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Ladies and gentlemen, good day, and welcome to the Escorts Limited Q1 FY '19 Earnings Conference Call hosted by SBICAP Securities Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Chirag Jain from SBICAP Securities Limited. Thank you. And over to you, sir.
Thank you, Liza. Good evening, everyone. On behalf of SBICAP Securities Limited, I welcome you all for Escorts Limited Q1 FY '19 Results Conference Call. I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us Mr. Bharat Madan, Group Chief Financial Officer; Mr. Shenu Agarwal, Chief Executive, Escorts Agri Machinery; Mr. Ajay Mandahr, Chief Executive, Escorts Construction Equipment; Mr. Dipankar Ghosh, Chief Executive, Railway Equipment Division, and Investor Relation team at Escorts Limited.We would start the call with the 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 in today's discussion will be forward-looking in nature.At this point, I will request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Chirag. Ladies and gentlemen, a very good evening to you all. Thank you all for joining us on the earning call for first quarter ended 30th June 2018.A snapshot of company's quarterly performance is as follows: turnover at INR 1,511.3 crores against INR 1,163.2 crores last year, is up by 29.9%, led by volume growth across all segments. Tractor volume is up by 39.5% to 24,494 tractors, as against 17,561 tractors last year same quarter. Construction equipment volumes are up by 51.8% to 1,345 machines against 886 machines last year same quarter.EBITDA at INR 185.5 crores against INR 97.5 crores last year, is up by 90.2%. EBITDA margin now stands at 12.3%. Finance costs went down by INR 5.1 crores to INR 2.9 crore as compared to quarter ended June '17. The total debt outstanding as of June '18 is INR 40 crores, is down probably INR 50 crores in March '18.PBT stands at INR 180.8 crores, is up by 95.9%, against INR 92.3 crores last year same quarter. The company reported a PAT of INR 120.7 crores versus INR 62.6 crores last year, up by 92.7%. PAT margin now stands at 8% versus 5.4% last year. EPS reported during the quarter at INR 10.10 against INR 5.25 last year same quarter.Moving on to segmental business performance. Starting with the Agri Machinery business, domestic tractor industry volumes went up by 26.6% to 2.24 lakh tractors as compared to 1.77 lakh tractors in previous fiscal same quarter. Our domestic volume went up by 39.2% at 23,939 tractors as against 17,199 tractors in previous fiscal same quarter. Industry in our strong markets of North and Central India grew by 19% (sic) [ 18% ], whereas industry grew by 31% (sic) [ 32% ] in the opportunity markets of South and West.In line with our Vision 2022, we have gained market share across all major states. Our main market share in strong market is up by 200 basis points. And in opportunity market, it went up by 90 basis points, resulting in overall domestic market share at 10.7% as against 9.7% in previous fiscal same quarter.Export industry went up by 27% to 25,000 tractors as compared to 20,000 tractors in previous fiscal same quarter. Our export volumes went up by 53.3% to 555 tractors as against 362 tractors in previous fiscal same quarter, driven by new product introductions and market penetrations.EBIT margin correspondingly is up by 335 basis points, but sequentially, it's down by 99 basis points and now stands at 14.2% for quarter ended June '18. Adverse product mix and inflationary trend in the commodity prices impacted the margin in current quarter sequentially. The midyear price went up by 2.5% in this quarter, while company was able to pass on roughly 50% of the same to the market through price increase taken in mid-April '18 and balanced another -- through another price increase effective from mid of July of 2018. Going forward, we expect domestic industry volumes likely to go up within 12% to 15% in current fiscal.Coming to the construction equipment business. Construction equipment industry grew by 30% in quarter 1 FY '19 with respect to quarter 1 FY '18. All major segments have seen a positive moment. Our served industry, Backhoe Loaders, Pick ‘n’ Carry cranes and compactors, went up by 49% in Q1 FY '19. Pick ‘n’ Carry cranes have been the biggest gainer with growth of 60% followed by Backhoe Loader that grew by 50%, and compactors which grew by 20% in Q1 FY '19. Our total volumes manufactured and traded products in the quarter ended June 30 '18, correspondingly is up by 51.8% to 1,345 units against 886 units in quarter ended June '17. EBIT margin correspondingly is up by 451 basis points. It now stands at 2.4% for quarter ended June 30 '18. We expect that our served construction equipment will still continue to grow at 16% to 18% CAGR.Coming to the railway division, in the quarter ended June 2018, revenue is correspondingly up by 37.5% (sic) [ 35% ] at INR 88.1 crore as against INR 65.2 crore in quarter ended June '17 and sequentially up by 18% (sic) [ 15.9% ] against INR 76.02 crores in quarter ended March '18. This quarter, we have better product mix, higher spare part sales and lower sales of new products that resulted in the EBIT margin correspondingly moving up by 1,543 basis points and sequentially up by 937 basis points (sic) [ 947 basis points ] and now stands at 25.3% for quarter ended June 2018. The current order book as of 30th June 2018 is more than INR 300 crores and will be executed in the next 11 to 12 months. Going forward, we expect railway equipment segment to continue to grow at 18% to 20% CAGR.Now I request the moderator to open the floor for Q&A session.
[Operator Instructions] The first question is from the line of Hitesh Goel from Kotak Securities.
Sir, my first question is on the tractor industry volume per se for this year. You have guided that it will grow at 9% to 11% this year according to your estimate, but given that, the first quarter has been very good and the monsoon had been good, do you like -- would you like to revise that guidance? And secondly, you have a capacity of 98,000 tractors on stewardship basis. So what is the kind of capacity expansion you are looking at in the next 2 years? And also, the CapEx, if you can give us CapEx guidance for the business?
Okay. This is Shenu. So I'll respond to the first question on the tractor industry. So earlier, we had given a guidance of 9% to 11%, and now we are revising it to 12% to 15%, somewhere in that range. And this is majorly because of the better monsoon than expected or than forecasted. And therefore, I mean, we have seen that impact in Q1 also where industry has grown by about 25%, 26%. So we think overall, probably for the year, it will grow by 12% to 15% now.
And sir, on the capacity, if you can add some sense into that?
So capacity, like we said, we are in the process of expanding the capacity on machining side this year, for which we have already marked this effect CapEx of roughly INR 100 crores, which will, by the end of this year, will take the capacity to about 150,000 units on machining side. But obviously, if you look at this quarter, we have done close to -- I think we're almost, I think, 115,000, 116,000 sort of capacity rate today, I think, the investment, it's start happening now. So obviously, that will also depend on a lot of the product mix that we sell going forward. So we think -- I think going up to 100,000, 110,000 should not be an issue really during this year till the time this new capacity is set up.
Okay. Yes. And sir, my second question will be on the railway business. We had seen that on the railway business, the margin expanded quite a bit. You have alluded to the product mix and the spare parts being higher in this quarter. But what is the kind of steady trend we should look at? And was there any one-off income booked in this quarter, particularly the previous quarter, which led to higher volumes?
No. I mean -- this is Dipankar. This is -- basically, we had a very favorable product mix and also a very high volume of spares. So this shows a spike in the EBITDA, but we are confident we should be able to maintain in the range of 17% to 18% sort of EBITDA level on the average on full year.
EBIT side, right? EBIT margin?
Yes, EBIT margin.
The next question is from the line of Raghunandhan from Emkay Global.
Can you throw some light on new products and tractors? Number one was the paddy specialist tractor? How is the sale in Q1 and plans ahead in terms of launch of more variants or launch in more states? Also, please share your expectation on volume for the full year for this product? Secondly, on Atom tractors, what was the volume in Q1 and the expectation for the full year?
Okay. This is Shenu again. So let me first respond to the Atom. So Atom, we are selling roughly about 60 to 70 tractors a month, which is, of course, not the reflection of the demand. We think we can easily do about like minimum of 3,000 a year on an annualized basis. And therefore, we are trying to, right now, ramping up the production for Atom, and I think this should happen somewhere around September, October. So from September, October onwards, we should be able to do about 250 to 300 tractors a month, if not more. And similarly, on the price, paddy special, since it is altogether new product like Atom, so we are a little bit cautious in terms of ramping up too quickly. So right now, again, on this price, paddy special, we are doing about 50 to 70 tractors a month. And from, like I said, next season, which will be October, November, we'll be ramping up production levels of minimum 250 to 300 a month. Of course, the demand is more than that, and -- but since the product is new, we are just making sure that everything is in place before we really ramp up the volumes in the market.
EBIT margin in the tractor segment was at 14.2%, which was lower than what was achieved in the last 3 quarters. How do you see the margin panning ahead? Has commodity inflation impact been fully passed on after the July price hike? Is more hit on margin expected in the coming quarter?
There are 2 reasons. One obviously was the inflation on the commodity prices. In the first quarter, we had like obviously sort of the balance whatever the price increase was there in the commodity side, we have been able to pass it in second quarter -- in Q2, in July. So as we speak today, so obviously, as of now, the inflation so far has already passed on. So we expect that effect will be sort of close to 0.5% because of inflation on the margin will not be there, unless [ envision the retail is ] totally different side and again goes up, where as of now we don't think that should be the case. And second is also with regard to some one-off expense on the manpower cost side, which you look at so there's some increase which has happened in natural demand compared to sequential quarter of March. So there are some pension liabilities, which we have to provide this time. There is some old defined benefit scheme, which is continuing, which was still not provided for earlier. So based on that the material provisioning has been done this time. So there is a one-off -- in rate of close to INR 9 crores to INR 10 crores on manpower costs this time, which has really impacted the margin for our tractor business slightly. So for these 2 reasons, we expect the margin should be in this range if the volumes continued to be in these level, which we've seen in this quarter.
And this is a one-off, correct, sir, so it should not come in the next quarter?
Yes, on the manpower side, it will be a one-off thing, but now, we also have an appraisal cycle, which follows July to June period. So from 1st of July, there'll be some increases, which will happen on regard of manpower cost increases, the increment, which is -- given now to the management team. So that obviously will have some impact, but obviously, we're trying to see how we correctly rationalize Atom. But we still think that it'd be somewhere in the range of about INR 120 crores of absolute costs on per quarter basis going forward.
And sir, like -- to Shenu sir, couple of questions. Can you share the mix of PowerTrac versus Farmtrac ratio for the quarter? And how do you see this mix being for the full year? Also, can you share the details of financing ratio from Escorts' credit and your expectations on this ratio for the full year?
Okay. On the mix, I think we were very close to like 60 and 40. I think, to be precise -- yes, that is actually precise, 60-40, and that is what we had or planned also. So we are very much on target. Of course, our intention is to increase Farmtrac mix more, because Farmtrac, we make more margin than in PowerTrac. So we are putting up some strategy around it which we'll be rolling out in the next couple of years. But in the short term, it will -- should stay close to 60 to -- 60 and 40.
Understood, sir. And how is the increase or penetration happening for Escorts' credit?
Escorts' credit is going very well for us. We have almost kind of touched to 1,000 units every month now. I think last year, this was close to about 400 units a month. So we are ramping up not just in volumes, but we are ramping up also in terms of geographies. So until last year, we were only in 3 or 4 markets, but right now, we are in about 6 or 7 markets. And then by December, we will open maybe another 3 or 4 markets. So by end of this fiscal, Escorts' credit geographically will cover about 70% to 80% of our dealerships, and therefore, we'll see more volume coming in.
The next question is from the line of Nitesh Sharma from PhillipCapital.
Sir, wanted to know the outlook on the tractor export business. We were looking at a strong traction from exports in FY '19. So are we on track on achieving a strong volume growth in this segment?
Yes, we are very much on track. As we said, we wanted to -- really, our plan is to increase our export volume by about 40% to 50% this year. And right now, there is like nothing that is of concern to us in meeting that number.
Okay. And sir, on this railway business, can you please share the spare sales, if possible, for the quarter, because I think that has led to a huge margin surprise to us?
Yes. The spares, actually, particularly the EP breaks of the electro-pneumatic brakes, we had a lot of spares orders, and we could deliver them with a pretty healthy profit margin. So that's one of them. And the second part was that some of our other conventional products, we could get some better prices in the tendering, which meant that the price margin overall had increased. And thirdly, the planned import, the new product had some import content. The planned new products did not happen in the Q1. So that way -- that also helped in the margin to shoot up to around 24%, 25%.
Okay. And could you quantify the spare sales for the quarter?
Quantify the spare sale, I don't have the numbers. We'll get back to you.
Sure. And sir, construction equipment business has seen surprisingly strong growth during the lean monsoon period. So don't you think for the full year as well, it could surprise and we could overachieve our guidance?
Thank you. This is Ajay with you. Our guidance of 16% to 18% is basically based on the last quarter. Your last quarter is not as strong as it used to be because of the elections that are coming forward and then there will be some other issues that we come up on the investment side, but it remains at 16% to 18%, more towards 18% plus side.
Okay. Got it, sir. And any new launches in the construction equipment segment this year, new segments?
I think you'll get the announcement within this year, within the H2. You'll know about it.
The next question is from the line of Mitul Shah from Reliance Securities.
Sir, first question is on the tractor side. You highlighted in the presentation 12% to 15% growth for the full year and considering the first quarter's growth, it indicates that in the remaining quarter, it would be single-digit growth. So just can you throw some light on this? And want to understand the regional growth parameters for first quarter and going forward.
Yes, Mitul. See last year also, we had a kind of a lopsided growth in the second half of the year. So we think that quarter 1 had gone well and that's why we have raised our projections of the industry from, say, 9% to 11%, to 12% to 15%. Whereas, there could be some upside because we all know that the market is very positive right now and the monsoon has been good and all the macroeconomic factors are in favor. But right now, we have -- we think that because of high growth last year in H2, we think that we may not see that much growth in H2 that we will see in H1 probably, right? And also, there is a seasonal -- there is a bit of like shift also. So right now, we will maintain 12% to 15%, with possibility of some upside later.
Considering high base for the second half and this is the third year of high growth period which generally happens in the past cycle, is there any possibility that second half may witness decline?
As we said in the last call, we don't think the decline would happen in this fiscal year. We don't think there would be any degrowth that may happen at least until May or June of next year. But yes, I mean, it's difficult to comment exactly when the cycle would change, but at least until April, May next year, we don't think that the tractor industry will face any new challenges. Although, the growth rate, as we said, may just trickle down a little bit, so the overall year would be about 12% to 15%, while the first quarter is 24%, 25%.
Okay. Sir, second question is on the construction equipment side. Volumes are down by around 12%, 13%. Our margins directly went down from 5% to 2%. So [ in this ] reasonably high is purely because of the volume or any other dynamic there? And on the same line, we have guided 16% to 18% growth, that is indirectly indicating single-digit growth for the remaining period. So here, then it would be a loss. Is it right analysis?
I don't think so because this is the weaker cycle in the sense that you get more of low-value products on the equities in the first quarter. So first quarter, generally the earning is on the growth side. If you see historically also, it's always on the growth side. As we go along, the product mix becomes better. We will get into more of high-value products. And I think this year should be a surprise.
Sir, last question on the same line. Then what is our targeted margin estimate for the segment for full year?
I think...
We're expecting anywhere in the range of 4% to 5% EBIT margin for construction equipment business this year.
The next question is from the line of Vaibhav Jain from Crédit Suisse.
This is Jatin. A couple of questions on the tractor side first. One is, we have been reading a lot in terms of government support on tractor volumes. There are various schemes that are going on. So broadly, rough -- just give a rough number, what would be your sense of volumes that are coming through these schemes or government support right now? And do you see that sustain -- how long do you see that sustaining?
Yes, Jatin, it's very hard to do the -- point out a exact number. I mean -- but I mean, the only thing that works direct in terms of volumes is the amount of subsidy that government gives, so the number of tractors that it provides on subsidy. So we definitely see that there is uptrend this year as compared to last in terms of number of tractors. So for example, like Assam introduced subsidy scheme by the Government of Assam, that is coming up, that has actually started implementation now, which was not there last year. Also, subsidy -- number of tractors in subsidy promised by the respective state governments in Andhra Pradesh, Telangana, Gujarat, even Haryana and Himachal Pradesh and some others have been much -- are much higher than last year, right? So it's difficult to give a number, but we think about -- maybe about 8% to 10% market overall this year might be supported directly with government subsidy. But I can say that the sentiments are very high because of [ broad ] initiatives that the government has taken in this sector. And for capital goods like ours, sentiments will play an equally important role than as direct subsidies, et cetera, right? So the sentiments are very positive right now.
Sure. On the 2 -- when I look at 2Q, would it be fair to say that 2Q volumes might be impacted a little bit by shifting of festive season to a later month, and hence, we should expect a stronger 3Q and a slightly weaker 2Q?
Yes, yes, that is the case actually. So because of the shift in the festive season and also some delays in sowing because of some delays in rainfall in some parts in the country. We are expecting that the shift will happen. So industry, our estimate of Q2 industry is far lower than what we have seen in Q1 or that we will see in the whole year going forward.
For the industry, would you expect a single-digit growth in 2Q?
At best a single-digit growth, but it could hover around like 0% to 2%, something like that.
Okay, okay. And just a question on the margin side for Bharat. Bharat, do we still expect 100 bps margin improvement at an overall level for the company for further...
Yes, so full year basis, we are still maintaining the guidance compared to last year.
Looking at the trend, would that be more driven by construction and railways? Or we will expect some margins...
I think it'll be combination of all 3 segments, so -- because all 3 are likely to do better now, including construction, we are guiding at 4% to 5%; railway, 17%, 18%; and tractor also, on a full year basis, we are looking at going up by close to 90, 100 basis points. So I think, overall, we're still looking at that 100 basis point guidance for this year.
The next question is from the line of Naveen Dubey from Narnolia Financial Securities.
Sir, my question pertains to the realization of tractor segment. Sir, we have seen year-on-year decline in the margins. So is there any structural changes in the product mix or are we seeing any structural changes in the product mix going ahead?
Yes, I don't know about the year-to-year decline. That maybe Bharat will answer, but in the short term, as we spoke in the last call, that in the contracts, in the -- under the contract plans, we introduced some products in the small horsepower segment, which is like around 40 horsepower segment. And of course, those products are cheaper than the average contract products that we earlier had. And therefore, we suggested that there would be a decline in the realization side on the contract. And that you will see continuing going forward because that's a pretty much structural strategic decision we have taken that we will play both the brands in the market and let them compete in each of the segments as we are bifurcating the distribution for both the segments in the -- both the brands in the market, right? So while we will see market share gains and volume gains, but we might see some lower realization mainly on this account.
Okay. And sir, on the construction equipment side, the margins, you're guiding for 4% to 5% margins going ahead in FY '19. So coming to the realization trend on the construction equipment, is there any -- or do you say a cyclical thing that realization in Q1 remains higher?
I think it's the other way around. The Q1 realizations are generally on the growth side. That will remains on the growth side. And then as we go along -- second half of the year is always better on realizations. I've seen it in the last year, so I think I'll go by that update.
You expect second half realization to be better than first half?
Yes.
The next question is from the line of Sameer Deshpande from Fairdeal Investments.
I think this is the record quarter in the history of the company where we are at INR 10 per share.
Yes, you're right, Sameer. So far, it's been the best performance ever in a quarter.
So extremely encouraging results and really congratulations. And turnaround is really very much positive, and our sentiments also continued to be good. The monsoon also now, I think in the north, which is a laggard, I think it has picked up in the last 2, 3 days also, so it should augur well for our industry. And even the construction, et cetera. So actually, our net debt is negative, no?
That's right.
Sir, how much overall in cash balances you were at this point of time?
So cash balance, if you compare, the debt level is about INR 40-odd crores. And if we exclude the escrow account of INR 132 crores, so we have close to and in total INR 854 crores of cash, so about [ INR 814 crores minus ] INR 132 crores. So it'll be close to INR 720 crores of net cash on the balance sheet as of 30th June.
And actually, you mentioned something about these pension costs debited about INR 10 crores in this quarter, and you are going to -- you'll have a wage revision agreement going forward?
So wage revision will be due in next year sometime, so at the end of next year, in 2019.
So this pension is a onetime thing, but you mentioned something that some costs will be from 1st July, it will be going up?
So for July, the normal way of our performance appraisal cycles, so every year we give increments, obviously, to the staff, so that will be due from 1st of July, so that has been already given, so I think as a result that will be close to 8% on that account to the white collar staff. The blue collar will happen as per the agreement which we already done with them which is normally due in August. The last installment will be due in August. And then next year, we enter into the next settlement period, which obviously will be negotiated with the union.
Sir, not much impact is going to affect our margins. [ Is that a way - it is right? ]
[indiscernible] there.
And this construction equipment as well, normally, the product mix will go -- will be better in half 2, as you mentioned, so the margins will improve there.
Yes, that's right.
[Operator Instructions] The next question is from the line of Chirag Jain from SBICAP Securities Limited. As there is no response from the current participant, we will move on to the next, that is from the line of Riken Gopani from Infina Finance.
I have 2 questions. One is on the railways division. So you said that this quarter, there was higher spare sales. Any particular trend that this would be recurring once in every year, or this was some unusual order, and it was not a part of the order book, and it suddenly came? Just some color as to how -- what is the seasonality of the spares revenue for the full year for this division?
Actually, it's not a seasonal thing. I mean, there were spares, and it's not one-off. We expect that since railway is going in for more revenues and particularly in the Mumbai cover bond and in the Chennai sort of a thing. We should be expecting this sort of a high-margin spares business also going forward. But this is what we had booked in the last quarter, and we could deliver it in this quarter -- last quarter of the last year. And this quarter, we could deliver it. So we expect that such good profitable spares would be available for tendering in the coming months also. Primarily, what I'd missed out also in the previous question when I was asked about the spares is that we also had China orders. We had supplied to China some brake systems, which is also very a profitable business for us. So that also adds to the profit, what we had -- get in this quarter.
So typically, for a full year, what is the sort of contribution of spares to the division sales?
It should be around -- almost around in the range of 20%, something in the range of 20%.
And this quarter, it would have been materially higher?
This quarter, it was 16% of the Q1 sales, but the export order was there also around INR 6 crores of export order, which is a fairly profitable business for us.
Okay. But you said for this quarter, it was 16%.
Yes.
Okay. So it's -- I mean, since you are calling it out as to higher than the usual, so I couldn't understand. You said 20...
Based on the what kind of spares we are supplying. Obviously, we're supplying here on a good 16% or higher margin, higher distribution parts. So this is what has happened in this quarter. The margins have been very high in this business, almost 25% plus contribution in parts. So this is why you've seen this one-off thing happening now. But I think like I said, going forward, on a full year basis, we expect the railway business sale delivers about -- something around 17% to 18% sort of margin this year.
Okay. And one follow-up, on the railways division itself, typically, we have been saying that the typical execution cycle for this business is around 6 to 7 months in the past. Correct me if I'm wrong. I heard that for the current order book, you're having a cycle of around 12 to 18 months. Is that right? Or -- so has there been...
We only said 11 to 12 months. The order book as of 30th June, we got 11- to 12-month execution cycle, so it is more [ suffered when we can take the orders ] in the next 9 months, 7 to -- [indiscernible] next 8 to 9 months.
Yes. Okay. So that's the typical cycle of execution. There's no change to that as well during the...
Right.
Okay. One question on the tractor division. So you said that there has been a price hike that you've taken, and that would basically take care of whatever was the cost inflation beyond the first quarter, or this will help you reinstate your margins back to the Q4 levels? Or how should we read into this?
So tractor, I'd say if you look at -- so there were other conditions, or at least if you continue to have the sort of volume that we had in Q1. So obviously, like we've mentioned, Q2 may not have the solid numbers. We are now looking at the industry doing better. We've had a shift of season particularly into Q3 now. And also, the last time, we had this deferral for the GST billing, which happened in Q2. So you may not see the same sort of margin level being maintained in Q2, but the volumes will really not be in that range. But yes, so the impact, because the inflation on the commodity price, will get hindrance to this price increase.
Understood. Understood. And given that you would see a relatively soft Q2, would there be, you would expect, any elevation in the discounts level or the market dealership inventory levels are relatively higher? How do you see that scenario currently? And for you as well, what is the dealer inventory level?
So no, we don't think there would be any fresh discounts that would be appearing in the industry because like everybody knows, it's just a shift of about a week in the market, because the Navratri, which is a holy kind of auspicious season, we had a few days of Navratri in September last year, but now, they will be in October. So I don't think people will panic because of that. It's just timing issue, which is very common to tractor industry. So one is that. The other question was?
On the dealer inventory levels, how are they currently?
Yes. So our inventory levels are very, very healthy, in the last 3 years, while our sales has gone up, our annualized sales, but our dealer inventory has gone down. So we are at a very, very healthy level, so I think there's only a couple of guys in this industry, including us, who have such low levels of inventory. We're [ fitting ] in the right number, and it's very healthy for dealer profitability. I think there is no concern overall also in terms of dealer inventory in the -- at the industry level right now.
The next question is from the line of Chirag Jain from SBICAP Securities Limited.
A couple questions from my side. In general, when are the next level of emissions norms expected in the tractor industry? And how do you see that having an impact, be it growth or mix or even competitive scenario?
So the next level of emissions right now are proposed for October 2020, which is about more than 2 years later from -- 2 years from now. And this is also only on tractors above 50-horsepower, which comprise of about, let us say, at that time, it will comprise up to about 15% to 20% of industry max, right? So below 50-horsepower tractor market, which is the belly of the market in India, we don't have any announcement from the government or any proposal from the government about the date. There are still some discussions going for around 2022, 2023, but we are not sure about that. Yes, above 50-horsepower, we will have new norms. It seems now, most probably, we'll have new norms in October 2020. And there will be some repercussion on that part of the segment because the costs will go very, very high because of the use of CRDi engines. So we are prepared with the technology, of course, at the CRDi side, and we are watching the market or the [ transport ] behavior very closely so that we can adapt accordingly.
Okay. And how is the competitive landscape in general in the tractor industry over the last few quarters? We have been hearing that, in general, competitive intensity, especially in the northern side, where obviously we have a larger presence, it has started to go up. So maybe if you can share some insights on that.
Yes. I don't think there is any, like, huge change in the intensity in the last 6 months. Of course -- I mean, of course, everybody's trying to gain as much as possible. But yes, I think it is very normal. I mean, with time, the intensity goes up normally in mature industries, and only that is the kind of scenario you are looking at. We are not looking at something extraordinary really.
Okay. And just lastly, if you can share your view on commodities. Do we still see, let's say, commodities going up even from current levels? I mean, if you have any view on that.
So we have factored that some increase will happen in Q2, while very marginal increase really in Q3. So as of now, we still see it being -- continue to go up but may not be at the same pace what you've seen happening in the last 2 quarters, which is very steep. So we think the pace of another increase has now slowed down a bit. So maybe by Q3, we should see adding more so inflation should have been factored in.
The next question is from the line of Deep Shah from Motilal Oswal Securities.
Sir, one question on the side of construction equipment business. You mentioned there were sales of lower-value products in this quarter. So if you can throw some more light, I mean, on the product mix part of it and how it will pan out in the coming quarters for better understanding.
All right. If you look at the crane segment, we have 2 segments very clearly. One is the hydra segment. I don't know if you know these nomenclatures or not, but if this is low end, it is called hydra, and there is a TRX crane, which is on the higher side. It has got -- TRX crane is basically considered to be high-value product in the Pick "n" Carry segment. Now first half, you get the -- generally, when we work, we tend to work towards 60-40, 60 on the hydra side and 40 on the TRX side in terms of mix. This quarter was heavier on -- 60 became 70, in fact. So you have that mix change happening, and that mix change is reversing whatever you are seeing, the reverse that we have got. But as we go along, if you see our performances, as we go along, first quarter starts with this kind of scenario. Then we move to 55-45, and that is a range which gives you a very good contribution at the bottom line. So we will be moving towards in that direction, plus our own focus is to get more of the TRX range into -- in the market. We already have about 67% market share as of now if you look at that segment. We want to take it up to 75% [ basically ] as we go along with new products and all that stuff.
Right. So sir, I mean, just a follow-up with that, so are we adding -- I mean, can you just share a product pipeline in this site? How -- what are the plans for the launch of it? And that will be helpful.
We are working on several products, if you ask me. There are variants that we keep doing on an ongoing basis just to improve the value proposition for the customers. That is an ongoing process that happens every quarter. We keep doing it. One product or the other is definitely coming. But we have a product line, what we are talking about now is more and more technology coming into our product. So you will see, as we go along, I can not announce at this point in time, but you will see more technology going into hydra, making it much more safer and then more technology going into safer crane to make them ultrasafe. So that is the direction that we have taken. So you'll see it in the announcement we'll be making about that.
The next question is from the line of [ Deepak Jain from GIBCA Ventures ].
Sir, I have 2 questions. Yes. Sir, you said the industry growth expectation of 12% to 15%. So what is your expectation for your core strong market growth and the opportunity on market growth? And the related question is that how do you see the Atom and rice specialty tractor which has, as you know, position for the [ last sector ] or maybe the opportunity markets? How do you see the mix of the compact tractor moving from current levels to probably the next 3, 4 quarters? And what will this mix do to the realization? Because that has -- due to the product mix, that has gone down in the last 2, 3 quarters.
Okay. So on the volume on Atom and the paddy special, special, I have already answered that. Right now, we are consciously selling that because it's very, altogether, new products, just a completely new family and a completely new platform. So we just want to be sure that the product is right, and the product is received right in the market. But by the next season, we will be touching about 250 to 300 tractors per month on each of these 2 tractors. Yes, the margin has been lower as in the case of most of the new launches, where a platform changes, because in the beginning, the cost is high, and then, engineers would work over a period of time to reduce the cost through value engineering and other means, right? So we might have an impact, a little bit, which is already built in our estimates, our predictions for the -- for this year. But going forward, maybe come next year, we'll see better margins on these 2 products also.
Sir, actually, I wanted more clarity on the realization part, not really on the margin part. Because if we are expecting, let's say, 15% to 18% volume growth -- sorry, 12% to 15% volume growth, then thus, due to the product mix change, the revenue growth on the tractors side would be lower compared to whatever volume growth we'll be doing. Because we need -- because as you said, we will be ramping up the Atom Series and the rice series to go to the good demand. Basically, the revenue growths are undergoing the volume growth due to the product mix change.
Okay. So let me respond like this. So let us just break the market in 3. So the loss realization is less than 40-horsepower. So last year, in Q1, our investment in 40 sales was about 48% of the total volume, which has gone up to about 54% in this quarter -- in the last quarter, right? And we don't expect it to go beyond 54%. So whatever we have seen in Q1 should very much stay for the rest of the year. So we don't think there should be any concerns going forward that this trend will continue because this was a one-time launch, which has happened in the last 6 months, and it has stabilized quite a bit for us. So we don't think that it's going to change -- the mix is going to change going forward.
Okay. And so the new, higher range, 70 to 90 HP, is it for exports? Or what is -- how do you see this panning over the next few years, if you could provide that.
Yes. The 70 to 90 is primarily for export right now, which does not mean that we won't find customers in India for these tractors. But they will be far and rare, right? So at the appropriate time, we would launch these tractors in India also in selected markets, in selected pockets rather, but primarily, these tractors would be focused -- would be for exports mostly.
[Operator Instructions] The next question is from the line of Kashyap Jhaveri from Emkay Global.
Just wondering, on the earlier comments, you mentioned about construction equipment, that the elections down the line during next 12 months could have some effect on demand. Could you elaborate on that with respect to your 16% to 18% growth guidance?
We have taken that into account, and that's the reason we are talking about 16% to 18% growth in the industry.
Should you expect like the spending on the construction will start to slow down because there will be elections down the line?
I think so.
The next question is from the line of Nishant from ICICI Securities.
Sir, I had a connected question to your earlier comment on the emission change for 2020. So basically, sir, right now, we are seeing some degree of, let's say, the [ cheaper ] tractor or the downtrading on this tractor in terms of overall share of industry mix also. So I just want to kind of ask your opinion on, if import pricing goes up significantly of the 50-HP segment, sir, do you envisage that post 2020, the mix could go down further in terms of the consumer and the downtrading on this? And commensurately, what do you think will be the impact of industry profitability and competitive dynamics? Could we see some prebuy effects or pre-October 2020 on this? Yes, your comments.
Yes, still early to say, but we don't think it will have much impact on the profitability, and I'll explain you why. So firstly, the emission norms, they actually are given only for tractors above 50-horsepower and not up to 50-horsepower, and which is a small portion of the entire market. Secondly, all these customers who buy today tractors above 50-horsepower, we do expect that some, about half or more of these customers would really need something more than 50-horsepower, so they would have no other option but to go for these tractors even at a higher price, right? So even if half of the customers go up and half of the customers go down, the customers that go up, let us say, to 60, 65-horsepower would actually end up kind of -- we are going to end up making more money there, right? So we think that the market is going to split. Half of it will come -- will go below 50, and half of it will go further up to like 60 or 65. But that is for now, and we still have a lot of time to see how it plays out. But since the market size, very, very small that is affected, I mean it's not much of a concern.
Just a clarification on your earlier comment. In the previous question you had said that the segment that might be impacted would be 15% to 20% of the industry. So now you are saying that it will not be that large.
I'm saying right now, the market is only 8% to 9%. I am saying even if it goes up to 15% because higher HP, most of the predictions are that higher HP is going to go up, right? So I mean -- but right now, it is only 8% to 9% or 10%, right? All I'm saying, only half of that will still remain up, upwards of 50, but it would give better margins to compensate for the customers who may go below 50.
The next question is from the line of [indiscernible] from ULJK.
My question is majorly on construction equipment side. If we change your presentation within 2020, you mentioned you're approximately expecting growth of [ people ]. Hello?
[Operator Instructions]
And current capacity utilization is around 55%. So there is any expansion we are expecting in the next 5 years?
Sorry, I didn't get you. But let me again repeat your question. You are asking about 3x growth, and you are talking about the planned -- the product plan going forward?
Yes, sir.
Yes. We are working towards 3x plan, that is for sure. And more or less, as far as our strategy is required and the product planning is to be done, which has already come in place to a great extent, we are looking at adding new products, new portfolios. As I said earlier, it's too early for me to get into the details of that, but probably we'll start to hear from next quarter and onwards something would come. So you'll get new products. We will have new categories being created. So all these things are going to happen. You'll see it happening as we go along.
The next question is from the line of Raghunandhan from Emkay Global.
One is, what would be the approximate price hike because of this emission norm changes in 50-HP tractors? And within the construction equipment segment, what would be the share of Doosan trading business this quarter?
I think it's very premature to say what would be the price hike because that depends on our competitive and other factors. But just to give you a rough estimate right now, that could be in the range of about 1, 1 to -- or upwards of 1 lakh.
Got it. And the Doosan share in construction equipment?
[Operator Instructions]
It will be -- it's very small, so probably the real impacts are going to come from next quarter onward because the organization is in place. The gears are getting on a roll. So the impact will come, but definitely, we have done as per time, the numbers, the average added value of numbers, we are talking about a 7 to 10 numbers a month -- per month as of now.
The next question is from the line of Nitesh Sharma from PhillipCapital.
Continuing on the emission norms, would this entail additional spends on R&D or any technical tie-up?
Most of the expenditure in R&D has already been done or is in progress, because these emission norms are coming in India in 2020 October, as I said, but they are valid or applicable in many parts of the world right now where we are exporting, right? So most of the expense is already been done.
Okay. And does this mean that OEMs with foreign parentage have -- might have an upper hand going forward, and they could become aggressive in the market? Do you foresee such a scenario?
No, we don't think that will have any effect. I mean, people -- everyone pretty much has already technology really, so I mean, it doesn't matter really whether you are more stronger outside India or less.
The next question is from the line of Sameer Deshpande from Fairdeal Investments.
So I would like to ask Mr. Madan, that the earning per share which we had calculated for the 31st March 2018 year-ending was after the treasury stock adjustment. I'm sure our equity remains at around INR 85.3 crores, so the earning per share was around INR 40 or INR 41 something. So this time, we have given the standalone results which show the [ minimum is ] 29, which is standalone, without this treasury stock adjustment. So I think you had mentioned last time it is due to [ index ]. We have to view the consolidated -- the earning per share which should be ex treasury. So what is the position now?
First of all, what we published quarterly is the standalone result, so it's not consolidated, which gets published only on an annual basis. So when you look at the consolidated EPS, then obviously, we net out the trading stock which get merged into the consolidated financials. But on the standalone financial, they're still [ as an ] investment, and we report the full capital, so which is the reason when you see the annual results, which should be consolidated numbers, where EPS will be different from the standalone EPS that we report.
So at the end of the year, it will be ex treasury.
Yes, and you know [ the grades ] also you can orderindiscernible] but standalone to them, we've taken that option with [ severe and soft trading ], that's why we need to report standalone numbers only.
Got you. Because the earnings per share will go up substantially if you adjust that, okay.
That's right.
Next question is from the line of Raghunandhan from Emkay Global.
My question was to the bunkers, sir. Sir, can you share the progress on the localization plans in railway segment and any time line? And when do you see the benefits coming in on the margins?
The localization, we have already done all the R&D and the localization, the whole [indiscernible] everything is ready. We are just waiting for our government approvals because we had got an approval with import content, and now we are going in with our localized systems. So that will take at least another quarter or so if not more to get the government approval. If we get that, then obviously, we should be able to get a very healthy profit margin for those products also. Finally, these other products which are already localized there, we have now started making money. For example, the new set of EP brakes for the Mumbai rail [ becomes ] a [indiscernible] coaches. There we are anyway, we do not have any input content, meaning it is all in [ limited ] design out here. So there, you see wherever we have spares from those sort of a segment, the EBITDA and the profit margins are very high.
So once you get the government approval to commercialize production, how much time will that take, sir?
See production is already done. Commercialization will only depend on the final approval. We have already the product ready. So we are saying at least 1 or 2 quarters it will be [ great ] because the whole of the approval process usually, the government takes a little bit of time. So we are taking an estimate of at least 1 or 2 quarters before we introduce the local as one. We do have orders. These orders we have to execute as per the orders we can input content. So we have now started working with our localized content also. Once these orders are on the verge of execution, then only will -- and finally we get the approval from the [indiscernible] which will be able to push the [indiscernible] cost with brake systems.
And sir, any thoughts on new products, either via organic or inorganic routes?
We are working on few other products. I mean, it's too early to say that. I mean, hopefully, another quarter we should have more clarity about how we can do organically. We do not have a ready-made answer for you now because it's still work in progress. While the other new product pipeline, for example, the locomotive-based systems, locomotive-based electronics, here, we are almost [ to we're done ]. We are now waiting for -- we'll be submitting everything for the approval process, which will take at least 6 months to almost 9 months.
If I can ask I had a query for Bharat Madan, sir.
Hello.
Sir, on auto components side, there was an EBIT of 17 million. Can you explain the nature of this and that more is expected? Also, can you give some color on full year tax rate?
So on auto products, actually, the [indiscernible] but the business has continued and most of the excess [indiscernible]. So obviously, whatever small recovery efforts on the reform method, that will keep on coming as a recovery. So we still expect maybe some more income may come, so maybe in the range of maybe 20 million, 30 million may happen over a period of time. So that process will really continue. But otherwise, there's no negative surprise that you we expect this happen on the automotive development, that is all fully paid for. On the effective tax rate side, this quarter, we had them roughly at 33%, and we spread on a full year basis also. R&D benefit is going down from this year, also we will get only 150% operating ratio, which earlier used to be 200%. So that benefited is not going down, but the tax rates are going up, the sales going up and [indiscernible]. So effectively, we expect to be somewhere around 33% only in this year too on a full year basis.
Ladies and gentlemen, that is the last question. I now hand the conference over to Mr. Bharat Madan for his closing comments.
Thank you, ladies and gentlemen, for being present on this call. For any feedback and queries, please feel free to write into us at Investor Relation at Escorts Limited. We'll meet again the next quarter. Thank you very much, and a good evening.
Thank you. Ladies and gentlemen, on behalf of SBICAP Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.