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Ladies and gentlemen, good day and welcome to the Escorts Limited Q1 FY '22 Conference Call hosted by Anand Rathi Share & Stock Brokers. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vijay Sarthy from Anand Rathi Share & Stock Brokers. Thank you and over to you, sir.
Thank you, Nandija. Good evening, and on behalf of Anand Rathi, I welcome you all to the Escorts Limited Q1 FY '22 Results Earnings Call. I'll also take this opportunity to welcome the management team from Escorts Limited. We have Mr. Bharat Madan, the CFO and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO Escorts Construction Equipment; and the Investor Relations team at Escorts. As always, we will start the call with brief opening remarks from the management, followed by the Q&A session. Before we start, I would like to add that some of the statements that we make today will be forward-looking in nature and are subject to risks as outlined in the analyst presentation. At this point, I would request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Vijay. Good evening, everyone, and thank you all for joining us on this earnings call for the first quarter ended 30 June 2021. I trust each of you and your families are safe and well. At Escorts, safety and well-being of our customers, dealers, suppliers and employees is of utmost importance. I am pleased to inform you that our employees, including third-party role workforce, have been vaccinated against COVID for the first dose, and the vaccination drive for a second dose is on. We continue to take all the safety precautions in all of our business ventures as per government guidelines. A few highlights of the company's stand-alone performance for Q1 ended June 2021 are as follows. Please do note that due to COVID-19 impact, the figures for the current as well as corresponding previous quarter do not reach the normal level of operations, and to that extent, are not simply comparable and growth figures may be skewed. Coming to the highlights. Revenue from operations was up by 57.5% at INR 1,671.5 crores as against INR 1,061.6 crores in Q1 last year previous fiscal, led by growth across all 3 divisions. Tractor sales volume up by 42.9% year-on-year to 25,935 tractors, our highest sales volume for this quarter. Construction Equipment sales up by 159% year-on-year to 606 units. Railway Equipment Division sales up by 117.5% year-on-year to 119.4 crores. EBITDA at INR 233.2 crores is up by 95% as against INR 119.6 crores last year quarter one. EBITDA margin for Q1 FY '22 at 14% is up by 269 basis points as against 11.3% last year same quarter. The company continues to be net debt free, with sufficient available liquidity for growth. PBT at INR 246.1 crores is up by 103.3% as against INR 121.1 crores last year same quarter. Net profit more than doubled to INR 185.2 crores as against INR 92.2 crores last year same quarter. On a consolidated basis, financial performance for Q1 FY '22 is as follows: Revenue from operations was up by 56.2% year-on-year at INR 1,701.8 crores. EBITDA at INR 236.4 crores is up by 94%. Net profit improved to INR 178.5 crores, is up by 92.8%. EPS at consolidated level stands at INR 18.13, as against INR 10.78 last year same quarter. Now moving on to the segmental business performance, starting with the Agri Machinery business. The domestic tractor industry volume for the quarter ended June 2021 went up by 38.9% to 229,000 tractors as compared to 165,000 tractors in same quarter previous fiscal. This is on the low base of last year, especially of April, when the company was in the lockdown. So just May and June growth, excluding April is at 8.3%. This is the highest-ever industry volume for April to June quarter. All macroeconomic factors remain positive. Monsoon after a 3-week hiatus has recovered well and kharif sowing also has got pace. This, coupled with all-time high of the wheat crop procurement by the government augurs well for the industry in the next few months. Most of the dealerships are now open and can fully serve customers. Our domestic tractor volume was at 24,500 tractors in quarter ended June 2021, as against 17,690 tractors in same quarter previous fiscal. This is a growth of 38.5%, which is almost in line with domestic growth. Our dealer inventory level in terms of number of days of sales continues to be lower than the industry average. We continue to embark on our growth path by leveraging our 2 brands, Farmtrac and Powertrac, through differentiated new products and through dual distribution strategy. Our total dealer count in India now stands at 1,100-plus with most of our new dealers coming up in Southern and Western regions. On back of new product launches, the penetration of our product has been increasing in more than 40 HP tractor segment and during the last quarter also, 60% of our total sales came from above 40 HP segment. We're also now focusing on agri implements in the [indiscernible] segment and have launched 2 major product lines here in the previous quarter. On export side, industry was up by 146.7% to 26,600 tractors as compared to 10,800 tractors in last year Q1. Our export volumes went up by 212% to 1,435 tractors as against 460 tractors in Q1 last year. This is driven by focus on product development and [ onboarding ] new channel partners. Sales to global Kubota network are also gradually increasing as we are ramping up our supplies to global Kubota network. EBIT margins for Agri Machinery business went up by 112 basis points to 15.6% as against 14.5% last year Q1. Despite 3 price increases in the last 9 months, inflation in raw material prices is continuing to adversely impact our contribution margins. In quarter 1 of this fiscal, we have been able to partly neutralize this impact through cost savings and through higher volumes. Now coming to the Construction Equipment business. Our served industry, comprising backhoe loader, pick n carry cranes and compactors, grew by 66% in Q1 FY '22 over Q1 FY '21. Crane industry grew by 214%, but has shifted to price-sensitive Hydra segment. Compactor industry grew by 110% and backhoeloaders grew by 44%. Our total volume comprising both manufactured and traded products grew by 159% to 606 machines as against 234 machines in the previous fiscal. Segment revenue went up by 168.3% at INR 140.8 crores as against INR 52.5 crores in corresponding quarter previous fiscal. EBIT margin stood negative 2.3% for the quarter ended June 2021 as against negative 32% in the previous fiscal. The second wave was more widespread and severe as compared to the first wave. But the ecosystem was better prepared this time, localized in selective lockdowns and related lower level migration, resulting in better productivity on project sites. Our concerns related to likely subsequent waves, increased prices of equipment due to CEV IV emission norms implementation and commodity inflation and tighter financing control are expected to get neutralized over the next few quarters. We expect going forward with government trust on asset monetization, Build India trust to revive the economy and improve liquidity, liquidity is widely expected to recover to its full potential from October '21 onwards post the monsoon season. With road project execution targets set at 40 kilometers per day, against 37 kilometers per day achieved last year, Construction Equipment growth looks promising, road construction being the largest driver for Construction Equipment demand. For full-year FY '22, we expect Construction Equipment segment to grow in mid-teens and margins for the segment to improve further, led by our various operating matrices and breakeven point reduction measures that we have spoken about many times in the past. Coming to the Railway Division. Revenue for the first quarter went up by 117.5% at INR 119.4 crores in quarter ended June '21 as against INR 54.9 crores in the corresponding quarter. Sales from new products more than doubled and now contribute 63% of total division sales as against 43% last year corresponding quarter. EBIT margin for quarter ended June '21 stood at 14.6% as against 2.6% in the previous year. Indian rail is still not running its full operations due to unprecedented COVID-19 pandemic and have cut down their annual production rate, affecting fresh order tendering and order inflow. Order book for the division at the end of June '21 was more than INR 300 crores. And going forward with government safety measures and vaccination drive picking up at fast pace, we expect that tendering process will get back to pre-COVID levels within the current fiscal year. For FY '22, we expect Railway Equipment segment to grow by lower double digits and margins for the segment are likely to be maintained around last year's level. I request the moderator to open the floor for Q&A.
[Operator Instructions] The first question is from the line of Gunjan Prithyani from Bank of America.
Thanks for taking my questions. I have 2 questions. Firstly, if you can give us better color on the demand side? Clearly, Q1 initially, we did see the lockdown impact. But in terms of on-the-ground fundamentals, what are you seeing? And also, if you can give some sense on the inventory situation in the market? I'll pose the second question afterwards.
Gunjan, is that for tractors?
Yes.
Okay. This is Shenu. So as Bharat has also explained in his opening remarks, the industry was roughly 39% up in quarter 1. But we have to see it in the light of last year's lockdowns, where April was very, very slow last year. And therefore, if you just look at May and June, the industry growth is roughly around 8% instead of 39% that appears from quarter 1 because of last year's slowdown in April. So that is what I think is the real kind of industry growth we have witnessed so far, roughly between 6% to 8% since the July data is already out. So we know May, June, July is roughly around 6% growth. Now, so the macroeconomic factors are quite okay, positive. We had a little bit of a worry in the middle of June, when the monsoon kind of slowed down and therefore affecting the sowing of kharif crops. So there was a slowdown in monsoon for about 3 weeks. But fortunately enough, the monsoon recovered very, very well and in a very short period of time. And therefore, today, I think we are pretty much okay on the rainfall. And also, sowing has caught up pace by now. And even on sowing, I think we are good right now. So although there was a worry in the -- in a couple of weeks to 3 weeks, June -- mid-June to mid-July. But now I think the sentiment is again positive, since monsoon is fine and the sowing is also fine right now. So on ground, we see no challenges, really. Right now, the prices are good. The production has been good. The procurement has been good of the [indiscernible]. So the sentiment is, of course, positive.
So would you stick with the guidance? Or is there any case to revisit the guidance for F '22? I mean positive growth of what magnitude, if you can talk about that?
Yes. So right now, I think we'll stick to the guidance. Yes, a lot has to be seen during the festive season. But as I said, the sentiment has become positive again now. So we are expecting a good festive season coming up, which is like Navratra to Diwali, yes. But overall, we'd like to stick to the estimate given before in the industry.
And second question is on the margin side. It will be great if you can help us understand like what kind of commodity hit we saw from compared to last quarter and the price increases taken? From what I recollect, last call, you all had shared that there was an under-recovery of 3% or so, has been -- incrementally, what has been the movement on both, commodity as well as the price? Sorry, again, this is on tractors.
Bharat?
So Gunjan, as we mentioned last time also on the call, so the commodity, like we've been passing on the price increases to the market with some lag. So the lag is roughly a quarter. So in the June quarter, we had passed on all the cost increases which happened in the March quarter. And then the June quarter inflation, we have passed from in the month of July, we've only taken 1 price increase now has been announced, which is the third price increase which we've done in the last 9 months. So as of now, as we stand at the end of June, the entire inflation til June has been passed to the market. But yes, so there's further inflation, which is coming up in the current quarter, which obviously we are not sure, it may be again another 2% which will happen. So that's something which will have to be seen, when do we pass it on in Q3 or later. So that's something which we're still observing. So definitely it's still not ended, so the inflation pressure continues. So it's not as severe as we saw in the last quarter, but the pressure is still on. So let's see how the industry reacts to that going forward.
So if I got it right, your incremental, there is still 2% pressure from the commodity side that we could see in this quarter, keeping the operating leverage aside?
That's right.
Okay. And just last thing, if I can ask. Cumulatively, can you just give us a perspective of how has been -- how much has been the commodity increase since September last year or just last 4 quarters? How is total increase versus total price increases taken by exports, just cumulative number, if you can share?
Cumulative, I think on the material cost part, it's almost 10% to 12% cost increases, which we've seen already happen. And then we have, on the sale price, it will be close to 7%, 8% sort of increase which has happened. So we were able to pass on that increase so far in the last 3 price increases til June. And like I said, 2% is still further, which will come up in this quarter. So that will be later. So cumulatively, almost 10% of the realization, which has come out in price increases and with the inflation.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
My question, first question, is the outlook. So are we maintaining our guidance of about 5%, 6% growth for FY '22?
Jinesh, this is Shenu. So yes, as I said, we are sticking to that guidance of low single-digit increase in the industry right now. As I explained, if we look at this May, June and July, the industry growth has been roughly 6%. I think we should be lower April because of last year's low base in April, right? And we think from month-on-month, it may change because last year, there was many ups and downs because of supply chain situation, yes. But overall, I think we will maintain roughly around this kind of a guidance.
So it's like wouldn't that guidance effectively mean that for the remaining 9 months or remaining 8 months, there would be no growth, in fact a deteriorating kind of a scenario? Is that what you're looking at? Or you're indicating, I mean similar 5%, 6% growth, of low digit growth for remaining 8 months as well?
No. So overall, for the year, we are saying roughly low single-digits. So that is what we are saying right now.
Okay. Understood. And second question pertains to the tractor market share aspiration, which you had some time back. I mean obviously, many things have changed, including COVID and other factors. Now are we aspiring for the 15% market share over the next 2, 3 years? Or that -- that will get pushed back further?
So see, so what we have told in our Vision 2022 document was that we will achieve roughly 14%, 15% by year '22. Of course, as you know that we were continuously growing for 3 to 4 years, so we were like roughly around 10%. And then we were very, very close to 12% in 2019. And then, of course, last year, 1.5 years, was roughly, kind of a lot of other factors played out, like supply chain, stock, et cetera. But now I think everything -- now I think the whole industry is back on track. So it's an even platform for everybody to play around, right? Of course, I mean we don't know about the third wave, if that would cause again some disruptions in terms of supply chain or some markets getting closed or something. But other than that, I think it's a level playing field again. So I think we are like kind of looking forward to continue on that growth path now on again. So yes, it will -- I mean another 2 or 3 years, we would like to definitely pass that 15% mark.
Okay. And secondly, you indicated our inventory is lower than the industry. Can you give indication of what is our inventory level and what would be it for industry?
Yes. So for tractors, I can say, I mean what we hear, of course, you guys probably would know better, but what we hear is that the tractor industry average dealer stock level would be roughly in the range of 45 to 50 days. And at Escorts, we are still kind of less than 30 days, right now, right? So we are quite well placed in terms of inventory that we maintain at dealerships as relative to the industry.
And lastly, what would be your CapEx guidance for this year for tractors and overall as such?
Bharat?
So this would be again close to INR 300 crores, INR 325 crores, what we indicated earlier on the last call. So we maintain that guidance now. And most of it, I said almost crores INR 275 crores, INR 280 crores, would be on the tractor side only. So the balance is reasonably small, INR 30 crores, INR 40 crores.
The next question is from the line of Vijay Sarthy, Anand Rathi.
Just 2 questions. One, how has been the product mix this quarter sequentially? Realization has gone up, so is there any change in the product mix or it has been same, number one? Second question is to look at the emission norms that is likely in FY '24, is that scheduled? Or is there a chance of that getting postponed because of COVID? Any color on that will be helpful.
Yes. This is Shenu. So I think Prateek can give you some detailed data on the product mix. I'll answer the emission norms question. So you know that emission norms, the [ BS-IV ] norms loans were supposed to come on greater than 50 HP tractors from 1st October this year. But now the government has issued a notification where they have postponed it by 6 months. So for above 50 HP, [ BS-IV ] will be now applicable from 1st of April next year, 2022. And I think the pretext behind the postponement was the situation that we were all going through in COVID and all that. The Stage V norms for all tractors above 25 HP, which is slated to be on with effective from 1st April 2024, is still on track. And we are not expecting any further postponements on that one now.
[Operator Instructions] The next question is from the line of Pramod Amthe from Incred Capital.
Just 2 questions. Sir, with regard to this emission norms, when you say 1st of April, this is for production cutoff or for the retail cutoff?
Yes. So Pramod, 1st of April 2022 for above 50 HP [ BS-IV ], that is the production cutoff date.
And considering the earlier...
[indiscernible] Sorry, go ahead.
Earlier, the government thought process was the consumer retail rural segment, production cutoff will happen earlier and then there will be a 6-month transition for dealers to do that. Does that stand intact even in the new norm?
Yes, it is, as far as tractors is concerned, there is no -- yes. Yes. There is no bar on like by what time we can sell, but we cannot produce after 1st of April 2022.
And in that context, do you see any prebuying and what is the expected results in the segment in the context of new emission? And do you see any prebuying happening in next 1 year in the higher HP segment til the next of September?
Yes. Pramod, as I explained, these norms are effective only on tractors greater than 50 horsepower and 50 horsepower segment still kind of under 10% industry contribution. So there will be, of course, these tractors, this segment of tractors will be impacted, but it's not a very, very large share of the industry. So this segment may see some prebuying, yes, but it's not going to make a significant difference to the whole industry. You see my point?
Yes.
The next question is from the line of Mitul Shah from Reliance Securities.
Thank you for taking my question, sir. I have a question on tractor growth in terms of original disparity. As we highlighted in our PPT, North growth was much lower compared to South segment, Northern segment around 23% growth compared to 60%-plus in South and West. Similar trend we have also seen in July, where industry growth being sub-3%, North declined by 5% of the South, also declining -- South growing. So how do you see this regional growth in coming months and full-year FY '22? Because we are more inclined over North or North contribution is quite ripe for export. So how do you see its impact on market share?
Yes, Mitul, thank you for asking that question. Now you are right, Mitul, that since we are very -- we have a very skewed share of market traditionally in the country, with some 5 or 6 states where we enjoy market shares in the range of 13% to even 19%. And in some states, we are like even now we are like 5%, 6%. And in some other states, we are still hovering around 8%, 10%. So there are like -- there is a significant difference in our market share from state to state. Now and that is why if the industry grows much higher in, for example, states like South or West, where we have more market share, it just mathematically affects our overall market share very badly. So for example, even in Q1, if the market growth would have been equal in all these types of markets, then our market share growth would have been substantial, right? But because of this phenomena, we do suffer as far as our all India market share is concerned. Right now coming to your question of the disparity, yes, it is a little bit unusual. Of course, in the long term, we know that West and South will grow slightly more than North and Center and East, right? But this time, in quarter 1, it has been quite unusual. So for example, in our strong markets of the 6 states of Punjab, Haryana, MP, UP, Bihar and Rajasthan, the market has grown 43%, 44% in Q1, while the markets in our big markets or the 4 states of South has grown 64%, 65%, which is a huge disparity. Now we know the reason why it has happened because like most of the Southern states or large parts of Southern states or even in West, lot of parts of [indiscernible] maybe, they are rain-fed and they are rain dependent. And therefore, whenever there is a good monsoon, we see this kind of phenomena that happens, that West and South, parts of West and South, they grow phenomenally well. So -- so yes. So this -- I think this will continue for maybe another 2 to 3 months before North also starts picking up that, because North has also been receiving good rainfall now. And some of the markets in the North remain even subdued even last year. I mean they did not show much growth. So this is the right time for even North and Center and East to bounce back. Yes. But I mean I already, like we saw July, as compared to Q1, so July, the growth was not that disproportionate as it was in Q1, right? So it's already kind of tapering back to normal, but probably another 2, 3 months, we will have average effects.
So my second question is on industry growth, where we are highlighting low single digit of inventory at around 5%. But as we all know, the inventory system is very high, close to INR 120,000-plus right now compared to INR 70,000, INR 80,000 for any August, which is a record high. So even if you adjust this inventory thing and roughly, which is around 5% of the annual number, so if we are assuming around 10%-plus kind of a retail growth, then only 4%, 5% wholesale growth is possible. So do you see the situation like that, that inventory will still remain high at this level of 120-plus throughout?
Yes, Mitul, I mean of course, you have a better idea on inventory of -- at the industry level. Yes, but see, there are 2 things. One is the industry, the way industry has increased over the last 2, 3 years. I mean there would be some increase in the inventory levels also at the industry level. There's a lot of new dealers are getting created because of the spike in the industry in the last 2, 3 years. Everybody is pretty much doing that to enhance, to ensure that coverage of all the customers. So some of that -- some of this inventory increase will get absorbed because of that new dealers that most of the companies are appointing. In our case, of course, you know that we are very aggressive on appointment of new dealers and we have already reached 1,100-plus; 3, 4 years ago, we were like close to 700, 750. So a lot of inventory gets absorbed in that sense. And of course, there would be some correction also, yes. But correction may not be to the tune of 5%, I don't think 5% of the total industry. I think correction would be much lesser than that.
Lastly on Construction Equipment, considering this is post-inflation, what is the price hike taken? And any shift in the breakeven point from earlier guided number of 700 units?
So as Bharat explained on inflation, specifically on tractors, the inflation is in the range of, Bharat said, 7% to 8% so far. And we have already taken 3 price increases. The last one was in July. And we have already passed on all inflation that we have experienced in absolute terms, small part. So that already has been passed on to the market. But now in quarter 2, we are again expecting some inflation to come in, maybe roughly around 2% of the selling price and that inflation, we will pass on at the right time, some time in quarter 3.
Sir, I'm asking on Construction Equipment, post-inflation pricing and breakeven point?
Okay. I'm sorry about that. Yes, Ajay?
Can you hear me?
Just My question is Construction Equipment side, what is price hike considering post-inflation and any change in breakeven point compared to earlier indication?
So we have passed on -- we have passed on the price increase in the market as a [indiscernible] because Construction Equipment does not have that kind leverage available on the price. So we [indiscernible] growth will be when the inflation that as we passed on 100% onto the market. Acceptance levels [indiscernible]. We have, like you know, if I talk about this on problems of [indiscernible] for the market. And as regards to breakeven point, we are running at a lower breakeven point [indiscernible]. I think Bharat said it better. Breakeven points are coming down because we are optimizing our costs. Year-on-year, we are optimizing our cost and the cost inflation project that is running [indiscernible]. And that's the reason why even with the drop in volumes we are able to maintain [indiscernible].
[Operator Instructions] The next question is from the line of Saksham Kaushal from PhillipCapital.
I have 2 questions. Further, on the commodity side, we gather that the steel companies have again asked for a significant increase retrospectively, I think, from 1st of July. And given that per tractor gross usage of steel is roughly 1,700 kilos and this time around, the increase is roughly, I think, the ask is INR 89 per kg. And given the previous increases as you've told of INR 30,000 to INR 42,000, do you think that we can pass this on without impacting demand? How would the demand play out if we pass this on? That's the first question, sir.
Yes. So definitely, I mean we are experiencing problems in the market because of frequent price hikes. Everybody is, right? I mean so far, it has not really affected the demand, but it has -- I mean the cycle itself is getting a little bit prolonged, the selling cycle. Because it's taking more time to really convert the customers and have them to a buying point. So that is 1 phenomena we are seeing. We hope it will settle sometime soon. And the other thing is also -- I mean like it is putting pressure on our margins, it is also putting some pressure on the dealers' margins. Because while we as manufacturers can raise the price, sometimes it is difficult for the dealers to immediately pass it on to the customers. So yes, I mean we are going through some tough times from that perspective, from the inflation perspective. But we hope that probably this is the last quarter of such a high inflation. So things should settle down sometime soon.
So do you think that if the price hike continues, you see a downsizing in the HP product mix? Because we gather like the first quarter as well, the 20, 30 HP mix was far higher than what it was usually. And last year also, mix for the 45 HP and above was around 61%. So do you think any adverse impact because of the significant increases that you've had?
No, I don't think it will have a bearing on the HP wise segmentation. Yes, I mean because we know that tractors are being used more and more in income-generating areas. And therefore, I think it will not have such a high bearing on the HP itself because of the price issue. Yes, but last year was extraordinarily high, extraordinary swing happened from 30 to 40 -- from 30 to 40 to 40 to 50. And that may kind of neutralize a little bit this year. And we know the reasons for that. I mean why last year, we had a high HP shift, yes. So that may neutralize a bit as we have already indicated earlier.
And I think you indicated that the industry inventory is roughly around 45 to 50 days and ours is less than 30 days. Is that right?
Yes, that is our -- I mean on industry, that is our estimate.
So ours is less than 30 days, so should give us a lot of hope to campaign for the festive season, because before festive, we would like to stock up, I guess?
Yes, yes, everybody would stock up more. I mean it depends on which players are at what level. We don't know that information very exactly, yes. But yes, it gives us a little bit better scope. Not necessarily that we will increase our inventory continuously. We may increase comparatively prior to the season. But then we would like to bring it back to the current levels in number of days.
A I was talking near term only. As you know, we are so well placed so that gives us scope with the festive of all, everything's [indiscernible] ramp up in October, so numbers progressing in September should be good. So I was just asking from that point.
[Operator Instructions] The next question is from the line of Aditya Makharia from HDFC.
Yes, I just had 2 questions. I wanted your sense, do you feel the penetration of tractors in a state like UP would be higher than perhaps what we see in the Southern and Western states? Would like UP and Bihar be at par with the national average when it comes to tractor penetration?
Yes. So we know that South and West has lower penetration than the more mature markets in the North. So yes, that is true. So for the Northern markets have [ that ] penetration. Now Punjab and Haryana lead the path in terms of penetration, yes, and UP and Bihar is not at the level of Punjab and Haryana, of course, but South and West is [indiscernible].
Right. So sir, I was just trying to understand, despite having a lot more fragmented land, why would a state like UP and Bihar, because they both typically have smaller landholdings. Why would their penetration levels be higher than what we see as compared to the ones in the South? Is it due to better irrigation? Or is it better government credit or subsidy? Or just any color, if you could throw on this?
Yes, I think the reason is historical because the agri revolution started much nearer in Punjab and Haryana and then in sectors down to UP and Bihar and MP. And finally, it got into South, right? So I think that is the reason. It is just the timing. I mean eventually, I think everybody, every state, is going to -- or every region is going to be at the same level that Punjab and Haryana are right now.
The next question is from the line of Mihir Jhaveri from Avendus.
Just 1 question on the operating leverage part. So when you said that the commodity pressure is around 200 bps. And given the guidance where we are in terms of the decline, we expect that there could be a decline in terms of numbers for the rest of the month? How does operating leverage will play a part in terms of that? And hence, my question is that how do you look at margins from the current trajectory of 14%? So do you think that we [indiscernible] that probably margins will now is likely to fall from the leverage? And what will be guidance on the same for the rest of the year? That's my only question.
Mr. Jhaveri, there's a disturbance coming from your line. We request you to mute your line while the management answers your question.
I'm sorry, I couldn't hear you that well. Can you repeat?
Yes. Sorry sorry, my question is...
I'll respond to that. As we mentioned, so like in June quarter, we are running a lag of about 3% in margin and also which got also in July and the next -- we're seeing the mid this quarter, current quarter, we're again looking at 2% sort of inflation which was set in, which will be again a lag. So essentially, you're looking at an improvement happening is from a 3% lag last quarter, which we'll pass on this quarter, you're reducing it to 2%. So inflation intensity is not as high as it was earlier in the last quarter. So definitely, that will likely help in improving margin further from where we were in the last quarter. And we see that actually inflation stabilizes going forward. So that definitely should help in the margin improvement further.
So sir, my question is that in case of a decline in terms of numbers which we envisage, given that we have a low single-digit number. How do we see that the margins will improve from the current 14% level is what I wanted to understand?
So overall, we are still looking at this current year, which will show mid-single-digit growth. So we don't see if that will have a negative impact on the operating leverage on a full-year basis. So really if the inflation is passed on, it happens with a lag. So end of the year, you'll see fully end of the year, with the fully cost which the increase which has happened. So really, it won't be, so I think the margin overall should actually see an improvement from the level that you've seen in the first quarter in the balance of year.
And just to clarify, I mean just to clarify yes, sorry, just to clarify that if we are saying like 5%, 6% industry growth for the year and last year it was 900, so that I say 950, 960, somewhere in that range, depending on that 5%, 6% thing. And if you look just at April, July, the industry has increased from roughly 230 to 295, 294. So [ 65,000 ] odd gain against the whole year gain of like 50 to 60. So it's not like a deep decline or a significant decline in the rest of the 8 months. There's just like a few thousand tractors.
The next question is from the line of Mythili Balakrishnan from Alchemy Capital.
Just 2 quick questions. One, I wanted to get a sense from you of -- in terms of the exports. Clearly, we have seen a very, very strong number there. So just want get a sense from you is this the Kubota [indiscernible] sort of setting up? Or is that your own exports move to Kubota? And how exactly are you seeing that? And my second question was on the cash, because we have like a ton of cash right now on our balance sheet. So just curious as to, is there any indication of what exactly are we using for, given the cash?
Yes. So on the export side, although we have started now with Kubota and the volumes, we are ramping up on a monthly basis. But still, the contribution of Kubota, of Kubota network to our exports is still very, very small. So whatever, I mean most of the growth that we have achieved or the numbers you are seeing for Q1 is largely through our own network. Of course, in future, as we are progressing more and more with Kubota, their number will also grow and their contribution to our overall exports will also grow. But right now, it is not a significant or a very huge contribution. So most of the growth is through our channel only.
On the cash, please?
On the cash front, obviously, the company has some aspiration -- hello? Can you hear me?
Yes, yes.
Yes, so on the cash front, definitely, company has some aspiration of growth and we are also looking at some inorganic options for the business. Like we said, the Railway was another interesting business that we aim to grow and also there are opportunities which we are evaluating and they keep on coming. So definitely, we'll target the right time, which is the right valuation, which also serves our purpose and as the business grows and also gives better returns to the shareholders. So as of now, I'd say wait and watch. So -- but if something comes up which is of interest to us, we'd likely utilize that money for the growth of the business in future.
And sir, if I could squeeze one in, any impact of semiconductors shortage on our business?
No, no, no impact at all on our business because of that. We use -- we barely use any electronics in our tractors right now.
The next question is from the line of Utkarsh from Point72.
Sir, I have 2 questions. Firstly, just on your guidance on the mid-single 5% to 6% industry growth. So what about at cost? Given that we had a lower base in terms of the market share last year and this year, like you previously guided, that some of that market share loss would come back. And also, you're sitting on lower inventory versus the market. So are you optimistic about beating the industry growth this year?
Yes, we are very optimistic. I think we'll continue to beat the industry growth this year and also going forward. You know, we have been telling you our story, our plans about how we are planning to do that. And we are -- I think we are on track as far as our plans of growth are concerned. And broadly speaking, these are in 2 areas. As you are aware, that we have a very poor coverage regionally in the Southern and Western markets. And that we are increasing now year-on-year. And also we are covering most of our white spaces now in the product portfolio. So both the things are on track and we will see those results coming in, in the future.
Got it. Well understood. And sir, just to clarify on your earlier comment on raw material inflation and pricing. So there is basically, if I summarize it, there's 2% raw material inflation next quarter, but you've taken 3% pricing. And this is quarter-on-quarter that I'm seeing. So it's slightly better on margins for the next quarter, leaving aside the operating leverage aspect. Is that a fair understanding? And if so, by which quarter do you think that you can cover all of it? You mentioned that there might be another one coming in the third quarter. So if there is no inflation, should we assume that by third quarter, you're back to your levels seen last year in terms of the COVID savings as well that you have?
So first, your understanding is correct. So definitely, that's what we meant. So if your lag is reducing in vis-à-vis inflation, certainly that will help in growing the margin. But obviously, 2% right now for the next quarter is, I guess, a fair estimate as of now. As you know, the steel companies are taking the price changes from retrospective date and that settlement takes some time. It happens with some lag. They have settled the prices for the March quarter now with the [ CM body ], the steel company. So the April price impact is still pending. So we are fully provided for in the books as of now, but still you don't know at what level that will get settled. And then again, for the July quarter, what will happen there. So as of now, our fair estimate is about 2%. And if it remains at that level, then definitely you see the margin improvement happening. Whether they get fully passed on in Q3 or not, I think better to watch the steel and other players, how they respond, because volume is equally important in the whole industry. So let's see, I think we wait and watch. The idea is so far, the industry has been passing it on and we expect that in the same momentum continue in future too. And if there's no further inflation in Q3, then clearly, by Q3 it will be lower fully.
Understood, sir. So just to follow up there. So the second part of my question was also in terms of your COVID savings during last year, like any permanent savings on the OpEx side that you've done? And would that be 100 bps, 200 bps, if you could quantify that, please?
It is difficult to say whether it will be a permanent saving, because like you've seen in Q3 and Q4 last year also, most of the costs actually started coming back. And the major cost on travel promotion is back. You're back in the market, return back to normalcy. So in this quarter also, there have been some savings, we just come up because the month of April, May, which saw some lockdown happening. So those savings were there. But whether they'll be called permanent, I think it's difficult to say that. I won't say it will be really permanent. I think at the moment you go back to the normal situation, the cost does start going up again.
The next question is from the line of Nishit Jalan from Axis Capital.
My question is on ASPs in the tractor segment. If I look at, we have inflationary price increase. Our mix is better on the domestic side as well as the export mix has gone up. Still, ASPs in the segment has increased only 3.6% on a Y-o-Y basis. What are you missing here that the ASPs are still not increasing to that extent?
Bharat, you want to respond? Right now, I don't have visibility to this.
So one, obviously is the mix. So if the export mix realizations are not high and then export realizations are slightly lower. And also, again, depends on what mix you're actually exporting as we're actually doing most of the small tractors, compact tractors there, where the mix is slightly lower. But overall, and if you look at the overall realization, they have gone up compared to last year. So last year, our segment 40 HP and above, the mix was better. So this quarter, we've seen a dip of [indiscernible] 1.5%. In terms of the overall sale, which was 61%-plus in more than 40 HP segment. This time it is down to about 60%. So a 1% dip is there. It's not significant, but definitely it will have some impact on the margin -- on the [ ASR ] also. And secondly, on the non-tractor sales, which does happen in the overall contribution, which used to be 8% to 10%. So that's another sector I believe is going to have some impact on the [ ASR ].
Sure. And just 1 follow-up. Typically, what is the non-tractor sales or the farm implement sales as a percentage of revenues in the overall tractor segment? And is it fair to assume that, that segment will be growing at a faster pace given the kind of higher penetration we are seeing in that segment?
So when I say non-tractors, it's not just mean rail, it can spare parts, et cetera also, so you know the engines and spare parts which get sold, which is not strictly tractor. So normally, this ranges from 8% to 10% depending on quarter-to-quarter. So I think this time also it's about 9.5% of the overall segment here.
So 8% to 10% is the non-tractor sales, which includes [indiscernible] and farm implements and other things?
Yes.
[Operator Instructions] The next question is from the line of Sameer Deshpande from Fair Deal Investments.
Sir, I would like to know about the Railway Equipment business. I think Mr. Madan mentioned that we've been growing -- grow in about low single digits. And we would like to -- hope to maintain the margins at the same level as last year. The current order book seems to be a bit lower at around INR 300 crores because of the problems faced by the railways. So going forward, if there is no COVID wave or the third wave is not that severe, then do we hope the business in the second half or in the balance, 3 months, it will grow well or will be just maintaining the margins and the turnover also at the same level as last year?
So Sameer, we actually had mentioned that the growth will be lower double digits, so it's not low single digit, first of all. So from the last year, it means definitely, it will be good growth. Double-digit means can actually go up to 13% 14% level from the last year's level. And if we maintain the last year's margin level also, I think it will be still better, much better than last year, what we've seen in the numbers. So in terms of the order book, yes, it's low because of the issues to railway. So the production rate has been cut down by them and the tendering was actually not happening. But now we've seen some pickup has started happening on the railway front, even though they're not running the trains to the pre-COVID levels, they're still running at 65%, 70% level, the normal situation. I think as the transportation picks up, as they start running to the normal level, the demand will largely increase for the new parts and also for the spare parts for maintenance, which has actually slowed down. So we expect the order book actually will start picking up now from maybe Q3 onwards. And by end of the year, we should be back to the normal level. So right now what we're trying to do is to speed up the execution pace at railway for the existing order book, so we are able to maintain the growth which we have indicated here.
Good. And secondly, we have really done very well in this quarter despite the raw material price increase and we are successfully passing on and without affecting the demand, because the competition in the industry is quite high. So congratulations to you people for doing really well on the marketing as well as all other fronts and the cost optimization. But actually, I wanted to know, are we targeting any products in the farm light machinery segment which that is the farm maintenance, et cetera, which can be bundled with the tractors and which will help the farmers increasing their productivity and that is, beat the competition in some way in this way? Are we doing anything on that front?
Yes. Yes. So as we have been saying that farm implements and attachments is going to be 1 of our focus area going forward. So we are in the process of -- process of putting those brands together. And we have already launched a few implements in the market, of course very, very nascent stages, but we have been launching some of those implements. But we are preparing also our plans in the long term, how to penetrate this part of the market. But yes, you are right this is 1 of the strategic focus areas for us for expansion.
Because to my knowledge, I have heard from some of the large companies in the sector, that the size of the farm light machinery and implement business is a few times of the tractor industry. So is it true?
No, no, no. It is not few times, at least in India. I mean when you look at markets overseas, like more mature, developed markets in Europe or U.S.A., of course, the implement size -- implement attachment industry is quite huge. But in India, it is not the case. In India, it is still kind of in the developing phase. This whole industry was in the unorganized sector previously. But now a lot of attention is coming on this industry and a lot of organized players are also entering. So while it is not a few times, it is like much less than the tractor industry in terms of value. But yes, it is going to grow quite rapidly in the future.
With the GST and all other implementations, the unorganized market is shrinking everywhere. So whenever -- so I think the organized market and companies in the sector like us, can see a big shift from the unorganized market. And I think will then the tractor penetration, sometimes -- at some point of time, will face some order. I think this segment will help us grow going forward?
You are absolutely right. You are absolutely right. This is something very, very important for the industry, not just for us. And we are also like putting a lot of focus on this part.
Thank you, and all the best to you. And there was 1 more question, it was regarding the surplus on the balance sheet. We really have a healthy balance sheet in the [indiscernible] and there is around INR 3,000-odd crores surplus. There will be some CapEx, which is still not very large and a starter number. So I think it is a challenge to deploy that money in the money market instrument here and there, we hardly get any 4%, 5% here and there. But with this, the current -- our other income for this quarter was around INR 50 crores. So what will be the expected run rate of other income going forward for the balance of the year?
So Sameer, it will be in the same level, it will be somewhere around INR 40 crores, INR 45 crores each quarter, at the great level of cash for which we have on the balance sheet. And if it grows further, then definitely see the further upside there.
[Operator Instructions] The next question is from the line of Saksham Kaushal from PhillipCapital.
I just wanted to check on the discounting levels and the dealer support that is there and the level -- how the industry inventory we talked about. So could you just comment on how it is for us and the competition is there, especially the discounting and dealer support?
Saksham, we haven't seen any changes per se in discounting even -- I mean even at the industry level and definitely for us. Normally, I mean in tractor industry, that is not a very huge play. So discounts are like very -- I mean normal and static.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
My question pertains to the Railway business. We've seen a near doubling of contribution from the new orders, new products as such. So do we expect to sustain and [indiscernible] sustainable margins for railways?
Yes, Jinesh. So we have seen the proportion of the new product development has been increasing. So that's something a trend which will continue, I think, in future, too. And then as we had mentioned earlier also, I think in the earlier calls, so I think there's a maturity cycle to any new product which gets introduced. So over the period of a few years, your cost cuts coming down. And in these particular products, since we are also inputting a lot. And there's an effort to do the localization there on those parts. So the moment you go through the localization process, the margin actually will improve further. So there are a number of products which are in the pipeline, so there are already some cycle you see there. So idea is to have this margin remain in the range of 17% to 20% for this business, [ a little bit ]. So I think we will probably be maintaining those sort of levels going forward on this business.
Okay. Got it. And lastly, with respect to our farm machinery sales ex of tractors, what it would be currently? I mean what percentage of our revenues or [indiscernible] would be coming from farm machinery?
So right now, it's not much, at least, like just mentioned, so it's only recently started entering into this area now. So it's a few products which have been introduced only last quarter. So but this is 1 significant area where the focus of the company is and that should continue to do well. So I think in the times to come, maybe when you come -- when we come back to you at our next plan for the midterm business plan by the end of this year, probably you will get more clarity what sort of revenue we're expecting from this and how the lines will get built up.
The next question is from the line of Mitul Shah from Reliance Securities.
Thank you for giving the opportunity again. So as we guided for single-digit growth on a full-year basis, so I want to understand some near-term visibility in terms of next few months say, August, September. Even if I'm assuming 8% to 10% kind of a growth over pre-COVID peak level of tractor industry volume for August, September and it is translating into kind of a 15%, 20% decline on a Y-o-Y basis. So can you throw some more light on next few months?
Yes, Mitul. So as I explained, I mean overall, like we are still sticking to that guidance of 5%, 6%. And the tractor industry in absolute numbers have been up 60,000, 65,000 units April, July. And if we say 5%, 6%, the industry would be roughly around like let us say 950, 960 for the whole year, which is about 50,000, 60,000 more than last year. So first of all, I mean we are not saying that there will be a kind of a significant decline in rest of the areas. It will be roughly kind of similar. If we just consider August, March period, it would be roughly similar, maybe 5,000, 10,000 tractors less on a base of roughly 600,000 tractors. Yes. Now, I mean last year was a very, very different year because there were a lot of challenges and these challenges were different with different companies and for the different times, they were different because of the supply chain issues, because most of the supply chain issues that we faced as an industry was in the period July to October. And then after November or mid-November, the supply chain started getting stabilized. Now, of course, there is a general sense in the industry that that there was a pent-up demand in this period from the first quarter. But also, there was some supply side shortages. And therefore, I would kind of like to think that while the rest, for the 8 months we are saying that more or less the industry would be at same level as last year. I think there is still some growth that we will see in the next 3, 4 months and probably some decline then going forward. But on absolute basis, number basis, the 8 months would be more or less same as last year.
Sir, lastly, on the competition from small players, new players. Recently, we have seen this Kubota [indiscernible] sector capture also. All those put together, market share has improved size over the last 1, 1.5 years. Any view on that?
Yes. I think, Mitul, the most important players out of these players that you named, I think is Kubota. Because Kubota has come in at the premium side and trying to establish its network and also its products in the Indian market. So we think that Kubota has a lot of upside in the market in terms of market share because they are -- still, they are like 3 or 4 product company and they are only present in a few states right now. So they have a lot of upside. Of course, we are watching every other player, small or big in the market. But as I said, the prospects of Kubota for growth are the highest right now in our view.
Thank you. As there are no further questions, I would now like to hand the conference over to Mr. Madan 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 investorrelations@escorts.co.in. Thank you very much and have a good evening. Please take care and stay safe and healthy.
Thank you. On behalf of Anand Rathi Share & Stock Brokers, that concludes this conference. Thank you for joining us and you may now disconnect your lines.