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Ladies and gentlemen, good day, and welcome to the Escorts Limited Q4 FY '21 Earnings Call hosted by Kotak Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Hitesh from Kotak Securities Limited. Thank you, and over to you, sir.
Thank you, Mallika. Good evening, and on behalf of Kotak Securities Limited, I welcome you all for Escorts Limited Q4 and FY '21 results earnings conference call. I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us Mr. Bharat Madan, Group Chief Financial Officer and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division and Investor Relations team at Escorts Limited. We would start the call with the brief opening remarks from the management, followed by an interactive Q&A session. Before we start, I would like to add that some of the statements that we make in today's discussion will be forward-looking in nature and are subject to risks as outlined in the annual report. At this point, I request Mr. Madan to make his opening remarks. Over to you, sir.
Thank you, Hitesh. Good evening, everyone, and thank you all for joining us on this earnings call for the fourth quarter and financial year ended March 31, 2021. The second wave of the COVID-19 in India is way more severe, and we are all affected by it in some way or another. We trust during these unusual times, you and your family is well and safe. At Escorts, safety and health of our employees, customers, dealers, suppliers and wellness of our business ecosystem is of utmost importance. The company is taking all measures in line with government advisories, including mass testing and vaccination drive to cover all its eligible employees. The year 2021 is 75th financial year of the company and also a landmark year for us. A few highlights of the company's stand-alone annual performance for FY '21 are as follows: Turnover at INR 6,929.3 crores against INR 5,761 crore in the previous year, was up by 20.3%. Tractor volumes up by 24.1% to 1,06,741 tractors as against 86,018 tractors during the previous year. It is first time ever that the company has crossed 100,000-unit landmark in terms of tractor sales and tractor production in India in any fiscal year. Construction equipment volume at 3,913 in FY '21 as against 4,042 machines in the corresponding year. Also, this happens to be the golden of the year for Escorts Construction Equipment business. EBITDA at INR 1,129.2 crore as against INR 675.8 crore in the previous year, is up by 67.1%. The finance costs went down by INR 4.5 crore to INR 11 crore as against INR 15.5 crore in the previous year. The company continues to be debt-free with sufficient available liquidity for future growth and expansion as of March 2021. PBT before exceptional items stands at INR 1,157.1 crore, up by 78.5% as against INR 648.1 crore in the previous year. Net profit at INR 874.1 crore, is up by 80% as against INR 485.5 crore in the previous year, our highest sales. The Board of Directors have recommended the payment of final dividend of 50%. That is INR 5 per equity shares. In addition, the Board of Directors have also recommended a onetime platinum jubilee year special dividend of 25%, that is INR 2.5 per equity share to commemorate 75th financial year of this company. The total dividend for the year ended March 31, 2021 will be INR 7.50 per equity share, which is 75% against INR 2.50 per equity share that is 25% for the previous year ended March 31, 2020. Moving on to company's standalone quarterly performance for Q4 FY '21. Turnover at INR 2,210.5 crore is up by 60% as against INR 1,380.7 crore in the previous year same quarter. Tractor volumes up by 62.1% to 32,588 tractors as against 20,108 tractors in the last year corresponding quarter, our highest ever quarterly volume so far. Construction Equipment volume went up by 62.7% to 1,604 machines as against 986 machines in last year corresponding quarter, again, our highest ever quarterly volume so far. EBITDA at INR 344.7 crore, up by 77.3% as against the INR 194.4 crore in the last year corresponding quarter. Net profit for the quarter at INR 271.3 crore, is up by 93.2% as against INR 140.4 crore in the last year corresponding quarter. Now on the consolidated basis, financial performance for FY '21. The revenue from operation that will be INR 7,014.4 crore in the year ended March 2021 was up by 20.7% as against INR 5,810.1 crore in the year ended March 2020. Consolidated net profit recorded at INR 871.6 crore in the year ended March '21, was up by 85% as against a profit of INR 471.7 crore in the previous year. Consolidated EPS stands at INR 92.15 as against INR 55.04 in the previous year. Moving on to segmental business performance. Starting with the Agri Machinery business, the domestic tractor industry volume in FY '21 went up by 27% to 8.99 lakh tractors as compared to 7.09 lakh tractors in the previous fiscal. This is an all-time record for the tractor industry. All macroeconomic factors such as crop production, crop prices, a good monsoon and availability of retail finance remained positive. This was further aided by a [ record crop driven ] by the government last year. Despite a slowdown in the first 2 months of the year, huge pent-up demand surface post the lockdown period. Our domestic tractor volume went up by 24% at 1,01,848 tractors as against 82,252 tractors in the previous fiscal. This is the first time the company has crossed 1 lakh tractor sales in the domestic market. The company maintained lean inventory, [ brought baggers on depos and address dealerships ]. Because of this and coupled by the fact that we face huge supply chain issue in the first 8 months of the year, leading it to the peak sales season of Diwali, we lost market share during this period. However, after supply situation improved, we bounced back and achieved a market share of [ 12.8% in the last 4 months ] of the year. For the whole fiscal year, our domestic market share stood at 11.3% as against 11.6% in the previous fiscal. During the year, it was 62% of our domestic sales came from above 40 HP tractors as against 51% in the previous fiscal. This resulted in significant model mix gains and is reflective of the success of our new products in the higher HP segment. With continued efforts around channel expansion, the total dealer count in India is now more than 1,100. All in all, dual-distribution strategy for both our key brands will continue to further expand our dealer network, specifically in our opportunity market. On export side, industry went up by 16.5% to 88,600 tractors as compared to 76,000 tractors in the previous fiscal. Our export volumes went up by 30% to 4,893 tractors as against 3,766 tractors in the previous fiscal, driven by new product introduction and penetration in new markets. Sales to global Kubota network also started late in the year and will gradually increase going forward as we open more markets for our products within the Kubota channel. EBIT margin for the Agri Machinery business went up by 521 basis points to 18.2% as against 13% last year. This is record profitability for us in the Agri business aided by not just higher operating leverage and better product mix, but also our huge focus on cost efficiencies. Inflation remains a worry going forward as commodity prices are going through the roof. We partially neutralized the impact. We have taken 2 price increases lately, one in mid-November and another in the beginning of April this year. One more price increase is imminent in Q2 of this fiscal year. While such frequent price increases are unprecedented in our industry, we hope to recover the entire EBITDA inflation during the ongoing year. At the start of the year, the prospects of the tractor industry for FY '22 were looking quite positive as all macroeconomic factors continue to stay strong, including prediction of a very good and timely monsoon again this year. The second wave of the pandemic, however, has proved to be dampener so far. At this time, around the pandemic has also affected the rural heart line of the country. We are watching ongoing situation and believe that like last year, the industry may see a pent-up demand again this year as soon as the current conditions improve. Given that assumption, we still expect full year FY '22 tractor industry to grow in mid-single digits. Coming to the Construction Equipment business, our served industry, backhoe loaders, Pick n carry cranes and compactors, grew by 11% in FY '21 over FY '20. Crane industry remains flat year-on-year, but due to COVID-19 and cash flow issues in market, Pick n carry crane industry has shifted more towards price-sensitive Hydra segment. Compactor industry grew by 10% and backhoe loaders grew by approximately 15% year-on-year. Our total volumes, manufactured and traded products went up by 3 -- went down by 3% to 3,913 machines as against 4,042 machines in the previous fiscal. Segment revenue for the year came at INR 776.1 crore as against INR 839.8 crores in the previous fiscal. During the year, we sold 58% of total claims from Hydra category with lower margins as compared to previous fiscal when it was 47%. Despite volume drop and commodity inflation, we have been able to maintain EBIT margin at last year's level of 3.6%. Last year, industry saw a good traction from September 2020 onwards, resulting in 34% growth in served industry, taking the growth only to March '21. Despite some supply-related challenges during same period, our volume grew by approximately 41% during October '20 to March '21. In April 2021, the industry was majorly impacted due to the massive surge in coronavirus infection all across the country and currently due to the shortage of certain critical items, including industrial oxygen, the production is also adversely affected. The situation is, however, likely to improve with accelerated vaccination program and other measures being adopted by the government in the near term. Given the government trust on monetization through this investment and the huge projects under national infrastructure pipeline, we expect the industry to show stronger recovery going forward. For FY '22, we expect Construction Equipment segment to grow in high single digit. And margins for the segment to improve further led by our various operating matrices and cost control measures that we have spoken about many times in the past. Coming to the Railway division. Revenues at INR 479 crores, well, marginally up as against INR 477.2 crores in the previous year. During the year, we executed 59% of total orders from new product category with high import content and lower margins as compared to previous year when it was only 38%. EBIT margin for FY '21 was at 16% as against 18% in previous year, impacted mainly due to product mix and one-off provision towards GST rate differential on orders executed after September 2019. Indian Railways is still not running its full operations due to unprecedented COVID-19 pandemic situation and has done revisions in the production plans affecting fresh order tendering and order inflows. With government safety measures and vaccination drive picking up at fast pace, we expect that tendering will essentially get back to pre-COVID level by end of Q2 of current year.During the year, we made an entry into metro business by bagging contract for retrofitting work. Order book for this division as at end of March 31 stood at more than INR 340 crores, which is likely to be executed over next 6 to 8 months. For FY '22, we still expect Railway Equipment segment revenue to grow by lower double digit. And operating margins for the segment are likely to be maintained around [ 16% to 18% ] levels. I request the moderator to open the floor for Q&A session.
[Operator Instructions] The first question is from the line of Hitesh Goel.
This question is to Shenu. My question is related to the -- how are you seeing the situation on the ground? I understand the people may not be coming out and buying tractors. So how is the sentiment on the ground with the various factors described, the rabi crop is very good, crop prices also going up and monsoons being normal. So what percentage of tractor dealerships are open? What is the financing situation in tractors? And what is the -- on the ground situation. So if you can give us some sense on that.
Hitesh, thank you for the question. Hitesh, you're right, all the macroeconomic factors are very, very positive, whether we talk about production or prices or monsoon or even government procurement, et cetera, and availability of finance. However, the on-ground situation is not very good right now. And it is very, very dynamic as well, right? So daily, on daily basis, the situation changes from geography to geography. But we are tightly kind of monitoring it and making sure that we can serve the communities that need either repairs or services or even new equipment. But currently, roughly about 2/3 of our dealers are either closed or if they are open, they are open for limited hours, right? So that is basically the situation. So the focus right now is other than conducting the business, especially where people need us, customers need us. We are also focusing on the medium-term right now by making sure that maximum staff at our dealerships get vaccinated as soon as possible. And we are also helping our dealer staff with a lot of initiatives where we can support them. So one thing is just the actual situation on the ground, which we are all aware of. But other thing is also this a little bit of a fear psychosis that has penetrated into Tier 2, Tier 3 rural areas, right? So we are doing our best to see how soon we can come out of that. The situation is dynamic right now.
Just a follow-up here. So basically, there's a lot of concern in the investor community that if by June 9, if this continues and the normalization doesn't happen. One season actually goes away for farming, right? In your opinion, how big an impact can it be? Should we then start looking at a decline for the full year or it can be compensated in the -- from July, August onwards?
Yes. So Hitesh, there are two things that we are keeping in mind, I think we should all keep in mind that one of the things is that even in the last year, although the penetration was not very deep in the rural areas of the virus. But we know from experience with the last year and otherwise that the resilience in rural India is much more higher. That is just the DNA of our country, right? So -- and the other thing is that you are right that we are in a very, very critical phase this time of the year, because last year, the lockdown was primarily in March and April and early part of May, and then it started easing out. But this time, we are in -- already in the middle of May. And the sowing season is about to start, right? We are also hearing a lot of feedback from our customers because most of our teams are in touch with them over calls now. We are also hearing that customers are not getting enough tractors on hiring right now because of various restrictions or just kind of a hesitation in customers to go to other forms and do hiring work, right? And therefore, there has to be kind of some push that will come. So some pull that will come from the customer side as well as we get nearer to the sowing season. So maybe we are optimistic right now because, as I said, the situation is very dynamic. But we do believe that this virus, wherever it goes, has a kind of a 5- to 6-week cycle. When it picks up and goes back to a little bit kind of reasonable levels. And therefore, we do think that sometime in end of this month or early June, we will have some markets that will open up. It will also -- the sowing season will create a pull towards that, irrespective of the situation on the ground. And therefore, I think we will see some momentum very, very soon in the next few weeks. Now as far as the whole year is concerned, we are very hopeful that this year, overall, whether it opens up in early June or late June. We know -- we are very sure that this pent-up demand will come back only because the macroeconomic factors are extremely, extremely positive.
The next question is from the line of Gunjan Prithyani from JPMorgan.
I had a couple of questions. Firstly, the follow-up, so what Hitesh asked essentially, on the financing side, also what we pick up is the situation is not as great. Now is this -- that this stuff is not available or you see some step back from the bank or financial institutions as well, given the situation is pretty dynamic as you yourself fell out. So if you can talk about the financing and also the inventory levels in the channel right now.
Okay. Gunjan, thank you for your question. So let me address the financing issue first. We have been, of course, in touch with all our banking partners on the retail finance side very, very closely. And generally, the situation in the retail financing for tractors, particularly, is that there has been a kind of slowdown as far as the collections of the current portfolio is concerned, which is basically EMI collections, right? But the slowdown is not as much as the slowdown is in the demand right now, right? And therefore, in terms of cash flows, most of the banks and NBFCs have very little concern. The main concern they have is because of the stricter provisioning norms that we are falling in the country for the last few years. If they -- even if like 1 payment is missed, they have to now provision more aggressively for that, right? And therefore, they have a worry for their balance sheet, that the health of their balance sheet may not look very, very good in this quarter. Right now, that problem will not be solved by restricting new business acquisition or new customers for loans because that new customer acquisition depends more on cash flow and less on the health of the balance sheet, right? So generally, the opinion from the banks and NBFCs is that they will not slow down, rather they will go quite aggressive as the collections have not hampered to the extent that the demand has hampered, right? And once the situation improves, they are also very hopeful that collections will also come back. Now unlike last year, this time, the government has not announced any measures either on moratoriums of loans or on revising the provisioning norms for banks and NBFCs on such loans. And of course, the financing industry is looking forward to some stuff like that, right? But still, if it doesn't happen, they are not concerned about acquiring new business. So from that point of view, the new demand should not get affected because of availability of retail finance, although the balance sheet is still a concern in the minds of a bank. In terms of -- I think your other question -- other question was on inventory. So inventory right now is that a healthy level. I mean I think at the industry level, the inventory is not either too high or not either too low, right? So there is sufficient inventory. So this time, last time we had a problem when that -- when even customers started coming back after the lockdowns, most of the companies struggle with inventory issues. But this time, we don't think that is going to be the problem. So whenever the customer is ready to buy, customers can move around, I think manufacturers would be ready to deliver.
Is there any risk of it being high because we must have a stock for the season, but clearly, at least the showrooms are shut or there are very limited walk-ins. So is there any risk if you were to look at Feb-March numbers? If you can give some idea whether it is 5 weeks, 6 weeks in what levels it would be relative to Feb-March offtake?
Yes. So see, I wouldn't be able to comment on the industry stocks. But generally, I can tell you that because Q4 was a bumper Q4, as you have seen from the data, our data and industry data. So the stock situation is not -- I mean we don't have too much stock at the industry level also as of end of March, right? Now of course, because of the slowdown in demand and lesser problems in the supply chain, most of the companies are continuing to produce. In a hope that when the things turn better than they should have enough stocks. So as far as dealer inventory is concerned, I don't think we are at abnormal levels. And as far as the whole inventory or company inventory is concerned, of course, that inventory, everybody is now increasing because the production is going at a certain level, which is higher than the demand that we are getting in the market. But that is not of a concern because this is a time to actually wait that inventory just in case we will get some good demand in the following 2 months.
Okay. The second question from my side is on the margins. If you can talk about what has been the cumulative commodity inflation that we've seen so far and against that, what kind of price increases -- you did mention 2 price increases, and if I'm not mistaken around 3%. So what is the [ net job ] cost headwind that we -- that is there in the business, if you can give some sense on that?
Yes. So inflation is also extremely dynamic right now. And it is beyond our expectation, of course, and it is beyond the expectation of the industry, right. So every quarter, we hope that next quarter, it will stabilize, but it has not done so since it started and like in late Q3 of last year, right? So we are just watching the situation on the ground as to how much it will impact us in the ongoing -- in the following few quarters. But roughly, it seems like that the inflation would be in the range of like 8% to 10% or so of the current material costs, right? So 8% to 10% of material cost, it is not that -- it's not like selling price. And on the price increase is concerned, we have taken 2 price increases, 1 in mid-November as soon as inflation started happening and as soon as it was clear that inflation would be more than what we can possibly manage well. And therefore, we took early price increase, while the industry, rest of the players, normally -- I mean generally took a price increase in early January or late December, we decided to take it and kind of mid-November, so that was one. And then we took another one in early April. So in combination, the price increase roughly is in the range of -- both combined is in the range of 5% of the selling price.
[Operator Instructions] The next question is from the line of Mitul Shah from Reliance Securities.
Sir, I have question on EBITDA margin for both the segments, tractor and construction equipment, wherein we reported all-time high volumes for the quarter. So what would be the sustainable margin for tractor segment as well as for the construction equipment?
Bharat, would you like to take that?
Yes, sure. Mitul, so I think as we indicated in our last call also, so we had indicated 17% to 18% will be the new normal for the ag business. But obviously, that is under the normal circumstances.So if you look at the situation today with the rising inflation, obviously, there's a difficulty in passing on 100% to the customer right now, looking at the demand scenario in the market. So that's going to be a bit of challenge, and that's what we've seen in the last quarter also when the margin got impacted almost by 150 to 200 basis points only because of the large effect of the inflation.So on a full year basis, we are hoping we'll be able to neutralize the entire thing, but [indiscernible] this has an impact on the margin, too. And if you're able to pass on 100% of the inflation to the market, that still impacts your margin by almost 100, 150 basis points in a year. So yes, I think in the normal scenario, if you're talking about 17% to 18% of the margin. So with the inflation issue, maybe this can have an impact of about 150 to 200 basis points impact because of the [indiscernible].
Product mix was also quite favorable this time. So if that situation normalizes still, do you expect margins to sustain?
Yes. If it's a normal situation like we indicated last time, then definitely, we think the margin should sustain.
Then second question is on the construction equipment side, sir, you guided for single-digit growth. So despite such a low base and as people are expecting strong uptick in construction activities in FY '22, still do you expect single-digit growth on volume? I think you're on mute.
If you take a look at this, there is an impact on the industry on the channel because of this second wave of COVID and I think quarter by quarter, we would have an impact. And progressively, the market would recover back. And there is expectation that growth would return back because we can see that demand is there. The projects are there. The money allocation and the money mobilization that the government does is happening. So I think once this wave, this second wave of pandemic drop to some level, I think the growth would return back to construction. And we do see -- if you see the numbers around for next 5, 6 years construction [indiscernible].
Lastly, sir, just to reconfirm, you are saying single-digit growth for tractor side also. And as you pointed out rightly, last year, there was an inventory related restocking. Probably around 8% to 10% growth is because of the restocking, which is not the case this time in FY '22 as right now already inventory is quite healthy, probably around 90 days plus in the system. So still, do you think, in this situation, single-digit growth is possible? So sorry, I -- 90,000 plus inventory in the system.
Yes. So Mitul, see, I don't think inventory really has a lot to do with it because right now, we are at a normal level. I mean, if you just ignore last few weeks where some stocks have built up, yes, but that is only for -- only hoping that some pent-up demand will come, and therefore, people are getting ready. But if you look at the inventory levels on April 1 versus last year April 1, I mean, it is not a big significant business, right? So I don't think that will play a big part this year. So we -- yes, we are still very hopeful that industry should at least touch last year level or either -- or it should grow slightly, marginally in the low single digits or mid-single digits. Because see, Mitul, I mean, we are basically regarding on the structural situation of the market rather than the ongoing COVID-related situation, right? Because, we think the momentum is there. We do understand that tractor is a cyclical market. And therefore, there is -- I mean, a lot of people have spoken to us whether this is the year when we will see a downward trend. But we don't think that this is the year. I mean, monsoon production is also very good. So I think this year should be a good year.
The next question is from the line of Avinash Singh (sic) [ Avinash Singhal ] from Master Capital.
I just wanted to check with you, on the balance sheet -- this is just a descriptive question. On the balance sheet, I could see that there is an increase in investments accounted for using equity method. So it increased from last year INR 144.6 crores to INR 259.8 crores. So could you please tell me the reason where this investment has been made?
Sorry to interrupt. Sir, there is disturbance coming from your line. Request you to mute your line while the management answers your question.
Bharat, would you like to take that? It's, I think, balance sheet question.
Yes. One is the investment that the company had done during the year in acquiring the stake in the Kubota sales JV, which was about INR 90 crores. Is it that you're referring to? That's the only increase which has happened in this year on the investment side.
I could see there is an increase of almost INR 115 crores on the balance sheet.
Yes. So there are 2 JVs. So one is the investment we did in the Tadano JV during the year and the INR 90 crores was the investment which we did in acquiring 40% stake in the sales JV with Kubota. So these 2 investments has happened. So INR 26 crores is the investment in Tadano and INR 90 crores in the Kubota sales JV. So these 2 investments have happened in the year.
And just wanted to ask you, in addition, sir, you have a healthy balance sheet right now. So how you're planning to utilize the cash which is there on your balance sheet? Is there any plans company has in place to utilize...
Yes, definitely. So the company is in discussion with the Board now. So we are actually in discussion and coming up with a midterm business plan. And we had also told the analysts and investors that we'll likely be announcing it after the results are done. So just wait for a month. So we expect that in May end or maybe in the middle of June, we should be announcing that also to the investors community. It is a work in process right now with the Board members.
The next question is from the line of Raghunandhan from Emkay Global.
Shenu sir, trying to understand the demand drivers for tractors. Can you throw some color on what are your expectations for government subsidy and demand from non-agri segment for FY '22?
Yes. So Raghu, thank you for the question. Yes, we are not really harping too much on the government side this year. Because we think that the government's focus will more be on COVID as it was last year. Even last year, there was not a major -- there were no new major programs on subsidies. There were some ongoing things that will continue to happen even this year. But we don't think there will be a significant portion of industry that will be allocated to government-led subsidy business.On the commercial side, non-agri side, of course, right now, the demand is very, very low, both in agri and non-agri. But we do see that once we open up fully, as and when we open up fully, all these projects will again start. And therefore, we do expect a bumper increase.Actually, this year, on the non-agri side, as compared to last year, we think it will be much better. Last year, the non-agri side was still kind of very, very slow, except in the last 3 months of the year, 3 or 4 months of the year. But this year, we think that some of the growth that we are saying will come -- will actually come from the non-agri side.
Just a follow-up there. Can you -- I mean, would you be able to quantify how much was the subsidy sales in FY '21? And broadly, what percentage was non-agri sales?
Yes. So Raghu, I mean, we have been trying to answer that question in the past as well. But the situation on subsidy sales is actually kind of taking a different turn. So most of the states now, the way they are making out their subsidy policies is that they are giving subsidies directly to the customers, right? And they are giving it not just at the time of the purchase, but they are even giving subsidies after the purchase, right? And therefore, it is becoming very, very difficult to actually put the right number as to what percentage of customers or what percentage of industry is getting the subsidy sales. We do get like overall numbers because we know when some scheme is launched. For example, let us say, a scheme is launched in Gujarat, we know what is the outlay on that scheme, right? But we no longer can really tell you specifically that at the time of sale of the tractor, whether there was subsidiary involved or not, right?So for most of the states are going to a lottery system, which is actually much better system because it is much more transparent and the subsidy goes directly to the customer rather than to the manufacturer or to an intermediary. So yes. But I think, having said that, we don't think last year, the subsidy sales was in excess of 50,000 units. And this is a ballpark estimate.
And non-agri, how do you see the share in FY '21? And what could it be in FY '22?
So I think FY '20 -- see, normally the non-agri share, again, I have to give you ballpark figures because it's very, very difficult to quantify specifically how much is it. I think normally, the non-agri sale, non-agri component has reached roughly about 30% to 35%. But I think last year, it was not that much. I think this year, it would get back to the same levels. Because, again, like I explained last year, the first 8 or 9 months, the non-agri sale was quite slow, and agri sales had grown quite a bit. But this year, that equation might change back to a situation where non-agri sales actually may grow higher than agri sales.
That was helpful. On the HP mix, over 60% of volumes came from above 40 HP segment for Escorts. Do you expect mix to remain skewed towards higher HP products? Or do you think there can be some reversal this year?
Yes. So Raghu, there would be some reversal. As I think we had explained in our earlier calls also that one of the main reasons, not just for Escorts, but also for the industry, although Escorts did better than industry in higher HP sales, yes, but there was a momentum towards higher HP sales -- lot of momentum in higher HP sales last year at the industry level. And one of the reasons for that was that, as I explained, agri sales, the growth in agri sales was much higher than the growth in non-agri sales. And normally in agri sales, people have -- customers have more and more tendency now to go with higher HP. And non-agri sales, although non-agri sales is also finding applications in higher HP, but largely, it is a phenomena which is driven by lower HP, right? But this year, if non-agri sales is going to show us higher growth, that would also mean that the sales of high HP tractors in relation to the lower HP tractors may be lesser than last year, right. So I think we knew this all along that why the higher HP sales has become so sharper in the last year. And therefore, some traction will happen in that.
The next question is from the line of Jinesh Gandhi from Motilal Oswal.
Just first clarification on the cost inflation on the commodity side. You indicated so far, you have seen about 8% to 10% on the material costs in second half FY '21 so far? Is that a right understanding?
Yes, that is up to March -- end of March, right. Now as I explained that the situation is very, very dynamic. Every day, we are seeing requests from our suppliers to give them a hike largely led by steel and rubber and some other components. Yes. So I can't give you a number right now. We are still kind of in negotiating with the suppliers as to what would be the impact of Q1 in this year, right? Now the number that I gave you, 8% to 10% is up to 31st March.
Understood. Understood. But clearly, there will be further more headwinds in first half FY '22, given their key commodity prices are up. Would that be a fair assessment?
Yes. For Q1, for sure, there would be a substantial inflation that we will face in Q1. As I said, I can't give you a number again because we are still kind of negotiating as to what would be the timing of that and what would be the quantum of that, right? So in some cases, we have to do it retroactively also which means we have to give some hikes from April 1 also. So that situation will get fairer in next few days. Yes. And there is some chance that this will continue to July and August also. That is what we can indicate right now.
Understood. Understood. And second question pertains to the sales to Kubota network. So can you throw some light on what has been run rate since we started it, which all new markets are we addressing so far? And what should we expect there? And secondly on Kubota JV, the plant which has started, any update on that with respect to how it is doing and from when we can expect supplies to us coming through?
Yes. So as far as our exports to Kubota channel is concerned, we just started like in the last quarter of the previous year. And there was very insignificant small volume that we started with. We have opened up about 4 markets with Kubota channel so far. And some initial shipments have started going in all these 4 markets, right? So we are waiting for the market response. And once we see the market response, then we will ramp up our volumes to these markets. In the current year, also, we are going to open up more markets with Kubota channel, of course, progressively, right? And therefore, this year, we will see some good volume from Kubota channel. But I think the real buildup will start happening from next year onwards in terms of volumes, right? So this year, just scaling up in the existing markets that we have already opened up and opening up new markets, more markets for best marketing. And then next year, I think we should see some good ramp up.
Sure. And this you will be selling with Kubota brand?
Yes. All the exports that we are making through Kubota channel are in the Kubota brand. And as far as the JV production facility is concerned, it is running very, very smoothly. And we are increasing production every month there. As you would imagine, I mean, it takes some time to ramp up production. So in last fiscal year, I think we've produced more than 5,000, close to 5,400 tractors in that factory. And yes, every month, the production will now keep on increasing as Kubota brand demand goes up in the country. As well as this year, we will also start producing some of the Escorts tractors in that JV plant.
Right, right, right. Okay. And lastly, guidance on CapEx for FY '22?
I'm sorry, can you repeat that?
CapEx for FY '22?
Yes, Bharat, please.
Yes, this is going to be, I think, close to somewhere around INR 300 crores to INR 325 crores for this year. So there's a lot of spillover from last year with regard to the COVID situation. So expense did not happen. So there was spillover on the capacity also, which is coming in this year now. So cash flow-wise, you can take, it will be somewhere around INR 300 crores to INR 325 crores.
Right. And this would add what kind of capacity with regards to the capacity you're investing in?
So last year, we said the announced capacity we are intending to increase from 120,000 to 150,000, and 30,000 unit capacity will come from the Kubota JV units. So about 180,000, 190,000 sort of capacity should come in place by September.
The next question is from the line of Kapil Singh from Nomura.
Sir, you mentioned that the non-agri component is usually 30% to 35%. Last year, it was lower. Can you quantify in what range it would be in FY '21?
Yes, Kapil, I can only give you like a ballpark number again. So let us say, I guess, the normal is 30% to 35%. I think in FY '21, it would have been close to 25% to 30%.
Okay. Okay. And how do you track this, sir?
Yes. So that is why we give you a ballpark number because at the time of the customer buying the tractor, we do qualify the customer as to kind of what applications they will use. But that does not really mean that the customer is going to use it for that application only, right? So what we really figure out is the decision criteria of the customer, right, whether he is -- whether the customer is buying a tractor predominantly for agri use or for non-agri use. And based on that information, we can kind of quantify a ballpark number, right? But you know that mixed-use in India is going higher and higher. A lot of customers, when they have no use of tractors, they do use it for agri -- or for non-agri purposes, right. And therefore, a fine number is difficult to track. But yes, we know like the reason -- the primary reason why a customer is buying the tractor in the first place.
Okay. This is quite helpful. And can you also talk about current situation on the ground in terms of what percentage of dealerships are open, and currently compared to a normal levels, where are the retail present? I know we cannot extrapolate this, but just to understand where are they today.
Yes. So as far as number of dealerships are concerned, I answered that. So roughly about 2/3 of our dealerships are either closed or are open for limited hours, right? So sometimes, they would be allowed to open like in the morning 8:00 to 12:00 or 8:00 to 1:00. And sometimes they would be allowed to be open in like in the afternoon, right? So it is different in different cities. It's different in different districts. It is a very, very dynamic situation, although we are monitoring it on a daily basis. Yes, but that is very, very dynamic. So what I'm telling you today might not be true 3 days later, yes. So just please keep that in mind. Now as far as the retail takeoff is concerned, that situation is also very, very dynamic. And therefore, I would avoid giving you a number there because some days are good days and some days are bad days and some days are real bad days, right? So please trust me that the reason I'm not giving you a number is because the situation is very dynamic, right? Yes. But as we've said, as the ground situation improves, we might see a lot of customers coming back, lot of dealerships getting opened and lot of dealership staff visiting -- start visiting the villages again, right? So let us just hope for the best. I mean I am very clear that this will turn around very, very quickly. The only thing that I can't tell you right now with confidence is when will that happen.
Sure, sir. And if you could give some on-ground situation comments for construction equipment business as well? Is the demand significantly impacted there also? Because I think construction activity seem to be going on, at least from the government side, there is still support from most of the states. So how is the demand there? And is it -- if it is impacted, why is it? Is it because customers are afraid to transact at this point? Or is it that dealerships there are also closed?
Kapil, this is Ajay Mandahr. See situation is -- people have a fear factor. You know somebody [indiscernible] has got affected during the second wave of COVID. So I think most of the things or most of the buying decisions...
[ Sir, I'm not able to hear. The volume is ] coming very low. Can you speak, please?
Is it better now?
Yes.
The thing is that it's -- basically, the second wave has impacted one way or another in the sector. And you see dealer network, okay, dealer network or the [ remover ] is down because of some impact on their employees or their families due to the second wave. Most of the customers are pulling the decisions. Basically, I think it's a fear factor that has come in great. As we go along, things would definitely start to increase. The acquisition probably would take -- would happen -- start to happen as government is doing now. So in the industry, definitely on the demand side is there, demand side is strong, but the postponement is happening. That's it. So as you did see last year, the majority -- first half, if you see the entire construction equipment was 45% down in the second half was, 25% down. And the construction date of National Highway was pretty high. So I think once this second wave impact is put under control, things will start to move. And I think it could be a lot of pent-up demand that will come up.
[Operator Instructions] The next question is from the line of Mukesh Saraf from Spark Capital.
Firstly is on the exports, again, in the last quarter, you mentioned that the order book was really strong, but production was an issue because domestic obviously was slowing by then. The stand around -- I mean, the commentary is not as strong on export. So is there any kind of a delay in some of those orders that we had on exports?
Yes. Mukesh, thank you for your question. Yes, on the exports front, we have been kind of carrying a backlog although we did much better numbers in FY '21 as compared to FY '20, but we are carrying kind of a backlog in terms of fulfilling the orders. Now that backlog, although has reduced a little bit in quarter 4 and in April, but we are still carrying a backlog, a significant backlog. Now if the domestic situation remains down for another few weeks, I think we will focus on altering those export orders. And we should be able to eliminate all that backlog, hopefully, by end of June, right? So we will just continue to see and balance depending on those demand from exports and domestic.
Yes. Right. Understood. And just one more question on the financials. It seems there is a loss from associates this time around. Last quarter, it was a INR 6 crores profit. So any kind of a sense on that? So why it has gone into a loss this quarter?
So this is actually the loss -- measure loss coming from this JV, manufacturing JV with Kubota. And like I said, this quarter was because of the high inflation at the country price movement, so which obviously, we've not been able to pass on so that's related to the decline. And in the same situation that across the industry, including in this costs you're seeing. So that's what we're projecting in these numbers. But overall, on a full year basis, still within the -- more the JVs, Kubota, manufacturing and the sales JV and more or less at [ breaking into ] sort of operation combined.
Okay. Okay. So the losses because of the manufacturing operations, kind of just ramping up on the initial costs there or even the marketing where we have had a loss. And the marketing part of the...
So manufacturing JVs, the [indiscernible], which is associated now. So obviously, this change of price happens to with a lag. So those discussions we are in right now, how much again will depend on can be pass to the market. So based on that, there will be equation which lags.
The next question is from the line of Vikram from Maybank.
Actually, most of my questions are answered, but I'd like to ask one. Still your working capital management has been excellent. In fact, I would go on to say it was one of the best. So anything that worked in our favor? And the additional question to that is, do we expect it to remain the same or is it sustainable going forward?
So 2 key reasons for that. So one, obviously, saying the rural cash flow last year has been quite good and strong. So obviously, that led to the lower dependence on period and from the channel partner side and the financial availability also has been quite good on the retail side. So that led to good turnaround with the capital. And secondly, in the commercial policy wise, because of this season, I think we were shifting more to cash and carry than allowing more credit to the dealers. So I think both these factors are responsible for a better management of working capital this year. Whether this will sustain in future, like even having the wins on the demand side because last time, it was very unprecedented demand, which is [indiscernible] and the procurement from governments were extensive and the cash ready is very good. So this year, the sentiment looks positive. Even now the crop output is good. Procurement is also going to be very good from the government side so far from what have we seen. So cash already will be there. So definitely, we expect the same momentum to continue even in this year.
The next question is from the line of Aditya Makharia from HDFC.
I had a more medium-term question. You have said that you expect longer-term tax sales to be in the [ 1.20 to 1.5 million ] range, maybe by 2030. So where do you see us in terms of penetration levels? And if you could just give some thoughts as to how you will see the industry evolve.
Yes, Aditya, thank you for the question, yes. So you're right, the general consensus in the tractor industry is that the market should reach that level what you described by about the year 2030 or a few years year on later, right? So right now, I mean, last year, we touched 900,000. And even if you look at CAGR over the next 9 years, I think even taking on the various areas, we should reach those levels. Now there are additional factors, of course, that make us believe that industry would be in that range, because with the availability of -- with the lesser availability of farm labor, there would be a need of more and more power in the forms and more and more mechanization in the forms. Right? So I think that is kind of the basic structural factor that will drive more penetration of practice. The other thing is also the tractors are being used in many, many different applications, which are non-form kind of applications. So not only the tractor uses proliferating into other things, but also the number of hours that we are putting on the factors is going up, right? So that is both good for the industry because as you use more and more -- I mean, more -- as we put more and more number of hours on the tractors, then there is, of course, a need for replacing it faster, right? So for both from the replacement side, and from the penetration side to new customers, I think it augurs well. Yes. So yes, you had another question other than this, right?
No, just like the replacement cycle for tractors, would it be for like 10 years right now?
So it's very, very different in different markets. In some of the more developed markets or saturated markets, the replacement cycle is as low as 3 to 4 years, right? And in some markets, which are not yet saturated or they do not have enough use of tractor right now because of traditional methods of agriculture, the replacement cycle could be like kind of 10 to 12 years. So on an average, we would say about 7 to 8 years currently in the country.
Got it. And just a last question. In terms of penetration, it's fair to say the southern states are lesser penetrated because, I guess, not there is a lot of government focus and impetus as well?
Yes, that is right. So certain states are towards the bottom part of the penetration, right? So in the long run, we would expect more and more demand, more demand coming from the South. But South is not only the 1 region, but there are other regions in the country where penetration is quite low as compared to some other region, right? So yes, I mean, other than like a few states where we think it is like the replacement demand has already reached 70%, 80%, all other states actually are at well below 30% to 40% in the place on the one.
The next question is from the line of Ashish Chan from Macquarie.
Sir, my question pertains to your strategy for Southwest market like you alluded [indiscernible] you see medium-term growth being pretty strong in. And our current penetration and market share is pretty low in those markets. So can you share it from a sincere perspective, where do we see our market share going there? And what are we actually planning to achieve that?
Yes. Yes. So Ashish, sorry. Thank you for your question. And we already have made considerable progress as far as our market share is concerned in all the states of the South. And that is on account of basically 2 things. One is that we are making now we have in our fold, more and more products that cater to the southern kind of applications. And also, we are doing some very, very innovative market penetration into the South. We are constructing some very, very unique different models in the South and trying to scale their growth up now. So on both these factors, because of both these factors, we are very hopeful that in South, our market share will increase going forward as well. Now another thing is that in South right now, we are only a 1 brand company, which means that we only sell Powertrac-branded tractors. At the right time in the future, we will also open up our Compact brand, which is actually more of an application-led brand, right, which is most suitable for the South. We are making some investments for that product line also for the Southern markets. And as soon as we have both product studies, we will also launch something -- we'll also launch this brand in the South. So that would add another layer of opportunities for us in the South. Yes. So of course, our goal remains that we want to be 10% market share or more in South. And I think it is -- it will take us a few more years to get there.
Sure, sir. Sir, my other question was just a housekeeping question. In terms of margin, what is the differential margin between agri, non-agri tractors? Can you quantify that?
No, no, no. So see, the product line is the same, right? So I mean we don't...
Yes. I mean [indiscernible].
Yes. Again, I mean, there is a lot of misconception in our minds in the minds of everyone that, generally, the high horsepower tractors would earn better margins. I mean I think, philosophically that is okay to understand, right? I mean, understand it that way. But it really also depends on the pricing power, right? So you -- like all tractor and companies based on the strength of their product line, do create some solid sub brand, right, within the overall brand. So for example, like if you look at our portfolio in Powertrac, there is a model called 439, and it is hugely, hugely successful, right? It is a [ 3949 or 50 ] tractors. Now that gives us a lot of pricing power for that particular segment or that particular product in some of these markets where it is highly valued, right? So it is not necessary that every time in every state with every company, you will have higher margins for higher HP tractors as compared to lower HP. I mean philosophically, as I said, it seems to be right, yes. But it also depends a lot on pricing power, right? So for example, like everybody has a mainstay in some of the segments, customer segments or application segments. And the brands which are more popular in those segments, they command a significant pricing power, right? So yes, so I mean generally answering your question, there is a difference between like when you average everything out at industry level; there is a difference between low HP and higher HP tractors in the margins as well. But it is not very, very significant.
[Operator Instructions] The next question is from the line of Vivek Gedda from HSBC.
Firstly, I just wanted to understand the 5% price increase that we have done in November and April together. Could you possibly split that between how much was by cycle April?
Sorry, can you repeat that question, please?
I just wanted to understand...
Are you asking how much was the hike in April?
Yes, that's right.
Yes. So April was roughly under -- roughly slightly under 3%, and the balance was in November.
Got it. And the pipeline like that we are expecting in second quarter would be largely to get to the 17 -- 17% to 18% margin time second half of the second [indiscernible], is that understanding correct?
Sorry, sir, you have to repeat that. There was some noise. Can you repeat that, please?
Sir, your line is breaking. I would request you to move to a better reception area and then ask your question, sir.
Hi? Am I audible now?
Yes, sir, you may go ahead. The line for the current participant has disconnected. The next question is from the line of Joseph George from IIFL.
The only question that I had was in relation to the quantum of commodities, which is the key commodities which is steel and rubber. So could you give us a sense of how much of steel as a percentage of ASP and how much is tire or rubber as a percentage of ASP just to get a sense of the significance of these key commodities in your P&L?
Yes. I don't remember -- remember it offhand. Maybe we can answer you separately. Bharat, do you have a sense of [indiscernible] right now?
No. I don't have those data. But like you said, in [indiscernible] part of the 1.5 ton weight in the tractor is mostly tire and steel. So obviously, the major question will likely come from that only.
So -- or in terms of weight, would you have a sense of -- how about percent of the weight to the tractor 1.5 tons with tires and how much is steel? If not, as a percentage of revenues.
Yes. Yes. So roughly speaking, on an average, the tractor would weigh around 1,800 kilograms, 1,800 to 1,900 kilograms. And roughly 1,300 to 1,400 of that will be steel and rubber parts. We are, of course, exploring some of the OEM parts here, which will also carry some steel, right? So actually, I mean, if you combine all that, it would be more than even 1,300, 1,400 kilograms.
The next question is from the line of Abhishek Jain from Dolat Capital.
Sir, how much fall are you predicting sequentially in first quarter for tractor segment? As one of your competitors has also indicated around 20% growth in first quarter. Is there any space for the channel saving?
Yes. I think the competitor that you are talking about, I think that statement was made in context of automotive business. And not tractor business, but you may like to double check on that. It is very hard to say. So I think we would reserve our comments on this because we are going through a dynamic situation, as I have explained. We are hoping that things will turn around, and we are hoping that the sowing season will create a lot of pull, right? Because there is no way the country or the farmer can miss this sowing season. And when the -- the sowing may get delayed by a few days, right, but it cannot be delayed, I mean, beyond that, right? So there is going to be some pull irrespective of the ground situation that will come on the market. But let's hold onto this for a few more days.
Okay. Sir, my last question is related to the growth in Southern and the Western India for FY '21. So that was significant. So what are the key factors which are driving your growth in these regions for Escort? Can you throw some light on your GST expansion in this region?
You are asking this in reference to Escort's growth?
Yes, yes. Only for Escorts because we have seen a significant growth in Southern and Western India in FY '21.
Yes. I think -- see, I think this is going to continue because -- it just depends -- it's only because our opportunity is much better there, right? So in the markets where we are already at 13% to 15% or 17% market share, the headroom for growing further is still limited, right? But in the markets where we are 2%, 3%, 4% or had been 2%, 3%, 4% in the past, the opportunity to grow is immense. So we have been saying for the last 2, 3 years that we will grow in these markets because there is a higher potential or a higher opportunity for us to grow. And it will take some time because it is kind of a journey in terms of product development, the right placement of the products and coming up with the right channel. And so that is an ongoing thing. What we have seen in the past is actually, we are hoping that we will do better than that in terms of the tractor or the growth trajectory because a lot of things start now getting into shape. Earlier, like we were still kind of -- we had issues here or there. We did not have a complete product line. We did not have a complete channel, et cetera, right? So that distance, we have now covered. I'm not saying that we have done everything. Even now, there are a lot of things that are in the pipeline. But the growth in South and West will continue to happen.
The next question is from the line of Rahul Ranade from Goldman Sachs.
Just a question on the agri segment margins where you mentioned that more sustainable level of margins now will be around the 17%, 18%, barring some bleed lags for RM. Just wanted to get a sense of what is giving us the confidence of kind of sustainably setting a higher level of margins going ahead from here on.
The 2 reasons. One, obviously, say, these margins are dependent on the volume. So we're assuming the volumes will not go down below last year's number. So that is, I think, the key assumption there. And second, we said, in the normal circumstances, this margin will be [indiscernible]. So in place of a high inflation scenario, that definitely impacts your margin negatively and if you are able to pass it on and over the lag.Otherwise, the reason why we get this confidence in normal circumstances is because the company has been working towards improving the margin and improving on the cost efficiencies and in the material costs and in the product mix. I think those are the initiatives our company has been taking for a number of years now. This has now started improve. So if the other assumptions hold good in sort of maintaining those volumes and in a normal condition, not leading to this inflation scenario, we think these margins which we're talking about are sustainable.
Okay. Okay. And these are segment margins that is at EBIT level, right?
Yes, that's right. It's a segment margins of the business.
Thank you. 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 being present on this call. Kindly feedback and/or queries, please feel free to write into us at Investor Relations at escorts.co.in. Thank you very much, and have a good evening. Please take care, and we pray that all of you stay safe and healthy. Thank you.
Thank you, everyone. Bye.
Thank you. Thank you.
Thank you. Goodbye. On behalf of Kotak Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.