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Ladies and gentlemen, welcome to the Q2 FY '21 Results Call of Escorts Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Raghunandhan N. L. of Emkay Global. Thank you, and over to you, sir.
Good evening, everyone. On behalf of Emkay Global Financial Services. I welcome you all for Escorts Limited Q2 FY '21 Results Earnings Call. I also take this opportunity to welcome the management team from Escorts, and thank them for giving us this opportunity. 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; and Mr. Dipankar Ghosh, CEO, Railway Equipment Division, along with the Investor Relations team at Escorts Limited. We would start the call with brief opening remarks from management, followed by a Q&A session.[ At this point, I would request ] Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Raghu. Good evening, ladies and gentlemen. Thank you for joining us for the conference call for the second quarter[Technical Difficulty]We trust each of you are safe and healthy. [Technical Difficulty] you our Q2 stand-alone financial performance that also happens to be our best ever quarterly performance so far. The turnover during the quarter was up by 23.9% at INR 1,639.7 crores as against INR 1,323.9 crores in previous fiscal. Agri Machinery and Railway segment continued to outperform, segmental revenues growing by 32.8% and 26.4%, respectively, while Construction Equipment segment revenue came down by 21.9% on a Y-o-Y basis. Tractor sales volume went up by 23.8% to 24,441 tractors as against 19,750 tractors last year same quarter.Construction equipment sales volume went down by 13.1% to 821 machines as against 945 machines last year same quarter. Highest ever quarterly EBITDA at INR 300.9 crores up by 137.4% as against INR 126.7 crores last year. EBITDA margin now stands at 18.4% as against 9.6% last year same quarter. Company is debt-free as of September 2020 with strong liquidity positions sported with the strong cash flows and significantly improved working capital. PBT at INR 307.8 crores as against INR 108.7 crores last year same quarter, is nearly up by 3x. Net profit more than doubled at INR 229.9 crores as against INR 104.6 crores last year same quarter, our quarterly year highest. EPS stands at INR 17.72 as against INR 8.75 last year same quarter. Now moving on to segmental business performance. Starting with the agri machinery business, domestic tractor industry volumes went up by 41.4% to 2.36 lakh tractors as compared to 1.67 lakh tractors in last year same quarter. The rural demand could remain positive, led by lower base of last year, pent-up demand from COVID-19 related lockdowns and fundamentally positive macroeconomic factors. Timely and widespread monsoon, record rabi crop production and this minimum spot price of all key crops, along with faster procurement by the government and good availability of retail finance helped drive positive farmer sentiment. Our domestic volumes went up in Q2 by 23.2% at 23,156 tractors as against 18,789 tractors in last year same quarter. The production remained constraint, especially in the first half of the quarter because of serious supply chain issues. While inventories continue to remain lower than normal, we are now producing close to our peak capacity. About 2/3 of our domestic sales came from over 40 HP tractors, resulting in significant model mix gains. Our export volumes were up by 33.7% to 1,285 tractors as against 961 tractors in last year same quarter. EBIT margin for Agri Machinery business went up by 973 basis points to 20% against 10.3% last year same quarter, our highest ever. While favorable model mix and operating leverage helped, we continue to maintain our focus on cost efficiencies. Sequentially, EBIT margins were up by 557 basis points as compared to 14.5% in Q1 FY '21. However, increasing inflationary pressure on the commodity prices product mix changes and increasing FCI costs as situation normalizes, may put some pressure on the margin in balance of year from the current levels. With continued efforts around channel expansion, the total dealer count is now close to 1,050. Overall, tractor industry sentiments are positive. We now expect FY '21 domestic tractor industry to grow at low double-digit levels. Coming to the Construction Equipment business. Our served industry, backhoe loaders, pick and carry cranes and compactors grew by 31% in Q2. Compactors have been our biggest gainer in Q2 with growth of 47%, followed by backhoe, that grew by 43.6% in Q2. However, due to COVID-19 and cash flow issues in market, pick and carry crane industry has shifted to price-sensitive hydro segment and still industry is down by 20%. Our total volumes manufactured and traded products combined went down by 13.1% to 821 machines as against 945 machines in last year same quarter. EBIT margin stands at positive 1.7% as against negative margin of 32% in sequential quarters. We have seen good traction coming back from September onwards, and same momentum is expected in H2 of this fiscal 2, and full year margins are also likely to be maintained at last year's level.Coming to the Railway Equipment division, revenue for the quarter ended September 2020 went up by 26.4% at INR 160.2 crores, which also happens to be the highest ever quarterly revenue for this business segment. EBIT margins up by 119 basis points stands at 20.3% in quarter ended September 20 as against 19.1% in last year's same quarter. During the quarter, we have executed 58.4% of total orders from new products category as compared to previous fiscal when it was 42.3% due to unprecedented COVID-19 pandemic situation during first half of fiscal '20/'21 and the total stoppage of all train operation except for few Shramik Special trains, all the coast's locomotive production rates and wagon manufacturers have cut down the annual production for FY '21 drastically as fresh orders tendering and order inflow have been affected. Our order book for the division at end of September 2020 is more than INR 350 crores that will get executed in the next 6 to 8 months. Going forward, we expect tendering process to get back to pre-COVID level by Q4 of current fiscal. For FY '21, we now expect railway equipment segment to slightly grow in revenue year-on-year, and margins for the segment are also likely to be maintained at last year's level. Now I request the moderator to open the floor for Q&A, please.
Congratulations on wonderful set of results. Just 2 questions from my side if you could here, firstly, sir, the tractor market share has come off partly due to production constraints, as you highlighted, how do you see the reversal going forward? Would you be able to broadly sustain market share on a full year basis? Secondly, on realizations and gross margin, there is a sharp improvement. How much of the improvement is sustainable going forward? Congratulations again.
Okay. This is Shenu. I hope you can hear me. So I'll answer the -- our question on market share. So of course, we have lost market share because of some production constraints. We normally keep very, very lean inventory. And therefore, at this time, when the demand was very, very skewed in the last quarter, we faced this issue, right, of billing. So our stocks are very, very low. They have been low throughout the quarter. And even now they continue to be low. Now as far as here, it is going to be a challenge, of course, to sustain last year's market share because the situation on supply side would probably continue to affect us, if not as much as it did in the past, but there would be some issues. And even at industry level, the stocks are very, very low at this time. Right. But yes, we will see -- we'll give it our best shot, but it will be difficult to sustain last full year market share this time.
On the -- I think Mr. Madan filled on the realizations in gross margin, the improvement, how do you see the sustainability of this high level of margins?
So Raghu, obviously, margins this quarter has been helped by 3-4 factors. So I'll just try to explain that. One, obviously, the operating leverage, which is at play because we are doing pretty well. The production is also running at peak capacities now. And we've seen the growth momentum, which has been there this quarter. And second advantage we got was also from the very favorable product mix wise. As I mentioned, like 2/3 of the sale likely in the tractor segment has been happening, which is more than 40 HP, which happened in this quarter. So which happens to be actually the highest margin segment in terms of the overall profitability wise. So that's something which definitely helped. The model mix has been quite good in this quarter. Third aspect is on the cost front. So because of the COVID situation, so the selling and general admin costs are still low. So your cost like travel, promotion and people are not being incurred to the extent that we used to be on a pre-COVID level. So that's another factor, which is at play. And the fourth very important factor was also the commodity prices, which continue to remain soft through the quarter. So it's only from September, we saw some pressure started building up on the inflation side. Otherwise, for the full quarter, the impact of the inflation was not really seen. So it may actually happen going forward. So all these 3, 4 factors may actually undergo some change as the situation normalizes. So there may be some impact, which can happen on the margin from there. I think what we are seeing 20% odd sort of margins. Obviously, it will fairly have some impact going forward in the next 2 quarters. So maybe few basis points, 100 to 200 basis point impact may happen really from these levels. Otherwise, we expect the current momentum, which is there, we should be able to hold on to at least 17%, 18% sort of margin in the future.Thank you, sir, and all the best. Ayesha, I will request you to open the floor for Q&A.
[Operator Instructions] The first question is from the line of Mike Sell from Alquity.
I have 2 questions. Firstly, could you give us some more thoughts about the volumes you are able to achieve over the rest of the year? Obviously, this is the perfect situation to further track the business, as you said. And it would be very disappointing if we were not able to make full use of it given the production constraints? And secondly, on the construction equipment, could you talk about when you expect to see significant improvements there with government spending, infrastructure, et cetera?
Yes. On the first part, as we have already said that we expect the whole year the full year industry to be growing on a full year basis in lower double digits, right? So -- and although it is true that in quarter 1, we could sustain our market share and quarter 2, we lost because of our inability to produce sufficient quantities. But going forward, as I said, I think the supply chain issues will smoothen out within the next month or so. And going forward, I think we should be able to at least retain our market share. Yes. So that is frankly the broad outlook for rest of the year.[Technical Difficulty]
Bharat sir, sorry to interrupt. Sir, your audio is not quite clear. We're not able to hear you.
Is it better?
Not really, sir. If you could speak a little louder.
Okay. Can you hear me now?
Yes, sir.
Okay. Mike, the government spending has now started[Technical Difficulty]
Still you are not audible, Ajay.
Hello?
Yes, you have to speak louder, you are not audible otherwise.
Okay. Mike, can you here me?
Yes, sir.
Yes, it's better now.
Okay. Now Mike, what I'm saying is that I think the government is doing a better job by putting in the outlets that has been budgeted for. It was about INR 100 million. And 40% of that has already been awarded and is under construction. And others are getting -- is at very stages of project awarding and the action to start. I think versus lower our construction is different, and we have seen some traction coming in[Technical Difficulty]
The next question is from the line of Viraj Kacharia from Securities Investment Management.
Congratulation for good set of numbers. I just want to get some outlook on the tractor business. So is it that the industry saw a lot of advancement in terms of sales in Q2? Is that the way the right -- one should look at it and growth in the second half, maybe low single-digit or at max high single digit kind of a run rate? Because even after such a low base, we have just seen a flattish kind of a volume for players in the industry. So I'm just trying to understand what is the trend which you see and how the retail is happening?[Technical Difficulty]
Yes. This is Shenu Agarwal. I'm sorry, there was a little bit of a noise. So I'm not sure if I could gather your question well. But specifically on tractor business, I mean, there has been a very, very fundamental positivity in the market. And it is because of the reasons known to us. I mean, rabi crop has been a record crop. The crop prices have been happening. Kharif crop sowing has been going on at a very, very good pace. There is no dearth of financing available for farmers right now, and the monsoon has been very, very widespread and more than expected, right? So I think all those sectors have wherein created a lot of positivity, the cash flows are good. And therefore, there is a fundamental kind of a shift in the industry to the positive side. Although it is a fact that there has been a pent-up demand from the knockdown period. And that pent-up demand is probably going to be slowing down or dieing over the next few weeks, right? But there has been a fundamental positivity also because of the macroeconomic factors. Also, you may like to note that the retail industry has been higher because more or less, all players, to some extent, had supply issues, right? And yes, so I think, overall, it is very, very positive.
So what is the retail trend we are seeing for, say, September or October? And you said the retail inventory is higher for everyone in the industry, is that right?
No, no. I said the retails were higher for pretty much everyone in the industry because everyone have had some kind of supply constraint, of course, to different extents depending on the inventory they were carrying[Technical Difficulty]overall at industry level, retail was higher. So I mean, the numbers that you are seeing, actually, the numbers would have been greater if all the players would have supplied more products. So -- and stocks right now, both at dealers and at depots are at the lowest ever. I mean for us, it is very, very low. And I think for the industry also, it is not as much as the normal level.
Okay. And the supply issues are by and large resolved now? I mean, is that...
Yes. It seems more or less, I think it is smoothening up. I think it may take a few more weeks before it completely comes to normal. But as you know, there would be some volatility in the supply, right? So something can happen unexpectedly, which has been the case in the last few months. So to that extent, nobody can say how it will pan out. But yes, most of the fundamental issues have been resolved.
[Operator Instructions] The next question is from the line of Ashwani Agarwalla from Baroda Mutual Fund.
Congratulations for the good results. Sir, the first question on sentiment, I had asked about the EBITDA margins for sustainability of this 18% EBITDA margins. So I couldn't get it clearly. Can you just throw some light at how is this 18% margin really going to pan out in next 3 years?
Ashwani, I think I mentioned -- so there are 3, 4 factors, which we must look at in looking at these margins. One is the operating leverage which is at play in this quarter. So we've been running mostly at a peak capacity. And second is the soft commodity prices, which continued through the quarter. So it's only towards the end of September, we started seeing some inflation pressure building up. But otherwise, on a net-net basis, on a full quarter basis, we still had no inflation pressure. So that definitely helped the material costs, which actually came down. The third was, as I think we mentioned in the opening remarks. So the model mix has been quite healthy this time. So if you look at 2/3 of the sales of tractors this time has happened in the above 40 HP category, which happens to be a good margin segment, actually, the best margin segment, which happens is about 40 HP. So the higher the volume there, definitely, your model mix advantage has really come into play, which are[Technical Difficulty]And the fourth factor is on the sales selling and general admin cost, which has been in the current situation of COVID-19 so a lot of costs like travels, promotion, et cetera and that kind of thing. So I think once the situation normalizes and the demand probably starts seeing some impact, maybe these costs will also get built up in the future. So as of now, we think the sort of -- obviously, this is something, which is a very good number, and we like this to be sustained. But given the reality of these costs, which clearly can move up in the coming months. So there can be deferring impact on the margin as we go along. So -- but waiting on the agri business side, which delivered 20% EBIT margin this quarter. I think maintaining at level of 17%, 18% looks like feasible in the next 2 quarters.
And what about construction equipments and railways?
So construction railways, as we guided, we should be able to hold on to the last year's level of margin in this year. In spite of the dip happening in the construction equipment volumes and the railway business, still, I think we should be able to mildly grow over last year. And in spite of the new product share going up there, we will still be able to hold.
And sir, what was the reason we lost market share in the domestic tractor?
Yes. So primarily, I mean, it was the issue of -- basically, the market share was driven by supply this time in this quarter. So whoever could produce or ship more, I mean, that is how the market share responded, right? So as I said, there was shortage for everyone, but there were more shortages for some players than others. And it depended on the inventories that different players carried at the pre lockdown level and also it depended on the ability to etch supplies. Right, so every player has kind of a different format of suppliers. And every player had different levels of inventory to begin with. And those 2 factors determined basically how each player could ship to the market. So it is not a fundamental kind of a reflection of the strength of each of the brands in the market. It is basically determined by some very temporary supply chain factors, right? Yes. So that is the scene. In our case, we were -- we had a very, very low inventory, relatively speaking, at pre lockdown levels. And of course, there were some supply challenges as well.
My last question, sir, for the next 3 years or 5 years, how -- what is our strategy to increase the market share? Because we are just kind of at 11% of the entire market. And typical of these kind of product sets as we see more of this product the key is that, you tend to buy more of these brands. So this too is also trying to be sure. So how do you plan to increase your market share? And what's your target for next 3 years or 5 years market share?
Yes. So I mean, when we released our Vision 2022 document about 4 years ago, I mean, we had said that we will try to reach about 15% market share by 2022. Now because of the disruption in this year, this year is kind of a bad year for market share for us because we have lost some after having gained market share for about 3 or 4 years now, right? So we have gained about 1.5% to 1.7% in last 4 years. And we have been the second fastest kind of tractor -- second fastest-growing tractor company in the country. I mean, market share, I mean, fundamentally, our strategies have not changed, right? So this year is probably not a reflection on what we are going to do in future because our strategy remains the same, right? So we are investing in the right products. We are fulfilling our white spaces, both in the product lineup and also in geographical channel coverage. Right? We are going with a dual distribution strategy, which means that we are trying to make both our brands independent and stand on their own feet in terms of gaining market share. We are doing some very, very special projects in our weaker and opportunity markets, right? So all those things are continuing. So this year, probably is an abrasion in our journey. I think we should be back to winning ways very, very soon as the market -- as the supply side situation normalizes. But our strategy is intact.
[Operator Instructions] The next question is from the line of Gunjan Prithyani from JPMorgan.
Yes. I had 2 follow-ups on the tractor segment. Firstly, you mentioned this favorable product mix a couple of times on the above 40 HP. Now is this something which is specific to Escorts? Or is it an industry-wide phenomenon? And what is really driving this mix shift? Do you think that this will sustain if you can just share more insight on this?
Yes, ma'am. So yes, it is true that it is also an industry-wide phenomenon. And it is also true that Escorts has gained market share in the bigger horsepower categories. Right? So we have kind of -- we have taken more advantage than the industry has, but it is a kind of industry phenomena as well. So a major reason that I can see why this sudden shift has happened, and the shift has been quite drastic in a short period of time is basically because of the fact that tractors are used primarily for 2 purposes, one is pure agriculture purpose. And the other is kind of a commercial purpose or a mix of agri and commercial. Right, in the last 4 or 5 months, the commercial side of the tractor usage dropped because of a lot of infrastructure projects got delayed or got stopped. And therefore, the demand from that side of the market was actually much lower. Normally, the commercial segment of the tractors, they use lower HP, especially for haulage and some other purposes. And the agri uses a higher HP tractor. Right. And therefore, we have seen a drastic shift because the demand on commercial was lower and agri was really booming. And therefore, we saw a sudden shift. Now this is not going to sustain because the haulage side demand is also coming back now. And therefore, it will kind of get to normal levels, but it will still be higher than normal times the higher HP. So I think that is the reason. The reason that Escorts had an advantage over the industry in high HP is because of our new products that we had launched last year before the lockdown, and we are seeing some gains from them.
Okay. Just before I move off to my next question on tractor, Bharat, sir, it will be possible for you to share what's the impact of the favorable mix on the margin? Any broad ballpark number?
Yes. So you can say roughly INR 20 crores impact, INR 18 crores to INR 20 crores impact has come because of favorable mix in this quarter in absolute terms
Okay. The second question on the tractor business is just to point out that there is a production content, which seems more an issue in the month of October and prior to that we did face some issues on the supply chain side also. Now when I look at the industry growth, clearly, the new industry until September, October is up somewhere around 10%. And some of the other unlisted players have gained share, let's say, [indiscernible]. Now what is it that they are able to manage better? Because from my understanding, the component suppliers would be broadly similar for everyone, right? So what is it that they are able to manage from the supply chain better? And secondly, are we able to use the Kubota JV capacity to fill in some of the shortage that we are seeing in the business?
Yes. So let me respond to that. This is Shenu. So see, the ability to produce the ability to sell at these -- this point in time, specifically quarter 2 was not just from the level of production, right. But also was a factor of the stocks that different brands were carrying before the lockdown started, right? So when you analyze the production data versus the sales data, you will see that difference coming in, in terms of how much stock each brand has carried before the lockdown, right? But yes, but it is -- although you are right that the type of suppliers are very same. But still, there is a lot of difference in the location of the suppliers, in the capacity of the suppliers, et cetera, right? And therefore, in such times, which were very volatile times, it just kind of depended on where the supplier was and in what circumstances the supplier was, what was the location of the supplier and how much it got affected with COVID and the other things, right? So it's very difficult to say. But I just want to point out that it is not just the ability of production or getting the goods, but also it was a factor of how much stock each brand carried pre lockdown period.
Okay. And last question, if I can just ask on the railway business. The order book has come off, right? And you pointed out that the new ordering has been slower. But does this, in any way, hamper the revenue visibility going into next year, if you can just share thoughts on that?
This is Dipankar. As of now, since the tendering and everything was postponed and a lot of orders have been postponed to the FY '22 business. So there may be a little bit of a issue about the order book being built up because it usually takes around 5 to 6 months to take -- build that order book. But what we see is that a lot of activity has already started in the railway board and the different routes. So we are very hopeful by December or January, it should be becoming normal again, and we should be having the similar or maybe better order book going forward.
The next question is from the line of Hitesh Goel from Kotak Securities.
Sir, and I would congratulate you on the...
Sorry to interrupt. Mr. Goel, I would request you please speak a little louder.
Can you hear me now?
Yes, sir. You can go ahead.
I would like to congratulate the management for a very good set of results. I just wanted some more granularity on the tractor margin. So when I see, say for example, when I'm comparing the top line of 3Q FY '20 versus this quarter, it's almost similar, right? You reported a margin of 14.5% EBIT margin at that time. So new normal, you have been consistently improving margins. The new normal was 14%, 15% of tractor margin, which is now you're saying 17%, 18% is kind of your margin which can happen on the tractor business. I can understand the mix had an impact of 1.5% EBIT margin. But what explains this 1.5%, 2% additional margin, which you're talking about. And if the top line remains similar? Do we expect this is the new normal for the company? Assuming commodity costs are also flattish, so assuming everything being normal. So just wanted to understand the structural cost advantages that you have done in the business.
Hitesh, if you recall, we have been guiding obviously for the tractor business margin to improve by 150 to 200 basis points this year, which wasn't the normal case, which we in any case are factoring in, but that is the cost initiative what company took last year of how is the annualized impact will likely be coming this year. So especially on the material cost front, whatever initiative were taken. Where you got the result only towards the end of last year. So that full year impact will be coming now in this year. Which is another 2% gain, this is actually happening on the material cost front. So that is 1 factor, which definitely will sustain. So it's why we're saying 17%, 18% now looks feasible given the other situation that you're looking at. Both on the other cost front on the front of your model mix gain, which has actually come up now. And assuming some of it we will differently be able to sustain even if not fully, but still like some gains we will definitely sustain looking at the kind of product launches that company has done. So that gives us more confidence. I think maybe sustaining at the level of 17%, 18%, looks like feasible now for tractor business. Given these volume directly continues. If you continue to be in this range, with 24,000 plus volume means almost analyze 100,000 tractors volumes. So that volume definitely these sort of margins can happen.
Yes. And just a follow-up there. So basically, the construction equipment is coming back very sharply, government spending is also going to be revived in the second half. So tractor on the infrastructure side will also pickup, right? So mix is likely to deteriorate in second half in my view because you don't have capacity for -- is it fair to say that 50 HP plus, which is used in haulage the margins will be much higher as well? So mix also should not deteriorate. Is that correct?
Yes, effects of mix will deteriorate from the Q2 levels, what we have registered. As I explained, the lower HP segment was not performing as much as the higher HP segment on the industry side itself, right? But I also explained that we gained market share above 40 HP tractors, right? So yes, I mean, mix would be much better than normal levels, but I think it will not be as good as Q2.
Okay. And what is the capacity -- stretch capacity with the company can do now on a monthly basis or annual basis?
So right now, we have been able to stretch ourselves beyond our capacity because our constraints in capacity were not really from the assembly point of view, they were more towards like the machining capacity and also the supplier capacity, right? So I mean, in such times, you really -- I mean, we have really slogged very, very hard to go even beyond the capacity right now. So we have produced like more than 11,000 tractors in September and October each.
[Operator Instructions] The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.
Yes. Am I audible? Yes. Yes. So my question is on the pent-up demand that you spoke about in tractors, okay. You even mentioned that the pent up demand in tractors is now almost coming to an end and thereon, we should see more on a slightly lower level of demand for sale. Now if you can try to explain at this point[Technical Difficulty]which are reasons that the pent up demand has been satisfied and which still has more underlying demand coming through?
Yes, thank you for the question. So as you know, we had a -- I mean, lockdown since last week of March, and then the retail started happening only like towards middle of June. And therefore, there were a lot of customers who could not buy tractors at that time. And those customers came back and bought tractors between June and let's say October period, right? So if you look at a H1 level, like first 6 months, despite a very, very low demand in April and May, still like we are 12% higher than last year, H1 this year compared to H1 last year. Right. So there had been definitely a pent-up demand, and you saw like July, August, September, the industry went up by 41%, which is, of course, not like a fundamental thing to grow by such a huge amount, right? But that demand, I think, I mean it is just our opinion that, that demand is kind of -- pent-up demand is kind of dying down or dying away. And therefore, now, the real demand, I mean, the real fundamental demand will -- we will see, right? So expect, of course, it would be very positive. Now as far as the geographical spread, the industry, of course, has been growing much more in South and in some other markets. And -- but as per the pent up demand is concerned, of course, the pent-up demand came in every market because every market was kind of locked out.
Understood, sir. Understood. Sir, the other question is to Bharat, sir, from a balance sheet perspective, the receivables have come down compared to March levels by around INR 200 odd crores, whereas the payables are at similar levels, are there any change in terms of trade or any change in the policies would be delayed? So if you can highlight anything on that front.
Yes. So since the cash flows in the rural side are pretty good. So company is also trying to shift now as it is since you've seen there's a supply constraint. So it's really a new seller side of the market. So the company has been pushing to convert most of their dealers to cash and carry situation. So this is why you looked at the debtors, which has come down almost from 58 days level, which are there last year to about 30-day level now at a company level, so which is quite significant change. While on the trade payable continues to higher because you're running at a peak capacity now as Shenu mentioned in the last 2 months, we have been doing almost going beyond our capacity of 10,000 tractors trying to do maximum production so the -- obviously, the payables continue to be high which is still in not new category. So that's why you're seeing a very good working capital and liquidity support happening now in this particular quarter.
[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial.
My question pertains to the EBITDA margins, PBT margin for tractors. You indicated there was some benefit of lower SG&A cost and do you expect that to normalize? And secondly, on the commodity side, what kind of pressures are you seeing? And thirdly with respect to 40 HP and above you indicated flip slide in this quarter, how it was same quarter last year and in the first quarter? Hello?
Bharat, do you want to take that?
Sorry, Jinesh. Can you just repeat the question?
Yes. So on the margin front, 3 clarification 1 is you said SG&A costs were rendered due to COVID. Do you expect that to normalize in coming quarters? Secondly, on commodity side, what kind of cost inflation are you seeing? And thirdly, share of over 40 HP tractors in same quarter last year and 1Q.
Okay. So yes, on SGA costs, as the things really start becoming normal, so we'll see the cost pressure will start building up. So as of now, still, I think a lot of places are still under lockdown so the travel is restricted[Technical Difficulty]it would be in a normal course because you are also looking at a supply cost and right now the demand is being not an issue. I think as you cross festive season and things really start becoming normal. So these costs will likely start building up so when it will happen, it's very difficult to predict because we don't know what will be the situation like after 2 months 3 months and now the second year really will play out in India. So that's something, which we are all keeping our fingers crossed. But yes, in the normal course, these levels will likely start moving up, so that much I can confirm. So since coming to year[Technical Difficulty]are seeing some increase happening so maybe another 3% to 4%, we expect the cost movement will happen, which can be somewhere around 1.5% sort of level, 1.5% to 2% level movement can happen on the inflation on special industry price, et cetera. So that's something which we are probably watching and see how the competition reacts to those cost changes and how the demand really pans out which will actually decide the ability to pass on those cost increases to the market. On the 40 HP front, give me a moment to just conform it to you. Do you have that number? Last year and in the first quarter? 40 HP in the last year's same quarter and the first quarter, how much of the percentage which we did?
40 HP were last year, same quarter, we did 45% and.
45%.
Yes, and this year 63%.
And first quarter?
62%.
So first quarter was 62%.
Sure. Sure. And just 1 clarification, this 11,000 production of tractors is just at our plants. And now we have Kubota capacity also available. Is that correct?
So Kubota production right now is started only for their products. So for our products, it will start somewhere in next fiscal. So that's why the capacity right now is not available. But given -- even if the capacity is available, the cost end of the supply side would still happen there. So if we are facing issues from the supplier itself, so this is more assembly so that was still probably would have been a challenge. So I think first preference is to really ramp up the capacity at the supplier level and also then smoothen the supply chain and then also increase capacity as Shenu mentioned on the machining shop side. So last year, when the demand started coming down, we actually held back that CapEx, but now looking at the pent up demand. So we are again releasing that money. So hopefully, by next 6 to 9 months, we'll have those capacity ramp up also happening.
So are we increasing our CapEx guidance for FY '21 and '22?
So yes we have earmarked about INR 90 crores to INR 100 crores for the additional capacity. So both at the supplier and as well as at our end. So right now, like I said, our stated capacity was about 10,000 tractors per month, I guess, which we're already running at a stretch. So with this -- the additional CapEx, we expect we should be somewhere around 12,500 odd tractors from one, which is about 150,000 capacity, which will be with Escorts. And then may be another 30,000, which will be available with the JV with Kubota. So about 180,000 capacity can happen by next fiscal.
Okay. What would be your CapEx for FY '21?
See FY '21, we had said about INR 200 crores to INR 250 crores. But now looking at the current situation, the additional CapEx is being earmarked. So cash flow-wise, we will still be in the range of same INR 250 crores to INR 260 crores, our commitment, I think we will be much higher at INR 300 crores plus, INR 300 crores to INR 350 crores CapEx there.
Got it.
But it will get spilled over to in terms of cash next year.
[Operator Instructions] The next question is from the line of Mitul Shah from Reliance Securities.
Yes, sir. Congratulations on a very strong performance. Sir 1 clarification you indicated that market share will remain under pressure. But if I compare second half this year versus last...[Technical Difficulty]
Sorry to interrupt. Mr. Shah, the audio is not quite clear. If you could come closer to the phone and then speak.
Sir, my question is on a clarification on the market share, you stated that it would remain under pressure, but that is because of the first half, if I will compare second half this year versus last year, and again, your monthly volume last year was roughly 6,000 for balance of the period between November to March. So capacity should not be a issue. So is that despite this, you expect market to remain under pressure?
Yes, Mitul. See, there are a couple of factors that we can't predict right now. So first of all, we know that the inventory levels are very low. Right? So a lot of -- I mean, supply chain side pressure might still continue because those inventories will get filled up, right? And therefore, it is hard to say, I mean, exactly what would happen. But yes, I'm in, more or less, we would -- I would say that we'll try to maintain our market share going forward, at least, if not gain. But yes, there will be -- there are some of the things that are hard to predict right now in terms of relative advantages or disadvantages.
Sir, and on the margin side, if I look at your monthly numbers, November being more than 13,000 given this October 13,000 plus we produced and November, December, even if I assume low single-digit growth, still sequentially, your quarterly volume, Q3 tractor volume would be higher than Q2. And despite that, you think that product mix and all those things will have a negative impact. On the other end, construction equipment will also improve sequentially, railway also we are expecting higher orders now onwards. So putting all these things still for us, sir, do you expect margin will come down?
I mean already in the October month, we have seen the product mix has actually started going against us. So it's not same as it was in the period till September. And second, like we mentioned by inflation is another factor, so which has already started catching up now. So we've already given some cost increases to the suppliers, even in September and again in October. So the price increase, obviously, is still on hold. So we are still waiting for festive season to be over and we will also wait and watch how the competition reacts to these inflation pressures. So these will obviously impact the margins in the coming quarter. Even though the volume may look slightly better than Q3, Q2, in Q3. But I think margin-wise, I think we still have to keep a wait and watch which is why I indicated 17% to 18% as such more looks like a achievable number than probably what we did in the Q2.
Sir, I'm asking about blended margin even if construction will improve, railway will improve still blended margin will come down?
Yes, the construction margins are not very high. So even if you look at we are able to hold on to the margin for railway and construction segment going forward too, in fact railway did better this quarter. So the margins in Railways are also good at 20% plus. So there, we don't see the impact will be really there on the construction equipment side, the margins are going to be in 3% to 5% sort of range, which is the level which we achieved last year. So that's not going to be a major game changer. So essentially, the margin basically impacting the overall status will still be tractor business only. That's it.
The next question is from the line of Vivek Gedda from HSBC Securities.
Am I audible?
Yes, sir, you can go ahead, please.
Very good set of numbers. Congratulations on that. I just had 1 question for Shenu sir. In fact, it's just an observation. Am I correct in saying that probably our market share region-wise has not been significantly different from last year, at least in North, Central and East. And the only -- the market share loss on that this is mainly because of South regions doing much better? Or have we actually seen some bit of market share erosion in our -- in regional basis as well?
Yes. So both factors. One is that the industry has really boomed, relatively speaking and like more in South and West, right? Yes. But even like otherwise, we have lost some market share. So for example, even in our strong markets, we have lost some and in opportunity markets, again, again, we have lost some. So actually in our weak markets like South, the core states of south, we have actually gained market share because of some of the fundamental things that we are doing there. Right, but the market share loss is pretty much everywhere except in other. And that is only because of our inability to produce as much as the demand was there.
Got it. Sir, just related to that. So going forward, over the next 2 quarters, based on your demand checks on the ground. Do you still expect a south and west to continue outperformance? And if so, why -- what are the key reasons that are leading to that kind of an outperformance? As I understand, I think even the sales because of subsidies are lower right now this year because of the strong demand. So just wanted to get a sense on that.
Yes. So largely, the growth that we are seeing in South and West is vastly because of the base effect, right? So I mean this time, South and West had like plenty of rainfall and the water reservoirs are like really, really up right and like at record levels. So that is just showing up in the demand. And you remember, I mean, if you look at last 3 to 4 years, 5 years going back, you will see that south got really subdued because of the lack of water. Right. But now since water is coming back. Therefore, you are seeing this extraordinary growth in these -- some of these markets, which are very, very rain dependent. So at this point in time, because of the good monsoon, all rain dependent markets or largely rain dependent markets will show better growth because of the base effect.
Got it. Sir, second question is for Bharat sir. I just wanted to get a sense on the paid up capital, which has gone up so after the stakes into Kubota, have we actually already extinguished our treasury shares? Or is that yet to come?
No. So that's a process which will run through NCLT Vivek. So it will take some time. I think it takes roughly 9 months to a year to really get home. So we made application to the stock exchanges. So we got some queries from them on that process. So we're just sorting that out. So after stock exchanges approval is there, then we file the scheme with NCLT for cap reduction. And that will take, I think, about 6 months more time. And looking at the current situation with COVID-19, the bench is not really working to full efficiencies. So that will take maybe another 6 to 9 months for this to happen
Sir, if I may squeeze just 1 more question. From a long-term perspective, we have seen pretty strong pickup in margins and ROCs have picked up as well but now that we have such a huge cash that has come and sitting on our books. How do you look at ROE trends probably 2 years or 3 years from now? Probably, what I would also look to hear probably is on the capital allocation part, how do we actually look at ROE and capital allocation together?
Yes. So I think as we have been mentioning earlier, so definitely, we also recognize this fact that more cash on the balance sheet will only dilute your return ratio. So we also need to be leasing the right opportunity for the business where we can put in money, which can deliver a much better returns than what we are getting now on this liquidity. So we are working, like I said, we are working with Kubota now to develop this joint business plan, which is under discussion with them, which includes your investment, which will happen over the next few years and that's how we want to put this cash in best of developing the implements for the further capacity ramp up for building up volumes for exports. So the new model development, which will happen. So I think all these factors, which definitely will be requiring cash from the perspective of overall business growth, which will be the first priority. And second, we also mentioned about the opportunity which we are exploring in the railway segment, there's another segment, which we think will actually show very good potential. And already we've seeing serviceability there. So that's another sector, which will probably need some bit of cash from us. So those will be obviously the priorities. So our first priority will be to redeploy the money in the business, which can deliver much better returns it is a capital allocation. And obviously, the other option which we obviously will be exploring is industrial distribution, which will also be really 1 thing which we have not been doing in the past, looking at the constant cash flows and the requirement on the CapEx side. But now given the good free cash, maybe that's another possibility that the board will look at.
The next question is from the line of Sonal Gupta from UBS.
Yes. Just 1 question. I just wanted to ask, I mean, like on the retail side, in the month of October, how thing has been? Because what I can see from the VAHAN data, it seems to suggest that the retail is down for the industry by like 20% month-on-month. So if you could just shed some light on that, I mean, like what is -- how do you think underlying retail has been actually for the industry?
Yes. So 2 factors we have to consider when we look at VAHAN data. One thing is that it is -- it comes with a lag of a month, almost, right? The other thing is that is that there has been a kind of a festive shift this year. So last year, Diwali and Dhanteras, which are like very, very big days for tractor industry. They were in October. And this time, Diwali and Dhanteras both are in November, right? So there has been kind of some shift as well as some lags. So I mean for a particular month, Vahan data is not a real reflection of the things going on the ground.
Okay. I'm sorry. And you said that -- I mean, the delay is like almost a month, right? So the lag is almost like a month, not a week or 2 weeks?
No. In case of tractors, because we have a slightly longish kind of a retail financing cycle. So the log -- and so the delay is roughly about a month. And in some states, it is probably like 2 to 3 weeks, but some other states is like 3 to 4 weeks.
[Operator Instructions] The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.
Sir, just wanted to check, is it fair to say that now your breakeven point have structurally gone down when we see these kind of margins, I just seem to think about your breakeven points, though I know it's quite low. But just trying to think that how much of this cost savings will be structural in the sense even if there is a down cycle, you would be able to report better EBITDA margins than what you would have in the comparable down cycle? Hello?
Yes, that's right, Prateek. So roughly, given the contribution improvement which you are seeing on the grounds, when the gross contribution are going up. So some of it is structural, and some of it is maybe temporary in nature. So like you said, the modern exchanges may not be the permanent feature, but yes, it may be a temporary phenomenon or it may not sustain to the same level as you've seen in the past. But definitely, there are changes in the material cost or the initiative what company took, that is something, it's really more permanent in nature. And when I say permanent means it all depends on how the product mix undergoes changes. So that's going to be a constant exercise which company has to continue doing. So that will continue. But yes, that will definitely have a much longer impact, and then those savings do continue for the longer period. So to your question, yes, the breakeven levels have been going down, and that is too across all businesses, including on construction equipment side also we are now aiming to fairly hit a level of 200 to 210 machines a month at the breakeven level by end of this year, even though right now they are slightly higher.
And sir, you said INR 20 crores is the model mix impact, right? Which is very small on an EBITDA of INR 300 crores? Is that a fair...
That was in the quarter is almost -- that's almost 1.25% in this quarter itself and the tractor business will be even higher.
[Operator Instructions] The next question is from the line of Ritesh Badjatya from Asian Market Securities.
My all questions has been answered.
The next question is from the line of Chirag Shah from Edelweiss Securities Limited.
Yes. Sir just 1 question. See, on this favorable tractor mix that you indicated you are on course to achieve, is there a regional mix also a driver because of all are different in different regions. And that could also be a reason because now[Technical Difficulty] and hence demand higher HP tractors was -- will that also be a driver for a higher HP contribution?
Yes, yes, theoretically, yes, but it's hard to say, I mean, exactly because I mean in terms of like when at industry level, you are short on supplies, I mean most of the manufacturers would tend to kind of produce probably better margins, right? So I mean, the data will not reveal everything. That is actually going on the ground. But yes, generally, I would say the impact was also because the commercial side of the market demand was slightly slower, right? But I mean, yes, because it is also because of the supply chain shortages. So if you can produce only x number of tractors, then you would produce more of them high margin ones.
And sir, when we say combustion, you are experiencing construction equipment pent up demand, right? You are just[Technical Difficulty]
So I;m basically -- yes, I'm basically saying [Technical Difficult]type of demand so fresh type of demand largely comes from a lot of infrastructure kind of projects.
Yes. But the tractor[Technical Difficulty] this is expected, that would be higher [Technical Difficulty] to come back.
Yes, yes, yes, both actually, I mean, in commercial usages tractors are used like all across from low to high HP. But if you just average them out, the concentration is more towards lower HP.
The next question is from the line of Viraj Kacharia from Securities Investment Managers (sic) [ Management ].
Yes. I just had a follow up on, you mentioned that you had some issues, I mean the supply chain and supply shortage of certain components, which led to the market share loss in regard with the competition. So what particular components are we talking about? If you can just provide some color.
Yes. So the most -- mostly, it has been a problem like with some proprietary components like fuel injection pumps and tires, et cetera. On the other side, there was also some issues with some castings, right? So it's not so much about the component itself, that created a problem or a type of component. It is most -- it was more or less a very good location of the supplier [Technical Difficulty] in that location in terms of the project.
The next question is from the line of [ Shanti Patel from Shanti Patel Investment Advisers ].
My question is[Technical Difficulty]more emphasis on rural side, and want to I think double the income of farmers, what will be the probable impact on the tractor demand and supply side and who our main competitors? That's all. Hello?
Okay. So revenue state you want for the quarter?
No, I mean, normally, normal. I don't want to say specific in this quarter. On the volatile, it can vary within here and there?
On an average. So on an average, we used to be about 78% to 80% used to come from the tractor business. And 12% to 13% was from construction equipment and 6% to 7% from railways. So in this particular quarter, railway construction are more or less at a similar level and tractor business continues to be at about 80%.
Got it. And that's one. For government the emphasis is in governing the income of farmers, will it don't affect the demand for tractors in future. And then what will be the scenario of demand and supply in the industry?
Yes. So there are like 2 types of interventions that government does, 1 are like very short-term interventions like announcing some subsidies or some direct cash benefit or direct cash benefit to the farmers. So both, of course, have an immediate impact on the rural cash flows and therefore, on the tractor market. And there are some other things that the government does, which are more longish term in nature, and therefore, those impacts will come in the future. But yes, you are right, government is very, very focused on the rural side. I mean, I mean, COVID essentially has put attention on the rural and the farming for even the general public. So it has come into a lot of attention in the last 6 to 8 months. Yes, to simply answer your question, yes, it will have a positive impact on the rural demand for on the tractor industry.
Who are our main competitors, if you give the 2 names.
Yes. So I mean, I need a lot of time to answer that. But because the competition changes from geography to geography, depending on the market dynamics. Yes. But of course, I mean as far sense of -- that is in the side to regain our market leadership, and therefore, we look at everybody who is challenging us. So yes, I mean, yes, but it's hard to generalize. I mean, it is like very, very brand centric and geographic centric.
[Operator Instructions] The next question is from the line of [ Sonia Vernekar from Equentis Wealth Advisory ].
Hello. Yes, am I audible?
Yes, you can go ahead ma'am.
Yes. Yes. My question is more, I have only 1 question. It's on the Vision '22 plan, which you had shared. So if we take the base of FY '17, and we calculate the numbers which we have shared in the outlook. So the protest, which we have achieved till FY '20, and the growth rate, which we need to achieve for reaching that level by '22. There's a big gap. So what do you think, do you think this is doable the numbers which we have shared in for '22 are they achievable? Or do you think that because of FY '21 and this all pandemic things, do you think that can go 1 year or 2 year ahead? What's your view on that?
Yes. So generally speaking, like for tractors, I can say, I mean, especially the volumes and market share. So this year has been a setback economy, right? So we were building it up quite nicely in the last 3 years, but this has been a setback, right? So therefore, it will -- we with the delay only that we will probably reach our FY '22 aspiration. So probably, I would say, a year, 2.5 years delay.
The next question is from the line of Sameer Bhaskar Deshpande from Fair Deal Investments.
Congratulations for the excellent numbers. And actually, I wanted to know whether our main markets in North and Central are currently growing at, I think, a lower rate than the South and west. But with the good crop and good rabi season also expected with a good monsoon. Will that change going forward in half 2?
Yes. Yes. So as I said, overall, at the yearly level, FY '21, we are looking at a low double-digit growth of the tractor industry, right? There has been a skew in the first 6 months. Between North West, south and center. And to some extent, I would say that skew will continue for rest of the year, right? So South and West are going to outperform North, Center and East. At least until March, April this year.
Okay. But we will continue to grow ahead of the industry?
Yes. As I have explained it before, at this time, I mean, for next few months it is going to be a challenging thing. It's very, very hard to predict because of the skewness in the market, which COVID has created in terms of stocks, in terms of supply chain situation. So it is very, very hard to say, but that is what we are hoping for that going forward, at least from December, January onwards. When the supply situation should smoothen out, I think then we should back in our winning ways in terms of going beyond industry.
[Foreign Language] And regarding construction equipment and railway, half 2 will be better than the last year half 2 because now the COVID things are behind. So do we hope to maintain the sales and the revenues and profits, which will be higher in half 2 compared to the last year?
Sameer, this is Ajay with you. Can you hear me?
Yes, yes.
Sameer, the -- generally what happens is second half is 50%, 50% to 55% of the total volume of the year. And with the positivity that we are looking at from September onward, I think these numbers should be similar to last year numbers, the industry I'm talking about. And we would maintain a position in that. Again, as Shenu said, there are supply chain issues on our side as well. So trying to mitigate that, but the industry is moving in the right direction. And is expected to move -- continue this movement -- positive movement going forward this year.
[Foreign Language] For railway also do you expect?
Yes, this is Dipankar. For Railways, we -- I mean, we had a very good quarter. The Q2 was one of the best we had for all these few last few years. So Q3 and Q4 may not be that strong because, as I was saying before, a lot of tenders have not happened, a lot of tenders have been postponed. So what -- we are assuming the tenders will be again starting from the December, January time frame. But as you would appreciate that government tender by that time, you get the physical order in hand for execution, it takes almost 2.5 to 3 months. So let's say we will not be able to meet the Q2 sort of a growth, but we will at least maintain whatever we have been doing the last year.
And I was asking about last year half 2 only, whether we'll be in the same -- because we have the order backlog of INR 350 crores, which we have to compete within next 6 to 7 months.
But what happens is -- I mean, railway is also postponing many of the orders. The order book is intact, but many of the order railway says I don't need now because almost 50%, 60% of the post production, locomotive production, [indiscernible] production has come down because of the COVID and they don't -- the trains are not running for the last seven, 8 months. So that way, I mean, not sure whether we'll be able to fully execute. The order will be there, but whether we'll be able to execute within the same is -- so that we have to -- we'll be knowing maybe another 1 month or so. So that way we will be able to get more clarity about that.
The last question is from the line of Sanjaya Satapathy from Ampersand Capital.
Yes. Sir, can I just understand from you the instant that you start your winning ways from January. So are we talking about it in terms of wholesale or retail level in terms of market share gain? Because I believe that retail is what will matter as such.
Yes. Sanjaya, I mean fundamentally, both. I mean, on the market share numbers are projected only at the wholesale level. But yes, I mean, both retail and wholesale. I mean, they have to, in the long term, they have to go together, right? So yes, we will -- I think once the supply side situation smoothens out, then you should see that fundamental growth coming back to previous levels.
And sir, as such November, December base are pretty low compared to the kind of number that you did in September, October. So despite that, why are we saying that you will still face supply challenge in November as well as December? I'm not able to reconcile to that.
Yes. So for example, like November, I would say that most of the players have stocked out, right? So basically, the sales in November, for example, or the ability to sell would be limited to the ability to produce, right? So from that point of view, even November would be kind of a constraint. So it seems like demand will still outpace supply, right? I mean, because nobody has any -- probably nobody has any stocks left. Right? So that is one. And then going forward, although the market will not be as high in December as it was in October and November, but then everybody would like to fill their inventories back, both at the dealerships and the depos and also the raw material, right? And therefore, still, I mean, December will be tight in terms of supply chain, I would say.
Understood. And it is only through January that you will be normal. That is what you are saying?
That is what we are hoping for. I mean, it all depends on how the market behaves and how the inventory levels pan out. I mean -- but yes, I mean, we expect that from January sometime or maybe early February, the supply chain situation should be back to normal. Of course, I mean, you know that there are some volatilities at this time. So it's hard to predict with accuracy. But yes, that is what we are looking for.
Understood, sir. And if you can just touch upon on the -- can you give a bit more granularity about this Kubota which is delayed, right, sir? The component...
In Kubota what?
Sir just I mean how.
So Kubota JV plan has already started running. And have already started shipping tractors. And the plan itself was they would produce Kubota branded tractors first. And Escorts branded tractors would come later. I mean, there was a delay of a few months in starting the plant from our original plan, there was a delay and some of the delays got caused because of COVID also. But at this point in time, the plant is -- has started running now.
Sir, at what capacity and how much Kubota is likely to sell, let's say, in quarter 4?
Yes. So capacity -- so it's hard to say about capacity because right now, the plant is in stabilization mode. Right? So the plant has just started operating from last less than 2 months, I would say, right? So I think we can give you more clarity after 2 to 3 months[Technical Difficulty]
As that was the last question, I would now like to hand the conference over to the management for closing comments. Sir, would you like to add any closing remarks?
Yes. Thank you, ladies and gentlemen, for being present on this call. For any feedback and/or queries please feel free to get in touch with Investor Relations at escorts.co.in. Thank you very much, and have a good day and stay safe and healthy. Thank you.
Thank you. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.