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Ladies and gentlemen, welcome to the Q2 FY2022 Results Conference Call of Escorts Limited, hosted by Emkay Global Financial Services. [Operator Instructions] Please note, that this conference is being recorded.I'd now like to hand the conference over to Mr. Raghunandhan N. L. of Emkay Global Financial Services. Thank you and over to you.
Thank you, Ritija. Good evening, everyone. I'd like to welcome the management and thank them for this opportunity. We have with us today Mr. Bharat Madan, Group Chief Financial Officer and Corporate Head, Mr. Shenu Agarwal, CEO, Escorts AGRI Machinery, Mr. Ajay Mandahr, CEO Escorts Construction Equipment, Mr. Ankur Dev, Chief Executive Railway Product Division and Investor Relations Team of Escorts Limited.I shall now hand over the call to the management for opening remarks. Over to you, sir.
Thank you, Raghu. Good evening, ladies and gentlemen, and thank you all for joining us on the earnings call for the second quarter and our period ended September 30, 2021. We trust each of you and your families are safe and healthy. Few highlights of our company's stand-alone performance for second quarter ended September 2021 are as follows.Revenue from operations during the quarter was up by 1.4% at INR 1,662.3 crores as against to INR 1639.7 crores in previous fiscal. Construction Equipment business and Railway Product segments continue to outperform. Segmental revenue growing by 58.8% and 6.2%, respectively, while AGRI Machinery segment revenue came down by 6.1% on year-on-year basis.On sales volume front, tractor sales volume came down by 13.8% to 21,073 tractors as against 24,441 tractors last year same quarter. Whereas construction equipment volume went up by 30.8% to 1,074 machines as against 821 machines last year same quarter. EBITDA for the quarter ended September 2021 at INR 210.1 crores, down by 30.2% as against INR 300.9 crores last year same quarter.EBITDA margin for Q2 stands at 12.6% as against 18.3% last year same quarter. The margins have been adversely impacted by commodity prices, inflation as well as lower sales volume in Tractor segment. Company continues to be net debt-free with sufficient available liquidity for growth. Even though, there has been temporarily working capital build up in H1 in preparing for the festive season and to avoid any possible supply-chain disruption due to COVID as we saw last year. The same will be collected in the coming months. PBT at INR 237.4 crores as against INR 307.8 crores last year same quarter. Net profit at INR 176.7 crores as against INR 229.9 crores last year same quarter.On a consolidated basis, financial performance for first half ended September 2021 is as follows. Revenue from operations was up by 23% year-on-year at INR 3,375.6 crores. EBITDA at INR 446.7 crores, up by 6.3% year-on-year. Net profit at INR 351.9 crores, up by 10% year-on-year. EPS stands at 35.75% as against 35.10% last year same period.Moving on to segmental business performance. Starting with the AGRI machinery business. The domestic tractor industry volume went down by 10.6% to 2.11 lakh tractors as compared to 2.36 lakh tractors in last year same quarter. This is primarily attributed to very low rainfall and for about 3 weeks in July and August.And thereafter, heavy and continuous rain in September, affecting the delay of the sowing and harvesting cycle of the Kharif and Rabi crop. This phenomenon has also delayed the seasonal -- tractor market demand by about 3 to 4 weeks this year. Our domestic sales volume at 18,950 tractors went down by 18.2% as against 23,156 tractors in last year's same quarter.During the quarter, industry in our strong business of North and Central India was down by 19%, whereas industry in our opportunity regions of South and Western India was down only by 3%. So this resulted in overall domestic market share in H1 of 9.9% as compared to that of 10.2% last year same period.Our dealer inventory level in terms of number of days of sales continues to be lower than the industry average. Our total dealer count in India now stands at 1,100 plus, with most of our new dealers coming up in the southern and western regions. Our market share in our opportunity market continues to be on the rise. As far as 40-plus HP sales is concerned, our sales share in this segment in first half of this fiscal year has been 61.1%, a bit higher than industry share of 60.9%.Few years ago, in the same period, our sales share in this segment was 47% as against industry share of 54.3%. This quantum leap in higher HP tractor sales for us is on account of new product launches in these segments as well as on account of our better penetration in the southern investment markets. The industry of Indian tractor exports was up in this quarter by 55.2% to reach the level of 35,600 tractors as compared to 23,000 tractors in last year same quarter.Our export volume went up by 65.2%, to our ever highest quarterly volume of 2,123 tractors as against 1,285 tractors in the same quarter last year. This is driven by our continuous focus on new product development and on expanding our distribution network through new channel partners.Sales to Kubota's Global network is also gradually increasing. Segment revenue went down by 6.1% at INR 1,240.9 crore as against INR 1,322.2 crore in corresponding quarter previous fiscal. EBIT margins for AGRI machinery business stood at 15.1% as against 20% last year in Q2 and 15.6% in Q1, adversely impacted by steep inflation in commodity prices and lower volumes.As we enter the festive season, overall, rural sentiments are positive on account of good rainfall, expected good yield and crop production, higher crop MSPs and better retail finance availability. For full year, we are projecting industry to be around plus/minus 2%, 3% of last year's numbers. Inflation continues under weighted and is putting a pressure on our margins. Coming to the Construction Equipment business, our served industry comprising backhoe loader, pick & carry cranes and compactors went down by 15% in Q2, led by de-growth in backhoe loader industry by 22% on account of BS III to BS IV transition. Whereas compactors industry grew by 12% and carry industry has been the biggest gainer in Q2 with growth of 19% plus. But growth continues more towards price-sensitive hydra segment.Our total volumes manufactured and traded products went up by 830.8% to 1,074 machines as against 821 machines in last year same quarter. Our performance in crane and backhoe loader is better than industry, resulting in market share gain of 500 basis points plus in crane segment and 110 basis point gain in backhoe loader segment. Segment revenue went up by 58.4% at INR 249.2 crores as against 156.9% corresponding quarter of previous fiscal. EBIT margin went up by 185 basis points at 3.6% as against 1.7% in corresponding quarter previous year.We are anticipating strong equipment demand in second half of FY '22, starting from October '21, in-line with the trend change during the last fiscal year. The demand is also likely to get a boost from government push on infrastructure projects and due to long tail of projects under execution and substantial increase in new projects being awarded. Our off payments for recovery in this segment remains intact.Also per day execution target our road projects in FY '22 at 40 kilometers per day compared to last year 37 kilometers per day is expected. In Equipment penetration for the equipment segment to grow in mid-teens and margins for the segments to improve further led by our various operating mixes and breakeven point reduction. However, inflation continues to be an area of concern.Coming to the Railway Equipment division. Revenue for the second quarter went up by 6.2% to our ever highest -- highest ever quarterly revenue of INR 170.2 crores as against INR 160.2 crores in corresponding quarter. Sales from new production of 64% to total division sales as against 58% last year corresponding quarter.EBIT margin for the quarter ended September 2021 stood at 17.3% as against 20.3% in corresponding period last year and 14.6% in Q1. We are now witnessing good traction in tendering process and order book for the division at the end of September 2021 was more than INR 310 crores.For FY '22, we expect Railway Equipment Segment to grow in mid-teens and margins for the segment are likely to be maintained between 16% to 18%.Now, I request the moderator to open the floor for Q&A.
[Operator Instructions] The first question is from the line of Mitul Shah from Reliance Securities.
Congratulation on a good set of numbers sir. Sir, my question is on tractor volume guidance of plus or minus 2%, 3%. So more or less, we are expecting flat volume for full year. The first half growth of around 12%, 13%. So then balance period, we are expecting decline in the range of 5% to 7%? And can you give more details in terms of geography-wise for us, whether you expect growth or decline from our weaker markets or stronger markets. So basically, I want to understand how your market share will pan out based on the geographical distribution of growth or decline?
Mitul, good afternoon, and thank you for the question. This is Shenu Agarwal. So Mitul, yes. I mean, quarter 1 was unprecedented growth of roughly 38%, 39%. But quarter 2 as you know, we have had some industry declines. Quarter 3 and quarter 4 also we are expecting a decline in the overall market.And the reason, we know that, firstly, we are operating on a high base. And of course, there was a lot of interest demand last year in quarter 3 and quarter 4 as well, some of it. So H2, therefore, will be a slight decline. But overall, for the year, because this year is exactly not comparable with last year quarter-on-quarter because of various disruptions last year and this year related to COVID and supply chain issues.But overall, for a year, and as Bharat said, we are expecting a plus/minus 2% or 3% industry year-on-year. So that is our estimate for HP in the whole year. Geographically, yes, the market in South and West is growing much faster than the markets where we are strong, which is not central and some parts of the Eastern India. While the average industry growth is roughly 10% in H1. But the markets -- the strong -- our strong markets, which is North and Central Eastern India were very much flat as compared to last year, I'm talking about H1.While the market in where we are weaker relatively weaker, they grew by roughly 21%. And I mean, the reason -- this is not the first time this is happening. This happens once in a while that South and West grow stronger. And we know the reasons why it happens. This time, specifically, it is just because the way monsoon has panned out in the last 18 months, like last 2 months it has been quite good in South and West. And that is why we are seeing the obsession demand there. While in the north, we have had some issues with the rainfall North and central, like Bharat explained in July, which was kind of a peak sowing season when the range were required. We had a kind of assets in the monsoon of about weeks, right?And similarly, some late rainfall has put some problems in terms of delaying over the harvest and also some damage to the crops. So that is how the geographical spread is right now, which, of course is not favoring us at the moment. As far as market share is concerned Mitul, of course, and Escorts is a very unique company or a brand in the sense that we have an even distribution of market share traditionally. We are very, very strong in certain parts or certain states of the country, their market share is above 15%, 16%. And in some of the areas we're still very, very weak.Although we are trying to change that situation in the last 3 years. And hopefully, in future, we'll be successful in changing that situation. But right now, of course, we are in that situation. And therefore, whenever South and West markets grow, more than North Central and East, our overall market share does not look very bright. And therefore, our request always is to look at state-wise market shares and not just all India market share.And I'm happy to say that if you look at state-wise market shares for H1 and compare it to the H1 of last fiscal year, then, out of 16 or 17 major states, I think our market shares are up, in 13 out of our 16 states, right?
Sir, again, the question on the second half indications that sir, as we know that last year October, retail were somewhere around 150,000, 155,000. This time it would be the max 120 kind of a number.
Sorry to interrupt. The line of the management got disconnected. Ladies and gentlemen, please stay connected while we reconnect the management.Ladies and gentlemen, thank you for patiently holding your lines. The management line is being connected. Thank you, and over to you, sir.
Hello, am I audible?
Yes, sir, you are.
Yes, sir. My question is again on the second half projections. But over example this October last year, retail would somewhere around 155,000. This year, we expect roughly 115 to 120 possibly. So even if I assume some inventory correction and also number roughly 100 to 105, it is almost 10% decline for October on a very higher base number.Q4, as we know that last year Q4 was almost 20% higher than the past few years average. So there also double-digit decline is very much possible. Inventory in the system is also quite high, particularly for us, our growing market, our stronger market of UP, Bihar declining by 30%, 40% in this month.So in this situation, sir, if I'll do this calculation, industry number comes roughly minus 5% or even slightly higher decline. So that's why I'm not able to understand in what case it can be like a plus or minus 2% or plus 2%, 3% growth, sir.
Okay. Mitul, this is Shenu again. So see, there are a couple of things which remain to be seen in the market, right? So your estimates are more or less okay for October. But we have to keep in mind that because this was a very, very typical year, right? Because the sowing and harvesting cycle has been delayed this year quite a lot, right?So when there was a time, peak time of sowing, at that time, the crops get much rainfall. And therefore, the entire sowing cycle got delayed, which had a bearing on the harvesting also below in harvesting. Now as we speak, normally, Navratra to Dussera is a great period for tractor industry. But as you said, the Navratra to the Dussera period was not as right as it would normally be.And the main reason for that was that this swing disturbance in the cycle of sowing and harvesting of the Rabi Crop. Now, of course, there has been some damage because it's a late monsoons. But the situation is still, I think on the ground is very positive. So let us not -- I would suggest, let us not think that everything is gone, because we are seeing still a positive sentiment on the ground. We are still seeing a lot of customers who have not come out so far because of these delays, but they would come out in the winter.And right now, I think Escorts and almost the entire industry is hoping that the numbers should be a very, very good number starting from Dhanteras. So yes, so we still maintain that we might end up with plus/minus 2% to 3% from the last year base.
Sir just last thing on the construction and equipment side, can you share new breakeven point after this price increase and product mix change? And what could be the likely margins in next 1 or 2 years.
So you will take this call?
Yes, sure, So I think the breakeven on only inflation has been one of the concern. Otherwise, we are quite coming to quite low number on the number on the breakeven. But with obviously inflation, some changes happened. So we still expect having around 250 machines a month, I think is our average, but I think it all also depends on what mix you sell in those machines.But yes, this is a sort of number, I think it should be there for a breakeven number. And we expect the segment margin, I think on full year basis within the range of 4% to 5% on a full year basis. So which is normally in 6 -- last 6 months, the margins are better, where you see very good volume traction happening in the later part of the year in second half, where you have 6% to 7% gross margin coming in to give you that overall average.
[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
My question pertains to tractors. So when we are seeing the plus/minus 2%, 3% growth outlook for tractors. This is after factoring in for any recovery in the non-farm sales for tractors or that is also under pressure?
Jinesh, you were talking about non-farm sales, right?
Right, right.
Yes. Yes. So non-farm sales was quite -- the non-farm sales was quite subdued last year, as you all know. And last year, growth was primarily because of upsurge in the demand from the pure agriculture or kind of mix right? But -- so this year, of course, that situation is improving now. And we are seeing the non-farm sales also coming up.Yes. So it has not reached to its normal level, of course, because still some -- in many areas, we have certain issues. But I think that situation will dramatically increase in the next 6 months or second half of the year.
Okay. Okay. That's interesting. And the second question is on the inventory. So you mentioned we have lower inventory than the industry. But can you quantify what could be inventory level for us and industry?
Yes. It's hard to get a specific number. But normally, as you know, Escorts maintains inventory, which is lower than the industry average. And that is the trend that has gone even now.
But for Escorts, would it be difficult to share inventory for your network? Industry understanding -- of the data.
Yes. So Jinesh, so see, right now, we are in the middle of the peak season. And of course, in the middle of the peak season, our inventories are high. For example, on the second have festival we have a good fiscal comped, which is like the to forestry. So I mean, even if I give you a number, that is not going to be represented as the real situation, right?But I can tell you that by end of November, we will be back to our normal inventory levels of roughly between 25 to 30 days.
Okay. Okay. So currently, we are well-stocked for any pickup during Diwali and Dhanteras, that would be fair to say? I mean, we would not lose out because of any inventory issues?
Yes. Yes. Now, this year, we have made sure that we have enough stocks, of course, not overstock, but we have enough stocks because normally, because of our earlier constraints on capacities, et cetera, we tend to lose out on these 2 phases. But this time, we are not in that situation. So we are well stocked, but not overly stocked.As I said, of course, we have raised the stock levels, but those are not representative of the normal situations. As soon as, we're out of Diwali, our stocks will be back to normal.
Sure. Sure. And my third question is regarding railways. So considering last 12 to 18 months have been fairly subdued for railways because of COVID related impact. Would it be fair to say, now we are seeing normalization of activities even in that business?
Yes. Yes. Ankur Dev here. So I would say that the tender has started coming up, and it has -- it is better than last year, but it has still not reached a pre-COVID level. But certainly, things are improving in the last 18 months, I would say. The coaches, the trains are now running at around 90% capacity. And in terms of passengers, it is hovering around 60% to 70%. The things are improving, but we're still to catch the Pre-COVID things.
Okay. So we still maintain that 15% kind of a growth next year, I mean this year and next year?
Yes. We are expecting that kind of growth.
Okay. And last question on CapEx. So Mr. Madan, if you can touch upon that, what kind of CapEx we expect, I mean, first half was about INR 778 crores, full year, we still maintain about INR 200 crores to INR 250 crores, considering we are already 90% utilization in tractors?
So we expect, I think it will be roughly around INR 240 crores this year. But let's see, adding a thing at the initial 2 months in this year, obviously, was a dent. So the spend couldn't happen because of the second wave of COVID. So hoping everything remains normal, so we are expecting it will still be in that range 250 plus.
The next question is from the line of Gunjan Prithyani from Bank of America.
I have just a follow-up, firstly, on the demand side. So if I understand, right, what you're essentially suggesting is that it's high base and some delay in the monsoons, that's the reason for the flight shrink that you're calling in the industry growth.But generally, the sentiment that we are picking up on the rural has been pretty underwhelming. So I'm just trying to understand, is it just high base or you're seeing some turn in the sentiment on the ground -- on the farm side?So if you can share some thoughts around it, it will help us.
Yes, Gunjan, this is Shenu. Now, see, I mean, I think this year, when we compare quarter-to-quarter as I was telling Mitul, we have to just keep in mind that there has been -- they are not exactly comparable because there has been very uneven or unusual circumstances last year and some this year, right? And therefore, we have to see the situation in that context.So for example, like last fiscal year, quarter 1 was a de-growth, as I said, it was pretty high de-growth. And therefore, we were working on a very, very low base. While this year, I mean, there were very, very positive growth on this.But then again, those were on last year's low base. Now last year, low base in quarter 1 resulted in a pent up demand for quarter 2, quarter 3 and even quarter 4, right? And quarter 2 and quarter 3 are also witnessed some of the supply chain challenges. Yes. So therefore, we are working on a very, very high base in quarter 3 and 4 and quarter 2 as well.And therefore, it is very, very normal to see this negative growth in these quarters. Now, so when we see that in that context, it is really not a reflection of the rural sentiments per se in our view, right?So you know that last year was the peak industry in practice crossed 900,000, and that was roughly like 27% growth over the previous year. So we are like at comparing it against that year. So having said that, I would say that, yes, there in July, August and September, there was a - in the sentiments in the rural India, especially North Central and East.And the reason for that was this uneven monsoon this year, right? At some point of time, we were like all -- we were like all very, very worried that we will have a drop of crops, right? But fortunately enough, the monsoon has recovered. And then we had good rains in mid- through late September. Although they created a little bit of a delay in the whole cropping cycle. But now, the sentiment I feel are back, right? I mean we are witnessing those on the ground.People are very, very optimistic about the next crop now, because reservoir levels are up. It is very, very much available. Our NPA situation is not bad at all. So we don't think there is anything fundamentally wrong with the rural economy right now.
Okay. Got it. That's helpful. The other question that I had was on the margin. Now we've gotten to about 15% EBIT. And our guidance, as guidance from what I recall, has been more like high teens.How should we think about margins? I mean, what is the kind of under recovery that is there in terms of commodity? And is there any pricing action on the events?
So Gunjan, on this, obviously, the margin has been under pressure because of the inflation, which is continuing on the commodity side. So I think there are 2 reasons. One is the drag, which has been there and the lag effect of passing on the inflation to the market.So we're still carrying some impact, which has not yet passed on and maybe -- the post pricing action that we're anticipating for this quarter to caution that EBIT, which also is close to I think 2% to 2.5% to 3% impact. This is because of the lag effect. Second is, even the rate inflation, which is poised on to the market, that also has a numerator - denominator impact to this whatever inflation has actually happened in absolute demand or the -- has been poised the market. So that also express your margin by about 2%, 2.5%. So both put together, I think there's an impact of about 5% -- 4% to 5% sort of impact on the margin compared to last year. And there, some of the impact has been there to the high volume base and some cost initiatives that the company was taking.But still, and that's a worry factor right now. So the higher volumes are not really looking at the kind of margin base we expected. But we expect, I think most this price creation happens and we're able to pass it on to the market depending on how the competition we add to this. And at what time we pass it on, I think maybe towards end of next quarter, when we exit the year, we expect the margin should be back to the normal level. And I'm hoping the inflation will stabilize there at that time.
Okay. So under recovery is about 300?
So as far as the price increases are concerned, you know that this is a very, very unusual environment we are in right now. Our industry is not used to a quarterly price hike. And especially of this quantum, that we have done so far. We have increased prices in November last year and again in April and then again in July this year. And of course, the way the inflation is panning out, we should have taken a price increase in October.Now this, October and November period is coinciding with the peak. The non time, and therefore, we decided that we will wait for the price increase until the season, the peak demand is over, the peak season is over. So very, very clear that there will be a significant price hike of 3% to 4% as the season is over. We are just waiting and watching as to -- as I said, there is a delay in this, right?So normally, the reason was kind of after the end of Diwali, but I think this will -- the season will continue for a few more weeks this time. And as soon as that this peak demand is over, then, we will take the price hike.
Okay. Last question from my side, which we've been waiting for a pretty long time.
[Operator Instructions]
Sure. I'll get back in the queue.
The next question is from the line of Avadhooot Joshi from Newberry Capital.
I have just one question about the capital reduction, the case hearing was going on into the NCLT and it was supposed to be heard today.I would like to know what was the outcome or what happened to that?
See, what we came to know, even though we had not got the certified copy right now for the order, but we came to know the reduction has been approved by the NCLT. But the order has been reserved. So until we get a certified copy of the order in our hand, we can't really confirm the fact, but this is the situation as of today. so, the fact which was about more knowledge.
The next question is from the line of Mihir Jhaveri from Avendus.
Sir, I just have one question on the Kubota. We keep hearing about the Kubota investment from the company since the last 2 months. Will the management provide some inputs on this or how do we look at it, sir? Is it happening or categorically denied? What's the stance of the management that's my only question?
So we already responded to the stock changes on this, which we have said, I think we don't comment as a policy on this regulation. So until something gone creative there, there's no point in discussing those issues.
The next question is from the line of Nitij Mangal from Jefferies.
Could you share some -- how do you think FY '23 can pan out on the tractor industry side? I mean, can it be another 10%, 12% kind of a growth here or do you think FY '23 will be under pressure as well?
Yes. This is Shenu Agarwal. It's slightly premature to answer that question. Let us see how the rest of the year pans out. But broadly speaking, as I was telling Gunjan and Mitul earlier, that we think that fundamentally, the rural economy is fine. We've got some shippers in the team and maybe people are carrying that at perception from July, August and September. But we think that sentiments are fine. We think most of the macro drivers for rural economy are in place right now. The monsoons have been good. The monsoon last year had been good, right? So we have like 2 or 3 years of good monsoon now.And reservoir levels, which were dipping earlier in the year are now back to like all-time high. There is no problem with retail financing. We have been talking to all banks and NBFCs and they are very, very aggressive in the market right now. So we don't see any fundamental issues in the industry. And we know like, fundamentally, I mean, India is far away from saturation modes, in terms of characterization.So I mean, things look bright. But as I said, maybe 4 or 5 months later, we'd like to make a confirm estimate on next year industry levels.
Sure. And my second question is, what kind of discounting trend are you seeing in tractors? I believe last year, discounting was very, very low because the top peers were supply constrained. How is that changing now?
Yes. So there has been some increase. I think they are back to kind of post to normal, because right now, there is no constraint on supply. The industry is good. And therefore, people are running for market shares more penetration.Yes. So very close to normal, not anything dramatically there.
The next question is from the line of Nirmal Bari from Sameeksha Capital.
Yes, my first question is on the quantum of price hike that we have taken in the tractor segment. If you can tell how much it was in the last 3 times?
Yes. Nirmal, so it has been roughly, I'd say, 7% to 8% that we have already taken so far including all the 3 previous types starting November last year.
Okay. And this 2.5% to 3% that we are expecting to take going forward, that would suffice for whatever the wage -- sorry, the cost inflation has been so far?
Yes. So we are hoping to take roughly 3% to 4% now, which will be our, I think the biggest price hike so far out of the last 3 on this one. And it will more or less cover inflation that we estimate up to Q3. But there are some signs that there will be some small inflation that may happen in Q4 as well.So that could still remain producing if it happens in Q4. But right now, the estimate is it would be small.
Okay. And a couple of clarifications from the presentation. So we are seeing that capacity utilization in tractors is at 90% plus. So our capacity, if I remember, it's around 120,000 from our own plants and then we have about 30,000 capacity from the joint venture plant. While our manufacturing in the current quarter was about 18 -- sorry, 21,000 factors only. So this -- it doesn't match with the 90% numbers? So, are we excluding some…
21,000 is the sales number, which is -- yes, so you're looking at is the sales number, not the production numbers. When you look at the utilization capacity, which is both lower business production number. So as you know, there's an inventory buildup which has happened in this quarter for the festive season. So that'll reflected the capacity. You are talking about only the standalone Escorts Limited capacity, not counting the JV capacity.So it's basically based on 120,000 capacity, which is for the company for Escort, and this is based on the production number, utilization, not based on the sales number.
Okay. Okay. And for the 30,000 capacity that we have with the -- in the JV, would we start utilizing that going forward or?
Yes. We have plans to start utilizing that from -- yes, we have plans to start utilizing that from -- hopefully from next quarter, which is quarter 4 of this fiscal.
Okay. And this -- the ratio of less than 40 HP to more than 40 HP is 40:60, is that correct? So less than 40 HP forms, 40% of the total volume for us?
Yes, yes, that is right. So I think Bharat mentioned in his opening comments that 2 years ago, we were roughly 47% in greater than 40 HP, while the industry was roughly 54%. But now in H1 of the fiscal year, we are at 61%, which is almost same as the industry. So we have really caught up on particular HP sales in the last 2 years.
Okay. And one last question on the Railways division. So there, you said that the tendering activity has picked up, but our overall order book has come down because since we have also recorded good revenues. So is the tendering activity sufficient that the order book going forward will start seeing growth as well to keep in line with our target of 55 growth?
Hi, Ankur Dev here. So we expect, as the country processes increased in Q2, it should further increase in Q3 and further in Q4. So we are quite hopeful that we will be able to achieve this kind of growth. Because even with the highest ever quarterly, even our order book is almost equal to Q1 end. We hope that we'll be able to achieve this growth.
The next question is from the line of Joseph George from IIFL.
I have a couple of questions. One is, when I look at your P&L, there is inventory adjustment of about INR 350 crores. I guess that's because your production this quarter was much higher compared to the sale. And even if it was is the number or whatever INR 350 crores. So I wanted to understand how much did this adjustment benefit gross margin in this quarter?
Sorry your voice was a bit unclear. Can you please repeat your query?
Yes, I'll just repeat it. So when I look at your P&L, there is an inventory adjustment of close to INR 350 crores, which is a fairly significant number in the context of INR 1,600 crores value. I guess, it's because this quarter your production was much higher than pace. And typically, when this happened, there's benefit on the gross margin has initiated in the past. So I want to understand in this quarter, how much will gross margin benefit because of this?
But the better absorption of overhead. So I think this would be close to INR 25 crores to INR 30 crores.
Okay. So INR 25 crores - INR 30 crores of gross margin benefit because of the overall?
Yes, that's right.
Understood. And sir, second question was in the context of 3Q, do you expect further RM pressure in 3Q? So are you seeing an increase in the raw material basket during the 3Q compared to 2Q?
Joseph, I'm not sure whether if I heard you right. But are you asking about any further impact on raw material inflation?
That's correct. So are you seeing further inflation impact in 3Q compared to 2Q?
I can't hear it, there's an issue to it. If you can answer that?
So I believe what he's asking is, is there any further inflation, which may come after Q2. Right, Joseph?
Correct. That's right sir.
Yes. Okay. So as I explained earlier, there would be -- there is some inflation that is expected in Q3, although not to the levels of inflation that we have seen in Q1 and Q2. So it is right now kind of taking down. And we are also expecting some increase in Q3 as well, which we will pass on in Q4, right?But that would be -- right now, our estimate is that will be a significant amount. But you know, I mean, we have always been proved wrong on estimating inflation. So let us just see how it goes.
[Operator Instructions] The next question is from the line of Kishan Gupta from CD Equisearch Private Limited.
So essentially, we want to understand what is? Hello? So essentially, we want to understand like what is the management rationale of housing these 3 businesses in one company, because they are basically unrelated?
Well, this is the legacy, I think what company has. So between construction equipment and tractor business, there's still a lot of back end, which is common. So operation wise, I think there are a lot of commonality, which exist, including the use of some of the aggregates like Indian transmission. On the railway, we do agree. I think that's a business where the synergies, at least with the other 2 businesses are not really there.But unfortunately, that has been the legacy which the company is carrying. And we will look into the way...
Sir, we were not able to hear you. You may please go ahead now.
Bharat, can you repeat what you just?
Can you hear me?
Yes. We can hear you know.
Okay. Okay. Sorry. I think maybe some net -- Internet problem. What I'm saying was, obviously, this is a legacy what the company has. So we had multiple businesses at one-time within this entity. And as you know, we also execute from our other non-core businesses, including the auto combined business, which was there in this company. So right now, we are left with these 3 businesses. And within construction equipment and tractors, there's still a lot of synergies, basically on the back end side.But the operation wise, there are many commonalities that are there, that are being used, like Indian and transmission. On the railway side, yes, we do agree and the synergies between the existing 2 business and that business is not much. But since the scale of the business is not very high. So that's why this was continuing to be under this company. I think once you really reached the levels what we are aspiring for, maybe we can actually explore and as there's a -- whether you can house this one the separate subsidiary.But as of now, the scale is low. But yes, the way we are looking at this business for railway, looks like that's the one possibility that can happen.
Because the concern is like essentially because the valuation tends to improve when you have more focused businesses. So can we expect this sometime maybe in the near future or medium-term this, having of a little bit...
It's difficult to put a time line to that, difficult to put a timeline, like you said for separating a business, there should also be reasonable scale for that business to grow. And also, I think in the past, some of the businesses were actually loss making. So tax perspective wise, it was making sense to continue in the same entity.And land and construction segment, now the margins are not very high. So they're still in the single-digit range and at a very low single-digit activate now. So I think once the scale improves and the margin is reasonable where they can active regularly then...
We cannot hear the management sir. Hello.
Bharat, we've lost you again, but I think you're quite audible until the end. We can maybe go the next question now.
The next question is from the line of Abhishek Jain from Dolat Capital.
Sir, what is the outlook for the export side? What is the medium-term volume target? And are you looking for some contract manufacturing opportunity investments?
Yes. So no, we are not looking at any contract manufacturing opportunity as such. But you know that we have a -- we have a partnership with Kubota now since last few quarters. And we do intend to utilize Kubota's global network to enhance our exports volume, right? So some of our products would be going to their network, and that is one area of -- or one lever of growth for our exposure.But exports, overall, yes, we are very optimistic. As you have seen in the last 3, 4 years, we have been able to scale our volume substantially. And we still are not among the top exporters out of India, net exporters. So there is still a lot of headroom available. You know, we have been investing these amounts of money in R&D to develop new products specifically for the export markets.And many of those are in the market now and many more are on the asset. And so, overall, we are very optimistic on exports.
The next question is from the line of Ashish Jain from Macquarie.
Sir, my question is on the market share. So earlier, at the start of the year, you were guiding for some gains in market share, something that you had lost last year because of supply chain issues.Now on the contrary, first half because of not being more subdued, we actually have lost market share. So the recovery that you're talking about or you're seeing -- is it kind of more tilted towards North East and all?And should we think that we are kind of looking to gain 100 basis points or more of market share in the latter half of the year?
Yes. Ashish, thank you for that question. This is Shenu. And as I was explaining earlier in the call, we are a very, very unique company in the way our market shares are distributed in different parts of the country. I think there is like no one like us in the industry. So we are very subdued in terms of our market share penetration, north, center and East, we have markets or states where our market share is even more than 15%, 16%. And there are some areas in south and west where our market share is as low as 5% also.So that presents a little bit of a challenge to us because whenever the market grows more in our weaker areas. We -- our all India, our total market share does not look very, very good, right? So we are going through that phase in the last 18 months, and that was the reason or one of the reasons we lost slightly last year also.And that is the same reason that we have lost in H1 slightly again. Now this situation, of course, is going to break itself. I mean, I hope so. And then, you will see starts again. But if you really want to kind of make a judgment on our real market share growth or real growth as to our market penetration is concerned, then, I request you look at state-wise data.And then, you will see that out of 16 major states, we have tractor industry results. We have grown in -- we have grown market share in 13 of those, right? So the only 3 that we have lost is Maharashtra, Haryana and Punjab. And we know the reasons why, there is some restructuring that we are doing, for example, in Maharashtra, we are separating our distribution now between power brands and contract brands.And whenever we do that, we faced a little bit of a challenge in terms of maintaining market share, right? So -- yes, but that is kind of, I think a good thing for us for future. So Maharashtra would also be on back in other markets. But we are growing in almost every state, and we'll continue to do that. Now, as soon as the South and West situation normalizes, then, of course, all India or overall market share will also start looking good.
Sir, my question was more in context of the growth optimism or at least in place in the next 2, 3 months, the festive season demand that we're talking about, is that more tilted towards any specific region or regions? And should that make us be more optimistic about gaining market share in the latter half of the year or it is again?
And so Ashish that is also true that the festivals are majorly North and central India, Eastern India festivals. And therefore, if these festivals do well, then, the demand comes in this festive season, then, we will be benefited because of our strong base and not Center and East. So yes, that tilt will change now with respect to this.
The next question is from the line of Chirag Jain (sic) [ Shah ] from Edelweiss.
Yes. Sir, I have a follow-up question on the Kubota side. So 2 questions over there. One, on the speculation of Kubota increasing stake, how should we think that promoters holding in the company because it is at reasonable levels of 36%, how low promoter, if promoter comfortable with 36% or they would like to have more? That is my first question. Because if Kubota has to buy more in a company, somebody will have to sacrifice the holding either all of us as a shareholders or maybe promoter will have to add. So what is the comfortable level of shareholding that promoter think for the business? That is my first question.
So I not understood your question, sir. So I think the promoter is comfortable with the share, which the answer is, yes, 36% are center.
So they're open. I do think the stake from here on or they or not? That's my question.
No, but I already mentioned that this is all speculation, and we don't comment on the speculation. And I think government for so nationality stronger changes. So I'm not going to comment on that.
So second question was on the technology side, if you can share some update, between you and Kubota, has there been any further discussions on how to integrate the technology or how to share the best practices to take us some light on that? And when we will start implementing that in product development programs.
Yes. This is Shenu. So as we have been saying that a lot of things are in work with Kubota as far as joint technology and product development is concerned. So that program -- we are planning a new products that will jointly developed for India and global markets.Yes. So as soon as we are ready with those plans, we would update you.
Okay. And sir, generally, what is the development plan that you assume? Is it a 3-year cycle or once you decide could happen in the short-term of 12 to 18 months? If you can just help us educate us on that would be helpful.
Yes. It varies. I mean, there is no standard answer to that. It really depends on what kind of products we want to make and whether we have existing aggregates that we can use for that. For example, like existing engine or existing transmission. So if that is the case when the product development cycle would be the roughly between 20.0 to 18.0 months.But if we have to develop something from patch, then, it would be more, it would be more like 36.0 to 40.0 months. But really, I mean, that is just a broad direction. It really depends on what kind of products do we want to make, right?So broadly speaking, you can say major product changes with the carriers and some minor product changes based on existing aggregates would require a year or 1.5 years.
Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen for your present on this call. For any feedback and update.
On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.