Action Construction Equipment Limited (ACE) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Action Construction Equipment Q2 FY '22 Earnings Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Abhineet Anand from Emkay Global Financial Services. Thank you, and over to you, sir.

Thanks, Lisanne. Good afternoon, everyone, and welcome to 2Q FY '22 Conference Call of Action Construction Equipment. From the management, we have Mr. Sorab Agarwal, Executive Director; Mr. Rajan Luthra, CFO; and Mr. Vyom Agarwal, Head of Investor Relations. We will have an opening remark from the management post which we'll open the floor for Q&A. Over to you, sir.

Yes. Good afternoon, everybody. I'm Sorab Agarwal, Executive Director at Action Construction Equipment, and I welcome everyone to this earnings conference call for discussing the results for the quarter and half year ended 30th September '21. We hope that you are staying safe and healthy. Along with me in today's earnings con call, we have our CFO, Mr. Rajan Luthra; and our Senior Vice President -- sorry and Head of Investor Relations, Mr. Vyom Agarwal. I hope that all of you have had an opportunity to look at the company's financial statements and the earnings presentation, which has been circulated and uploaded at the stock exchanges. To brief you on the financial performance of the second quarter of FY '22, the operational revenues grew by 35% on a year-on-year basis to INR 360 crores with an EBITDA margin of 10.2%. The EBITDA during the quarter increased to INR 37 crores in comparison to INR 26 crores on a yearly basis, which is a growth of around 42%. The PBT grew by around 57%, and PAT grew by 58% year-on-year to INR 30 crores and INR 23 crores, respectively, while the PAT margin stood at 6.4%. In the quarter gone by, the company registered a strong revenue growth across all the segments. In the crane segment, we reiterated our dominant market leadership position and registered revenue of INR 241 crores with margins of 11.26%. On a year-on-year basis, the crane segment registered a robust revenue growth of 45%. Similarly, we were able to achieve 30% growth in our Construction Equipment segment with stabilization of EBITDA margins and 42% growth in our material handling segment with EBITDA margin at 12%. The revenue in agri segment generated for by around 6% due to erratic and prolonged monsoons -- the monsoon season, but the EBITDA margin was still close to 8% in this segment. It is important to note that despite this earning time with prolonged monsoons, the company achieved its highest-ever revenue, EBITDA and PAT margins for the second quarter due to sustained focus on cost efficiencies and customer-centric approach. Further, I would like to state that although in the first quarter of current financial year, we have experienced disruptions on account of second wave of COVID-19, but the company was able to recover well and thereafter, we will see sequential growth with every passing month. For the first half of FY '22, we have been able to grow our revenues by 84% and our PBT has grown by 281%, PAT by 308% to INR 56.17 crores and INR 42.34 crores, respectively. For the first half of FY '22, the margin profile stood at 10.13% at EBITDA level and 8.18% at PBT level and 6.16% for at PAT level. On the operational side, the prices for many commodities continued to be at a multiyear high. These material prices continue to be at elevated record levels while crude, rubber and allied products have also valued significantly. Further global supply chains are witnessing massive disruption with shortages of shipping containers, standard operating shipping rates, congested airports and the recent energy prices in China. So in summary, while the operating environment has improved, it has remained challenging in this quarter. Further, the inflationary trend is continuing in the current quarter also, especially steel increasing by another 8% to 10% within the current quarter, that is October. The way we will manage this is exactly how we have done in the past few quarters. We will try and continue to manage the delicate balance of ensuring competitiveness of our brand and keeping EBITDA margins in a healthy range. The quarter gone by was also a very significant quarter for the company since we successfully completed our QIP of around INR 135 crores from a diverse mix of marquee investors. I would like to thank our investors for supporting the company during the QIP. Our strong cash flows and balance sheet as of date will ensure that the company continues to invest in long-term sustainable growth initiatives through market expansion and consolidation. We have a clear and compelling strategy. Our strategic position in infra and manufacturing and agricultural sectors, underpinned by strong operational excellence in our distinctive capability will enable us to drive growth and create a purpose-led future-fit aids. In the last quarter, company expanded its presence in the defense sector by getting a major breakthrough order for a multi-purpose 4x4 tractors for the Ministry of Defense, Indian army. We also received orders for manufacturing and supply of specialty metal boom cranes, which have been designed especially by us for the Ministry of Defense for handling design systems. The past 18 months were tough for the nation and the economy, but we have been able to emerge stronger out of this, thanks to our colleagues and team members who kept their focus on costs interviewing our customers, the rapid pace of vaccination, continued support from the government and receiving threat of third wave of COVID, give us confidence. We expect strong pace of economic recovery to continue in the second half of this year. And the economy seems to have gotten back on track, and monsoons have receded totally, although a bit late. And now looking ahead, as of now, we would like to reiterate our previous guidance of at least 15% to 20% growth in business revenue for the current year with a possible upside and EBITDA margins to be between 10.5% to 11% in this year. With this, I would like to open the call for question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Omar Irani, an investor.

Yes. My first question is there is this company that makes composite CNG cylinders, which are 10x lighter than metal cylinder and 1.5x CNG carries capacity that is 50% more and they are explosion proof. So my question to you is why don't you introduced in the states of Gujarat, Delhi and Maharashtra where there are abundant CNG filling stations, CNGs are running tractors and forklifts, okay, that are fitted with these composite cylinders. It will be a game changer. It could be a game changer for you. That's my first question. And my second question is when it comes to your agri equipment, can you give me a breakup between harvesters and tractors?

Yes. To answer the first question...

And there's a third question in regards to the -- you -- last con call you had mentioned that you're going to do a purchase that will increase your -- of another company that would increase your bottom line. So is that a component manufacturer that you're buying that will increase your bottom line? Or is this going to be a new technology that is going to evolve?

What I'll do is -- I'm Sorab Agarwal. I'll answer the first and third question and second question, Mr. Luthra will answer. And we already do forklift trucks, which are fitted with CNG and LPG kits.

Yes. But that doesn't have composite cylinders. Because they are 10x lighter, they have a higher carrying capacity as well, and they're explosion proof. And they are manufactured by Time Technoplast, which is an Indian company.

So we will also explore this, sir, like you have proposed. But like I was mentioning, we are -- Time Technoplast you said?

Yes. Time said they manufacture composite. They've just recently passed their composite cylinder/tank. Recently, it was passed. So now they can sell it in the open market, okay? Composite cylinders are 10x lighter, okay? They have a 1.5x carrying capacity for the same size of metals -- as compared to a metal tank, same size tank, the carrying capacity is 1.5x.

We will check that out. And I think we're already using CNG and LPG kits for our forklifts and currently working on adapting the same to our cranes and bucket loaders.

Yes. But what I'm saying is the composite cylinders will be a game changer for you.

I've understood. I've understood that. And I made a note of the company also, and then we'll definitely look into it. With respect to our inorganic growth possibilities, we are looking at both at the component level also and complete machinery level. And we are at advanced stage of talks with a couple of people. And going forward, we are expecting that we might be able to do something within this quarter, at least one of the possibilities. So let's see if we're able to finish it in this quarter. And regarding the breakup of agri number, Mr. Luthra will just reply.

We have been -- at present we are becoming number 2 in the harvester business and just and probably in the coming next year or year after, we'll be number 1 in the harvester also. As regard breakup of between the harvester and tractors, nearly 25% of the business is coming from the harvester. And harvester is a very small market as compared to tractors. So in spite of that, we are going to be a number -- we're already #2, but we're going to be a market leader, just like cranes and hopefully in the coming months.

The next question is from the line of Kashyap Javeri from Emkay Investment Managers.

Congratulations, sir, really great set of numbers.

You have to be a bit louder, please.

Sorry, just give me one second. Is this better?

Much better, yes.

I have three questions. One is on our unit -- per unit profitability. If I look at broader numbers about 60 basis points expansion [indiscernible] in terms of [indiscernible] EBITDA margins is actually masking a significant improvement in per unit profitability across all the product lines, except for agri equipment. So what explains that significant expansion in EBITDA margins per unit in, let's say, construction equipment and crane. And there has been a sharp decline in agri equipment. So what explains that for us? Second question is on our working capital. Seemingly, it's almost eaten up the whole -- almost half of the QIP money that we had raised. And despite that QIP closing in the end of September, there has not been a marked increase in the cash balances. So what's your view on the working capital cycle and as we go forward and as we grow much faster? And the third question is on our service network. What's the number as of today as at the end of H1 in terms of service network and dealers?

I'll answer your last question first. Service network with respect to cranes and construction equipment is close to 100-plus locations, maybe another 5, 6 more than 100. They keep on fluctuating 1 or 2 numbers here and there. With respect to working capital requirements, your standard working capital earlier has been close to about anywhere between 40 to 45 days. It is now at about 76 days, primarily because we were ready to do more business in the last quarter and even the quarter before that. That's why the inventory levels are a little blocked up. I would disagree that even after raising the QIP, our cash balances or our closing capital still is utilized there because that money has been put as of now temporarily into investments, not reflecting. And in any case, our borrowings are down to INR 57 crores, even after that. If by the end of the year, we are hopeful that either they'll be close to 0 or maybe at the sort of INR 15 crores, INR 20 crores.

So this 76 days that you mentioned, I mean, is -- would this go back to the old 40, 45 days number?

Yes, about a 45 days number we should -- as and when we decide to start controlling our inventories because like I mentioned, we were ready to do more business since June of this year. And unfortunately, yes, the quantum we were able to increase, but not up to our expectations, we are expecting to execute more business in the last quarter. Unfortunately, the process got prolonged, it went into October. So -- but I think now it's not the time to start controlling inventory, they'll just control automatically because the second half of every year is about 55% of our business. So I mean there will be an automatic correction in the inventories now and their working capital will start to reduce the number of days. Regarding your question of per unit machine. There might be a little bit expansion here and there only on the account of operating EBIT because numbers in the current quarter, the quarter which has gone by vis-à-vis year-on-year basis, the numbers have increased, so that might be the reason that you're seeing slight expansion there at EBITDA level or per machine level. But yes, because we've been able to somehow counter the drastic input cost release increase with our price increases, which we have been doing every quarter now. As a matter of fact, steel prices have gone up again in this quarter already by about 8% to 10% and which I mentioned in the opening address also. And we are already starting to increase our prices there. In agri, they might have seemed to be a little distracted, primarily on account that there was a slight dip in revenue of around 5% on a year-on-year basis, obviously, coupled with that here because we are a marginal player here in the agri business, especially tractors, so our ability to push prices totally depends on how the other bigger players are pushing their prices. There we had to absorb a little more of the input cost rather than passing it on. That was the main reason that you see a slight difference of profitability there.

So can one assume that in cranes and material handling, you would have passed on your probably input cost more than enough? And in tractor, it would be lower than what was needed because that's not where we are industry leaders.

In cranes and forklifts and even in construction equipment, we have passed on more or less the increase, which has happened until June, July. Unfortunately, as I mentioned, against steel and commodities last 1, 1.5 months have been increasing drastically. So that, again, we are pushing as of now. In tractors, yes, the total price increase required was not for looking at the competitive scenario in the market. But I'm sure within this quarter, that would also start to come.

The next question is from the line of Ashwani Sharma from Anand Rathi.

And congratulations for a great set of numbers. I have 2 questions. First is, where are we in terms of capacity utilization, especially on the crane and the construction equipment side?

We are unfortunately grossly underutilized here. In cranes, we are about 45%, 50%. And in construction, we are close to 30% as of now.

Close to 30%. So where -- you have already guided for 15%, 20% revenue growth. So what would be your internal target by the end of this year taking utilization level?

See if I tell you my internal target, you will take it as an external target and then it will be a problem. So definitely more than 15%, 20%.

Got it, sir. Sir, on the price hike, so if you could tell me what was the price hike that was taken during the Q2? And on a YTD basis, how much price hike we have taken in the cranes segment?

See, last year, in the quarter 3 and quarter 4, we took close to about 10%, 12% price increase. And in quarter 2 this year, we took close to another 10% price increase, 8% to 10%. And now going forward in quarter 3, in the month of November, we are again pushing the prices over the 5%, 6% to compensate for the increase in input costs.

And is the similar case do you see also in the construction equipment?

Yes, yes, yes. It is a similar trend with -- the pattern of increase might have been a little different, but the overall quantum would be nearly similar.

The next question is from the line order from Suraj Deora from Paladin Capital.

I have 2 questions. Firstly, could you just explain the seasonality in this business?

Yes. See, for our core business, cranes and construction equipment, so generally first quarter and second quarter, second quarter primarily because of monsoons, so it's about 40% to 45% of our business and generally the second quarter -- or the second half, sorry, sorry, the first half of the year and the second half, the second half is about 55% to 60% of our business. This is mainly skewed because of monsoon because the infra and the construction activity goes a little slow during monsoons and unfortunately, monsoons got a little prolonged well into October this year. So we are hopeful that October was good and things are looking up. So let's see how it stands out further with respect to execution of projects and agri follows the agri pattern. So generally, for us, the second half will start from quarter 2 and second half will be better for us in agri.

Is it fair to say that quarter 3 will see higher volume and higher prices in quarter 2?

Yes, so it should be like that. And that's what the numbers we did in October does make us believe it should be like that, yes.

And is that also in line with what you're seeing from purchase orders coming from your customers based on whatever ordering they are getting from government contracts and so on? Are you seeing a month-on-month ramp-up?

Yes. We've seen that happening even in July or the September month on month, and little, 5%, 10% here and there, yes, but increase. Then we saw that again a little more than that in October. Unfortunately, it's a little too early in November because Diwali was there more or less in the first week, and we just opened up a couple of days are. So maybe around mid of November, the solution becomes more clear with respect to orders going into November. But we are hopeful that we should be looking at sequential growth in October and November. December might be similar or slightly lower because with respect to crane and construction equipment, the year change thing happens as certain retail segment of the markets just [indiscernible] and wait for January. So there should be a typical increase. December might be on a slightly lower as compared to October and November.

What is the logic for the December and Jan?

See because a lot of rental companies are there. 50% of our crane construction equipment, even more than 50% in 2 rental companies hire a retail market. So they delay their purchases from wherever possible from December to January, so that it has come in the retail of the machine just like a car or a truck. So when it is resold, they say which year model it is. If they buy in December, they will say say '21. If they buy in January, they will say '22.

Understood, right, right. Okay. And my second question was actually I missed your opening comments. Somebody asked a question about the M&A plans. Could you just talk about that again? Where you are in the process? And what kind of company you're looking to acquire?

Yes. See, we have some options of inorganically being able to increase our top line as well as bottom line, but we are more focused on bottom line. So a component level is one thing, one of the key things we use. And secondly where we are focused a little more is a similar type of product that we are doing, where we'll be able to consolidate in our space, which will help us in improving our percentile.

Similar product, I mean, like a similar company in a different geo -- like a different part of the country, which will expand your network or will be overlapping networks and...

Lot of benefits will be given. See because what is happening is this is a smaller company at a lower price point, hardly selling anything but spoiling our prices in the market to be very frank with you. So that will give us the pricing power to be able to sell the product at the right price. So they lose money, but they end up spoiling the market in certain pockets.

The next question is from the line of Raj Mehta from Raj Mehta and Associates.

Congratulations, sir, for a very good set of numbers. So apart from the numbers, I want to ask you specific questions. So now, sir, what is that one thing which excites you and you come to work every day? So going forward now from being a small [indiscernible] MidCap company, so you have also rate QIP and you have increased as you have brought these very well-known investors. So what is that one thing which excites you every day?

What is the one thing that excites me coming back to work every day, right?

Yes.

I would say the thought of reaching INR 3,000 crores, INR 3,500 crores relatively because it seems possible for now.

Okay. And sir, what are the improvement areas in the organization? And if there are any, then what are the steps you have taken towards the same?

There are improvement areas in all aspects of any organization as well and similarly there are lots of these in our organization. So it is a continuous ongoing process, which keeps on happening, depending on departments, depending on divisions, depending on plants.

So can you just give me a brief, I mean 1 or 2, which you might have -- it might be a very small step, but I just want to have a brief idea where the organization...

I don't want to talk about it.

Sorry?

You mean any department, maybe I can give you. Because right now, this is happening. The improvement is a continuous ongoing process everywhere, improvement in upgradation. So if we talk of our weldings and we talk of our workshop, so there we are further starting to go into some semi robotics and robotics depending on where the components -- similar components are there in multiplicity. So if we talk of our final product finished quality, we are working on setting up a totally world class new paint shop, so which is still under designing, so that we are further able to offer better aesthetics in our products.

Okay. And sir, the technology which you have bought a few years back for that electric forklift, how is that panning out right now since the demand for -- the demand in warehouse has been increasing and your -- that forklift is generally used in the warehouse. So how is that going?

We did not buy any technology for forklift. We have worked it on our own. We've been making for many years. Last year, we were the first in the country to indigenously design and manufacture a lithium-ion technology-based electric forklift. And it is picking up reasonably well, but still people prefer the standard lead asset battery type electric forklift because the price is more economical.

Okay. And sir, my last question is that what is that one type of segment of our business, which today might not be a huge part of our revenue but you feel that, that segment can do very well in the next 5 years?

Which is not part of our revenue currently?

Might be a small part of your revenue, not a big part.

I feel the construction equipment segment of ours.

Okay. That is a very big story for you?

It will currently be bigger than cranes for us.

The next question is from the line of Kashyap Javeri from Emkay Investment Managers.

Sir, just one question from my side. We have done a fairly significant growth in terms of volume in all segment sector for agri. What would be the industry growth for H1 in all these industries?

The industry growth...

Industry growth, yes.

Yes. I have understood, whether cranes or construction equipment?

Yes, construction equipment and [indiscernible].

Yes. See, I won't have the answer for that right now, but I know for sure the Q1 data, which I remember seeing, we were faster than the industry every way, much faster than in force. Q2 would also be similar, but unfortunately I have not seen that with us so far, so I'll not be able to comment.

So on a qualitative comment, would our market share gains be significant in H1 versus last year?

Definitely. Cranes, I know for sure. It has increased by about a percentage. And for others, like I said, I thought the data is not handy enough, not looked at it in that perspective, so I will not be able to answer.

And in this growth versus, let's say, even versus, for example, H2 of last year, at least in cranes we have done, despite monsoons and everything, the volume drop has not been so sharp, so versus about 3,300, we still did about 2,400 cranes. What would have given that number which...

Last year...

Which is H2 of last year?

Reason for volume growth this year?

I'm saying but which industry would be a key driver of that volume number.

See, cranes primarily, as always, they are sold to the general infrastructure industry and manufacturing industry, ratio is 60-40. And I think both the segments are driving it as of now, manufacturing as well as infra. And forklifts, material handling, especially into manufacturing, so -- and logistics. So I think everything is being driven as of now. Real estate, again, is picking up. So yes, so cranes are going to real estate as well.

Okay. Okay. And to estimate this MHC revenues, can one just sort of look at what is the warehousing capacities, which are coming up in the country over the next 3 to 4 months, sir?

Very difficult to put it together, because what happens, see in metal handling, forklifts are used in most of the plants and factories. And these warehousing things which are coming up, uses smaller machines and the battery-operated pallet trucks, pallet trucks, tractors, they also use forklifts, but more of the smaller machines. So it's very difficult to put it in that perspective.

The next question is from the line of I'm Aman Rakesh Shah from Jeetay Investments.

A question on this same working capital thing. If you see FY '19 when we had a peak business in recent past, gross current assets where inventory and debtors book together were around INR 350 crores. And in H1, it has increased to INR 500 crores and contributed both by increase in debtors and inventory. So is it only because of our expectation of higher readiness that we invested a lot more in working capital? Or is there something where having a legit trade credit policy on the better side?

With respect to inventory, yes, it is our business decision to be because we really suffered last year on account of supply chain. So it's a temporary decision. We keep continuing forward well in quarter 1 and quarter 2. And let's see quarter 3, it's still very much there because our business is going to increase in all probability. And with respect to our receivables is, yes, they have increased by about INR 40 crores, INR 50 crores, INR 60 crores over what we used to be. But that is primarily because of COVID 1 and then because of COVID 2, the second wave. And the finance and the permits from the financiers, which are secured are getting delayed in the normal process by about 15, 20 days. Coupled with that, our exposure to exports is also increasing, wherein the business is done between 90 to 120 day fee term. So that is also a reason that you're seeing a little increase in our receivables. But I think all of this is controllable as now it seems that the COVID is waning off. So maybe Q4 or Q1 next year, even the receivables, apart from the export exposure of 7% of our revenue, we'll try to bring it back to normalcy. And I think we have to work very hard with finances. Rather, we have started doing this in Q4 of last year. But again, in Q1, COVID struck, so things are being rolled back to delays from payments with respect to finances.

Okay. Right, right. Exports also will be -- for this quarter, it was 7% of our sales, sir?

It's about 7%, yes. The first half, it is 7%. I think in the quarter, it is down 7%, but we have to catch up.

The next question is from the line of Sanjaya Sathapathy from Ampersand Capital.

So my question is that the guidance of 15%, is it for the whole year or for the second half?

The guidance of?

15%, 20%?

15%, 20% is for the whole year.

Okay. So essentially, you are indicating a decline in the next half, right, on a like-to-like basis?

See it's a very tricky question. It should at least be the number.

You asked for it because by giving that kind of a guidance.

I can't do anything more than that. See because the situation is very tricky. Like I said, the 15% to 20% with a possible upside. So I also said that.

Okay. Because the number suggests that it will decline by some 15%, 20% on a year-on-year basis and last year second half benefited from pent-up demand. So I thought that maybe you are looking at a decline because the pent-up demand is existing.

But here, I would just like to say that last year, we did 1,227. We have already done 682 in this year. So actually, we need to do 545 to reach there. But like I said, 55% of the business actually happened in the second half. So going by that, it could actually be more than 20%, but let's see.

Okay. And just on that same side. So you've taken almost 7%, 8% price increase and another 3%, 4%. So overall, almost this year, average price increase compared to last year would be something like 8%, 9%. So that means your volume growth is hardly anything.

Volume growth will be around close to 15%. Price growth will be around close to 8% to 10%. So it should actually be 20%, 25%. We are just keeping a buffer in place. You are trying to extract the exact -- somebody asked the internal target. So internal target is 25% to 40%, let me make it very clear. Let's see.

And the last thing that I wanted to segue to that, sir, your number one segment is crane and the earlier calls also, you had indicated that the growth expectation is the lowest in cranes and higher in other segments. So is that something which you are continuing that is you're not really as optimistic about crane as others?

See what happened that in the last 2 quarters, second half of last year, cranes picked up very nicely. So that is the only reason that we are a little slow on projecting our crane growth number at about 15%, 20%. In other segments, especially construction equipment and in agri, our base is very small, and our penetration into the market is smaller. Our market shares are very small. So scope of growth is much bigger. So that is the reason I say that construction equipment will grow faster than cranes. Cranes will also grow, but construction will grow faster. And if everything goes well, no third wave coming in, then I think quarter 4 onwards, we should be looking at a plus.

Okay. Okay. Okay. Great. And hopefully, I mean, we will hear lot better guidance next time.

The next question is from the line of Siddarth Gautam, an individual investor.

I'm Siddarth here. Congratulations for a very good quarter. Bhaisaab, I have a few questions for you. The first question is on -- my first...

Sir, your audio is not clear. Can you use handset mode while speaking and not the speakerphone?

[Foreign Language] My first question is on EBITDA margin. You have indicated that margins might come under pressure in the next half of the year due to inflation. What are we going to do to protect margin? Price increases, operating leverage, what are we going to do? And will we reach the margin of 10.80% that we reached last year, in this year or will it be lower?

See we are trying our very best. But when we started this year, we were very hopeful that we will be able to expand our margins. But it looks like a distant dream because in quarter 1, again commodities especially led by steel, there was huge increases in pricing, which has happened again in quarter 3 now. So currently, our main focus is on sustaining our margins between 10.5% to 11%, and that's why we are also taking a price increase in November. So I think we should be able to maintain similar to our last year margins and not be able to expand our margins. We'll be very lucky we are able to do it. This again depends totally on the operating leverage part of it. So if in the, let's say, the balance for this quarter or quarter 4, if the numbers start to serve with respect to our volumes, then maybe we might be able to better it a little than last year, but I would say they'll be more or less flattish in the current year, primarily because the input costs are beyond our control. And to be very frank with you, now we are getting huge resistance from our customers also because the prices have already been increased 2, 3x in the last 7, 8 months. So it is actually becoming difficult to control our customers, and we don't really want to lose our market share to further try and expand our margins at the current stage. So it is a very delicate balance that we are trying to fix up. So that's why it seems that it will be difficult to expand margins in this year, but we should be able to maintain them at least. And we'll be -- but in [indiscernible] that there might be a possibility, but that will only become clear in the quarter 4, because generally Q4 is the biggest quarter for our industry.

Thank you. In Construction Equipment, we achieved a 30% year-on-year growth this year -- this quarter, that is good, but we were expecting a 50% growth rate. What happened? What is your guidance for growth rate of construction equipment in the second half of the year. We had a target of reaching INR 500 crores of sales from construction equipment in 3 years. Are we on target to do it? It's around INR 150 crores per year. So will we reach that target? And lastly, how many backlog orders did you sell in this quarter -- in the previous quarter, I mean, the same quarter of last year?

Okay. We have done, like you said, 30% growth in our Construction Equipment segment. And if you -- with respect to the current year, we have been projecting only 25%, 30% growth in construction equipment, yes. But we are very hopeful that we'll start giving 40%, 50% levels. We could have done more in the last quarter also, but unfortunately prolonged monsoons were the main deterrent for the sale and also a substantial price increase on account of BS IV. But we are still very hopeful that in the second half, we should do better than 30%, maybe reaching 40%, 50%, if not more. And with respect to our numbers of backlog, we can give by quarter? So in the last quarter, we have done close to about 98 machines. In this quarter, we have done 131 machines. But same quarter last year, we had done 104 machines.

And has the process of subsidiarizing the Agri Equipment business, where are we in this process? Have we completed it? Is it the first towards selling the business? Or are they going to continue to be in that business?

Unfortunately, you'll have to repeat your question because this was not very clear to me.

Repeat the question. The process of subsidiarizing that, you wanted to make the agri equipment business into a fully-owned subsidiary. Where are we in the process? Have we completed it? Is that 1st October selling of the business? Or are we going to continue to be in the agri equipment business?

Okay. See we are sort of subsidiarizing it, but unfortunately we got busy with our fundraising plan. So hopefully, sometime soon, we should be in the process of doing it. And this is being done primarily to bring in more focus into this division and to drive its profitability and top line growth. So as of now, we are not sort of selling it or anything, but it really depends on the business dynamics and the type of value addition, which is possible by any testing. So I mean we are open to ideas. But as of now, we're trying to grow it, yes.

My last question, we have a target of achieving...

Sorry to interrupt, sir. May we request that you return to the question queue? There are participants waiting for their turn.

This will be the last question. I have a last question. We have a target of achieving INR 2,500 crores of sales in 3 years. Are we on target? Right now, we are around INR 1,400 crores run rate. Will we reach that target? Is it still valid? Second, what are you going to do with the QIP fund? Are we going to review it, just do an acquisition, what -- how are we going to use the QIP funds? That's my last question.

Okay. I think we are on track for doubling our business in 3 years' target, which is INR 2,500 crores. We would have expected this year to be slightly bigger than what we are projecting now. Let's see, by the end of the year, it might be. And we are going to use our QIP money as per the utilization objective, which we had put forth in our document which were the general corporate processes and inorganic and organic growth, so maybe some debt reduction. So obviously as per the plan, we are going to use it.

Okay. Okay. Just a last clarification. The target of INR 500 crores of sales from construction equipment within 3 years, we will achieve it, right?

Just a second, let me recalculate. In all probability, even if we miss it, maybe buy back of 10%. There is a problem, max plus/minus of 10%.

The next question is from the line of Rajendra, an Individual Investor.

So I have one question to ask. So you said that you will double that revenue to INR 2,500 crores. So my question is, so if we reach that revenue target, so will it be through the existing capacity utilization? Or we utilize any new CapEx spending to reach that?

Within capacity utilization. We don't need CapEx to reach INR 2,500 crores.

The next question is from the line of Omar Irani, an Individual Investor.

Yes. I just want to ask you with regards to exports, I've seen that you mostly export to developing countries in Africa and [indiscernible]. Are you looking to export to Europe and the U.S.?

See recently with the onset of BS IV norms, so we are now currently looking at expanding this to Central Asia, but primarily towards Eastern Europe and Russia. So that's the first thing we are planning now and not really Mainland Europe or Americas. But yes...

Okay. So not the developed countries because there is a lot of competition there?

A lot of competition and the sophistication they require in this machine. That's also possible, but we take it step by step. There are enough opportunities available in Eastern Europe and Russia and Central Asia. So first, we'll explore that, expand there and then go forward.

But once Eastern Europe be dicey with regards to payments, especially Russia and all that with the situation over there?

Totally on secured payments and fees, which are counter guaranteed by bigger international banks.

The next question is from the line of Raj Mehta from Raj Mehta and Associates.

Yes. Sir, you have mentioned that you have received the order from the government defense. So if we are going to take the orders for the government and will our working capital will be stretched from the current levels?

Maybe a little bit, because generally the payments from Ministry of Defense or Indian Army are pretty good. So we don't really see a problem there. And in any case, most of these bigger orders are not supplied in one go, so they're spread over 6 months to 1 year of delivery period. So we really don't see a problem there.

But what is the general payment cycle? Or how many creditors there we have?

The Indian defense payments happen within 30 to 60 days of supply of the [indiscernible].

Okay. And so what, the target which you have given to double the revenue is excluding the acquisitions, which we will do? Is it purely on an organic basis?

It is more or less an an organic basis, yes.

Okay, and if we do the acquisitions and...

Because inorganic growth will supplement more to the bottom line to be very healthy.

Okay. So the bottom line may be doubled -- may get doubled way faster than the top line in next 3 to 4 years?

Not doubled. Double would mean 20% EBITDA, I would love that, but definitely increase, yes.

Okay. And sir, how is the industry of this manufacturing and apart from that or also the infrastructure boom, which is happening right now, how is that panning out on ground levels because you always receive the -- you're always the initiator when the cycle picks up. So...

All things are looking good. And I think only time will tell how fast or how big it will become. But things are looking good. We are very excited.

And sir, how are the operating leverage, if that kicks in when the demand comes back, so can you give us just a general multiple or how much if we do INR 100 of sale suppose after utilizing 50% capacity, utilizations in cranes or in material equipment. And after that, another 10%, 20% utilization levels then what is the profitability that increased it at a similar level? Or how much is the pace of the utilization? How much is the fixed cost? And what is the variable costs which are involved? So just a brief, I just want a brief number, not a...

It depends what you are seeing, but in the current scenario, the biggest problem is that the input costs, especially material costs are increasing at drastic levels, making all these calculations are not very fruitful, but less. Keeping aside that the normal increase in input costs, which have been happening in the last 8, 9 months tender, I think for every additional about INR 100 crores, we should be beyond the level of, let's say, after a turnover of INR 1,200 crores, INR 1,300 crores, for any additional INR 100 crores of revenue, we should be adding about INR 17 crores, INR 18 crores to our EBITDA.

So that will be 17%, 18% additionally? Not a...

Above INR 1,200 crores, INR 1,300 crores, yes.

Because of the operating leverage?

Yes. So the -- obviously, the profitability increased much more beyond the point. But obviously, you have to keep in mind the input costs because in the last 1 year, we have been managing between input costs and our margins. It has been a very thin line.

The next question is from the line of Harsh Bhatia from Emkay Global.

I was just trying to understand the trend for construction equipment financing interest rate. So I think it's between 8% to 10%, but we don't have the exact rates in hand. If you could provide some light on the scene, that would be really helpful, yes, the construction equipment financing rates.

Yes. Depending on the customer profile, today it can range anywhere between 8% to 13%. It totally depends on the paper and the balance sheet strength of the purchaser. So if it is a financially sound good guy, a good company, it could be 8%. For retail guys, it could be as high as 13%, even more than that.

Okay. So the same change would be 5 years ago, as like in 2015, it would be in the range of 8% to 13%. It's not like housing?

It was slightly more than that, I would say. At that time, it was maybe 9%, 9.5% to maybe 14%. There has been a slight reduction, but a very small one.

The next question is from the line of Rajiv Maheshwari from Praj Investments.

My question is divided in 2 parts. The first part is regarding the couple of defense orders, which we had won a couple of months back. Just wanted to know what is the status on those orders in terms of execution? And do we expect some more repeat orders on the same products? Or some further orders on newer products, which the defense side -- defense team is looking at because the government is focusing much on the defense part. So how does this take it forward?

Yes. See, one of the bigger orders is close to about INR 75 crores, and the other order is close to about INR 25 crores. So hopefully, they will be put into execution sometime in the next year, but that would be only initial batches of supply -- sorry, next quarter, quarter 4. The actual effect of these deliveries would be coming in the next year. I would say 80%, 90% of the revenue part would be in the next year. And yes, once they get into execution, supply starts to happen. So the requirement is much more than these numbers, not only for these machines, but the other machines for which we have already switched in. For example, our backhaul loader is currently under trial in [indiscernible] with the army along with our competitive machines. And another machine is being -- we will be testing very soon. One or 2 other things have already been done in the past for which we are expecting orders. So yes, we are expecting more orders to come in, but I don't think that would be before next year, early, I mean, next financial year, maybe Q2. We'll be lucky if we're able to get something in Q4. But the effect -- the revenue effect of the current order would more or less be shifted to next year.

Yes, that's understandable. But going ahead, more orders are expected and maybe that would come into effect maybe sometime next year.

Yes, yes. Definitely, definitely.

And the next part is how is our pharma brand for tractors doing in the export market because we have a...

They started to pick up well. But unfortunately, in exports, what has happened in the recent past is that there the freight has gone up 3x, 4x, 5x. And that has become a very big deterrent. So that's why in the last quarter, if you see quarter 2, although first half we have done 7% revenue share of exports, but last quarter was slightly lower than that. So it's been slowed down a little bit of it, but I'm sure it will pick up.

So the product as a whole is acceptable. The only problem is in terms of the logistics and the shipping side.

Yes, because the prices have gone up so high that the customers even outside India are not able to digest this increase in price, so they're settling in. But the product and the acceptability, there is no problem.

Okay. And just one question from the academic point of view. There are lots of discussion regarding the chip shortage and all. So I don't think our company is using chips in our products as such.

What has happened that all our engines, whichever we are using, which are bigger than 50-horsepower have an electronic controller unit, you see on the engines, the electronic engines. So all of these engines use chips in the controller. So we were well aware of -- that this problem was growing up. So, so far, I would say 95% of our supply, we have not faced a problem. Only in India is bigger than 150-horsepower, 130 horsepower, if we are sourcing from Ashok Leyland, there has been a huge problem at least in the 1.5, 2 months. But because our cost of those engines are small, so it should be like a commission, they will get a [indiscernible].

Okay. So our consumption is only in the low power tractors and that is adequately covered as of now.

Yes. And they are on adequately covered budgets, like I said, about 30%, 35% of our cranes and most of our backhaul loaders have electronic engines. But there, as of now, we have not faced any problem because we were very well planned, and that is also reflecting in our inventory costs.

Yes, right, because lots of other people, there was hue and cry in terms of the stock of chips and the production CapEx, production is a big hit.

See we've been overstocking engines for about a month. Our 1 month extra inventory, we've been carrying in the last 3, 4 months [indiscernible].

You planned things and maybe the inventories on the higher side, but at least the production and dispatch was not hit in terms of what other companies have been reporting.

The inventory carrying cost vis-à-vis the cost of losing revenue is much more. So we will plan for certain things, components like that, yes.

Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.

Yes, things are looking good. Economy is coming back to shape after the slowdown and the buoyancy, which took a hit post the second COVID wave. And the buoyancy has been building up little by little over the last 3, 4 months. And then we are very hopeful that Q3 should be good, if not great, but we expect a good Q4, definitely a much better bigger Q4, that only time will tell. And like I said, in the short term, our prospects of the company are good. But we are very bullish for the medium-term to long-term prospects of the company. And with that, I would like to end my address. Thanks a lot. Thank you, everybody.

Thank you, everybody.

Ladies and gentlemen, on behalf of Emkay Global Financial Services, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines. Thank you.