VST Tillers Tractors Ltd
NSE:VSTTILLERS
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VST Tillers Tractors Ltd
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Ladies and gentlemen, good day, and welcome to the Q1 FY '23 Conference Call of V.S.T. Tillers Tractors Limited hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.
Thank you. On behalf of B&K Securities, welcome to V.S.T. Tillers Tractors Limited 1Q FY '23 conference call. From the management team, we have with us today, Mr. V.T. Ravindra, Managing Director; Mr. Antony Cherukara, Chief Executive Officer; and Mr. Pankaj Khemka, Chief Financial Officer. I now hand over the call to the management for opening remarks to be followed by questions-and-answer session. Over to you.
Good evening, everyone. This is Pankaj Khemka, CFO of V.S.T. Tillers Tractors Limited. For the opening remarks, V.S.T. Tillers Tractors Limited has done a revenue of INR 235.98 crore, a growth of 21.89% year-on-year. Overall EBITDA stood at INR 19.3 crore, which is 8.1% against 18.11% year-on-year. Operational EBITDA stood at INR 23.73 crores. Operational EBITDA by percentage is 10.06% compared to 13.11% previous year same quarter. Profit before tax stood at INR 12.68 crore compared to INR 31.3 crore previous year same quarter. PAT stood at INR 10.05 crore, which is compared to INR 24.01 crore previous year same quarter.
With respect to volumes, tillers volume for this quarter 1 was 9161 numbers compared to 6729 numbers previous year same quarter. Tractor volume was 1687 numbers compared to 2048 numbers previous year same quarter.
That was the opening remarks. Now we can shift to questions.
[Operator Instructions] We have a question from the line of Noel Vaz from Asian Markets Securities.
Am I audible?
Yes, please go ahead.
So regarding -- hello, can you hear me?
Your voice was breaking. Please, start again.
Yes. Sorry about that. I just had a query regarding the upcoming TREM regulation. Is there expected to be any impact on the tractor retail sales? Or is [indiscernible] impact is going to be very temporary in nature. So that's my first question.
Which regulation are you talking about?
TREM.
No, no. There is no impact on us for the regulation.
Okay. And so secondly, is that actually, one thing that is there is that we've seen a very strong traction for power tillers. So going forward, are you expecting this momentum to pick up even further? Or is the strong growth will continue at this rate? What is the best bet we are looking at?
Yes, the rate of growth in small farm mechanization will continue because there is a large demand for small machines considering labor is not available. So we expect this growth momentum to continue.
We have our next question from the line of Arjun Khanna from Kotak Mahindra Asset Management.
My first question is with respect to the tiller business. So if you look at the company margins, they have been on the lower side. So I just want to know that the contracted B2B power tiller business, was it a fixed price contract? And could that price be revised? If you could explain that first, sir.
To specifically answer, this is not a fixed price contract. Pricing is revisable. And in fact, in the month of July, we have had a price revision. In the first quarter, we didn't take a price revision for power tiller. And that is why you would see that the operational EBITDA was affected by roughly about 3%. But now we have taken the price correction.
Sure. And what would be the quantum of price increase both for the retail market to the customer and to the B2B? Is the price revision similar?
It's the same. It's similar.
And what would be the quantum, sir, as a percentage?
Roughly about 1.5% to 2%.
Sure, sure. That's helpful. My second question is in terms of the tractor piece, you did mention that the new TREM regulation won't impact us since its 50-horsepower and above. But I would assume that the new Zetor range possibly could have been with new products in that range. Was that a wrong understanding, sir?
We have the first phase of product, which is coming in the 45-horsepower and 49-horsepower categories from Zetor. So it will also be below the 50 HP. The phase 2 products, some of the products will be above 50 HP. At that point in time, we are ready for the Stage 5 regulations.
Perfect. That's helpful. In terms of the Zetor range, so if you look at the last few quarters in terms of tractor sales, the numbers have been slightly underwhelming given that we are looking at adding a lot of dealerships and expanding the scope of business. Just wanted your comments on that, sir.
We will continue to add dealerships in quarter 1 as well. However, our two biggest markets, which is Maharashtra and Gujarat, the retail sales were low. And as said before, we go by the retail sales and hence our billing reflects the retail sales in the market. So since the key predominant markets, the industry has slowed down, you see a slight decline in our tractor volumes. But we expect with the coming of the festival season that should pick up.
Sure. That's heartening to hear. In terms of other units, if you could give us a revenue, say, of the power weeder, the brush cutters, what volumes did we do?
So for weeders we did 891 numbers for quarter 1 FY '23.
I'm sorry, sir, if you could please repeat. The line was a little disturbed.
Weeder is 891 number, weeder. Brush cutter is about 365 numbers.
Sir, we were earlier talking of possibly exponential growth in these lower-priced products over the power tillers. We haven't quite seen that ramp up. So where is it that possibly we need to improve on?
The whole of last year, we did lesser than 2,000 numbers. So this year in the first quarter itself, we are close to about 900 number. And we are quite confident that we'll be growing exponentially this year. We should -- we are looking at upwards of 5,000 number this year in power weeders, which we usually achieve.
Sure. And just to understand, in terms of margins, would margins be similar to our projected or our ambition of 13% to 14% for the company?
Yes, it will be in that range.
Sure. The last is just a bookkeeping question. If you could give us the revenues for tillers and tractors and the other businesses?
The fourth quarter the revenues for the small farm mechanization is INR 135.13 crores and tractors is about INR 67 crores.
We have our next question from the line of Bharat Sheth from Quest Invest.
Sir, can you give some color on, one, first on the subsidy from the state government on the tiller, how it's -- whether new subsidiary has been announced or it's same old rate?
So there is very little influence of the subsidy on the tiller business, as I said before also that customers now buy -- the basis of the decision of purchase is not based on subsidy anymore. However, we expect the subsidies to continue this year as well. We don't see any drastic decline, neither we see any drastic growth in terms of subsidies. So more or less, it will be the same level as last year.
Okay. And sir, can you give some color -- more color on the particularly tiller side on the competitive scenario and as well as our sector where some of the large players have started launching a small tractors. So how it's really overall playing out?
Yes. So let me start with a tiller first. Tiller is all about creating the industry. So you see in the quarter 1, the tiller business has grown by almost 40%. So that, I think -- I don't know whether 40% will continue or not. But definitely, like I said before, 15% to 20% is expected growth in the power tiller business this year as well. So that will continue, that growth momentum will continue in the tiller business, and it will be like I said earlier, it will be guided based on the scarcity labor that is there in the small farm operations. So that will drive demand for small farm mechanization.
Coming to tractors, predominantly two states are the key for compact tractor industry, which is Maharashtra and Gujarat. This year, the Maharashtra and Gujarat industry has slowed down in terms of the compact 4-wheel drive tractors. And this affected our retail sales. However, with the monsoon playing out reasonably well and coming of the festival season, we expect the demand to pick up in these two markets and the retail should be back to normal. So that should help our compact tractor sales.
Apart from this, we are also getting into the higher horsepower segment in the latter part of this year with the launch of the VST Zetor range of tractors. And all the product launches we are coming on with 2 to 3 new compact tractors in the next 2 quarters. In Q3 and Q4, we'll be launching about three compact products, which is in line with the best offering that is available in the market, and we expect to recapture the volumes in these markets.
Can you give you also more color on competitive landscape?
The competition continues to grow in this segment. The number of products that is what like I told you, some of the new players, especially MNC players who have come have launched three products, for which we didn't have an answer until now. Now we have that answer, and we will be launching those products in the coming 2 quarters.
So the competitive scenario in the tractor industry will continue to be intensive. However, we are well-equipped to fight that intensity with competition, especially in the compact tractor space with our new launches that is expected in the next 2 quarters.
Okay. And sir, if you can give more on tiller also. Like Kirloskar also has launched tiller a couple of years back. So how this competitive landscape in tiller is playing out?
We are driving small farm mechanisms in the industry. Like I said, the growth that has been drop in the small farm mechanization industries, primarily driven by VST. So we've seen a 40% growth in the tiller volume this year in Q1. And that drive will continue. We have to launch several products in this segment, which we are continuing to do so, which will serve various crops and various geographies of the country. We are also looking at innovation in this area, which we will be talking to you in the next quarter.
Okay. And sir, it's Pan-India, if you can give like, say, penetration of the tiller, and which states are having high, vis-à-vis, which states are still low? And are we looking for geographical expansion within India?
Absolutely. So South, East and West are more or less reasonably covered by the tiller industry. However, the power weeder industry is across the country. So we are expanding the network across the country.
Okay. So on tiller side, do you think, I mean, say, Northwest and Northeast still not penetrated full?
North is not penetrated still. North is the area where we have not been able to penetrate and we are working on it.
We have a next question from the line of Nikhil Rungta from Nippon India Mutual Funds.
Sir, most of my questions have been answered, so just a couple of them more. Sir, now we are already, say, 12 to 15 months in the system post giving our guidance of INR 3,000 crores of revenue by FY '25. So now as on date, will that guidance stand at INR 3,000-odd crores? Or it would be revised?
So definitely the INR 3,000-crore milestone stands. However, I should also say that the day after we declared the vision of 2025, INR 3,000 crores may not had a single normal year. We got hit by COVID 2 years, supply disruptions after that. So there could be a delay of, at least a year or so. We are working on it. We are also -- I mean, buoyed by the fact that the primary intention of getting VST to a growth part has been achieved by the statement of the vision.
I'm very happy to say the last 3 years, the CAGR has been more than 25%, which the company has never done historically. So the primary objective of taking in a very aggressive vision has been achieved. But at the same time, it is important that we achieve that milestone, so we are working on it.
Okay. Okay. And sir, just quickly on the MTM losses. So what would be the book of investment as on date? And is this the equity part or the debt part we are investing into?
The investments are a mix of both equity and debt.
Okay. And what will be the size of investments?
It will be around INR 450 crores.
Okay, okay.
You're talking about our [indiscernible], right?
Right wherein we have booked MTM losses of around INR 67 million in this quarter compared to around INR 73 million last year.
Okay. Yes. Yes.
So you mentioned the book size is around INR 50-odd crores?
INR 450 crores I said.
INR 450 crores?
INR 450 crores.
Okay, okay. And sir, last thing, on the land parcel, which we have, what have we decided there now?
There is no decision yet. As I said earlier, we will be unleashing its value. Definitely, we will let you know.
We have a next question from the line of Sonal Gupta from L&T Mutual Funds.
Just on the -- I mean, I'm sorry, the line was probably not very clear. So you said small farm revenues of INR 175 crores this quarter?
I will tell you exactly, INR 135.13 crores.
INR 135 crores. And this would -- and the parts revenue would be, sir?
Parts, INR 26 crores.
Parts would be INR 26 crores. And the tractor was INR 64 crores?
INR 66 crores -- INR 67 crores.
INR 67 crores. Okay. And sir, again, coming back to the strategy on tractors, given that while we have a small base and you are expecting new launches to come in but I mean, like is this the -- I mean, you're coming post the festive season, is that the right time to be coming into the market? And then what is -- I understand that you're coming up with new products and the Zetor range. But still just trying to understand like given the intense competition in the space, what we are hearing is that there has been discounting pressure also in the tractor space. How are we -- how are you looking to compete in the space? And how will you sort of differentiate yourself?
Ladies and gentlemen, please stay on the line, I will reconnect the management team.
Hello?
Please go ahead.
Yes, yes. So can I go ahead [indiscernible].
Sir, your voice is breaking. Sir, I'll disconnect and reconnect. All right. Please disconnect this line.
We have reconnected the management team. Sir, please go ahead.
Yes. So can I go ahead with the answer about the question on the tractor business?
Yes, sir.
Yes, okay. So what I was saying is we don't go by building inventory or discounting. We have been following a strategy of -- one is cash and carry, and second is driven by retail sales. The focus is on the dealer profitability, increasing more rotations for them.
And the second aspect is to give unique value proposals in terms of the functionality of the tractor wherein we are focused, which is a 4-wheel drive compact space. So that is where we have been focused on. And I'm very happy to say that in that particular segment, per se, we have not lost market share.
Now certain new offerings have come from competition for which we have really higher interest going into the festival season for the compact tractor segment. In the higher horsepower series, the launch will be in this quarter 4 of this financial year. That is as per plan. And I mean the progress is as per plan.
Got it, sir. So is this going to again be launched in, I mean, these key markets that you have? Or are you like -- I mean...
The higher horsepower will be launched across India, especially in the northern market where we are not operating.
Got it. Okay. And in terms of, sir, just coming back to the question on the parts business. Like that was one of the key pillars that we're looking at and that, I think given that the synergies with your tiller business, it seems to work quite well. So just -- could you sort of, I mean, guide us on what sort of next steps because it seems the parts revenues have not really grown year-on-year. So just trying to understand like what are you planning to do here and what will be the next steps?
Let me clarify, a couple of years back, 2 years back our revenues in the parts business used to be roughly about INR 50 crores -- in the region of INR 50 crores. Last financial year, we closed -- that is FY '22, we had revenue from the parts business of about INR 91.37 crores. So definitely, there has been a very good progress.
Now like I said before, this is one of the key pillars of what business we are building in terms of rural distribution. So, we have digitized the entire network. And I am very happy to say that we have also bought into the business of electric pumps. We launched electric pumps in two markets only, which is in UP and Bihar. And this is a completely new digitized way of doing business.
We are in the feet on the street also, using a mobile phone, which is connected to the distributor, which is connected to the warehouse. So this entire digital distribution network is being built. And in the future, we expect this business to grow multiple times.
Got it. Got it. So this is not -- so then electric pumps is a sort of a slightly different business, right? So then it is not linked to...
It is a distribution business.
Correct. So it's not linked to the...
Serving the same segment of customers, which is farmers.
Sure. But then would you be using the same channel as your power weeders, et cetera?
No, no, no. This is a totally different distribution network, which is a digital network that we are building.
Got it. But then we -- I mean, I thought that this ride on the synergies that we have in terms of tillers and...
There will be some synergies definitely. Some distributable products like the small power weeders, 2 HP, 3 HP, might also get sold into distribution. We have not started as yet but I see that happening in the near future.
Got it. And sorry, sir, so just to clarify then the strategy for like these other components like power weeders and brush cutters and other components, that will still be through the tiller channel, right?
Tiller channel and some of the products will also be taken up by the distribution channel, whichever is -- for example, like classic product that can be distributed in the brush cutter because the brush cutter is available in almost every counter. So wherever it is a counter or over-the-counter kind of sales, those products will be taken into the distribution network also. That will also be available in the tiller network.
Got it. Got it.
But wherever the intensity of service is there, installation is there, parts availability, those kind of products, which is a 3-year network that is sales and services parts, that will continue to be specifically the dealer channel as well as tractor channel.
Got it. Got it. And just lastly, with the sort of price increases that you've taken and given the fact that the steel prices are now showing a moderation, do we see like your gross margins getting back to the previous levels, like your EBITDA margins improving back to the 12%, 13% range?
Yes, we will, do that. Like I said to the previous gentleman, we will be able to meet our margin guidelines of 12% to 14%.
We have our next question from the line of Arjun Khanna from Kotak Mahindra Asset Management.
Sir, I just wanted to understand how has been the performance of the Branson tractors, which we had launched. From the market, we are understanding it hasn't quite taken off. So what are the key learnings we have got for that before launching Zetor, if you could help us, sir?
No, it is -- these are two very different segments. The Branson is a compact higher horsepower tractor and it is very different tractor compared to VST Zetor, which is a high horsepower utility tractor. So as far as Branson is concerned, we have seeded tractors across India in various markets. And there is good feedback on the performance of the product. And we expect to launch a series of products in the coming future based on the Branson range.
Would this be indigenized, sir? Or...
It is indigenized.
Sure. So we could see a significant price reduction?
Yes, yes, compared to the imported product, there will be a significant price correction.
Sure. And for the Zetor, while launching it in terms of pricing with competitors, would it be at a significant discount from the leader? Or what is the key plan with which we would be launching the product?
So this will be a premium product, like I have said before, the VST Zetor be a premium range, which will compete with multinational products or the high-end products from the large manufacturers. So it will be a premium positioning product.
Sure. My final question is in terms of volumes. So for our plant, given that we aren't quite seeing the scale up. So generally, if one looks at, say, EBITDA margin, so what do you believe for us to be in that band of 12% to 14%, should probably be the operating volumes for the tractor business?
See, the operating volume in the current volume, we will be at 12% to 14%.
Even doing say 500 to 600 a quarter?
Not 500, 600 a quarter, it is anywhere between 1,600 to 2,000 tractors a quarter.
Right. Around 600 a month, perfect, sir. So even if we do around 8,000 units, you believe we could be in that range?
Yes, margins are protected. Like I said before, there are various projects that we have undertaken. The strength of the company is in frugal engineering, frugal manufacturing. And the philosophy, which has been applied in the small farm mechanization, especially the power tiller where the company has always been constrained in terms of pricing. That kind of -- that frugal mindset is applied to the tractor business as well. So that is the strength of the company.
Sure. And like we have taken a price hike of 2% in the tiller piece, has there been any price hike taken in the tractor piece also?
Yes, we have taken a price rise at roughly about 2% [indiscernible] on the right average. Percentage-wise, that is 1.5% we have taken in the tractor.
Sure. And if raw materials do possibly come down, do you think that would be passed on with the lag?
Yes. So there is a cooling of effect as we can see. But it's pretty volatile. For example, in Q2, so far, there has been a cooldown but in Q3, the commodity pressures will be a drag. So -- however, like I said, we are focused on ensuring that our guidance on margins is maintained.
Sure. So just carrying forward form here, maybe you could help us. So on the existing business, if you look at the tiller, volumes have been strong. Tractors, if it does ramp up, say, maybe not this year, next year, maybe move closer to 10,000 to 12,000 units as we had envisaged for growth. Should margins possibly be at the higher end of that range then?
We will be investing more of those margins into our growth, which we are continuing to do. We are projecting already for the transition of technology to electric. We are getting ready to launch more new products. We are getting ready with innovating products. So you will hear a lot from VST in the coming quarters. So all that means we would be -- I mean, like I said before, the 12% to 14% margin is what we are maintaining. And the rest of it, we will be using it for growth.
Sure. So just to understand that, sir. So the fair way of looking at it would be our existing products that we have margins of maybe 16%, 17% EBITDA and we would be deploying 200%, 300% for the incremental growth projects such as prototyping, R&D, et cetera. Is that the right understanding?
Absolutely.
Sure. And how much would the growth CapEx so as to speak, who have been done in FY '22?
FY '22 [indiscernible] -- INR 50 crores roughly.
Sure. So of the top line of what we see in FY '22 of almost INR 854 crores, we are saying we spent roughly INR 50 crores. And would all of that be written off from the P&L? Or would that be largely capitalized?
Largely capitalized. Most of the [indiscernible] in 31st of March 2022.
No. So that's on the CapEx front. So a lot of the R&D prototyping, won't that go through the P&L also?
You're asking the split between the revenue spend and the CapEx. So what we told you is the CapEx. There will be some amount of revenue spend also in terms of product development, especially there are large parts of product development, which cannot be capitalized. For example, product validation is a large amount of expense, which is not capitalized. I don't have the exact numbers now, but there is a significant spend on the revenue side also.
Would even a ballpark would be fine, not looking for an exact sir? Would we have some sense? We could have shown the...
Can I come back to you, on that?
Sure. No issues, sir.
We have a next question from the line of Devanshu Sampat from Yes Securities.
Can you hear me?
Yes.
A few questions. Sir, firstly, can you elaborate a bit more on your comment on us focusing on dealer profitability right? So you must be working with an ROI number, or you must have done a study internal. So how does that work for VST tractor dealers? And how -- as for your internal study, how does this compare to peers?
Yes. So what we are focused on is rotating the inventory, rotating the assets for the business, which means the EOP supply chain we have built over the last 2 years, it is a fuel to supply to the dealer only if the consumption happens at the dealer end. So for example, a dealer has a 30-day or 45-day inventory, which is maintained in its dealership. And then that -- let me say that is 10 tractors. Now if two tractors are retail only -- then two tractors get built in. So in the event, he doesn't have to worry about working capital management. He doesn't have to worry about the cost of capital. He doesn't have to worry about carrying these inventory. That is point number one.
Point number two, what we are assuring the dealers is we can join VST and get an assured ROI of 30% to 40%.
Okay. Okay.
So I believe it's going to be the key differentiator going forward with all the dealers who are joining us are very happy with this way of working. They're focused on building and getting more customers rather than worrying about their cost of capital.
Sure, sure. And there was very conscious strategy of separating the tiller, which eventually became the implements distribution and the tractor business, right? But then, at some level, these do also do go in hand. So are we rethinking that? Or this is something that is still working for us?
No, there is no rethinking. The tractor channel remains separate, the tiller channel remains separate, the distribution network remain separate. All these three network remain separate. Only thing is because some of the small farm mechanization products, which are distributable. In the sense, these are over-the-counter kind of products. That will be sold in the distribution network also. As of now, we have not started it. But going forward, it will likely be revenue add.
So what comes under distribution channel right now? You said pumps and?
It is spare parts, oil and pumps at the moment.
Okay. Okay. So can you give the dealer count as of today? And what is the target we have for the year-end for all these three, if you can cover.
For tractors, dealer count at the end of quarter 1 was 357. The tiller dealer count is 577. These are the dealer counts.
Okay, okay. And do we have a target that we have set? And are we on track to seeing that?
Yes, we should be able to further accelerate with the launch of the higher horsepower tractor, especially in the [indiscernible] north. We have not really aggressively spent it in the north, which we will be doing in the latter half of this year.
Okay. Coming, I wanted to just catch up on the focus that we have on the penetration of financing, right, financial services especially across. So we did this with certain products, but has it had a rub-off effect on the other categories as well? Can you give us a sense on how that has shaped up over time?
Yes. Financing is a key aspect, especially the retail financing of the product to the end consumer. So we have created several tie-ups. Some of the recent ones are with IndusInd bank, with Axis bank, with HDFC, with Kotak. And many of the banks, we have now tie-ups for selling our tractors and also the small farm machines. So it can mean a key aspect, and we are making good progress in that area.
So in the previous quarter, if I'm not mistaken, the number was around 5%, right? So can you share that number for this quarter?
Which one? 5%? I didn't get you.
I might be mistaken, but there was -- you had given a certain number of -- you've given a figure in terms of how many of our products are getting financed. Maybe one of the tiller products you were talking about that we're seeing increase in financing availability. So can you just share that number as of this quarter?
The percentage of finance of tillers is still about 4% to 5% only.
4%, 5%.
[indiscernible] If we move to 2%, 3%. Now it has clearly moved to 4%, 5%.
Okay, okay. Got it. Sir, just a final question on capital allocation and thoughts on the returning cash to shareholders, right? So you said we have about INR 450 crores of cash. We're generating roughly about INR 100 crores of free cash annually, and our cash flow position is definitely very stronger than before. And from your comments earlier, you mentioned that this is how it is likely to be going ahead. So any thoughts on if the promoter would like to comment on the returning cash to shareholders or on the overall valuation of the company and capital allocation?
I think the focus of the company as well as the promoter is to grow the company. So in terms of investment, we are looking at opportunities of growth, both organic as well as inorganic. So we would like to deploy this cash for growth. And definitely, in the near future, you will hear more about it.
So you're talking about a possible acquisition sometime this year?
Look, we are exploring those opportunities.
There are no more questions. I would now like to hand over the call to the management team for closing comments. Over to you, sir.
Yes. Thank you, everyone, for coming over for the call today. We look forward to interacting with you after the close of Q2. Until then, thank you, and goodbye.
On behalf of Batlivala & Karani Securities India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.