsoon, I think we should have a good year. I don't see anything going wrong right now for FY '22 also right now. Actually, I mean, I think that it might surprise us on the positive side.
[Operator Instructions] The next question is from the line of [ Sujit Kanoria ] from Angel Broking.We move to the next question from the line of Aditya Makharia from HDFC.
Yes, I just wanted to know the Kubota deal. So the focus will remain on the premium tractors. Or will we even look to go down the range? Like how -- what is the thinking behind the entire product suite from Kubota?
Okay. So if you are talking about the JV that we have with Kubota, which is called Escorts Kubota India Private Limited, I mean, that is kind of a manufacturing JV, where Kubota will produce their own tractors. And of course, Kubota always has played on premium side, right? And in that JV or in that plant, we will also manufacture contract tractors. And those tractors that we are going to produce in that plant would be also our premium products, right? So as far as manufacturing is concerned, of course, it will be all for the premium tractors.
Okay. And will we make any agri implements also? Is that also a part of the understanding?
Not yet. It is part of a broader thinking process right now. But we are speaking with Kubota as to what we can do in that space as well. But nothing complete as of now. But yes, definitely some thinking in progress.
The next question is from the line of Basudeb Banerjee from AMBIT Capital.
Congrats for a good set of numbers. Just a couple of things. One, I missed out somebody asking in the call also that in your supply chain, there can be dependence on various components, without which the whole assembly won't be possible. And several areas are still under the red zone. So what is the update from that perspective? I'd like to understand your complete supply chain and parts being available for full assembly.
Yes. So as I explained earlier, I mean, it's not true that everything is going to be shut down or is already shut down in red zones, right? Red zone like Faridabad itself is a red zone, right? But we have received permission to deploy 75% of our people. I think the view of the government right now, going forward and even right now, is that we have to learn to live with the virus. I mean we just can't stop economy and then hope to have a longer, longer period of lockdown, right?So I mean the -- I think the message is very, very clear. That we have to all adopt very, very safety precautions, et cetera. But we have to also start moving, right? So to that extent, I mean, a lot of our vendors who are in red zone have received permission to operate.Now the only point which is left, so the point is not whether this vendor will be able to supply or not, right? The point in future for the next few weeks is how much supply can we get, right? That is actually the point. And we are seeing -- as I said, we are seeing improvements on that front, right? So we are starting with, as I said, 10% production, and then we'll gradually hope to increase it to 50%. And that I am saying depending on all the discussions and dialogues we have with -- we are having with our suppliers. And probably by July sometime, I think we should be close to normal, if not normal.
Sir, your comments on -- no, no, continuation of the same thing that various [ type 2 ] component suppliers or even large players are fearing that if there is an increase of COVID in the factories, there is a risk of 3 months of production getting stopped and reports like that. So any...
No, no, no. I want to clarify that. At least what we have received information from our local authorities. I don't know about the rest of India and so on specifically. But I mean even if there is a case of COVID found in our factory, we are supposed to inform it to the government authorities and contain that for about 2 to 3 days and get it sanitized by -- through some special procedures. So that is what we have received. So based on that, we have already developed a disaster management plan. And we are fully ready to cope with those situations.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Sir, just one question on your regional mix. How does your mix stack up between North, Central, South and West?
I'm sorry, I cannot hear you. Can you repeat that on regional mix?
How does your regional mix stack up between -- hello?
Please go ahead. Yes.
Regional mix, how does it stack up between North, Central, South and West for tractors?
Okay. Okay. So I think -- I'll tell you some detailed data, too, a bit later on this, I mean, how do we operate in different sections of the country geographically. But as you know, much more stronger in North, Center and East. And we are trying to grow ourselves in rest of the market. And if you look at our like detailed data, you will see that we have considerably grown in actually our opportunity and weak markets, right?So in the South, for example, in the 4 states, we have grown our market share last year like 120, 140 basis points. And in most of the third states also, which are not in the South, let's say, in the West or in the Far East like Chhattisgarh, like Gujarat, like Maharashtra, even like Orissa and West Bengal, we have had really good growth in all those markets.And those are committing on the next of 2 things. Of course, one is that we are strengthening our distribution in these areas where we were traditionally weak in distribution. And the second is we have developed over the years, many new products which are -- which cater to such markets. For example, like we created Atom -- contract Atom model, which particularly caters to markets like Maharashtra, Gujarat and Karnataka. So -- yes, but data, I'll make sure you get it in the next few days.
But in your current mix, sir, North, Central and East will be what percentage of your sales?
Prateek, do you have those numbers right in front of you right now? I mean I don't want to give a wrong...
60%, 70%.
60% to 70% sales [ in aggregate ].
The next question is from the line of Abhishek Jain from Dolat Capital.
Sir, what is the contribution for subsidy based tractor volume for industry? And given the pandemic situation and limited fiscal and monetary schemes with the state government, what is the outlook ahead? And what's sort of the impact in this region?
Okay. So the year before last, which is FY '19, the subsidy volume was close to about 11% to 12% of the total volume, right? So roughly about 80,000 to 90,000 tractors in the whole year. Last year, the subsidy did not play out as well because of many local issues with states, I mean, in terms of administration of the subsidy, et cetera, right, and some delays because of, again, local issues. Nothing like -- nothing structural, I think, that can be extrapolated in the future. Mainly temporary local issues.But I think this year, I think the subsidy sales will actually be better than even FY '19 as a percentage of overall industry. Because there are several schemes in the pipeline, we actually -- which actually some of them got stopped because of the lockdown in the last phase. They were very, very mature, like something in Assam and something in Bihar and probably something in AP, Telangana. They were all stopped because of the lockdown, right? All -- they will start emerging.Actually, some has already started, and we have also started supplying tractors, supplying in Assam. And some other markets or some other states will come up very, very quickly now, like Bihar and AP and [ Gujarat ]. So I think this will be a good year. It's hard to say a number, but I think it would be, I think, better than FY '19 number.
Okay. And my next question is related with the outlook for the export as many countries are importing high duty on imports. So what sort of the recovery are you looking in export? Or what sort of the impact they are looking?
No, we are not looking at any impact. I mean we are looking at a massive explosion in our growth volumes over the next few years. We have invested like -- yes, we have invested huge amounts of money in creating a very formidable export product lineup. We are now going up to 110 HP, 120 HP. I mean -- and we are going -- in the bottom HP segments, we are going as low as 20 HP right now, right? And we are like very aggressively expanding distribution in a lot of countries. Distributor tie-up will also help us with export volume.So we are not -- I mean even last year, you look at the data, I mean, we were the fastest-growing in terms of percentage increase in sales and export. Of course, we are a small base, so we should not talk about percentages. But I mean even if the industry drops, even if there are any problems, we will be all right. And I don't think these import restrictions will be applicable on agriculture sector anywhere in the world. I mean barring 1 or 2, maybe somebody will do something. But I think generally, agri sector is always prevented from these kind of policies.
The next question is from the line of Iqbal Khan from CRISIL.The next question is from the line of Siddarth Mohta from Principal India.
I have got one question, which is on your wage agreement. In your presentation, I think you have written same business settled down. So if you can quantify that amount. And in FY '21, what can be the number which I should consider?
So Siddarth, the settlement is not yet done. So when we have the lockdown, obviously the negotiation actually was stopped. So now the things are opening back again. So we are again in discussion with the union. So I think once the settlement is signed, then we'll contact you with our plan.
Okay. Okay. So historically, it has been between, sir, like 9% to 10%? Or should I wait for the final conclusion?
We'll know it because this time, situation is different. I think every time the base changes, and the number of employees have also gone down compared to 6, 7 years ago. So I think we had a very low level and lower cost now. So let's wait for the settlement to happen, then we'll come back to you.
The next question is from the line Rajendra Mishra from IDFC Mutual Fund.
So just want to know whether this COVID lockdown will have an impact on market shares and whether things will remain status quo or whether market shares can change. Or how do you see that among the top players?
Yes, are you talking about tractor industry?
Yes, yes.
Okay. Yes. So I mean see, structurally, I mean COVID will not impact anyone. I mean any one strength or weakness or anything like that, right? So I mean in the long run, I mean, there will be no effect of COVID on market shares at least, right? Of course, market share can move still but not because of COVID but because of other things, right? So I don't think there will be a structural impact on market shares because of COVID.And in temporary terms like 3 months, 6 months period, it may happen because of the supply situations of different manufacturers or demand situation in particular states or something like this. But I think -- I mean that would only be short term.
The next question is from the line of Mahantesh Marilinga from Finquest Securities.
Sir, just had a couple of questions here. So actually, I heard in some of the news that there are some crop losses due to the farmers not able to reach their produce targets. In spite of that, are you able to see a demand uptick in the near term?
I think this is all just media hoopla. There is no truth about it. These are very sporadic cases. Please don't take it generally. I think generally, there have been no losses. Even hailstorm, et cetera, you read in news that in some areas, there was like huge devastation, et cetera. Believe me, those are only sporadic cases. We are in touch with a lot of farmers, and we are not seeing -- nothing of this sort, I mean, on a large scale.
Okay. Sir, you mentioned about the pent-up demand of 40% to 50%, what do you exactly mean by that? You mean the like-to-like March, April numbers demand going up by that number? What is the meaning of that?
No, what I mean by pent-up demand is definitely there was a loss of sales at the industry level in March and April and continues to be in May also, right? So my -- I mean rough guesstimate is that we might have lost about 70,000, 80,000 tractors at the industry level, just from the lockdown period until now, right?So when I say 30%, 40% will come back, which I mean is whatever demand we lost because of the lockdown, about 30%, 40% of that will come back. And we will see that in June, October period, right, over and above the normal levels of June up to date, right? So that is what I mean. So I think June, October, we'll definitely see a growth in volume as compared to last year's because of this pent-up demand. And then, of course, if there are any other positive factors, then they will also contribute.
So along with the normal growth of June, October industry growth, we expect around 40%, 50% of the 70,000, 80,000 lost during the 3 months?
That is the rough estimate, yes.
The next question is from the line of Nirmal Bari from Sameeksha Capital.
Yes, sir. I just have 2 clarification questions. One is on the subsidy that you said that you -- basically, you are expecting a much stronger subsidy sales. But given the fiscal condition of the states, what is giving us confidence in terms of the subsidy sales? And the second question is if you can -- the tractor division has seen significant increase in gross margin in the current quarter. So if you can provide a reason for that.
Yes. I will answer the first one, and then Bharat might take the second one. So see, I mean, governments are not worried about fiscal deficits and all that right now, right? I mean right now, they want to support people to come back to normal lives, right? I mean we hear this 10% of GDP is the relief package. I mean we don't have those extra funds available right now, but government wants to spend that right now because they want to just bring the economy and business and lives back to normal as much as they can, right?So I mean agri is always a priority sector. I mean there are a lot of mass population affected through agri, right? So we think that the government's focus will actually increase this year on agri because they want to benefit all these people.
Okay. And for the material cost decrease on tractors?
So Nirmal, I think we had responded to this question in the earlier. It's about roughly the same question. So if you look, there's one-off obviously benefit which has happened in this quarter also because of the higher production base BTL, and there's a lot of inventory which we actually carried when the lockdown happened. So that is roughly 2% margin actually that is coming from there.And in addition, as we mentioned in the opening remarks, so there has been an improvement in the product mix this time this year, selling higher Farmtrac and higher HP tractors, more than what we did than the last year, and also some material cost initiatives, which have been there. And there's also deflation on the commodity prices, which is actually helping us in improving the margin.
Okay. But the higher inventory shouldn't be impacting the material cost line item, right? Because the revenue that we have booked...
No. No. So the inventory get -- so when you produce tractors in the inventory and if it's unsold and that inventory ultimately leads to the lower cost of goods sold, so the benefit comes in the material cost. So this is like, as I said, a nonrecurring item, but this is a benefit in this quarter will directly come when the tractors actually get sold.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.
Just 2 questions. One is on the tractor financing. How much of financing would be coming from NBFCs? And second question would be with respect to your CapEx for FY '21. What are we budgeting for?
Okay. I'll take the first one. As far as financing is concerned, you know that public sector banks have absolutely no role in tractor financing anymore, right? So that as percentage, it would be like hardly 1% or 2% or 3%. So most of the financing is through private banks and NBFCs. And between the 2, I think the ratio will be about 2/3 and 1/3. 2/3 would be NBFCs and 1/3 would be private banks.
Okay. And CapEx?
Jinesh, this year, if it was a normal year, our original plan was to spend close to INR 250 crores this year in the CapEx, which is also the plan last year till the time the lockdown happened. Now depending on when the complete position opens obviously, there are projects which are in the pipeline where the money in this is already committed and are actually spent. So it all depend on how the opening up happens. So original plan was INR 250 crores. We should be obviously below that, looking at this condition also, anywhere between INR 200 crores to INR 250 crores will be the wild guess at this time.
We take the last question from the line of Bhaskar Bukrediwala from ASK Investment.
A couple of questions. One, on this Kubota deal, just wanted to understand the tractors that you'll be selling abroad, will that be co-branded or would be purely under Kubota brand? So how is that going to be?
Yes. So that decision we are going to take based on which market we are entering and the market dynamics. But so far, wherever we have started, we are using a joint brand, which is called -- yes, which is a joint brand. And so yes -- so -- but based on the market-to-market phenomena and dynamics, we will choose that going forward.
And so just to understand, I mean, as I understand, one is, of course, to leverage the distribution network that Kubota has and possibly to enter more high-end markets, either leveraging their brand or a co-brand. But from an overall partnership or a joint venture perspective, I mean, setting up a manufacturing facility in India for somebody like Kubota where you get it more efficient and lower cost probably compared to some of the other markets is also a reason why we are setting up manufacturing and then it becomes a win-win for both the partners. Is that a broader thought process also?
See, this relationship has a lot of facets, right? I mean we are going to cooperate and collaborate in many, many different ways, right? So like exports is one. Manufacturing is another. We are also thinking about how we can collaborate in developing products jointly for the global markets, right? A lot of facets. I mean we are going to learn from each other on manufacturing processes, on selling processes, on other business processes, right? So yes, I mean, this is a kind of a deep and wide relationship.
Sure. Sure. Just one small last question. On the working capital side, saw significant improvement this year. Would you like to talk a little bit in terms of what exactly the company has done? And do you think that this is going to be -- the working capital control that we have brought this year is going to be sustainable in the future?
So Bhaskar, there are 2, 3 reasons for this. So if you look at the numbers, which are there in FY '19, a lot of money actually got blocked in the working capital. So there are some amount which is stuck with the government, some supplies which happened under the subsidy program. And then we also had issues in not getting the GST refunds in time. So there's a 2 years combination, which is there as of March '19.And also, I think it's a lot of work which has happened on the inventory front because we were expecting a good season in April '19. So we have actually built up good inventory at that time and also stocked the channel at that point in time. So the receivables are also quite high.So I think all those collections have been happened and have been done now in this year. So we started getting the money back from the government for the subsidy scheme this year, which is close to INR 100-odd crores. We also got the refund from the GST from export as well as for domestic, which was again close to INR 100 crores, INR 125 crores this year. And obviously, the inventory levels which are there in last year, we could not correct that. So because the lockdown happened, certainly we are tightly stuck with this inventory. So that has still to happen. So we'll see probably that inventory level going down this year, too. So some working capital release will happen this year. So that's where we stand today. About INR 350 crores of working capital has got released last year.
Thank you. I now hand the conference over to Mr. Bharat Madan for closing comments.
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Thank you. Ladies and gentlemen, on behalf of HSBC Securities and Capital Markets India Private Limited, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.