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Ladies and gentlemen, good day and welcome to the Escorts Limited Q1 FY '21 Earnings Conference Call hosted by PhillipCapital (India) Pvt. Ltd. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Saksham Kaushal from PhillipCapital. Thank you, and over to you, sir.
Thanks, Steve. Good evening, everyone. On behalf of PhillipCapital, I welcome you all for the Q1 FY '21 Earnings Conference Call for Escorts Limited. I also take this opportunity to welcome the management. Today, we have with us Mr. Bharat Madan, Group Chief Financial Officer and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division; and the Investor Relations team. We would start the call with brief opening remarks from the management followed by an interactive Q&A. Over to you, Mr. Madan.
Thank you, Saksham. Good evening, everyone, and thank you for all for joining us on the earning call for the first quarter ended June 30, 2020. We trust during this unusual time, you, your family and your dear ones are all safe and healthy. During the quarter, there was a considerable slowdown in economic activities following the outbreak of COVID-19, as more than 45 days of this fiscal year have been wiped out, impacting business operations of the companies by way of interruption in production, sales and distribution, after-sales service, supply chain disruption as well as unavailability of personnel, et cetera. We started our operations with a partial lease on lockdown from second week of May after we received the permission from government authorities to resume operation in single shift with predefined workforce. Quarter ended June 2020 financials reflect the impact of COVID-19 and the figures do not represent normal operations and to that extent, not strictly comparable with any normal quarter. I would now like to share with you some highlights for stand-alone first quarter results for this financial year. Turnover during the quarter was at INR 1,061.6 crores against INR 1,423 crores in previous fiscal, down by 25.4%. This is primarily due to drop in sales across all business segments, impacted by nationwide lockdown and related issues. Tractor sales volume went down by 13.8% to 18,150 tractors as against 21,051 tractors last year same quarter. Construction Equipment sales volume went down by 78.1% to 234 machines as against 1,067 machines last year same quarter. Railway segment revenue went down by 53.5% to INR 54.9 crores as against INR 118.1 crores last year same quarter. EBIDTA at INR 119.6 crores as against INR 142.4 crores last year, is down by 16.1%. EBIDTA margin, however, now stands at 11.3% as against 10% last year same quarter. Finance costs went down by INR 3.9 crores to INR 1.9 crores as against INR 5.9 crores -- INR 5.8 crores, INR 5.9 crores last year same quarter. The total debt outstanding as of June 2020 is just INR 6 crores, down from INR 124 crores in June '19. Net debt, however, continues to remain negative at INR 1,055 crores as of June 2020. PBT is down 6.2% at INR 121.1 crores as against INR 129.14 crores last year same quarter. Net profit is up by 5.3% at INR 92.2 crores as against INR 87.5 crores last year same quarter. EPS stand-alone stands at INR 7.71 as against INR 7.32 last year same quarter. Now moving on to segment business performance, starting with the Agri Machinery business. Domestic tractor industry volumes went down by 13.7% to 1.65 lakh tractors as compared to 1.91 lakh tractors in last year same quarter. However, post-lockdown, there was a surge in demand, with June witnessing a 22.4% growth in domestic industry volumes as compared to June last year. This was a combination of pent-up demand and so very encouraging macroeconomic factors such as better crop prices, expectation of a good and widespread monsoon, record rabi crop harvest, timely reopening of retail finance and government focus on agri and rural development. The industry growth is widespread with growth in almost all markets, barring 1 or 2. However, domestic volume went down in Q1 by 12.1% at 17,690 tractors as against 20,122 tractors in last year's same quarter, resulting in a small gain in market share. Our finished goods inventories at dealerships and at depots as well as our raw material inventory at the factories are at an extraordinary low level. The demand was significantly higher than what we could produce owing to continuous challenges in supply chain. As supply-side issues subside, we would be able to stock up the sales pipeline to normal levels. On export side, industry went down by 39% to 10,800 tractors as compared to 17,800 tractors in previous fiscal. Our export volumes went down by 50.5% to 460 tractors as against 929 tractors in last year same quarter. While we had orders in hand, we could not fulfill them because of COVID-19-related supply chain issues. The market response for newly launched higher HP Farmtrac Powermaxx series has been positive and highly encouraging. The contribution of above 40 HP tractors in our portfolio improved significantly in Q1 FY '21 owing to both market dynamics as well as great acceptance of our newly launched models, resulting in a significant model mix gain. Farmtrac to Powertrac ratio remained 41% to 59% at similar level of last year. Despite lower volumes, EBIT margins for Agri Machinery business went up by 356 basis points to 14.5% against 10.9% last year same quarter. This reflects our enhanced focus on cost efficiency. Sequentially, EBIT margins were down by 139 basis points as compared to 15.8% in quarter 4 FY '20. Our pace on new dealer appointments suffered because of the lockdown. However, as the pipeline is strong, we expect to catch up on this front in second and third quarter. The total dealer count now stands at 1,017. Our focus on channel expansion in our opportunity markets shall continue. Supply chain already was high amongst almost throughout the quarter, but we reached close to 95% production of our capacity sometime in June, given some challenges with suppliers of some proprietary items. Currently, we are operating at around 50% to 60% of full capacity. While we expect to go back to full capacity by mid-August 2020, the supply chain situation may continue to be dynamic for another couple of months. Overall, the tractor industry sentiments are positive. Timely and higher sowing of kharif crops symbolizes that. We expect full year 2021 domestic tractor industry to register a positive growth as compared to last fiscal year. The quantum of growth will, however, depend upon how monsoon fares and the harvest expectation from the kharif crop. On both of which, the confidence is currently high. Coming to the Construction Equipment business, our served industry backhoe loaders, Pick n carry cranes and compactors de-grew by 60% in Q1 FY '21 with respect to Q1 FY '20. Our total volumes, manufactured and traded products, went down by 78% to 234 machines as against 1,067 machines in last year's same quarter. Pick n carry cranes market was majorly impacted with retail sales contracting by 81%. Most of sales were recorded in the last month of the quarter due to nationwide lockdown in the month of April and May 2020, resulting in EBIT for the quarter ended June 2020 at negative INR 16.8 crores as against INR 5.4 crores last year same quarter. Construction Equipment industry has seen a slowdown in FY '20 on account of financing and delayed payment for ongoing infra projects. The industry had started to recover from December '19 due to government clearance of payments and increased spending. However, the nationwide lockdown towards the end of March 2020, labor migration, financing issues like no fresh funding to moratorium availing customers further affected the market negatively. In past few years, we have taken a number of initiatives in the area of material cost reduction and production standardization, and we were able to reduce our breakeven level to around 230 to 250 machines per month. Going forward, we are further taking more stringent targets in these areas. And coupled with better sales mix and realizations, we are confident of reducing breakeven level further by end of this fiscal. With volumes expected to start recovering from second half onwards, we are optimistic of showing good margin recovery in the last 2 quarters. Coming to the Railway Equipment division. Revenue for the quarter ended June 2020 is at INR 54.9 crores as against INR 118.1 crores in the last year same quarter. EBIT margin stands at 2.6% in quarter ended June 2020 as compared to 20% in last year same quarter. The production in railway units have been affected badly due to the outbreak of COVID-19 pandemic and lockdown affecting coaches and locomotive production. In spite of available orders on hand, production and final dispatches from the plant during June 2020, we could not finally deliver the material as many of our delivery trucks were stuck in the major customer areas of Chennai, Mumbai and Raebareli, where lockdown continued till end of June 2020. During the quarter, we have executed 43.5% of total orders on new product category, with more import content and lower margin as compared to previous fiscal when it was 34%. Order book for this division stood at more than INR 480 crores, which will get executed in the next 12 to 15 months. For FY '21, we now expect the Railway Equipment segment to grow in higher single digit, and margins for the segment are likely to be maintained at last year's level. Now I request the moderator to open the floor for Q&A, please.
[Operator Instructions] The first question is from the line of Gunjan Prithyani from JPMorgan.
Two questions from my side. On the tractor side, if you could just give some sense on how have been the growth trends different in different geographies? And you have -- you've somewhere indicated in the presentation that you're looking at positive growth this year. Is there any guidance that you can share on the industry growth, how we are looking? And secondly, on the Construction Equipment side, if you can give some sense on when do we really expect the normalization in terms of revenue traction building up? Hello?
Hey, Gunjan, this is -- yes, Gunjan, can you hear me?
Yes.
Okay. This is Shenu Agarwal. I will answer the questions about the tractors. So reasonably speaking, I mean, there have been some kind of ups and downs in different markets. But overall, the situation is positive in almost every market. I'm just speaking about June. I'm not speaking about the quarter because the quarter there has been a minus 14% growth, right? But if you look at June, the June growth was close to 22%, and that was very widespread, except for 2 markets in West Bengal and CG, Chhattisgarh, every market witnessed growth. Now, of course, the growth is a little bit more skewed as far as June was concerned to Southern regions. So South, for example, grew about 50%, while the overall growth in the country was 22%. Yes. So a little bit skewed towards the South, but overall, kind of every market is growing -- grew in June. Similarly, the situation...
Sorry, you said South is 50%, is it?
Yes, roughly 50% as against 22% in June for the overall country.
Okay. Okay. And on how we are looking at full year for the industry, any growth guidance that you can share?
Yes. Right now, I think we can say that it will be positive. It will be more than last year. I think right now -- I mean, although it's too early to say, but still, we think that it will be like single low digits growth as compared to last year. So last year, industry was roughly about 710,000, right? So somewhere in -- so low single digits we are expecting. So yes, quarter 1 has been minus 14%. So basically, I mean, that means that in rest of the year, July to March, the industry would grow probably 10% or around that number.
And the regional trends should pretty much stand because South and West are somewhere we are seeing low base and the water table levels being higher helping, is that still the view...
Yes, yes, yes. South have been kind of -- South will, I think, grow a little bit better than the rest of the market. But I think, as we get into September and October, the rest of the country will also. So this skew will continue for, let us say, 3 or 4 months. And after that, I think the rest of the region should also show a similar -- similar growth.
Okay. Got it. And financing side is no issue at all on the tractor side?
No, no, none at all. Because the condition -- the cash flows are very, very solid in the rural areas, right? So financiers have no problem financing tractors right now.
Okay. And...
[Operator Instructions]
And my second question on Construction Equipment, if that can be taken, I will join back in the queue.
Gunjan, this is Ajay Mandahr with you. The first quarter has been pathetic in terms of 60% down. That means we were working on 40% of the demands. But I expect we have seen that traction now coming in, the inquiry levels are good, and this should be back to normal. That is what we expect, as sitting out today. And quarter 4 should be a good normal quarter for us. See typically, in Construction Equipment, the first half was still about 40% of the industry and 60% comes in the H2 quarter. So we still remain optimistic, and I think the guidance will be that though market may be negative, but still, the quarter will give us better returns, I think going forward.
The next question is from the line of Raghunandhan from Emkay Global.
Congratulations on good set of numbers despite tough times. Firstly, sir, you indicated that capacity utilization is at 50% to 60% currently. Can you elaborate on the supply constraints? And how do you see the ramp-up of utilization in months of August and September? Secondly, other expenses are lower in Q1, any one-off items here? Can you please highlight cost reduction effort? And possibly, if you can quantify the benefits for Q1 and FY '21?
Yes, Raghu, on the capacity utilization front, as we said in June, we almost reached our peak capacity for many days. And the situation was coming back to normal very, very fast after we opened up in the second week of May. But then we had a problem with a couple of suppliers, especially the proprietary ones. And these suppliers have -- are of a nature where they supply to the entire automotive industry, right? So we were not the only ones, but the entire automotive and tractor industry suffered because of some situation with the supplier, COVID-related situation, right? So we had for the last about 3.5, 4 weeks now, we are struggling with that situation. And that is why the production capacity is at 50%. I mean we have no issues specifically [Audio Gap] of our factories, but just issues because of a couple of these suppliers. Now the situation at these suppliers has improved dramatically over the last 2, 3, 4 days. And we are hoping that by mid of August, we should reach back to our full capacity, if not earlier. Now of course, as I say that, I mean, you all know that the situation is a bit dynamic in terms of supply chain, right? So I mean, we will manage the situation as it presents to us. But right now, that is what our belief is that by mid-August or earlier, we should be back to full capacity.
Understood, sir.
And on the expense side, of course, there is a very, very acute focus on reduction of the cost. I mean that is then on all levels, whether it is the focus on selling high contribution models for better contribution or by looking at opportunities in the material cost or in the fixed costs, including the manpower cost. So we have a very detailed out plan that we have set up, which is very, very aggressive because we thought that the situation requires that, right, because there would be some volatility on the supply chain side. And therefore, what we can definitively do is something on the cost, right? So that is why you are seeing better contribution and better overall margins, especially in the tractor side. Yes, this effort is going to continue in the future for rest of the year as well.
So sir, fair to understand there were no one-offs and other expenses. And any quantification you can give on cost-reduction benefits?
So Raghu, just to respond to your question, one, obviously, the one-off which was there, if you remember, in the last quarter, in Q4, we had the benefit of higher production because we built up inventory. So we had a good 2% improvement in EBITDA margin only because of that. So that, it has actually come in this quarter in Q1 when we actually utilized that inventory and sold those tractors. So there's a negative impact on the result side. So the positive is since there's 45 days of almost shutdown, so we had no expenses on the manufacturing, selling and admin side, which are very low. So that, obviously, you can consider the one-off, but this is not the situation when the plant is now working in a normal course. But entirely, yes, we have taken the target to look at this reduction of further fixed costs by 10% to 15% in this year and some of the efforts that have already started have been put into that perspective so that -- the savings we're expecting clearly will happen during the course of this year. But yes, if you remove the impact of the first 45 days of shutdown, which could be one-offs, but that to a large extent will get offset with this impact on the overhead side, which we got in the material costs. So these 2 are more or less are going to offset each other. So maybe still there be about INR 20 crores, INR 30 crores sort of one-off which will be there because of the lockdown, which may not be there going forward.
The next question is from the line of Vivek Gedda from HSBC Securities.
Actually pretty good set of numbers. Firstly, I wanted to get a sense on the impact of recent pickup in COVID cases in hinterland. This seems to be accelerating, especially in the past 3 to 4 weeks. Do you think that may start impacting sales if this continues? And related to that, actually, just wanted to get a sense on the construct of industry sales from sales push versus sales pull in the sense, how many people actually walk into the dealership to buy tractors rather than we actually going and approaching the customers? That will be my first question.
Yes. So we don't think COVID-19 is going to affect the demand side of it at all. I mean because some things have changed, the way that we approach sales have, of course, changed. We are going more digital. We are going more telephonically and video-on-video contacts with the customers, right? Those things have changed, but this is not going to impact the demand per se because the demand is very, very fundamental in nature. And all the macroeconomic factors are right. And also, the COVID penetration in rural areas is almost insignificant, right? So that is not going to be the case for sure. Of course, the volatility on the supply side may continue for some more time. And this is like very difficult to forecast. But yes, I mean, this volatility, we know is going to continue on the supply side. You had another question?
Great. Yes. I just wanted to get a sense in terms of pricing of products of Escorts versus Kubota in terms of what kind of differential pricing would we have and we have this entire manufacturing JV completely ramped up? So I just wanted to get a sense as to how -- what different ranges are we going to operate it so that we don't cannibalize each other?
Yes. So as we have been said and as is our intent is that Kubota and Escorts brands will continue to compete in the market, right? So both the companies will decide like how they want to position themselves in the market, right? So since we are competing on the market side, I mean, we possibly are not going to kind of have any synergies, at least on the pricing side, right? So yes, I mean, that question is -- right now, given our strategic outlook with Kubota, that question is not very relevant right now. But yes, I mean, overall, you know that Kubota would be priced at a very premium end, right? And therefore, they would compete with players like John Deere, and we have 2 brands, one on the premium side and one on the mass market side, right? So we will play with the competition that we have earmarked for, right? So probably, there would be some conflicts and some competition in terms of customer -- customers that we target, right? But yes, we will be -- we already have a little bit of a unique positioning, right? So -- but yes, I mean, we are going to compete in the market generally with Kubota.
Just to the -- sure, we actually was going to benefit significantly from the lightweight wetland application technology that Kubota is strong in and some of the joint development work that we are doing is probably in the same field. So the products that we're going to launch will be at a lower price compared to the products that Kubota will be selling. Is that -- is my understanding correct as and when we actually launch these products?
Yes. So right now, the joint development plan is still under discussion as to which products we will make. These have -- we have not concluded that idea as yet. Of course, and principally, we have decided we will work together on few projects that we will jointly develop. But as and when -- I mean that thing is more clear or we have better conclusion, and we'll get back to you on those issues. But right now, it's difficult to say unless we specify like which products we are going to jointly design and develop.
The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
Best wishes for the year, for the time ahead, sir, and this challenging time. Sir, you've mentioned some proprietary products, there was a shortage. Is it more on the fuel injection side, that kind of a proprietary product? Is that what you're referring to, sir?
Yes, that is right.
Okay, okay. Understood, sir. Understood. Sir, and you did mention that geography-wise, the Southern geography is seeing very good traction. Is that because of the base effect? Or are there any other reasons behind the Southern geographies are doing better than the rest of the country? Or is there any fundamental reason why we are seeing a more strong pickup in the Southern region as opposed to the Northern region?
That is the main reason because, I mean, water is the main reason because last few years, the Southern market was depressed because of the lack of water. And now since last few months and quarters, the water situation is better, right? And even this year, the monsoon, if it is widespread as it is forecasted then South will continue to fare better. So mainly low base and better availability of water right now. In any case, South is a little bit less underpenetrated as compared to some other states. So I mean that is another factor that South has a bit to catch up.
Right, sir. Got it. Got it. Sir, one point on the gross margin side. I mean you did mention even in the last call that the even 200-basis-point benefit was there because of the inventory costing therein. Now even if you adjust for that, the gross margin seems to be higher than even if you adjust for the 200 basis points. Anything else that has impacted us in terms of gross margin because you did mention the Farmtrac versus Powertrac mix was also very similar. And the greater than 40 horsepower was higher. So anything else that am I missing there? Because the realization is also pretty flattish quarter-on-quarter for the tractor. Any other point am I missing here, sir?
Yes. Other than the inventory part, I mean, there has been a positive on the model mix because we have been able to sell more greater than 40 or let us say higher contribution models in this quarter as compared to same quarter last year, right? So there is an impact of that. Bharat, would you like to add anything to that?
Yes. So I think the major, like mentioned, is on the other cost side. So you look at other cost lines is because of the lockdown, so the major costs have not been incurred. So all your selling expenses, like ATL/BTL activities have been put on hold or deferred, and the traveling, et cetera, for the sales team hasn't really happened, so most of them are working from home and actually trying to have a contactless sort of sales. So I think this is, obviously, evolving into a different sort of business model also in terms of the practice, what we really observe on the field. So that's also have positive impact. But now whether that will continue or not in future, it's something which is difficult to say. But at the moment, I think the business goes to normal, you'll see many things will likely come back into play. But yes, those advantages definitely have been there in this quarter, so -- but which may not sustain actually for the full and throughout the year.
Sir, I -- apologies, sir. I was asking on the RM cost to sales, if you see RM cost to sales for this quarter, it is at 67%. In the fourth quarter, it was 62.2%. But you said there was a 200-basis-point benefit in the fourth quarter because of the inventory line item. Now even if you adjust for that RM cost seems to be higher, gross margin is lower. So what is the point am I missing here? Why is the gross margin lower compared to last quarter? That is what I'm trying to understand.
See in the last quarter, we had a benefit of 2%. This time, we actually incurred a loss. And this time, the percentage is much higher than 2%, so your top line likely declined compared to last quarter. So we...
Okay. What's the exact version of that because...
[indiscernible] on material. It's only a reversal. So that's the only impact. If you remove the both impact from both quarters, they're more or less in the same manner. The margin hasn't really changed.
The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.
So just one question. You -- I mean, you did talk about it, that -- about the 200-basis-point impact of the excess production which got reversed this quarter. And that largely offsetting the 45 days of shutdown, which we had -- where we had some cost savings. But despite that, the top line is down 25% Y-o-Y. I just wanted to understand from this other expense perspective, how sustainable are these in terms of you building on these? I think you did talk about it at the start or in response to one of the questions of actually reducing some fixed costs. So I just wanted to understand how much of this fixed cost is reduced, which can be -- because as soon as the volumes come back, which you are hinting for in quarter 2, 3 and 4, would it be fair to say that you would build on these new level of margins? And going forward, we will see higher margins than what we have seen in the previous past because of your cost-saving initiatives?
That's right, Prateek. So that's what we are working on right now. So I think as we look at maybe in the second half, you will see some actions which we already initiated, and it's cutting down on the way we do business in the normal course. So whether it's in the sales -- of sales or the kind of traveling which used to be there, the kind of activity which we're likely involved in initially. So those things will undergo a change. And entirely, we had taken a target of cutting down fixed cost by 10% to 15% range in this year. So obviously, you won't get the full year impact because this will happen over the period of the year. But maybe next year onwards, we'll start to get to see the impact on the margin front too, if all those activities actually fructify.
In your mind, what is this fixed cost base in an absolute amount? How much would this be for a year? Any numbers, if you can help us through that, if at all?
So on an average, if you look at the numbers, we are close to 175% gross average in a quarter. So it's close to, I'd say, about INR 600 crores to INR 700 crores sort of fixed cost is there.
Understood. And lastly, on your inventory...
Other than manpower.
Yes, yes, yes. And just in terms of inventory in the channel, I think in the opening remarks, you said it's at an extraordinary low level. Could you quantify this? And given that now, the peak season would start in a couple of months, I'm sure you would like to build on that. So are you confident that you would be able to build on to that because we had seen some supply challenges in the month of July. So have you taken any steps so as to not let this reoccur because then it would be loss of sales for us, right, sir?
Yes. So I mean, the biggest challenge for us to ramp up our production and our supply chain, right? So that is the biggest challenge. As I said, we are hoping we are, I mean, working very, very -- in a very focused manner to make sure that we do not lose any more production. Now since the situation with those suppliers that were not operating very well in the last 4 weeks have become pretty much normal or is expected to become normal, right? So the main challenge, I think, would be supply chain. I think for the entire industry, at least for the next 3 or 4 months, at least until the next peak season in October, November, I think the market size as well as the market shares would actually be driven more from the supply side rather than anything else, right? So it is going to be a challenge for sure. But yes, I mean, we are studying the situation very minutely, working with all our suppliers on a daily basis, especially the critical ones. And trying to make sure that we produce at full capacity going forward.
I didn't get the number of inventory days you would have, sir, in the system as of now. Say depot plus channel partners combined or this channel partner if at all.
It is very, very, very, low -- very, very low. So those are almost fixed out completely.
Total combined maybe about 3 to 3.5 weeks between channel and company together.
I mean, generally it's what, 6 to 8 weeks, generally?
So generally, we have about 2 to 3 weeks inventory with the company and roughly 4 to 5 weeks inventory with the channel, yes. You can say 6 to 7 weeks is the normal level. So against that, we are down to 50% level now.
And -- can you take any mitigating steps so that this doesn't happen again in terms of telling your proprietary suppliers to give you in advance a lot of materials, so that you don't run out of or the dependency is low. Are you taking the kind of steps, or...
Yes. Yes, we are -- yes, Prateek, we are working out those measures. I mean that one that you specifically said and a lot of other measures, right? So I mean, even to the extent of raising our inventory of raw materials by a few crores, right. I mean, that is definitely one. So wherever we can, we are like pushing it hard, right? So in producing in advance, for example, for the peak season, buying raw material in advance for the peak season and stuff like that. We are adding into our warehousing storage capacity right now within the plants and sometimes outside the plants to be able to do this, right? And other things also. So wherever, I mean, we can produce in advance, we are doing that, whether internally or through supply chain, right? So that is basically the key right now that if you have enough tractors for October, November peak, then you would be able to sell because the demand is supposed to be quite good in that time.
[Operator Instructions] The next question is from the line of Amyn Pirani.
Yes. My question is on the outlook on rural cash flow. So it looks like the kharif crop will also be a good crop because of the monsoons and the better water level. But is there a risk that because demand may not be up to the market, especially for noncash products like cotton, if that were to happen and if prices were to go down, how does it impact rural cash flows? And then what is your outlook on the same?
Yes. So I mean, we are not seeing any such signs right now, right? I mean, on every crop, we have studied in detail what is the outlook on production and the outlook on price. So we don't see except forbearing, I mean, maybe 1 or 2 crops in certain geographies. We don't see anything like this really right now, right? So one actually positive factor is that the kharif sowing has been advanced a little bit, right, as compared to last few years. And therefore, actually, the season may start a little bit early, which is actually good for everyone because if the season starts early or the cash flow starts early in the rural markets because of the advanced kharif sowing, then -- I mean, retail financiers would be very, very happy and therefore, they will be more aggressive in actually financing new customers, right? So, yes. So I mean, we are not seeing any threat of any of those kinds right now.
The next question is from the line of Priya Ranjan from Antique Limited.
My first question is on the distribution side. You mentioned somewhere around 1,000-plus dealership as of now. So what is the optimum level of dealership which you envisaged? And what is the churn rate? I mean, there will be some churning also in the some noncritical mass or nonemerging markets because sometimes what happens, these guys joins and then lower volume, they quit also. So what kind of churn rate and what is the optimum level of distribution we foresee for ourself across pan-Indian?
Yes. So I think as you know that we have to appoint many more dealers in our opportunity markets, especially in the South and the West. So most of our dealer appointments are happening there, right? So we think that about 1,200 is optimum level for us, given that we have 2 brands and given that we are following a dual-distribution strategy for the last 3 years. So which means that in every city or every market or every micro market, we will have 2 dealers separate for Powertrac and Farmtrac, right? So that strategy, 1,200, it seems is kind of an appropriate level, plus/minus 50.We are already at 1,017. Normally, I mean, last 2 or 3 years, we have been kind of expediting dealer appointments into the South and the West part and other opportunity markets. So this year also, I think, we'll appoint close to 150 dealers. Although quarter 1, we haven't been able to appoint many, right, but we have a strong pipeline. So quarter 2 and quarter 3 will catch up on quarter 2 -- on quarter 1 derailment, right? Yes. So I think in another couple of years, maybe 18 months, I think we should reach an optimum level. As far as the churn is concerned, in our case, the churn is close to about 5% to 7%, right? So that means about 50 to 70 dealers we have to reappoint every year in terms of replacements, right? So that, I think, we'll have to continue unless the churn number changes. But yes, other than that, I mean, other than the churn, I think we should be done as far as reaching an optimal level in about 18 months.
The next question is from the line of Ashwani Agarwalla from Baroda Mutual Fund.
Hello?
Hi.
Am I audible?
Yes, yes, we can hear you. Please go ahead, Ash.
Ok, sure. What was the reason for loss in market share? In the last quarter, we had a good market share of roughly more than 30%. And we have seen 250 basis points decline in the market share Q-on-Q. So can you throw some light on that?
Yes. Firstly, Ashwani, I mean in tractor industry, you have to look at more on Y-o-Y market shares rather than Q-on-Q because there are several factors that affect market shares and industry growth and de-growths in different parts of the country, right? And that is purely because of the crop practices and some other factors, local factors, right? So it is, I mean, better to look at Q-o-Q market share. So for example, if you study our market shares for the last 3, 4 years, you will always find that Q4, we have the best market shares like in absolute terms, right? And Q1 is probably not the best or probably the lowest, right? So I mean, there are factors around that. I mean, that's a long story. We'll cover that sometime later why it is so. But it is better to look on Q -- on Y-o-Y market shares. So in Q1, I think we have improved by about 20 basis points as compared to same quarter last year.
The next question is from the line of Iqbal Khan from CRISIL.
Can you hear me?
Yes, sir, please go ahead.
Sir, correct me if I'm wrong. I think the BS-IV emission norm, has this been delayed to 1st October 2021? Or it's still in place and will be implemented by the 1st October 2020? And if in case it is still in place, what is your preparedness level for that?
Okay. So around middle of June, there has been a draft notification from the government that they want to delay it by 6 months. So the effective date was 1st of October 2020. So they wanted -- they want now to delay it to 1st April 2021. A final notice is still awaited, but that should be coming any time now.
Okay. So to -- is it fair to assume, if in case that gets implemented, would that be affecting the average realization price across the categories?
No, no. So if it gets delayed by 6 months, then there would be no change. I mean we will continue as it is until 1st of April next year.
Okay, okay. Fair enough, fair enough.
The existing norms, yes, existing norms will continue for 6 more months in that case.
The next question is from the line of Hitesh Goel from Kotak Securities.
Sir, on this BS thing, this is only for 50 above, right?
Yes. It is only for above 50 horsepower as far as tractors are concerned.
Okay. And my second question is that when we are talking about rules that there's a talk in the Street right now that because of the crop production being higher, there could be significant fall in the crop prices going forward as kharif output comes in the market, which can have an impact on the farmer cash flows. And also because there's a lot of -- cash income levels of the rural [ households ] is coming down because the payment that they're getting in NREGA is significantly lower than what they used to earn in cities. So just wanted to understand that what is your view with past experiences when crop output is higher, do you think the crop prices will remain stable or it will fall substantially? So these are 2 concerns...
So in -- yes. In our view, I mean, crop production as a parameter always weighs much more heavily than crop price, right? So if you have a great production year, but you have lower prices, I mean, that is positive for tractor industry. That is our view. I mean, that is our experience. Right now, having said that, you know, I mean, government is very, very committed to enhance the purchase of crops, right? So you have seen that in rabi, and you will also see that in the kharif, right? So I think even with better production or even with slightly lower prices, I think the government will come back to support it. In any case, as I said, crop production weighs much more heavily in terms of tractor demand and crop price.
The next question is from the line of Mayur Milak from BOB Capital Markets.
So I was just going through the presentation, and it did state that we are extinguishing our existing number of shares with the trust after we've given half of it to Kubota. Any specific reason after all these years, why are we doing this now?
So this was the understanding which we had with Kubota when we've signed the deal with them, so they wanted the equivalent numbers of shares to go down to maintain the same capital issue. So the initial discussion was to do a secondary offering, but then they are not very comfortable in the purchasing trade shares because there's a legacy [ NSG ] attached to that. They wanted a clean entry into the company, which is why we decided to then go with the preferential allotment of the similar number of shares and cancel the equivalent number of shares in the trust.
Okay. So at this point, because of the change in this now, so your overall equity base does come down by about 10%?
As we've also given special allotment to them. So overall base will not change. So they'll get 10% additional share, which are already allotted now, and we're also canceling the equivalent number of shares, which will happen maybe by end of this year. So overall, capital will be the same.
The next question is from the line of Nirmal Bari from Sameeksha Capital.
My first question is on the secondary sales that you are seeing in the rural areas. So June was -- May and June was possibly very good. But in July, are we seeing some tapering off because of the pent-up demand going away or something like that?
Yes. Nirmal, I mean, still a few days to go for July, yes. But demand sentiment that we are -- or the demand pulse that we are witnessing on the ground, there is no tapering off. Of course, as we know, there have been some supply challenges at the industry level, right? So that may impact slightly, but it will be positive. Industry growth will be significantly positive is what we are expecting right now.
Okay. And my second question is on the railways division. Do we expect a positive growth in the current year? I believe, earlier in some previous quarters, you said that we intend to grow it by 15% as in Q4. So with the current 50% down, do we still anticipate positive growth in this division? And do we have the capabilities to ramp up our revenues to, say, INR 150 crores or above that on a quarterly basis?
Yes. This is Dipankar. I mean what we feel is Q1 is a lift in our whole growth story because first 2 months almost April and May and also in a way, in month of June because of delivery and production issues with the railway customers, we could not deliver. Otherwise, our overall growth story remains still intact. We would be growing whatever we had been committing in the last few quarters. And we do have a significant order book. So we are pretty confident that the month of July as we speak and also August, September and in the coming quarters, we would have a very strong execution and a very strong revenue top line also.
The next question is from the line of Hitesh Goel from Kotak Securities.
This question was heard in the last time. I just wanted to get some sense on the railway business. I thought government projects are going as per track. So very surprised with the railway performance. And I heard you comment that full year, the revenue growth, you're still expecting a single-digit growth. So can you just shed some light what is happening there? And also on the margin side, with the new products coming in, margins, it would be much lower, but you're localizing at a faster pace to improve margins. So can you give some good color?
Yes. So this April, May, June, what has happened is, though April we could not produce. May, June, even though we had orders we had produced, but we could not recognize the bill -- hello, can you hear me?
Hello?
Sir, it seems like we lost the connection for the current participant. Sir, you want to reply to his question or shall we move to the next question?
Yes. Whichever you like. I mean you can move to the next question because once he comes back, we can obviously reply to his question. Yes?
We move to the next question from the line of Raghunandhan from Emkay Global.
So on the tractor side, given the favorable demand/supply situations, the -- how has discounts and marketing costs trended in the first quarter? And whether that reduction in discounts is likely to sustain even in the coming quarters? That was one.And also, if you can throw some light on commodity cost benefits in current quarter and expectations ahead?
Yes. Raghu, so discount is, of course, not the name of the game right now and will not be the same until we get our supply chain ramped up to the levels of the demand, right? So discount is going to be subdued, I mean, for some more time, at least until the supply chain gets back to normal levels. So the second question was around commodity prices?
Yes, sir. So the commodity prices have been softening. So just wanted to get a sense on how have been the benefits in the current quarter and whether more benefits are likely to accrue in the coming quarter?
Yes, Bharat.
Sorry. Can you repeat your question, please?
On commodity prices, I think.
On the softening commodity prices and benefits.
Yes. So I think in this quarter, obviously, the prices continue to be soft. So we're not seeing any pressure on the inflation right now, and we don't expect it'll happen in the next quarter, too. But we can't say because obviously, the rupee depreciation has happened, so they are indirect imports which are involved with the industry. So some impact may happen maybe in the first quarter, maybe Q3. So -- but as of now, we're not seeing any early impact coming in. So there's no visibility as for this quarter and Q2 also.
Understood, sir. And sir, like Escorts had launched a tractor on pilot basis in the rice specialized segment. What are the expectations ahead on the product launches for this segment in future? And how can Escorts make a presence felt here?
Yes. So right now, we are trying to ramp up that production of the rice special tractor. Of course, because of COVID that has been hit in a very, very severe manner. Because this tractor for right now, there are a lot of outsourced components that we buy, including some aggregates, right? So that is why this has been impacted much more than the rest of the product line, right? So on the demand side, I mean, this tractor is doing very, very well. After some customer seeding and testing and all that, we have made some improvements. And now the tractor is performing very, very well. Rice sowing markets like West Bengal, Orissa, Chhattisgarh the entire Southern rice belt, this tractor is generating a lot of positivity for us.In terms of the next tractor or more tractors, there are -- there is a plan to bring a couple of more additional models in the rice special category, but that are not in this year's horizon. So right now, the focus is on ramping up what we have right now to meet the demand.
[Operator Instructions] The next question is from the line of Dhaval Shah from Girik Capital.
Hello. Am I audible?
Hello? Yes, please, go ahead. Yes, yes. We can hear you.
Sir, my question is on the construction machinery business. Sir, do you see an increased demand for forklifts given there was a labor shortage and some sort of basic level of automation where the companies have opted for and might continue in the future if that's yielding more productivity. What is your sense on that?
This is Ajay. See, the demand side, even in the forklifts, the market is almost 30% of last year's same level. So...
Sir, your voice is not very audible. Hello?
Is it clear now?
Yes. Better, yes.
What I'm saying is the market was similar to construction. It was about 30% of last year's levels. And we expect that H2 onwards, that will also recover to some extent.
Okay. But particularly on the forklift as a product category because the other are more linked to be construction -- the broader construction segment. But post-COVID given the labor shortage less for on the forklift side.
Really no impact has come there. If you'll ask me, the market has been on a very, very downsize level. And I think this month, there's going to be some recovery that is going to happen, both for construction equipment and for forklift. And from now onwards, probably we are in a recovery phase.
Okay. And sir, just one more question on the finance part. If I'm correct, you mentioned INR 30 crore to INR 35 crore of fixed cost, which was not incurred because of this 45 days of lockdown. Is that number correct?
Yes. So it's a rough estimate. But yes, to that extent, it'll be there in this quarter.
Okay. So Q2 onwards, the 10%, 15% reduction which we are planning to do in our fixed cost that should be reflective now.
Well, since we had just opened up and we have started taking initiatives, so I'll say, I think the impact will start coming in more in the second half than in Q2. But yes, some impact will be there, but I think it will take time because there's some notice period required to shut down your offices or to close down those issues? So I think those things will be there. So it will take some time. It won't happen immediately. But yes, from second half, it should start getting reflected.
Okay. Sir, just one more question I may ask you. And sir, on the Kubota side, when will the entire JV business start and the exports out of here will start reflecting in our P&L?
The exports of Kubota has already started in Escorts. So whatever -- our tractors have already started going to some of their network. For example, we started exporting to South Africa now. We are sending some tractors to Turkey, in Europe. We're also sending some tractors to Thailand for testing. So the exports from Escorts has started.Now for the JV to start production, we expect the production may start sometime in -- towards the end of September, maybe end of this quarter, which will start with Kubota model. And initial, obviously, the requirement will be more to meet the domestic needs, which is what they will do and maybe the export will really start, maybe once the production stabilizes and gets ramped up. So I think as of now, initially, their levels will be low.
Okay. So by FY '22, we should see some Kubota branded tractors getting exported.
Possible.
And we will be reporting it separately?
So that will be in the JV, not in Escorts. Kubota brand's products will get sold in the JV only, which is not a listed company. What Escorts will export will get reflected in Escorts. So that will be our tractors or the tractor which we get made through the JV.
Next question is from the line of Hitesh Goel from Kotak Securities.
Sorry. I got dropped off. My question was on the railway business. You could hear me?
I mean -- yes, we could hear you. Yes. So basically, what I was trying to say in the previous question also is that the January -- sorry, the April, May, June sort of a quarter was more of a blip or a misnomer out there because of the fact that we could not deliver. There was no issue with production or our order book, particularly, the railway units were closed because like ICF Chennai, they had a lot of COVID cases out there. So they had totally shut down and there was no delivery being allowed, same with MCF Raebareli. That's why we have a blip in the EBITDA margin and also in the -- particularly the top line out there. But going forward, the production units have reopened, though, with skeletal staff, but the billing and the delivery is being allowed now. So what we see is that, I mean, the July, August, September, we would be able to recover quite significantly. And going forward, if the -- if there is no more of such sort of a lockdown, we should be coming back to our normal way of growth, and we should be growing the way we would have been growing. But obviously, whatever we lost in the quarter, it will be difficult to recover in the coming 9 months. But we would be attempting to see what we can rescue out of that particular gap.Coming back to your second question of EBITDA, we would be maintaining the EBITDA. Yes, there are import contents out there because a lot of orders are there with import content, but we are working significantly for our own localization program. And with the new Atma Nirbhar Bharat initiative launched by the Prime Minister and also Railways going in for a lot of local vendor -- local content requirements, we hope to get our localized brake systems and our localized products get approved pretty soon, maybe within this year itself. So that will give us a significant jump in the EBITDA, if we succeed in our localized content approval.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
Two questions. One is with respect to our gross margins that are at reported level. What we have seen is from fourth quarter and first quarter, primarily, last 2 quarters, the average gross margins have improved about 200 to 250 basis points on year-on-year basis or Q-o-Q previous quarter basis. So is that a reflection of the reduction in discounts which you have seen because of the demand improvement from December onwards and now the supply side issues further -- are resulting in reduction in discounts or there is something else to it?
So Jinesh, if you look at the first 6 months of last fiscal, actually, there's a lot of correction happened on the channel front on the inventory side. So the market suddenly turned negative and sales were not expecting the way we had planned. So whatever inventory got built up in March, '18 actually was getting corrected -- sorry, March '19 was getting corrected in the subsequent 6 months. So that's why the production was quite low. We cut down production in the 6 months by 35%. So that has an impact on the margin in the first 6 months, which got normalized in the Q3 and Q4 quarters, where the production is more or less equal. Likely in the Q4, the margins -- there was a build-up of inventory, so higher production actually than the normal level. So -- but if you look at -- even ignoring that 2% impact, in Q3 and Q4, the margin were at a -- exit rate were pretty good, which is the same trend which we are displaying even now.
Okay. Effectively, for normalized production, these kind of gross margins are more or less sustainable, except for any increase in variable marketing cost.
That's right. That's right.
Okay. And you also alluded to the fact that product mix on 40 HP tractor and above has increased. So can you indicate what would be the contribution of 40 HP and above now versus, say, fourth quarter or first quarter last year?
Bharat, do you have those numbers handy right now?
So in Q1, this time, the promotion of more than 50 HP is about 62% of the total sales, which was 45%, 46% in the last year in the same Q1. And close to 50 -- I think, 57% or 58% in Q4. So...
So you're saying 62% for 50 HP and above.
No, no. 40 HP.
40 HP.
40 HP and above is 62% this year -- this quarter and last year it was about 57%, 58%.
45%, 46% in Q1 last year corresponding period.
Okay. Okay. Got it. And fourth quarter, this year, you said 57%, 58%.
Yes.
Got it. And lastly, what was the CapEx for this year?
So this year it should be anywhere -- somewhere around INR 225 crores to INR 250 crores range. So although in the first quarter, we had not really spent much money because of lockdown and also -- because uncertainty, a lot of CapEx was actually deferred. But now -- today only I think we got this approval from the Board for the expanded program. So whatever projects were put on hold now, we are actually reviving it, which are more midterm and long term in nature. So it will all account around the new product development and capacity expansion and also some CapEx which are being incurred for our JV because we are creating that building and infrastructure for the facility. So those projects will continue. It will be somewhere between INR 225 crores to INR 250 crores range this year.
Okay. You plan to add capacity in stand-alone entity as well, given that there will be also capacity in the JV?
So we were building a machining capacity, actually. So we built some capacity last year, but we did not spend the whole money. So actually, we deferred some of the CapEx loss since the JV didn't come up in time because of various issues, the lockdown which happened first, because the pollution issues through the NGT shut it down. And then again, because there is COVID-19 situation now. So now we'll be continuing with that spend. So that capacity for machining will get used for both the JV as well as by Escorts. So it will be common capacity but created in Escorts. And this is the old one which was continuing. So this will add another 50,000 capacity on the machining side, which we were missing earlier.
The next question is from the line of Bhaskar Bukrediwala from ASK Investment.
Yes. This was with regards to money that comes in as part of the allotment to Kubota, which is fairly substantial, close to INR 1,000 crores. So -- and anyways you will have a good cash accruals for next couple of years given that the tractor is in the right cycle. So just wanted to understand, I think this money, what would be the intended utilization for the same?
So like we'd mentioned in the earlier calls, too, so there's a joint business plan which both teams are working on right now, and we expect by end November, Kubota has indicated they'll be ready with the plan what they will do in India and which we'll need to work upon jointly. But this money is a restricted use for the purpose of collaboration what we have actually entered into with them. So that plan will be available to us by end of November. So I think as soon as that is there, we'll share it with all of you. This will really be around collaboration principles and scope, which is basically centering around our tractor business, their implements really into this business in and around joint R&D setup, and there are some of the construction equipment like backhoe and excavators, which we want to go into.
Okay. So this money, essentially, I mean, whatever will be used, will be broadly under collaborated list, your future plans with Kubota?
That's right.
The next question is from the line of Aditi Mhatre (sic) [ Aditya Makharia ] from HDFC.
Yes. This is Aditya Makharia. My questions have been answered.
The next question is from the line of Arun Subrahmanyam from Ampersand. As there is no reply from the current participant, we move to the next question from the line of Sandip Verma from Axis Bank.
Sir, in Escorts, what is the total CapEx plan for the current financial year? And what is the gross debt as on June 30?
So as I mentioned in response to the last question. So the CapEx plan for this year is somewhere around INR 225 crores to INR 250 crores. And the debt as of June 30 was only INR 6 crores at the June 30 date.
The next question is from the line of Abhishek Jain from Dolat Capital.
Just wanted to know what is the contribution for the subsidy-based tractor volume for industry? And given the pandemic situation and limited fiscal space with the state government, what is the outlook for the second half? Will it impact the overall tractor volume?
Yes. So yes, last time also, we said that last year, subsidy business was not as good. But this year, it is expected to come back, right? So there are a couple of schemes which are already undergoing, right? There is 1 in Assam, which is going full stream right now. And there are some more on the an anvil, right? So I think this year, subsidy will play a good contributor to the industry growth overall. And -- I mean, right now, the estimate is probably 7% to 8% of the industry will be through subsidy.
Okay, sir. And the last question related with the export, what is the load volume target for the medium to long-term in export?
Yes. So in our Vision 2022 document, we had said that we'd like to reach somewhere close to about 8,000 to 10,000 tractors in exports. Last year, we were close to 3,000, right? So there may be a slight kind of delay in that maybe 6 months to a year, right? But still, we are looking at something around 8,000 to 10,000 tractors in next -- reaching that level in the next 3 years or so.
The next question is from the line of Hitesh Bhargava from B&K Securities.
Yes. Sir, one question. Sir, can you just explain what will be the replacement cycle? I mean like you will be -- there will be any change in the replacement cycle during the up cycles? That's my first question.
Sorry. Replacement cycles in what?
I mean replacement cycle now for tractor segment. During this upcycle, I mean, like now we are seeing -- after a degrowth in FY '20, we are seeing the growth in FY '21. So will there be any change in the replacement cycle of tractor in the replacement demand? How is it?
No. So replacement cycle is going to be shorter as we go along, but it's a slow phenomenon, and it's a long-term phenomenon, right? So over the last many years, we have seen that the replacement cycle is getting shorter, right? And that will continue to happen.
And what is it now, exactly, sir? What is it may be like 3, 4 years back?
I don't have that information handy right now. But generally, from the top of my mind, I can say that it has -- it would be roughly about 7 to 8 years right now. In some markets, I mean, it varies from market to market. Like in some mature markets like Punjab and Haryana, it is as low as 4 years also, right? But in some other markets, it is still like more than 10 years, right? So I think the average would be about 7 to 8 years, and it is getting shorter as we speak. I don't have the exact data right now, handy, but I can come back to you later on this with more precise data.
Okay, sir. My second question is like, what will be the share of replacement now? I mean like out of the 100 sales or something which we sell now, what will be the share of like replacement for first 9 months?
Yes. The replacement demand, again, I mean, it varies from market to market. So for some markets like Punjab, let us say, the replacement demand is as high as 80%, 85%. And in some markets, other markets which are not as mature, the replacement is only about 20%, 25%, right? So on an average, the replacement demand would still be like -- almost like 45% to 55%.
The next question is from the line of Jay Mehta from Edelweiss.
Sir, just one question. I missed that answer on your view on higher crop production and lower crop prices because 2 years back, we had seen this phenomena that higher crop prices led to a sharp fall in earnings capacity, and it had a lag effect on the demand also. So I just missed your comment on that side. Sorry if you are repeating the answer.
No, no. No problem at all. I mean of course, it depends on the quantums also. I was making a generic statement that if the crop production goes higher, and proportionately the crop prices go lower, then actually it is in the benefit of [Technical Difficulty]. But yes, I mean, it really depends on the quantum, right? So I think you are referring to a period when there were like in some of the cash crops, the prices tanked way below the expectation, and that is why there was a negative effect. So this is why we can remember -- I mean what I can remember from my memory is like onion prices, the cotton prices, they went really, really down, right? And some of it was a result of the crop production, but there were some other factors also involved in terms of export demands, et cetera, right? So yes, I mean, of course, time will tell how much the quantum could be or would be, right? But generally speaking, if the production and price change in proportion, and the production is better and the price is lower, then that is in the favor of the tractor industry as per our experience.
Yes. And sir, just one last question...
See in future as we go along in India, and this is, again, a long-term comment that I'm making, right, this will weigh -- production will weigh even more and more heavily as the storage capacity, as other means, as export channels, they open up more and more, warehousing opens up more and more, I think production will weigh more heavily than the prices in that -- I mean, going into future.
Yes. Sir, just one clarification. So you indicated this year, the kharif season has got preponed because of early onset of monsoon. So would it be right to make a statement that there is a preponement of demand also and the right way to analyze the demand is based on average 3-month basis for the entire season rather than looking at just monthly number? So should June be slightly...
I think the preponement of kharif would actually reflect in a preponement of demand, not right away, but it will reflect in like September, October, November period, right? So if the preponement has happened like by 15 days or 3 weeks, right, then in certain area, then to that extent, the cash flow will also happen slightly earlier, right?So like this year, like normally, what we see is that the huge concentration of the demand between the Navaratri and the Diwali period. So this time, there are 2 things happening. One is that the Navaratri and Diwali is postponed as compared to last year, so like by about, let us say, about like 10 days or so. So Navaratri and Diwali are pushed out, I mean, into like mid of November -- Diwali in mid of November, right? So that is one. But at the same time because of the advancement of the kharif, I mean cash flow would start happening a little bit earlier. So -- because of these 2 factors, I think there will be a more balance demand in September, October, November, rather than like more concentrated demand between Navaratri and Diwali period.
The next question is from the line of Rajit Rajoriya from Angel Broking.
My question was on breakeven sales.
Mr. Rajit, your voice is breaking up. Can you repeat your question?
Yes. Breakeven sales number for construction equipment numbers, sir, can you please share?
We mentioned in the opening remarks, so this is right now in the range of 230 to 250 machines a month.
The next question is from the line of Kuber Chauhan From BP Equities.
Yes so my question is to -- can you give me -- can you give us a breakup of CapEx for construction for tractors and also for railway equipment within the sectors?
So major CapEx, obviously, for the total spend will be on the tractor business only. The construction/railway will be very, very small, say, maybe somewhere -- something is in proportion to maybe the contribution on the revenue side. So we don't expect it'll be really significant. So maybe roughly INR 30 crores, INR 40 crores maximum CapEx going to this division, the balance will be all for tractors.
The next question is from the line of Jigar Shroff from Financial Research Technologies.
Sir, if you could shed some light about this 40% that you are going to invest in the Agri Machinery joint venture in terms of the products to manufacture and the size of opportunity?
So this is the sales company of Kubota in India. So they -- so we have a JV for manufacturing of tractors, so which is separate 60-40 JV. So they were already operating through another JV partner, Sumitomo Corporation in India. And this was, again, a 60-40 JV with Sumitomo and Kubota. Now Sumitomo is exiting from the JV, and we are going to enter into that JV as a partner with Kubota. So ultimately, plan is to merge both the manufacturing and sales company and be an integrated company, where we'll be 40% partner along with Kubota.
Okay. So I mean this is also basically going to cater to the tractor industry only, not -- I mean, Agri equipment -- I mean that we were...
So this -- so they deal in everything. They have got implements today. They also do export of component from India, they also do the trading in tractors. So it's essentially into the pure agri play right now.
Okay. And what is the size of opportunity we're looking, anything ballpark or anything?
See, right now, last year, they had a sale of close to INR 1,000-odd crores, out of which about INR 600-odd crores was in the tractor business, INR 200 crores from the implement space and roughly INR 200 crores probably was on the export of component from India.
We take the last question from the line of Sameer Deshpande from Fair Deal Investments.
Congratulations Mr. Madan and all the directors of Escorts for the decent show despite the excellent -- despite the very bad COVID situation and also completing the Kubota deal on time. So that has really helped and in future, it will help us. Actually, I wanted to know, we had declared last year that we would launch a product name Rider for this multipurpose transport vehicle for the rural areas. So when are we planning to launch that?
Yes. So I don't think we announced that we will launch next year. I think we just said that we are coming up with a concept, and we will study the market and see what is the right time to launch such a product, right? So that study is still continuing. Yes, because of the COVID, there has been a little bit of less focus on this than some other things, right? So we will revise this maybe in a few months and then decide on the appropriate launch time.
So it will take some more time. And regarding -- this is to Mr. Madan, regarding the commodity prices, we have been quite favorable in the Q1 and even Q4. So does the trend continue to be the same in this quarter going forward?
Yes. So looks like -- so we are not seeing -- normally, in our case, we pass on the commodity prices to the suppliers with the lag of a quarter. So since Q1 is soft, obviously, we'll not pass on anything in Q2. But if Q2, if we see any inflation setting in maybe towards the end of the quarter, so that impact only will come in Q3. So at least for Q2, we don't see any inflation pressure will come.
Sir, overall, the situation is not -- actually, it is going up and down. So -- but some of the commodities, I think the prices have started rising recently.
Yes. So like I said, since the exchange is obviously not favorable and rupee has depreciated in the last 3, 4 months, so wherever the imports of commodities are happening, so that obviously will get priced in. So it depends on whether the suppliers are importing the material or they're actually buying locally depending on availability. So that will...
Regarding the production, which we were facing the problems, we faced most of the problems in June or we faced major problems in July?
Mostly in July. I think we started facing the problems towards the fag end of the June, last couple of days, the last 2, 3 days, but mostly in July.
So 3 weeks of July, you had some supply issues, major.
Yes. Three weeks of July and a few days of June, yes.
So now they have been resolved. So from August onwards, we will see the things to be normalized.
Yes. It is under resolution as we are there. So every day, the situation is improving. But I think by mid of August, we should be back to full capacity.
We take the next question from the line of Satyam Thakur from Crédit Suisse.
A couple of questions from my side. So the first one is on this distribution expansion that we are doing. Last year, we added a lot of distribution in the South and -- because also the churn was a lot. So while the net additions was still lower, but gross addition seems to have been very high because churn was very high in the South. So if you could just help understand that a little better that what really caused this increase in churn in the South last year? Was it more from the retailers' side, from distribution side that they wanted to kind of move out? Or was it more from our side that we wanted to kind of push out some of the people who were not performing as well? And does this lead to kind of, number one, increasing any -- the margins kind of that we share with dealers in the South because a lot of these guys are new that we have appointed now? And secondly, are they ready now because like you're saying that South seems to be doing a little better this year. So because a lot of these dealers might be new, so are they going to be ready to kind of take-up that market share or will they still not be mature enough? That's the first question.
Yes. So yes. So just a general comment on the market share in the South, as you have seen that we have been growing for the last many quarters now consistently. Even in Q1, I think we improved by about 120 basis points in the 4 states of South. And the good thing is that we are growing in all the 4 states, not just 1 right now. So all 4 states had to contribute to this 120 basis point improvement in Q1. We are, I think, very, very close to 5% market share now. And in some states, we are actually close to like 8.5%, 9% also, right? So that is just a general comment. The other thing is that -- I mean, that comments in itself tells you that there is higher confidence in the distribution channel with our brands now than it was in the past. The other thing specifically to the churn is because of the fact that we have totally kind of changed in a very, very dramatic way, the way we are addressing the South market. So we have a project called Project Bahubali where we are appointing dealers. And right now, it is running in Telangana, right? So we are appointing single S dealers there, which means the dealers are only supposed to sell. That is one thing. The other thing is that we are giving them very, very small areas. So it's a very, very different distribution system as compared to the traditional system that is being followed by players like Mahindra and John Deere in South. So for example, Mahindra, John Deere in Telangana would have probably 30 to 35 dealers in the whole state, and we would probably have more than 150 dealers in the state. Now we are not calling them dealers, but we are calling them something else, like a retail form entrepreneur or something like that, right? And the whole idea is that this dealer would have very, very low investment. They would focus on a very small area. They would invest -- they would cater to a very low industry. These people will come from a rural background, so they will be -- not be established salesmen, but these will be young entrepreneurs who have a lot of local connect, et cetera. And they are going to manage only 1 S, which is sales. Because the service and the parts thing, we are creating a model in South now, where it will be direct from the company and 100% doorstep, right?So this kind of a model has given us lot of benefits now in terms of our penetration in the South and in terms of the customer experience and in terms of the confidence of the brand, right? And our intention is to kind of take this to the entire South gradually, right?So I mean, because of this model, we had some extra churn because some of the dealers who did not want to accommodate into the new model that we wanted to do had to be kind of parted away with, right? So that is the thing. And you will see a little bit more churn going on as we expand this model through the rest of the South. I mean right now, we are in half of Telangana. So for right now, we are focusing on expansion to Telangana only. And then later on, maybe we'll expand it into the rest of the states of South.
Okay. That makes sense. And the second question that I had was on, so I understand that your margin in the export business is a little lower by contrast to the tractor margins in India. If that is true? And then does that kind of distort the margin mix for us if the share of exports is going to go up sharply in the next 2, 3 years or so? Or how do you compensate that? Do you see the margins improving structurally in the export business and especially with Kubota -- as you are starting to sell through Kubota channels, what does that do to our margins in export? Does it leave it where it is or take it down or up?
Yes. I mean generally, if you see our peers also, the margins in exports would be slightly lower than the domestic because I mean you are -- I mean, normally, in export -- in countries outside India, you are a new player or not a very significant player. And therefore, you have to do many things to kind of -- to penetrate the market, right? So overall, yes, you are right. I mean, as we go along, we increase our export footprint. The margins on that on export tractors would be lower than the domestic tractors. But however, there is a huge opportunity that can be explored, right? So every tractor we sell helps us in kind of neutralizing or absorbing our fixed costs, right? So to that extent, I think it makes perfect sense. I mean -- yes, but of course, you are right, the export margins would be slightly lower than domestic margins.
I now hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen, for being present on this call. For any feedback and/or queries, please feel free to write into us at investorrelation@escorts.co.in. Thank you very much, and have a good evening, and please stay safe and healthy. Thank you.
Thank you. Ladies and gentlemen, on behalf of PhillipCapital (India) Pvt. Ltd., that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.