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Ladies and gentlemen, good day, and welcome to the Escorts Kubota Limited Q4 FY '23 Earnings Conference Call hosted by Emkay Global Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded.
Before we start, I would like to add that some of the statements that the company makes in today's call will be forward-looking in nature and subject to risks as outlined in the annual report and investor releases of the company. I now hand the conference over to Mr. Chirag Jain from Emkay Global Financial Services Limited. Thank you, and over to you, sir.
Thank you, Michel. Good evening, everyone. On behalf of Emkay Global Financial Services, I welcome you all for Escorts Kubota Limited Q4 FY '23 Earnings Conference Call. I also take this opportunity to welcome the management team from Escorts Kubota Limited. Today, we have with us Mr. Bharat Madan, Whole Time Director and Chief Financial Officer; Mr. Harish Lalchandani, Chief Officer, Agri Machinery Business Division; Mr. Sanjeev Bajaj, Chief Officer, Construction Equipment Business Division; and Mr. Ankur Dave, Chief Officer, Railway Equipment Business Division. As well as we have Mr. Prateek Singhal, Investor Relations and ESG at Escorts Kubota Limited.
We would start the call with brief opening remarks from the management followed by an interactive Q&A session. At this point, I would request management for their opening remarks. Over to you, sir.
Thank you, Chirag. Hi. Good evening, everyone. This is Prateek Singhal. Thank you all for joining us on the earnings call for the fourth quarter and fiscal year ended 31 March 2023. A few highlights of the company's stand-alone performance for the fourth quarter ended March 2023 are as follows: Revenue from operation during the quarter was up by 16.8% at INR 2,183 crores as against INR 1,869.6 crores in previous fiscal. On sales volume front, Tractor volume was up by 13.1% to 24,765 tractors as against 21,895 tractors last year same quarter. On the construction equipment volumes are up by 18.8% to 1,528 machines as against 1,286 machines in the last year same quarter. EBITDA for the quarter ended March 2023 came at INR 235.8 crores down by 6.2% as against INR 251.5 crores last year same quarter and sequentially up by 23.9% as against INR 190.3 crores in Q3 FY '23. EBITDA margin for Q4, up by 240 basis points to 10.8% as against 8.4% in sequential quarter and 13.5% last year same quarter. PBT before exceptional item at INR 271.4 crores as against INR 269.5 crores last year same quarter. Net profit at INR 185.5 crores as against INR 202.2 crores last year same quarter impacted due to exceptional provision of INR 24.4 crores on account of impairment of investment in the wholly owned subsidiary as [indiscernible] Solutions Limited. Company continue to be net debt previous sufficient available of liquidity for growth. The Board of Directors has recommended a final dividend of 70%, INR 7.0 per equity share for the year ended 31st March 2023. On a consolidated basis, company financial performance for the quarter ended March 2023 is as follows: Turnover is up by 17.4% year-on-year to -- at INR 2,214.5 crores. EBITDA margin at 10.5% as against 13.2% in last year's same quarter. Profit before tax up by 7.8% year-on-year at INR 277.6 crores, net profit margin up by 13.9% year-on-year at INR 216.5 crores.
Moving on to the segmental business performance. Starting with the Agri Machinery business, the total tractor industry volume, domestic as well as exports in FY '23 went up by 10.2% to 10.7 lakh tractor as compared to 9.7 lakh tractors in the previous year. This is a new record for the Tractor industry, meeting the last peak of 9.88 lakh tractor in FY '21. Our total volume went up by 9.7% to 1 lakh 3,290 tractors as against [ 9,228 ] tractors in the previous fiscal. Our total market share was maintained at 9.7%. Here to note that this is the second time that company has crossed 1 lakh plus tractor sales unit.
The domestic tractor industry went up by 12.2% to record number of 9.45 lakh as compared to 8.4 lakh tractors in the previous year. All macroeconomic factors, crop production, crop prices, good monsoon and availabiity of retail finance remained positive throughout the year. Our domestic tractor volume went up by 9.4% to 95,266 tractors as against 87,043 tractors in the previous year. We ended the year with a domestic market share of 10.1% for FY '23 as against 10.3% in FY '22. The marginal drop in the market share was mainly due to drop in Q1 FY '23. Post that, we have taken some corrective actions in the last 9 months of the fiscal from July '22 to March '23. Our domestic market share improved to 10.4% as against 10.2% for the same period in FY '22 and in Q4, we ended market share at 10.9%.
We have more than 100-plus dealer count. We continue to focus on channel expansion to cover the white spaces for both [ Power Track ] and [ Farm Tech ] brand. We have also initiated step to focus on the health of our channel and are taking a step to develop a strong and healthy dealer network.
On the export side, during fiscal FY '23, industry was down by 3.2% at 1.24 lakh tractors as compared to 1.28 lakhs tractors in the previous fiscal. However, our export volume went up by 11.7% to an all-time high of 8,024 tractors as against 7,185 tractors in the previous fiscal, driven by our continuous focus on new product development and expansion of our distribution network.
Sales through Kubota global network is also gradually increasing and during the year contributed more than 30% of the total export volume. Segment revenue was up by 13.5% to INR 6,316.1 crores as against INR 5,563.7 crores in the previous year. EBIT margin for the Agri Machinery business stood at 9.3%, impacted during the year by steep inflation in commodity price, advert product mix and impact of price rationalization in certain products of the geographies.
For the quarter ended March 2023, EBIT margin was up by 159 basis points to 9.9% as against 8.3% in the sequential quarter, led by a better product mix, improved price rationalization and softening of the commodity prices.
In Q1 FY '24, domestic tractor industry is expected to remain almost flat due to advancement of the key festive season to March '23 as against April last year combined with unseasonal line. However, for FY '24, we expect the domestic sector industry to do well and made a still low mid-single-digit growth led by positive macroeconomic factor on account of group,[ Rabi ] harvest improved crop prices and adequate water level is [indiscernible]. Coming on to the Construction Equipment business, our [indiscernible] industry of crane, back loader, and compactor was up by 24.5% in volume as compared to FY '22, led by growth in back loader industry, uo 28%, crane industry was up by 25%, whereas compactor industry see a de-growth of 5%.
Our total volume of manufactured and [ credit ] products went up by 12.2% to 4,620 machines as against 4,117 machines in the previous year. Segment revenue went up by 19.5% at INR 1,179 crores as against INR 986.8 crores in the previous year. EBIT margin went up by 48 bps to 2.9% as against 2.4% in the previous year. There is a sustained demand for construction equipment industry supported by government continued trust across all infrastructure.
we expect demand momentum to continue going forward for the current quarter and further accelerate in FY '23-'24. And margins for the segment to improve further owing to softening of the commodity price and improvement in the product mix. Coming to the Railway division. Revenue for the year ended March 2023 went up by 32.3% to ever highest yearly revenue of INR 841.9 crores as against INR 636.2 crores in the previous year. Sales from the new product contributes 65% of the total sales division sales. EBIT margin for the year ended March 2023 stood at 13.8% as against 14.8% in the previous year.
Order book for the division at the end of March 2023 stood at a healthy and ever highest level of more than INR 1,050 crores. With continuous focus on product diversification and export, we expect the Railway Equipment business segment to continue in the double digits in FY '24.
Now we'll request the moderator to kindly open the floor for the Q&A.
[Operator Instructions] The first question is from the line of Gunjan Prithyani from Bank of America.
I have 2 questions. Firstly, on the outlook for the industry. I'm not sure if it was flat for F '24 or low single digit, if you could clarify that? And also give us some color on how did the recent festive go? Any color on the geo trends, where are the inventory levels? Some color on the industry, what you're seeing on the ground?
Thanks, Gunjan. This is Harish. To give you our perspective of the industry, we expect the first quarter of this year to be flat, given some of the adverse weather conditions, but overall for the year, we expect the industry to grow by single digit, that's for F '24. Going at the end in the festive season, the festive season in quarter 4 was -- if you were to split the quarter into 2 parts, the first part of the quarter was good for us because of good [ informed ], good, what you call it, water supply, et cetera, good [ MSP ] prices. Last month, which was March, impacted positively as well as negatively. The positive impact was because of the festival. Negative impact was because of unseasonal markets.
And I mean, on balance, how -- I mean did it go as per your expectation? Was it growth versus if you compare with last year [ Navratra ] festive -- did these balance out each other? Or was it more on -- skewed more on the negative because of the unseasonal rates?
If you were to ask us if the unseasonal rain had didn't happen, and if you see the rains versus the previous quarter, the growth would have been better. But given the fact there was unseasonal rains, the market still grew 14%, but it is not in line with the growth in the previous quarters.
Okay. And where are the inventory levels? Is there some higher inventory levels because it didn't go -- the festive didn't go as anticipated?
Actually not because if you take a look at our quarter 4, our deliveries have been higher than our billings. Therefore, our net inventory at the end of quarter 4 stands lower than it was in the previous quarter.
So less there a month, I should assume?
It is in line with the 4 to 4.5 weeks that we normally have.
Okay. Got it. The second question is more around the margins. Now we've seen some sequential improvement given a combination of mix, price hikes as well as the cost easing. But if I were to look ahead for -- going by the assumption that there's incrementally not much of operating leverage to play if it's a flattish or a low single-digit volume growth is not incrementally much operating leverage as a lever. So how should I think about the various push and the pull factors like do we have scope to take more price increases? Are we expecting more commodity easing to flow through. So just some perspective on how I should think about margins for F '24 for the agri business.
Gunjan, this is Bharat Madan. So as you [indiscernible] mentioned, operating leverage, we are not really banking on too much. But if you look at the trend in the last 2 quarters, so we are getting the benefit of the softening of the county prices. And it looks like the trend will continue in the coming quarters, too. So price increase doesn't look like the feasibility in this scenario when the commodities are softening. So that is something which we are still keeping a watch. It will all depend on how the competition plays out and there is a possibility. So that will be explored. But right now, it looks difficult looking at the way commodities are moving.
But as we mentioned in the last quarter, that was a bottom or quarter from a margin perspective, and we're only looking at better margin coming in going forward. So this commodity cycle, obviously, is giving benefit going forward. So we expect that trend should continue, and that should actually lead to some better margin.
In addition, there are also some cost control measures which company had put into place for this year. So that will also start playing out. So that also should act to the overall bottom line. So at by the time we exit the year, we should be added back to what it used to be the normal level of margin for Tractor business.
Normal, you mean the low to mid as because we've gone through a huge range in the last 2.5 years, right, 13%, 14%, then we [indiscernible].
I think COVID year, you should exclude. So I think pre-COVID level, which used to be just 14%, 15% sort of range. So that are the sort of number which we're targeting to end the year this year as an exit.
Okay. Got it. Just last question, if I can pitch in this Construction segment margin at 8%. Is this sustainable? Is it one-off this quarter? Any clarity on that?
So Construction, as you know, I think the demand started picking up only from December last year. And the second half in Construction Equipment business is good. And you've already seen the margin historically also the last quarter used to be the best interest of the margin. Whether the same numbers will sustain, I think difficult to say, but the demand momentum is continuing. We've seen good numbers coming in April also. There's some spillover of demand, which is there. So industry is right now struggling with capacity issues with the very good demand coming in both domestic as well as an export front. I think the demand scenario for this year, we expect the momentum should be good. The price increases have been absorbed in the market. So the idea, the margins should continue to be better than last year, whether the same level is sustained, I think it's difficult to say at this point in time.
The next question is from the line of Chirag Jain from Emkay Global Financial.
I have a couple of questions on the market share front, within the tractor space, we have seen a decline last year. So how do we see that shaping up this year? And any major initiatives that you can call out, which can help in terms of boosting our market share.
This is Harish. Chirag, again, if you take a look at the full year and if you take a look at the sequential quarter-wise, quarter-on-quarter, we have increased our market share from Q1 to Q2 to Q3 to Q4. Biggest drop that we had was in Q1. Subsequent to that, we have always grown in our market share. So that is point number one. Two is, this has already some initiatives have been taken. Key among the focus on digital. Second is our focus on the 31 to 40 HP or focus on 41 to 50 HP as a focus of greater than 50 HP.
Second, this is in terms of geography, our focus on the strong as well as the opportunity markets, which is leading to a significant growth of share in this strong as well as the opportunity markets across quarters. The third is our focus on the haulage segment. So we see haulage segment as an opportunity for us going forward. And even in the last year, we have inroads into the segment.
Okay. Second question is with respect to the product mix or let's say, the segment-wise, let's say, growth profile within the tractor space, let's say, agri and non-agri. How do we see that, let's say, in this financial year? And this could have some implications on the margin profile as well. Maybe if you can discuss that as well.
The 2 bits. If you were to take a look at the market today, if you were to take a look at the pure non-agri, our estimate of the non-agri market is approximately 15% to 20%. And if you take a look at that specific market, that is predominantly driven by investments into infrastructure. Given that the government has the stated intent to double the spend in infrastructure this financial year as compared to the actual spend last year, we see this segment showing a significant growth. That is part one. I agree if you take a look at it, given the current quarter levels that we have and the positive trend that continues into the -- we also see a positive momentum in that segment.
Okay. Sir, just last thing and then I'll come back in the queue. In terms of trend for regulations, any update do we have? I think in the last call, we mentioned that it might come probably in September '24. So any final notification or any update that we have?
So no further update. It is just that as part of the [indiscernible], we have submitted a recommendation to the [indiscernible] to try and keep a 5-year gap between the [ M4 ] and the [ M5 ] but is still to get back.
And just on last call, we had mentioned in the original emission norm for more than 50 HP got delayed by almost 18 months. So we expect similar delays should be there for the lower HP segment also. So earlier the initial change of emission you was supposed to happen from first April '24. Now if you look at 18-month delay, it would have been September '25, not September '24. So -- but right now, obviously, there's no notification being issued. So we're still waiting and we'll come back once the discussion is out and the notification is out.
We have the next question from the line of [ Devika Jain ] from [ Ratnabali ] Investment Private Limited.
So we have grown our exports by nearly 12%. I just wanted to understand how our [ payers ] have performed. And also the reason for our outperformance as against the industry.
So industry has actually declined by almost 2% last year. Exports in India have not done well. So the industry [indiscernible] roughly 125,000 this year against 129,000, 130,000 a year before. So in our case, the exports have gone because obviously, we have started exporting to [indiscernible] also, which was also one of the region. So it's almost 30% export in our case, actually this year or through quarter it will and that's the trend we're seeing probably will continue. So that's why we have more bullish on the export number going forward too.
So in the industry scenario with some of the countries have started facing [ testation ] basically in EU countries. So we are seeing some sort of decision condition at prevailing because this geopolitical issue. And the U.S. also is expected to compare into this decision work. On exports, demand may get impacted slightly. But in our case, since we are banking more on the export to the network. So maybe we'll not see that sort of impact for [indiscernible] industry.
This quarter, our [ excludes ] through Kubota is more than 40%. What is the number going forward? Is it expecting through Kubota channel?
So right now, we are projecting a similar level as we have seen in the last year. So once we open more countries and there's a lot of work needs to happen on the product side. So once the product is steady, then obviously, you'll see the numbers going up. So that will take some time. But definitely, I think the current product portfolio that we have, which we are already exploring that as certain new markets which are opening this year. So we expect the number should gradually continue to improve, be in the range of 30%, 40% in [indiscernible]y going forward.
Got it. And one last question, sir. So I also wanted to understand the reasons for our poor volume uptick in the Construction Equipment segment this quarter?
Poor volume uptick. What do you say that?
As compared to the industry, the growth of our volume...
Essentially because of the product mix which we have. If you look at -- we are -- our main product portfolio is in the pick and carry crane segment where we have done almost in par with the industry. The issue is on the back loader, which is the [ earth ] moving segment, we are a very small player with about 1.5% to 2% market share and the maximum growth in the industry has happened in that category. So it's more in the issue in terms of mix that the industry has and that segment has grown, where we are not a very strong player. So the [indiscernible] industry looks like as if we have been dropping the market share. But if you look at our own second carry segment, I think quarter this quarter, we almost gained our market share back to 40% plus, which is the largest segment for us.
The next question is from the line of Mitul Shah from Reliance Securities.
I have a question on your yearly guidance of single-digit growth for the industry. sir, in view of festival being not there in April, this time in March to last year, April had a festival also the base was high even for this quarter also based for the coming months, May, June remains high. Overall, climatic situation is still advance and on timely monsoon. So despite all those negative factors fundamentally right now, on what are the factors you see could driving single-digit growth?
So Mitul, if you heard the commentary from Prateek, I think he mentioned in this quarter, since you already seen April has declined, the industry has declined and May we expect to be floor, almost flat industry and June early, we'll see growth coming in. So overall for the quarter, we are anticipating flat industry this quarter. The low single-digit growth we were talking about is for the full year basis. So it is the [indiscernible].
Question is on full year only. I asked that this quarter, we are saying flat and full year, we are seeing growth. These are the negative factors, even into the inventory level is also high for the industry, which probably may come down slightly. So adjusted for that wholesale growth, you are indicating single digits. So that's what I want to understand.
No, no. So Mitul, if you take a look at it, there are 3 positive factors that are impacting the industry today. One is the good MSP prices that we have as well as the crop prices. The second one is the reservoirs, which are significantly better than what we have in the last year. The third and most important one is the fact that it is an election year. Therefore, we expect infra trend, as I indicated, is doubling this year as compared to the previous years. So the haulage plus the mix segment, which accounts for close to 30% to the total industry is expected to give a big boost to that particular entire space, that combined so that infrastructure growth and hence, a significant boost in the 30% and 35% of the market, plus growth in agri because of MSP increase as well as irrigation that is expected to give you that single-digit growth.
Okay, sir. Second question, again, on the same in terms of -- as for the commentary, it seems that the second half would see the growth, first half may not be very great. In terms of region wise, where do you see high growth coming or which the regions do you see still have some weakness because this monsoon impact seems to be more in the North and Central where we are relatively stronger compared to South.
I think the growth we are expecting is going to be panning [indiscernible], that is one. And second one is monsoon is if it comes -- and I'm not sure what the outlook is going to be but I think it will impact most of the geographies if it does impact inside the irrigation in the northern and the western zones are actually better than some of the other areas, if you see the historical trend. So we feel a lesser impact would happen in our strong markets.
The next question is from the line of Hitesh Goel from CLSA.
First question is on the tractor margin, which has improved 160 bps Q-on-Q. You had highlighted in the last con call that there's not much commodity cost benefit, which you are expecting in the fourth quarter. But the commentary seems to be you've got some benefits, and that will flow through in the next quarter. So is it mostly commodity benefit that has helped margins? Or it is also the mix to some extent?
So it is the 3 reasons we mentioned. One, we also mentioned last quarter since we've taken the price increase after the festive season was over. So the full impact on the last quarter was not visible, which you've got the full impact in this quarter, which still is almost 0.75% and to the margin improvement. And then second, the softening of commodity price had happened. So still, there is some decline is happening on the last time, it was not visible. But during the quarter, when the rate got settled with the competition, the leader who actually take the lead in settling those rates on the [indiscernible] side. So we did get some benefit, which happened towards the later part of March and that's why we got the impact the full quarter, and that bit will continue in the coming quarters too.
And third is product mix, which is also positive because you look at the trend, the more than 40 [ bps ] sales number into the percentage has gone up by almost 3% in this quarter. So that also contributed to the better realizations. So all 3 factors were the [indiscernible] for the improved margin trend in the Tractor business.
And sir, my second question is on this, which Harish also highlighted, actually, irrigation intensity has improved quite dramatically, especially in states like [ Made Pradesh ] and [indiscernible]. So I did an analysis that only I think [ Maharashtra ] and [ Karnataka ] to some extent, Gujarat is the areas where monsoon can have an impact on tractor volumes if the water levels are quite high. Is the analysis right? So we should not worry too much about monsoons at least because it's on visible levels are only lower in UPB hardware anyway, the litigation intensity is very high. Is the analysis right?
Broadly in line with what we are also thinking that we don't feel there is going to be a significant impact of monsoon this particular year because of the reservoirs across most areas, which are key markets for us being reasonably good. And plus, as I said, the infrastructure growth, which is happening because of the election year.
[Operator Instructions] We have the next question from the line of Raghunandhan N. L. from [ Nama ] Research.
Congratulations on the strong margin performance, both in Agri and the Construction Equipment space and very heartening to hear the improvement expected by end of the year. Sir, a couple of questions. Firstly, on Kubota Agri Machinery, if you can share your thoughts on the time line for [ Master ] and also, how is the progress happening on the localization part? Would you see that exercise completing within the 2-, 3-year period and seeing EBIT margin of [indiscernible] and again, on Kubota [ machinery ], how do you see the component exports to global Kubota, what are the efforts there? And on a pilot basis, have you started exports?
So Raghu, on the merger front, right now, the -- we are waiting the approval from [ SEBI ]. So we had filed our application and all the stock changes have given the -- all the queries were resolved and the matter has been deferred by [indiscernible] to [ SEBI ] now. So we get to end, we see the approval. It's almost now close to 3 months spending with [ SEBI ]. Once we get that goal from [ SEBI ], then it will be filed with NCLT for the necessary processes. So it will take another 6 months' time. So right now, the way things stand, it looks like the process [ call ] gets delayed by another 3 months. We expecting it should happen by September, October, but the way I think things are today. So [ SEBI ] have already delayed this whole process. So it looks like it may go somewhere around December, January types, assuming everything comes in line in future.
On the localization front, so obviously, the localization in the JVs is essentially for the Indian manufacturing, which is a major part, which right now is getting imported and also other products which are right now, JV, was in the manufacturing JV, we are only doing 2 models for them right now. And the balance of the [ malls ] are actually imported from Japan. So that localization will happen so the more product that's introduced in the portfolio which will happen I think over the next 2, 3 years, as you mentioned, because we have already factored that in our midterm business plan, which was unveiled to the investors and analysts last year in November.
So that obviously is very much on. So the work is happening on that front. On the component export is already -- the [ metricing ] JV is exporting to some of the countries, including Thailand and U.S. market. And as they grow and develop more components and do more indigenization, so the opportunity for export will also further increase. So that is also already indicated, and that will continue. Obviously, the visibility to numbers will only happen when the merger happens. So right now, they are still stand-alone entities and we only consolidate the bottom line numbers there. So that is not really reflected right now. But the integration happens and the merger happens, and we'll get to know more, I think about them.
Effective date will be from 1st April, right, sir?
Yes, [indiscernible] date was April 2023. So as and when it happens, so we'll do the consolidation of results from 1st April and produce consolidated results.
[indiscernible] tractors are selling in the network of 300-odd outlets. Any thoughts on cross-selling using the Escort [indiscernible] network?
Yes. So like we mentioned, this is one of the key synergy which is there. So when the integration happens, so definitely, there will be an opportunity for the dealers of both the companies to do cross-selling. So the good dealers and Kubota can also sell our products maybe through a different ahowroom, not in the same showroom. And same thing can happen with our dealers also. So especially in the northern, central India where we are strong and [ core ] is not very strong. So that will give them also an opportunity get represented to network.
And on the Construction Equipment and Railways, if you can talk about outlook for FY '24?
Sanjeev, you want to talk about Construction, then Ankur can take the railway.
So this is Sanjeev, as I want to talk about the Construction Equipment outlook for this year. Now last year, we've seen that the first half was very subdued. And second half only, we saw that the demand came up. And we expect that the speed at which the projects are moving at presence and the demand from the infra projects is very, very high. So this year, it is expected that the same level of demand will continue. Although there was some backlog, which was to be covered in the last quarter for the first half of the year. Second half of the year -- I mean this year, we expect that the industry will continue to grow. Our [ serve ] industry will grow at about 10% to 12% is what we are expecting. And we see that till the end of the year, this demand should continue except for the small period of monsoons when the project is actually going too hard.
This is Ankur Dev. So regarding Railway business, so as of now, we have a strong order [ paid ] of INR 1,000 crores plus, as we mentioned in our opening remarks. Most of this will be executed in current financial year only, financial year '24. Additionally, we are going to commercialize 3 more products, which were in field trial in the last financial year. And obviously, these commercialization of these 3 new products will add to order [ pad ] and the revenue in the current financial year. So overall, I can say that we are -- we will continue this growth momentum in the Railway business, and we are hoping that we will be able to grow by double digit in the current financial year also.
And to Ankur, sir, if you can talk a bit on the localization efforts of [ new ] products and how the margin trajectory will go ahead on railway.
So regarding localization, as of now, mostly it is in the brake side for the [ LSV ] coaches. And we have already done the localization of the components which we are importing as of now. So all those localized components are put into the field trial as per the Indian Railways regulation. So we expect that this localization benefit will flow into our margin in financial year '25, basically the next financial year.
So you see margins going back to the historical price of 18% to 20%?
It is difficult to say exactly to those high levels because we have been impacted by the inflation in the metal cost in last 2 years. But obviously, we are working towards that.
The next question is from the line of Pritesh Chheda from Lucky Investment Managers.
Sir, my question is with the [indiscernible] tie-up in place, what kind of opportunities has opened up from a product perspective or what kind of [ gaps ] we are [indiscernible] from a product perspective. And over the next 3 years, alongside exports, this 95,000 or 100,000 tractor volume that we see, what kind of volumes are possible on a 3-year basis, if you could just give a small recap on that.
So Pritesh, we already unveil our midterm business plan. So maybe you can have a look at that. It's already available on our website. It gives the overall picture in just how our aspiration is to go, not really 3 years, we're talking about 5 years there by FY '28. And it's both on the domestic front, export front, the outsourcing opportunity, which exists for [ ETL ], which Kubota intends to use, both on the component side and on the finished goods side. So I think all those questions are getting addressed over there. So it's difficult to put a number right now and what will happen but obviously, the idea is to make sure wherever the white spaces exist in the work, so that gets addressed. And there's also for to obviously do a joint development of cars, which is a plan. So most of the first introduction will happen by FY '26, as I think it stands today and the projects are on, and it includes both the on the domestic side as well as for the export market.
Most of product introduction will happen by FY '26.
For the new products, which is totally under new development, but there are many opportunities which is in terms that are taking the existing product platform. So that will happen sooner. We will see some new products coming into the play.
The next question is from the line of [indiscernible] from Motilal Oswal. Mr. [ Manoj ], I have unmuted your line, kindly proceed to your questions. As the current participant is not answering, we move on to the next question, which is from the line of Kapil Singh from Nomura Group.
Just a follow-up on the [ TAM ] loans. How much was the cost increase that we did for more than 50 HP segment? And were we able to fully pass on this cost increase? And did that have any impact on volumes for this segment.
So [indiscernible] impact is roughly 10% to 15% of the total cost of the tractor. It's on the high 50 HP tractors on its mission of are put into place. So last part since the ban become effective only from first of January and most of the manufacturers were carrying inventory. So really, the impact has not been seen whether this gets absorbed in the market, no, I think we'll come to know in the coming quarters. So I think it's difficult to say at this point in time. But definitely, no one would like to keep the costs on the P&L. So anybody would like to purge onto the market.
So we have already taken 10% to 15% price increase?
So you mentioned most of the metrics are carrying inventory of the old tractors with the old engine. So once the new emission on tractors start coming to the market and start getting retail, so really will come to know. But yes, the price increase will happen based on this [ causing ] fee.
Okay. And by when is it expected that the new tractors will start coming into the market?
And from this quarter, you should start seeing the impact.
Okay. The second question was on exports. April saw a pretty sharp decline. Any particular reason? Was there a one-off? Or do you think that exports could be soft this year?
No. So export will not be soft. We have order book. We had more than 800 tractors order likely, but it could not be completed with some model mix issue and supply chain issues were there, but they will get addressed in the coming months. So there's no shortfall as far as the order book is concerned for export. I think it was the only temporary issue in the line and some quality issues which are getting addressed. So that should actually get a get off in the coming months.
Okay. So is it already addressed or it could -- like by when do you expect that this would be addressed the issues [indiscernible].
They have been addressed. So you will see the impact coming from the coming months.
The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.
A couple of questions from my side. One is the RM cost savings you expect to continue in coming quarters? And what materials are we seeing further operation from where we are today?
Yes, we expect the softening will continue. So we are seeing, I think, only seeing the new slipping from the sheet metal, the steel companies are talking about using the prices by about INR 1,500 to INR 2,000 per tonne. On the costing also, we think some softening is happening. So both on the [ coke ] prices and the big iron, both are going down. So we'll see some softening happening on the casting too, which is a major component for the tractor industry. We've also seen the level prices going down. So where you've seen the results of the [ tire ] companies, most of the companies are actually seeing the margins going up in last quarter. So hopefully, since we get the impact with some lag, so that should also start benefiting the company.
So to your question, yes, broadly, we see the trend is downward on the commodity side. So we should continue to get that impact as the quarters pass by.
Okay, okay. And in that context, we would not have taken any price increase in fourth quarter or till date in 1Q.
Yes. So industry hasn't taken any price increase because the prices are coming down. So net-net, basis, if you look at whatever the inflation has been there, it's been fully passed on to the market by the industry, including us. Yes, the margin on that increase has not been exhorted by the market and no one has been able to pass it on. So that is why we're seeing the cost wise, percentage-wise, the material cost is looking very high compared to what it used to be 2 years ago. So I think as the softening happens, you'll see the gradual increase will start happening on the margin front, too.
Got it. Got it. And lastly, with respect to the merger of those 2 entities, can you clarify what kind of [ past ] segment have on margins and profits based on FY '22 numbers or other indicator on [indiscernible] basis?
So I think it's already there in our investor presentation on the website. So we have given the consolidated view of FY '22 numbers based on the -- both the JVs numbers. So broadly, if you look at the last year's number, there was a dilution of happening in the EBITDA margin of about 1.5% to 2%, where they were just -- they were still almost breakeven sort of operation. So I think once the merger happens, there are a lot of cost synergies with flowing. So as you keep cutting down the cost, the margin will continue to improve going forward. So an objective is they should also continue to come back to the same level of margin, what we are doing in [ etail ] on the tractor business. Obviously, there'll be some difference with the positioning for Kubota brand is different than what [ etail ] so to that extent, there will be some defense should be there. But overall blended margins should be actually in the same way as the tractor industry enjoys.
Okay. And given that this is happening in FY '24, impact might be much [indiscernible] Than 1.5 to 2 percentage points at it, would that be fair?
It will be similar.
You mean similar dilution of 1.5 to 2 percentage points because of...
[ Revenues ] continue to be in the same line. So there's no major change there on the margin profile.
The next question is from the line of [ Joti Singh ] from Capital Markets Limited.
Sir, as most of my question got answered. So I just have one query. So how is the traction we are seeing on the non-automotive side.
Non-automotive means?
I mean, sorry, non-agri side.
Tractor uses for [indiscernible]. Are you talking, tractor uses for non-agri purposes.
Yes, sir.
Okay. So 2 parts to it. As I mentioned, tractor users for non-agri purposes is going to see a boost this year, at least that's our estimate. Given the increase in infrastructure spend, which is a doubling as compared to last year, point number one. Two is starting from Q2 of last year, we have had an increased focus in this particular segment, and we are consistently growth of share within that segment, and we continue to focus on the segment for F 24.
The next question is from the line of Sameer Deshpande from Fair Deal.
Congratulations, and welcome on the Board of Escorts. You really [indiscernible] seat and I'm happy that you are there. I hope the company prospers even better under [indiscernible]. Now the question is actually, we have a capacity utilization of 90% and we have sold 1.03 lakh tractors this year. So we have, I think, around [ 1.10 ] or something at the capacity. Now we -- earlier when we had with Kubota, we were planning to increase the capacity by about 50,000 tractors? So what is the status of that at level of [indiscernible]?
Yes, Sameek, you're right. So our own capacity in [ Ecil ] was close to 120,000 tractors. And with JV, we have another 50,000 tractors capacity, out of which roughly 30,000 capacity was available for users by [ ECL ] also. So overall, we had about 150,000 tractors capacity. So right now, we are at 103,000 this year. So capacity-wise, we don't see an issue on an immediate basis. And as we had indicated in our midterm business plan, there is a plan to double this capacity in the next 5 years and this is one of the key projects as part of our midterm business plan. So we'll be increasing the capacity from 150,000 to 300,000 tractors by setting up another great [indiscernible] venture within this next 5 years period.
So that will be on. So all will ensure there's no shortage of capacity in terms of what we need in the sales requirement. This 90% capacity is only in this quarter of March. So overall, the utilization level is not 90%. So that's why it's more seasonality, which comes into play. So there are options to keep the inventory build up if the requirement is there for any particular season, quarters of season months. So that can be done. So overall, so we don't really from a capacity perspective will be an issue. But yes, there are already plans to expand the capacity further.
And now with this, regarding margins and tractor industry outlook, I think it was mentioned that mid-single digits growth is possible this year. Despite the [indiscernible] sector, et cetera, because of the good water levels and overall irrigation improving, et cetera. That is good. Would we have any on the tractors in the non-agri segment also expected to have a good sales boost with the election year as good. But the margins you mentioned that currently, we have about 9.8% in this quarter for Tractor segment margin. So you mentioned that earlier, we are about 14%, 15%, about 1 year back, 1.5 years back. So are we likely to return to those levels by the end of the year?
Yes, that's what I indicated. So both I think we're expecting the commodity prices continue to soften and then also some benefits which will flow in from some of the cost initiatives that we have undertaken this year. So both put together should really lead us to a situation where we end the year with this sort of margin profile, which used to be there for the tractor business for us.
Will keep on improving [indiscernible] margins when margins will go on...
The cost impact, whatever cost initiative can we take, the impact will be maximum in the last quarter because every quarter, we will keep on accruing. So definitely, in the last quarter, you'll see the maximum bit coming in. So we think when we end this exit, we did this clear in the last quarter, so we should be in that range.
And one last question is this -- in our balance sheet, we had last year under current investment, INR 4,587 odd crores and now that has almost INR 2,785 crores has shifted to noncurrent investments. So what actually does it mean?
Only a classification issue because the investment which is held for more than 1 year is shifted to noncurrent. Otherwise, the overall investment portfolio remains same. So we have close to INR 4,800 crores of liquidity on the balance sheet, which is invested in this [indiscernible] funds. And that's excluding the count. So well, if you include escrow account balance, it will be more than INR 5,000 crores at the end of March.
Okay. And in Construction Equipment, really, after a long time, we are seeing very good results. So 25% of the capacity utilization at a volume of around INR 4,600 crores. We have been in a position to turn around and make some 3-odd percent on margins. So if the capacity goes up by around 30%, 40% more in the election year, maybe 20%, 30% more, can we see the margins grow 5% to 6%.
So Sameer, capacity depends on what product we are selling because there is a demand maybe for different products. So some of the products we are facing shortage of capacity today. So there are capacity constant, especially on the [ Safeway ] part, which is one of the key components, which is a high margin product for us. So there we are actually not able to produce, which is why we saw some of the spillover happening from last quarter to this quarter of some volume. So overall capacity looks like there's a issue because back loader, we are not doing much. So there we have supress capacity, but where we need capacity there, we have some shortage. So don't look at the overall number, but that is for the combined capacity, which is reflected in the presentation. But in yearly basis, it's something that we need to really track and us seeing how much we can grow.
[Operator Instructions] We have the next question from the line of Deepak Jain from [ Enam AMC ].
Sir, you were having some product mix issues a few quarters back. So are they being addressed? And in context of that, this 14% EBIT margin for the exit quarter, will it come entirely from the cost moderation? Or some other price hikes or some product mix improvement at event will also be there?
So it will be a mix of both in multiple matters. So like we mentioned, the cost initiative on which we are looking at, then there's also some softening of commodity prices, which we are expecting will happen. So that will also lead to improvement in the margin. And on product mix, I think it's -- compared to what we were earlier, we think some improvement which has happened in last quarter also and same trend was there in April too. So we hope if that continues, so that will only help us in getting the earlier than [indiscernible] last quarter.
The next question is from the line of [ Ayush Agarwal ] from [ Molecules Angeles ].
I wanted to ask about the commodities, the commodity prices you said are expected to go down. So in that, which commodities are you expecting the prices to [indiscernible]?
Casting [indiscernible] and lower prices, as I mentioned.
Okay. And could you please give us some idea about how much of the -- how much of the cost of our company would be coming from castings and [indiscernible].
So I think we indicated in last call also in last quarter, so it's almost 50% to 60% cost comes from these 2 commodities within lower and tires and costings for tractors which is why you did not see the impact of what we saw in the auto industry. We didn't see that impact coming in the tractor industry.
So casting tractor, could you give us in [indiscernible]? Casting and [indiscernible] is 50% around. So casting alone would be around?
Almost 40%. 35% to 40%.
35% to 40%. And over the past also, in the current -- in FY '23, how is the -- how has the prices [indiscernible].
In FY '23, as you all know, I think on the geopolitical issue happened. So in March, April, we saw a very steep increase in the commodity prices. In signal quarter, we had seen almost 4% to 5% increase happened in this material cost for us. And only the prices coming -- started coming down from Q3 onwards very marginally. It only happened in sheet metal likely first. And casting the price cut has only happened now, some of the [indiscernible] we SAW in Q4 and probably something will happen in this quarter, too. But it's not a major change. This has happened in the costing front. So that you're not seeing major impact coming on the [ commodity ] savings in the tractor industry.
Casting, we have more than 3 suppliers? Or are they consolidated?
No, no, there are multiple suppliers for casting. Many suppliers.
We have a follow-up question from the line of [ Devika Jain ] from [ Ratnabali ] Investment.
So I wanted to understand how and that [ trend ] will we deploy the cash paid where exactly -- where primarily?
So [ Devika ], you can refer to our midterm business plan, we've given a capital allocation strategy there, how the money will get utilized because obviously, the CapEx plan by the company. There is certain money which we got from Kubota is meant for using the business only. It's not meant for distribution that was the purpose of that money, which was being raised. So we had given the indication how much will get spent on CapEx and how the greenfield project has to come up regional capacity is creators. And then within the existing capacity, a lot of changes are happening and the [indiscernible] is happening there and the product development, which is another major spend, which happen on the multiple products, which we introduced both for domestic market as well as for export market.
So net-net, we have given the overall indication, what will be the capital allocation strategy the company will deploy including in the sort of distribution and the payout ratios, the buybacks. So everything I think is spread out there.
I basically wanted to understand when will we start seeing some movement.
Yes, it will happen gradually. You can't expect to happen overnight. So okay, as you see the improvement happening on the performance also and the numbers are looming up. So these things will also start getting better. So you've seen the dividend itself this year. We have maintained the same issue as last year, the payout actually has gone up compared to what we had last year. So as to really move up to the level what we had indicated in our midterm business plan.
Okay. And if we have any inorganic opportunities that we are exchanging.
So if something comes to us, definitely, we'll look at that.
Ladies and gentlemen, due to time constraint, that was the last question for today. I would now like to hand the conference over to Mr. Bharat Madan for closing comments. Over to you, sir.
Thank you, ladies and gentlemen, for being present on this call. For any feedback and or queries, please feel free to write in to us at investorrelation@escorts.com. Thank you very much, and have a good evening.
Thank you, sir. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.