Escorts Kubota Ltd
NSE:ESCORTS
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Escorts Kubota Ltd
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Ladies and gentlemen, good day, and welcome to Escorts Limited 4Q FY '22 Results Conference Call hosted by Asian Market Securities Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Mayur Milak from Asian Market Securities Limited. Thank you, and over to you, sir.
Thank you. Good evening. And on behalf of Asian Market Securities Private Limited, I welcome you all. I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us Mr. Bharat Madan, President Finance and Group CFO, and Corporate Head; Mr. Shenu Agarwal, President Agri Machinery and Construction Equipment business; and the Investor Relations team at Escorts Limited.
We will start the call with a brief opening remarks from the management, followed by an interactive Q&A session. Before we start, I would like to add that some of the statements that we make in today's call will be forward-looking in nature and are subject to risks as outlined in the annual reports and investor releases of the company.
At this point, I would request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Mayur. Good evening, everyone, and thank you all for joining us on this earnings call for the fourth quarter and financial year ended 31st March 2022. I would like to present few highlights of company's stand-alone performance for FY '22 as follows: Turnover at INR 7,152.7 crores against INR 6,929.3 crore in previous year is up by 3.2%. Tractor volumes at 94,228 tractors as against 106,741 tractors previous year. Construction equipment volume at 4,117 machines is up by 5.2% as against 3,913 machines last year same quarter. EBITDA at INR 951.3 crores as against INR 1,129.2 crores in previous year is down by 15.8%. EBITDA margin now stands at 13.3% as against 16.3% in last year. Margins have been adversely impacted by steep inflation in commodity prices as well as lower sales volume in agri machinery segment.
The company continues to be debt free with sufficient available liquidity for growth. The PBT at INR 1,021.9 crores as against INR 1,157.1 crores last year. Net profit at INR 765.6 crores as against INR 874.1 crore last year. Stand-alone EPS at INR 58.9 per share as against INR 68.1 per share last year. The Board of Directors have recommended the final dividend at 70%, that is to INR 7 per equity share for the year ended 31st March 2022 as against normal dividend at 50%, that is INR 5 per equity share for the year ended 31st March 2021. This is excluding onetime platinum jubilee year special dividend of 25%, which was declared last year.
Moving on to company's quarterly performance. Turnover at INR 1,861.4 crores as against INR 2,210.5 crores in previous fiscal same quarter. Tractor volumes down by 32.8% to 21,895 tractors as against 32,588 tractors in last year corresponding quarter. Construction volume down by 19.8% to 1,286 machines as against 1,604 machines in last year corresponding quarter. EBITDA at INR 243.4 crores as against INR 344.7 crores in last year corresponding quarter. Net profit for the quarter at INR 202.2 crores as against INR 271.3 crores in last year corresponding quarter. On a consolidated basis, revenue from operations at INR 7,238.5 crores in the year ended March 2022 was up by 3.2% as against INR 7,012.5 crores in the year ended March 2021.
Consolidated net profit recorded at INR 735.6 crores in the year ended March 2022 as against a profit of INR 872.6 crores in corresponding period last year. Consolidated EPS stands at INR 74.06 as against INR 92.15 per share in previous year.
Now moving on to segmental business performance, starting with the Agri Machinery business. Domestic tractor industry volumes in FY '22 went down by 6.4% to 8.42 lakh tractors as compared to 8.99 lakh tractors in previous fiscal year. You may recall that FY '21 was a record year with a growth of 27%. And with 6.4% drop over the peak of FY '21, the tractor industry in FY '22 recorded second highest peak. While tractor industry remains subdued in second half of FY '22, the recent trends are pointing to building up of positive sentiments. This is owing to good crop prices and prediction of a normal monsoon. April '22 witnessed a 41% growth in industry, and we expect Q1 of the ongoing year to be quite positive. We would hold full year's inventory guidance until after the onset of this monsoon season.
Our domestic volumes went down by 14.5% at 87,043 tractors in FY '22 as against 101,848 tractors in previous fiscal. Severe inflation pressures in the entire year led us to take 5 price hikes in 6 quarters, including recent price hike taken in mid-April 2022. Most of these price hikes have taken ahead of competition to balance our profitability and volume growth. Tractor market share improved from 10.1% to 11.8% between FY '16 and FY '19. For the next 2 years, it had a marginal decline to 11.3% in FY '21 owing to various supply chain issues in the peak COVID era inhibiting our ability to meet the demand. In FY '22, we declined further by 1% as industry in our strong markets like UP, which degrew at 15% and Bihar, which degrew at 20% did not do well as compared to some of our weaker markets such as Maharashtra, which grew by 20% and Karnataka which grew by 5% and AP and Gujarat which degrew at 3% and 4%, respectively, lower than the industry average degrowth.
Q4 FY '22 market share sequentially has grown to 11.4% as against 10.4% in Q3. Also, we hope the inflationary pressures to subside from Q3 onwards. After the massive steel and oil led inflation in Q4 of FY '22, the commodity prices are more stable, at least for the time being. On tractor export side, industry was up in FY '22 by 45.2%, to ever highest 1.28 lakh tractors as compared to 88,000 tractors in previous fiscal. Our export volumes went up by 46.8% to 7,185 tractors as against 4,893 tractors in the previous fiscal. This is driven by continued success of new products launched by us in the last few years as well as by our expanding distribution network.
EBIT margin for Agri Machinery business stands at 15.5% as against 18.3%, adversely impacted by steep inflation in commodity prices and lower volume, post the recent price hike in April 2022, which will have significant unabsorbed inflation. We plan to take 1 more price hike in Q2 of this year and then hope to recover the entire impact of inflation by end of the ongoing year.
Coming to the Construction Equipment business, our served industry of cranes, backhoe loaders and compactors was down by 23% in volume as compared to FY '21. Only crane industry showed marginal growth of 1.8%, but compactor industry was down by 11.6% and the backhoe loaders were down by 28.2%. Our total volume of manufactured and traded products went up by 5.2% to 4,117 machines as against 3,913 machines in the previous fiscal.
Segment revenue for the year at INR 985.3 crores was up by 27% as against INR 776.1 crores in previous fiscal. We increased market share in FY '22 in all key product segments. However, due to steep price inflation and lag effect in passing on the same to the market, our Construction Equipment business EBIT margin was at 2.4%, down by 116 basis points in the previous fiscal. With renewed government trust on infrastructure and then as budgetary layout, we expect good recovery in construction business starting Q2 of the current year.
Now coming to the Railway division. Revenue for the year ended March 2022 went up by 32.8% to ever highest yearly revenue of INR 636.2 crores as against INR 479 crores in the corresponding quarter. Sales from new products now contribute 65% to the total division sales as against 59% last year. EBIT margin for the year ended March '22 stood at 14.8% as against 16% in the previous year. We are witnessing good traction in tendering process and order book for the division at the end of March '22 stood at more than INR 440 crores. For FY '23, we expect Railway Equipment segment to continue to grow in the double digit.
Post successful closure of the open offer on 11 April 2022, Kubota Corporation has become joint promoter of the company. Joint teams have started working together in various functions to bring together best practices from both the companies and also started working together on developing a midterm business plan for the company, which will be shortly renamed as Escorts Kubota Limited. The plan is likely to be ready by third quarter of this fiscal year, outlining road map to achieving joint aspirations and associated investment strategy.
Now I request the moderator to kindly open the floor for Q&A session.
[Operator Instructions] The first question is from the line of Hitesh Goel from CLSA.
There are 2 questions. First is on the RM inflation front, what is the under recovery still in 1Q on the RM side and how much price increase have we taken given the current spot prices of steel? And secondly, on the railway business, we are seeing last 2 quarters, the revenue has jumped up, but margins are still declined from 2Q levels. So you had guided for 17%, 18% kind of EBIT levels on railways. So what is the under-recovery there and when will we reach those 17%, 18% EBIT margins?
Okay. Hitesh, this is Shenu. So I'll answer the first question on the raw material inflation. So I'm speaking about like the tractor side. So after the end of this quarter, after having taken one price increase in mid-April, we would still have about 4% to 5% of unabsorbed inflation of the average sales price. So this is although going to be a challenge. But as Bharat said, we are planning to take one more price increase in Q2. And then subsequently, we will see how to time the balance price increases. Of course, it would be too optimistic to hope for any deflation right now. But at least, we are seeing some stability in the raw material commodity prices in the last few weeks. So that is the situation on RM inflation and prices. The most recent price increase that we have taken is roughly 2%. And I'll pass on to Bharat to answer the question on railway.
Yes, Hitesh, in the railway margin front, there are 2 key reasons. As I mentioned, the new product contribution has been going up now in that segment and which is largely witnessed on imports for meeting this demand. And the exchange rate has not been very supportive. So both because the margins as it is are low in that segment in the [indiscernible] segment, and other is giving very good top line growth to us and second because of these currency issues. And then third, because these are all fixed price contracts because we've got a large order book now from railways, but with all fixed price contracts. So the inflation cannot be passed on to the government. So that's another challenge, which is coming now on the railway front. So even though we carry a good order book now, the tendering has just started now. So the new orders which are coming only will factor in the cost increases, but the one which are existing on the books, so that obviously will have some effect on the margin because of inflation. So that will last some bit overall, I think this year also on the railway margin front. so which I think will probably be more in the range of 13%, 14% now values for this year till the time we are able to really get to the new orders, which are with the building of cost increases, which has already happened.
The next question is from the line of Raghunandhan from Emkay Global.
My first question is to Shenu sir. Sir, farmers seem to be benefiting from both higher crop prices and additional crop as Rabi harvest was early this time. Can you talk about farmer sentiments and income improvement? Can industry growth be 20% plus for Q1 FY '23?
Yes, farmer sentiment is quite positive, more so in the wheat growing parts of the country right now because, as you know, most of the wheat is being sold in Mandi at market prices and not at the government MSP price. And the market price, although it varies from Monday to Monday and state to state, but it is quite a bit higher than what MSP is. So in MP, for example, it is ranging between INR 2,300 to INR 2,600. And in Rajasthan, in some places, it is even going up to about INR 3,000, right? So that is one good aspect. The other thing that we have to keep in mind that while in many areas, the yield of the wheat is good, but in some areas, especially in the Haryana belt, the yield has not been so good, right? We have seen because of high temperatures and early summer onset, the yields have affected. But yes, overall, the situation is good in terms of the, let's say, farmer income per acre, et cetera. So after having seen a 41% increase in the industry, although some of it is also because of some pushing the dealer stock, yes, it is quite fair to say that we can see something between 15% to 20% growth in Q1.
Shenu sir, can you also speak on the efforts at your end to regain market share towards 11%, 12%, your thoughts on marketing efforts, new product, network expansion?
Yes. So Raghu, as we have already always maintained that we have a very clear strategy that is in place for the last 3 to 4 years. And this strategy has basically 2 or 3 parts to it. So the first part is that wherever our market shares are more than, let us say, 13%, 14% or more than the average market share, which we call our strong markets, there, we are trying to marginally increase or sustain our market share. The second is like what we call the weak markets or the opportunity markets where our market shares have been traditionally very, very low, either slightly above 5% or even below 5%, there, we are running several special projects to increase our penetration. Now of course, most of these projects have a long-term, medium-term horizon. But we are very, very consistent in our approach to these. Now last couple of years have been a little bit kind of jittery for us because of this unusual, unprecedented inflation pressures, and every quarter, we had to think how much price to be increased and how much hit on the profit to be taken. So we were kind of balancing our act between our profits and between the market share or the volume expiration.
But I think now is the time because we really think that this situation has now -- I mean, this era is now probably going to be over sooner than later. So we are going back to now fully focused on the market side again. The strategy is not going to change. Even this year, we are following the same strategy, but we have renewed our efforts now in those projects. So for example, right now, for this year, we'll be running at least 4 or 5 projects in the weak markets and also 2 or 3 projects in the strong markets where we have lost some market share. But overall strategy remains the same. So we are expanding our dual distribution, which means separate dealers for Powertrac and Farmtrac. We are enhancing our reach by improving our channel coverage in white spaces. And we are also launching products wherever we have white spaces or opportunity to improve the current product range.
Just a clarification there. Would Kubota products get sold in our wide and strong network or would Kubota continue to be in a separate channel?
So Raghu, that deliberation is going on. As Bharat said, we are in the process of creating our mid-term business plan. And this mid-term business plan would cover all these aspects like what is going to be our joint brand strategy now going forward, what is going to be our channel strategy, not just in domestic, but even overseas markets, what is going to be our strategy in enhancing our efforts on the implements, attachment side et cetera. right. So please be a little bit more patient on this, hopefully, by end of Q2 or early Q3, maybe we should be ready by all the plans. A lot of detailed plans are being worked out, along with the investment plans also. So we would be able to answer to these questions around that time.
One last query to Bharat sir. Sir, we have huge cash reserves. Any plan on utilization or reward to shareholders in form of dividend, buyback, anything that can be expected? Or would you want to share this during that mid-term plan?
Yes, Raghu. I think we're all waiting for mid-term business plan, but that will also give us a road map of how much investment is needed organically for the business going forward. So depending on whether we'd be setting up a greenfield plant or going for further product portfolio expansion or getting to the new engines, I think all those clarity will come maybe at that time. So I think it will be too early right now for us to really say anything on that front, going by all other financial allotment, which we did.
So the entire money, which has come from Kubota actually has a restricted use, that can't be used for dividend. So what really will be available will be whatever surplus we were carrying prior to this preferential allotment or whatever will get limited in the future, which will be the [indiscernible] which will be available to us for distribution or for buyback or whatever further allocation strategy can be formed in this plant. So I think we'll come back to you. I think once the plan is ready, we also intend to announce it to the investors at large what is the road map for the company. So maybe wait for a few months more.
The next question is from the line of Gunjan Prithyani from Bank of America.
I have 2 follow-ups. Firstly, just the earlier question on the market share. So if I look at the market share we've been losing even in our strong markets in North as well as East. What I'm trying to understand it, is it just the price action that you all have taken is much higher than the competition? Or is there something else you're seeing aggression from other players? I mean, what is it really going on in your stronger markets from a market share perspective?
Yes. See, I mean, partly, I mean, on the surface, it looks like price is the reason because most of the price hikes we have taken, we have taken ahead of competition by a few days or weeks or even months. But what has happened in this process is in some of the markets, stronger markets, our positioning got upset. Our price positioning, product positioning got upset because of this phenomenon. So we don't think there is anything fundamentally wrong. We are not losing any dealers. There's no like big problems with the product. And there is nothing like competition has done, which is unusual in these markets, right? We really think it's a temporary phenomenon. Of course, you know when in such a scenario, our responsibility is not just to ourselves but to also to take care of the entire ecosystem because when we do 5 price hikes in 6 quarters, of course, it creates an impact on dealer profitability. When the inflation is so high, it creates an impact on supplier profitability. So I mean, we had to balance a lot of things. I mean, I'm not commenting like what the competition is, but we know our story best. But we have to balance a lot of things. We had to balance dealer profitability, our own volume, market share aspiration, our own profit, our suppliers, cash flows, et cetera. So it has been a difficult time, right? And like I said, we think things would be stable now going forward. And therefore, we are refocusing on our market share aspiration now.
Ms. Gunjan, is your question answered?
Sorry, I got dropped. I'll just take my second question, which was on the price on the farm segment. If I look at the ASPs quarter-on-quarter, they have come off. Now you did indicate a lot of price increases that have been taken along the way. So what really explains that the price reduction? And in the similar, I don't know maybe if I missed while I got dropped, are there any discount schemes that are being floated in the market just to kind of bring the demand back?
Nothing unusual. Of course, like from season to season, like we vary our discounts a bit, but nothing unusual right now. Of course, if the market comes back and if the inflation subsides, there would be a higher competitive intensity in the market because everybody would now start gunning for market volume and share. But nothing we have witnessed so far of this sort.
And ASP sir?
What was your question on ASP, I couldn't get it. So you say...
ASPs sequentially has come off despite you taking price hike in Jan or in quarter 4, what explains that reduction sequentially?
I'm not sure if ASP has come down. Do you have any specific data that you are referring to?
Yes, I'm referring to the farm segment ASPs, maybe I'll take it up offline, it's fine.
Yes, that would be better, yes.
[Operator Instructions] We have the next question from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Question on the April month strong volumes, which we saw for the industry. Any sense on how on the retail side trend? I mean, wholesale, as you indicated, there has also been inventory push which is happening. Any sense on the retail growth for month of April?
Yes. So there was quite a bit of growth in retail also in April. See, we don't share retail numbers even at the PMA level, et cetera. So it is more of an internal estimate. But yes, there was a solid growth in retail as well. However, the wholesale growth seems to be more than the retail growth in April. But yes, retail also improved quite a lot.
Sure, sure. And what kind of price hike we took in fourth quarter or early in Jan, Feb, March quarter?
I'll just respond to that in a minute. You said Jan quarter, right? My colleague is looking at it, I'll just respond in a minute.
Okay. And a question to with respect to the cost inflation, what was the gross RM cost inflation witnessed in fourth quarter?
In the fourth quarter -- in the third quarter, I think on the RM side will be close to 2%. But as we pass on the cost increases to the suppliers for the lag of the quarter, normally the contracts are [indiscernible] lag of the quarter. So what [indiscernible] got passed on in Q4 was more think Q3 inflation. Q4 has seen steep inflation, which clearly will have impact going forward, which will get passed on next quarter.
So Jinesh, on the price in the fourth quarter, we actually took a price increase on 1st December, which continued, of course, through the fourth quarter, and that was roughly between 2% and 2.5%.
Got it. Got it. And lastly, if you can talk about exports, how are we progressing on leveraging on Kubota's channel through Kubota brand and beyond Kubota's channel or how should we look at exports from FY '23 basis?
We are very, very optimistic on that front because you know that Kubota is a multinational brand, and they have a very, very strong distribution network in many parts of the world. So definitely, we are going to leverage that. Also, as part of our joint partnership, we have already notified that we are going to come up with a new product range, consisting of maybe some existing aggregates and some new, but this will be like basic machinery, not basic from an India standpoint, but basic from a world standpoint, like a basic value innovative machinery, both for machinery and construction that we will create and then export through or sell through Kubota overseas channel. So very optimistic, but yes, a lot of planning is being done right now to take it to another level. Right now, as you know, like a year or 1.5 years ago, we started some volume to export through Kubota channel. But now since this partnership has taken another form and shape, it will go to a very different level now. So all that planning is in works. As soon as we have our MTBP plans ready, then we'll share a lot of details with you.
Sure. And of this 7,200 exports in FY '22, how much would have been through Kubota channel?
Very, very small number, less than 1,000, but in a minute, I'll give you the exact number as we ll.
The next question is from the line of Mitul Shah from Reliance Securities.
I have a question on tractor volumes for FY '23 again. I know that it's difficult to give a number, but directionally, if you can help whether it will grow, it will remain flat or maybe decline on a wholesale basis?
Mitul, generally, the direction or the thought process right now is that it should be on a growth path again after having dropped 6% last year. We are quite optimistic about the first half, especially the first quarter. Now as Bharat said in his opening comments, we would try to hold back our guidance for the whole year until the onset of the monsoon and also watch some other macroeconomic situations that are happening, such as inflation and the war and other things. You know, there has been a lot of uncertainty and volatility in various macro parameters of late. And therefore, we are just hesitant to make a full year prediction right now. So give us a few more months, and we'll come with that prediction. But yes, first half looks very positive.
Basically, I'm asking from a wholesale point of view, as the inventory level in the system roughly around 135,000, 140,000, which is much higher than what we have witnessed in historical average of 85,000, 90,000, so even if you adjust the inventory may remain slightly elevated at close to 100,000 or 110,000, still there needs to be 30,000, 35,000 correction required in wholesale. So what I'm trying to understand, even if industry retail will grow by, say, 5%, 6%, wholesale may not grow. So what is your thought on this inventory side correction as well as on the retail side from that point of view?
Yes, you are right that dealer stock levels are higher than normal right now, and your numbers are pretty okay in the range. Yes, there would be some correction that might happen after the season on the dealer stock. But until then, I don't see any correction happening really. Yes, even right now, every manufacturer is gunning for full production, hoping for a bumper season in May, June and even later festive season. So yes, let us see how it stands out, I mean, but as I said, in the first half, the things are very optimistic and everybody is going to go for the best retail numbers ever.
Sir, second question on the sustainability of April number that what we are hearing from the few farmers as well as from a few dealers that because of the export of food grain going up and there is a kind of fear in the minds of private procurement companies that in future, because export going up, there would be lesser availability of this food grains, so they are purchasing at higher prices, as you pointed out rightly for wheat as against INR 1,900 MSP per quintal, roughly INR 2,400, INR 2,500 is at most of the places. So it is coming out primarily because of the Russia-Ukraine thing, once it gets settled down, the prices -- Mandi prices may come down. So how confident are you about the sustainability of this such a high growth which we have witnessed in month of April, even in that month, roughly, I think, INR 12,000 crores, INR 12,500 crores is the inventory push. Retail growth was roughly 25%, 27% only. So your view on this for coming months.
So Mitul, you are right. I mean, we are not at all expecting a repeat of April phenomenon throughout the year. April growth was 41%. And of course, as you rightly said, retail growth was not that high, but still very, very strong. I mean, you are right. I mean this wheat thing is a temporary phenomenon, which will affect the first 4 or 5 months of tractor industry. And after that, then we have to wait to see how the monsoon is, how the sowing is. But I mean, the Navratris are also in September this year, right? And we are expecting some early sowing as well in some parts of the country, right?
So all in all, it seems like the first 6 months has all the positivity around it because this rural cash flow, actually, some of the customers are even farmers are even holding their crops. Some of the customers are because they are receiving money from the Mandis and not from the government. So they have a staggered cash flow also, right? So every customer is not getting on spot money. I mean, some money they get right now, some money they get a month later, some money, they get even 2 months later. So considering all these factors and a few more, we are optimistic about the first 6 months. Again, to your point that there may be a stock reduction at the dealership level. But again, like since the Navratris are in September, we don't see happening that in first 6 months. In fact, in first 6 months, stocks may go up slightly more than what they are right now, right before the Navratris.
Sir, thank you for the detailed explanation. Sir, lastly, anything would you like to share on the non-agri tractor side?
On the...
Nonagri tractor -- tractor for nonagri purpose, also growth seems to be strong on that side.
Mitul, that is also one area, which is bringing some optimism in our industry because as you know that for last 2 years, whether it is non-agri or even to some extent, government-backed sales, is not really, really healthy right even like some states which have a high, high share of market in non-agri, like Bihar, for example, they are not doing well even now, right, because of the slow momentum in the non-agri side. Now see, what we see now is that this has to change. I mean the COVID possibility is kind of mild, a lot of spend has been committed by the government in the budget, a lot of outlays there on construction. So we really think that this will take a kick off this year. Now exactly when, it's hard to say. But still, my personal belief is after Q2, we should see some improvement in non-agri side also. So that will also help the industry and help exports.
The next question is from the line of Vikram R from MIB Securities.
So my question is on the supply side. 2, 3 quarters back, we had an issue with supplies, which was fixed, especially on the injection pump. And now we see most of the other auto industries are again facing issues with chips and basically the semiconductor shortage. Anything that you would like to comment? And is there a pending order book due to this?
Yes, Vikram. So you are right. I mean we had a terrible situation on the FIPs in the tractor market because of dependency on one company on FIPs for the entire industry. And that was largely related to COVID-related lockdowns, right? So while the rural demand was still going high, but I mean, supply chain got disrupted because of COVID and specifically, this company had a lot of issues. But I mean we are over that problem. Of course, there were some learnings also. So we have improved our inventory carrying capacity for some of the critical items such as these or some other items which were in risk at that point in time. Chips necessarily don't affect our industry too much, at least until the Stage 5 norms come up in 2024.
So right now, chips is not a problem. Yes, in some export-led products, chips is a problem, but not as much as the other players in automotive industry are facing. So like even in the export models, we use like 1 or 2 or 3 chips per tractor kind of a thing, while automotive and cars, et cetera, use a lot many more. So that way, we have no problem on supply chain. But yes, supply chain has been very, very erratic for the last 2, 3 years, and even now. And the main reason is this whole disruption because of unprecedented inflation. So in this era of inflation, I mean, a lot of suppliers face difficulties of cash flow and profits and all that, and we have to really hold their hand in such times. But that also brings a lot of volatility and uncertainty in the supply chain. Even today, we have a huge backlog of export orders, not because of chips, not because of FIPs just because of the uncertainty in the supplies on the supply side.
My second question is on the southern market, now because of our relationship with Kubota, do you foresee or presence in southern markets to improve because Kubota is slightly stronger than us in the southern side of the country?
Yes. That would definitely be a strength that Kubota will add to the company because their products are more suited towards for the wetland. They have like historically for many, many decades, they are very good on the wetland kind of products. So that is a strength that, of course, comes to the company now with that technology that know-how, that knowledge of the market, customer, et cetera. And on the back of that strength, we are going to have a different plan how to grow in South now. Of course, as I said, detailed working is going on for every market, for every state, for every product segment. And we will be ready with that by end of Q2 or Q3.
Sir, just a final question because you mentioned about the rising commodity costs because of general uncertainty around energy availability and cost, any time there's a clamor or push to move towards electric tractors or e-tractors or EVs in case of tractors?
Yes, a huge push, at least in its thoughts. I mean our Chairman Nikhil Nanda is personally like very, very passionate about the alternative technologies and about their impact on the environment, et cetera. So you know that we were the first company to launch a commercially viable tractor, electric tractor in the country and probably in the world as well. We have been ramping up the supply and production of the electric tractors now. We have already reached to a level of about 60 to 70 a month. And very soon, we will try to cross 100 a month as well. We are, by design, kind of taking it slowly because we want to make sure this technology more and more before we start pumping up big numbers in the market. A lot of work has to be done by us, both on the technology side and the cost of ownership side. So that work is on. But yes, there is a huge focus at least in the spots on alternative technologies, including electric tractors.
[Operator Instructions] The next question is from the line of Kapil Singh from Nomura.
I just have a follow-up on the commodity cost related answer that you gave. You mentioned that you've taken a 2% price increase in mid-April and another 4% to 5% cost increase to be passed on. So I just wanted to clarify this 4% to 5% is to maintain the current Q4 margins? Or is it to achieve a certain target margin?
So when I say 4% to 5%, it is on a cumulative basis since this inflation trend started in roughly in Q3 of FY '20. right? So this is like cumulative impact of last 6 or 7 quarters that we are at right now, we are still 4% to 5% short when we see the difference between inflation, what we have given to suppliers and the price increase that we have been able to command from the market. It is on a cumulative basis as often.
Okay. And how much cost inflation should we expect in the current quarter, quarter ending June?
Fingers cost. But as I said, last few weeks have been -- we have seen some stability in the commodity prices. So there is like roughly no impact. Some of the prices have gone down, some have gone up slightly but in a very narrow range. So I mean, in these days, it's hard to say what will happen in inflation. But right now, we are thinking that this quarter, probably the prices would be stable.
Okay. Okay. Great. And secondly, I just wanted to check for what is the update on TREM IV norms for less than 50 HP tractors. When are they going to be application? And what is the cost impact of that?
Yes. So there is no formal notification from the government yet. But yes, the date that has been discussed that has been under discussion with the government is April 1, 2024. The government in its various discussions has also said that they would have a minimum difference of 3 years between more than 50 and less than 50 HP tractors. Now since more than 50 has already been postponed again to October 1 this year. So I mean, the industry does not think that it will really happen in April 2024. It may get extended further as well. But yes, I mean, it will happen sometime in that time frame, 2024, 2025. The impact on the cost would be quite significant. It would be, let us say, roughly more than a INR 1 lakh on the selling price or even more in some higher HP models. So that is going to be kind of challenge for the industry when it comes. But yes, all the companies in the sector are trying to find different ways either to reduce the cost or to add some other value in the tractor to justify that kind of a hike. So we are still like minimum 2 years away, maybe 2.5 years away. So a lot of time we have on the hand to see how we can justify this to the customer.
[Operator Instructions] Our next question is from the line of Chirag Shah from Edelweiss.
Just a follow-up on your question. To this TREM IV, you indicated INR 100,000 price increase in TREM IV, right?
I'm sorry, voice is not very clear. Sir, you indicated the INR 100,000 cost increase in TREM IV. No, no. Stage V, I said.
Stage V. And what about...
Stage V which would be coming in 2024 or 2025.
And for the CHP tractor, which is get implemented, which is likely coming in October, what about that, sir?
See, firstly, like that market is not really big. That market is roughly 8% to 9% of the total market. And the cost increase would be not that much also. Cost increase would be roughly in the range of INR 50,000 to INR 60,000. And the prices of these factors also is much higher than the average price. So the impact would not be that much from the pricing point also... Stage V, the ones on 50, greater than 50 HP are stage IV now and there we don't need to add too much equipment to manage emissions.
Yes. And sir, lastly, on this commodity price deflation, which most of the industry is expecting to happen from H2. So in the past, would it be right to say that a good amount of the commodity deflation is actually passed on to the consumer or to the end user?
Sorry, can you repeat that? I'm really sorry, can you repeat?
The commodity deflation, which is expected from H2 to at least you hope let to go across like that. In the past, we have seen that whenever there is a commodity deflation, it is passed on to the consumer. Is it the right way of looking at the industry dynamics, whether the demand is strong or not to maintain the brand equity you tend to pass on the benefits...
We don't know. It's like if I make -- if I give you any answer, it will be very hypothetical right now. So we will see when it comes. I mean, we are not saying that we are seeing any deflation right now, right? We are just saying that we are increasing -- looking at some stability in the commodity prices. When this changes to a deflation scenario or whether it changes or not, it's very, very hard to say right now. But yes, I mean, if there is a deflation scenario, I think the response of the industry would be a mixed one. Some amount would be passed on. And then some would be adjusted in the potential price increase that we had to do in any case, right? So I think it will be a mixture of the 2.
The next question is from the line of Abhinav Chandak from Ratnabali Capital.
My question is on the merger. So where exactly is the merger pending right now, how long will it take? And post merger, I have a follow-up on that. So Escorts has been losing market share, whereas we see Kubota has been gaining market share, both especially Kubota put together, market share is going to be close to 14%. Post merger, what is your take? Do you see your market share continuing to grow because Kubota has been eating market share in the small size segment whereas our sales mix today in the small size is close to 40-60. Where do you see the sales mix? What are the margins in the small HP tractors? And what exactly is going to happen post the merger of both the entities?
Abhinav, I will answer the first question on the merger, then we'll pass it on to Shenu for your second question. So on the merger front, right now, as you know, so the open offer got concluded only in April last month. So right now, we're in the process of doing some formalities. So we still need to go to the Board for approval. But initially, what we declared in November when we signed the agreement was intend to evaluate the feasibility of merger. But now we are fully closer to that, and we need to work out on the process and there are both valuations, ratios and the time lines, et cetera, and how it will happen. So those things are in process right now. So maybe soon you will hear probably from us on that on the next step. But obviously, this is a process which will be a court process. This will take at least a year's time for this [indiscernible] allow to go through those [indiscernible] approval, then shareholders' approval [indiscernible] but yes, the process internally hasn't started, so let's see, we're trying to do it as early as possible.
Okay. So in the last call, when the merger thing was asked, we were told that the dilution for the existing shareholders is going to be miniscule. Do you still stand by that?
Sorry, what did you say?
The dilution on the merger for the existing shareholders, we were told it's going to be miniscule in the last call. So are you still standing by that?
[indiscernible] small in in size. So they are not really [indiscernible] JV is only kept for a sales company. So it's really not really much value there. And both put together are not very large companies compared to Escorts. So that's why we thought the dilution should not be much. But obviously, it will depend on what value the valuers come out with. But definitely, we don't think it will be very, very significant.
Yes. And coming to your question on the tractor categories and the market share, et cetera. So see, I mean, from our view, at least see, we think Kubota and Escorts brands are very complementary, and I'll tell you why. Because if you look at Kubota current portfolio, they are very strong in the very small HP tractors like the Orchard tractors. And they are very strong or getting more stronger in the larger tractors like 50 HP or more. While most of the Escorts strength lies in the midrange, which is like 35 to 50 HP. So I think from that point of view, it is very, very complementary.
The other thing is even geographically, we are very complementary. As you know, we are more stronger in the north and the center and Kubota is more stronger in the West and the South. In fact, they are not even present in many markets in the North and center. So that's another reason we think we're very complementary. Technology-wise, also very, very unique because Kubota having a background of price, their tractors are much more lighter and much are and better suited for wetland applications. While our tractors are much more heavier duty, they have more weight and they are much better for dryland applications. So I think, I mean, if we are able to successfully kind of leverage the unique strength of Kubota and our brands just in terms of geography, technology or product range, I think we would have a good winning combination. Now we are working on these aspects like how to create this winning combination. You are right, our combined market share is roughly 14%. And we have a stated aspiration of the joint market share. So we are just seeing how to get there in what time frame.
The next question is from the line of Rohit Sharma from Motilal Oswal Securities.
Just a question is that our average sales realization in quarter 4 has increased in the tractor segment, when I see out in the tractor segment quarter 4, Escorts tractor realization has increased by around INR 28,000, whereas the selling price we have taken is only INR 10,000, roughly INR 10,000. So is there a positive mix impact that is coming into the play for the tractor segment?
So the INR 10,000 price increase is actually taken in April. So the last quarter, we'll see the impact of price increase taken in the earlier period too, which is I think what is coming up besides the product mix gap, which are there [Technical Difficulty]
Sorry, ladies and gentlemen, it seems we have lost the line for the management. We request all participants to please stay connected while we reconnect them. Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Over to you, sir.
Sorry, I think Rohit, so I was responding to your question. So obviously, the price increase of INR 10,000 what we talked about is taken actually in April, so not in Q4. So Q4, impactfully more than the price increase was taken in that quarter or the prior quarter. So yes, there is some positive mix impact which is there. And third is also there's the non-tractor revenue. So it's not total revenue coming from just tractors. The nontractor revenue also, which is roughly 10% of the total unit top line which normally happen, like parts oil, et cetera. So which is also part of the total agri segment. So it's not pure tractor per se, which we still have this intake.
Yes. So that is what, sir, I roughly worked out dividing by number of tractors, so 594 to 622 is moving out. So you're saying non-tractor segment is also contributing towards that revenue.
Yes, that also, we're seeing the increase happening. So both on the implement front, the engine sale, which happens, straight part and oil lubricant [indiscernible] there. So we also follow the total top line. It's not for tractor simply.
And you have to also consider that the price hike we took was on 1st December. So that price hike had no effect in Q3, but a full effect in Q4, right? So when you compare Q3 and Q4, then you have to like account for that as well.
The next question is from the line of Eshit Sheth from Anvil Wealth Management.
Sir, I had one question. When we've seen generally a merger of entities or a global parent -- I mean, global promoter taking over an Indian company because of their style of working and manufacturing, the processes and all of that, there sometimes an impact of taking an inventory or write-off in the company. So you think something of this sort is possible as both companies come together?
So it's very difficult to answer that question, Eshit. So I think we think we have done all clear. So all negotiations for this company has been sorted out, and you've been seeing that happening in the last number of years now. So that's why the performance has been on the increase year after year. But yes, like I said we are the process of working on a midterm business plan. There may be decisions taken on what product portfolio to continue. There may be some hard costs which may need to be taken, depending on the synergies, it may exist in the longer term. So short term and midterm, there may be issues, which may come up, but we don't see really -- as of now, we don't have any visibility. So it will be very hypothetical for us to really say and comment on that. But we don't rule out. There are many cases where because of the longer-term synergy, you may have to take certain calls.
Next question is from the line of Saji John from Geojit Financial Services.
Most of my question has been answered. I just want to ask you on the export trend, sir, would you like to -- because on a full year basis, exports was good. So any ballpark number you would like to give for the next 2 years?
Yes. So as we explained that there has been a momentum in the exports industry firstly, right? I mean in exports industry like shot up quite a bit in FY '22, and there are reasons behind that, right? We think those reasons are not just short term. Those reasons are like midterm. And therefore, firstly, there will be a momentum in the export industry that will continue. So that will provide us some tailwinds to our own volumes. The other is, you know we have like a lot of opportunities coming up with Kubota's partnership. So our aspiration is very, very high. We want to be the leading exporter of tractors among all the Indian players. That would take us about 7 to 8 years to reach at that level. But yes, you can imagine that year by year what kind of growth we would need if we were to reach there. So definitely, I mean, the short-term goal is to cross the 10,000 tractor volume immediately like within 1.5 years or so.
Next question is from the line of Abhinav Chandak from Ratnabali Capital.
Yes. So this is a follow-up on my previous question. I even asked for margins on the smaller tractors. So if you could just quantify which segment, lower than 40 HP has higher margin compared to tractors above 40 HP. What exactly is the dynamic there?
Yes, yes. It's a little kind of technical to explain this point. But like in all automotive industries or including tractors, when we design a particular tractor, it is not designed for a particular HP point. It is designed for a range. So for example, if I create a new transmission or a new gearbox, I wouldn't design it for absolute 40 HP. I will design it for a range, let us say, 38 to 43 HP, right? So once I design that, and so on the tractors, which are 38 HP because they come on lower price, I make less money. But on the tractors, 43 HP I command more money, although the cost of the tractor is roughly the same, right? So that is why we have this platform theory in automotive. So there are like 3, let's say, platforms, which are most prevalent in tractor industry. one is 38 to 42. The other is 42 to 47, and the third is like 48 to 55. So of course, the margin goes up as we go up higher in the HP category and the margin again goes up when we go higher within the platform also, right? That is a normal trend in the tractor industry. So you can safely assume that the margins are better as an HP is going up.
Ladies and gentlemen, [indiscernible] plan, that would be our last question for today. I now hand the conference over to the management for their closing comments. Thank you, and over to you.
Thank you, ladies and gentlemen, for being present on this call. For the feedback and/or queries, please feel free to writing to us at investorrelations@escorts.co.in. Thank you very much, and have a good evening.
Thank you very much. Mr. Milak, would you like to add any...
Sure. On behalf of Asian Market Securities, this concludes the conference. Thank you all for joining. You may now disconnect the lines. Thank you.
Thank you very much. Ladies and gentlemen, on behalf of Asian Market Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines. Thank you.