Escorts Kubota Limited (ESCORTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to outcome of today's Board meeting of Escorts Limited. Today, we have with us Mr. Shailendra Agarwal, Executive Director, Escorts Limited; Mr. Bharat Madan, Group Chief Financial Officer and Corporate Head; and Mr. Shenu Agarwal , CEO, Escorts, Agri Machinery and Investor Relations team at Escorts Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bharat Madan. Thank you, and over to you, sir.

Thank you, Stephen. Good evening, everyone, and thank you for joining us for outcome of today's Board meeting of Escorts Limited. Escorts Limited and Kubota Corporation, to further deepen their existing relationship, Kubota Corporation to invest in Escorts Limited as the way the headline goes. Now with this, Escorts and Kubota will partner to become a leading player in the Indian market, and they have got product development, manufacturing and sourcing of global markets. Just to give the key transaction highlights. Escorts will issue and allot 1,22,57,688 equity shares through a preferential issue to Kubota at an issue price of INR 850 per share subject to shareholders and SEC regulatory approvals. Kubota's investment will contribute 9.1% of the equity stake on a pre-capital reduction or 10% on a post-capital reduction basis for a total investment of INR 1,041.9 crores. This price represents a premium of 48.21% over the last traded price of yesterday that 19 March 2020. The Board of Directors of Escorts has given an in-principle approval to consider reduction of 1,22, 57,688 equity shares, which is the same number as the preferential shares being allotted to Kubota of Escorts Limited and by Escorts Benefit and Welfare Trust, subject to the receipt of SEC approvals and upon completion of the preferential allotment to Kubota. This shall ensure that the total equity share capital of Escorts remains unchanged. And post the capital reduction, Kubota will hold 10% equity stake in Escorts. There is no secondary stake sale by the promoters or promoters group of Escorts. The operating control of Escorts will continue to remain with the current promoters. Kubota will have right to nominate 2 non-executive directors on the Board of Escorts Limited. In addition to the preferential issue, Escorts will also acquire a 40% stake in Kubota Agricultural Machinery India Private Limited; the marketing and sales company of Kubota in India for a consideration of INR 90 crores in an all price cash deal. The existing 60/40 joint venture between Kubota and Escorts, respectively, namely Escorts and Kubota India Private Limited will continue to operate as planned earlier. Capital infused into the company from this transition will be used for future growth and development of Agri Machinery business, mainly focusing on new product development, which we are creating together with Kubota to achieve our Vision 2027 that we'll share with you all at an appropriate time. Some of the benefits from this win-win collaboration to Escorts are product innovation, to indigenization of global R&D, production systems excellence, global supply chain, sales and distribution, and it's going to act as a global sourcing hub for Kubota, while Kubota has made an assured supply of cost-effective products out of India, joint product development for emerging and global markets and introduction to growth trends through respective distribution networks. We'll also explore new avenues of growth in construction equipment and agricultural implements space, leveraging on strengths of both the parties with focus on products, including earth-moving equipment and smart agriculture implements. We'll be creating one of the largest Indo-Japan agriculture association aligned to Indian government's Make in India Vision by integrating technological excellence and frugal innovation to provide latest farm mechanization solutions across the globe. I request the moderator to open the floor for Q&A.

[Operator Instructions] The first question is from the line of Vivek Gedda from HSBC.

Congratulations on strengthening of partnership with Kubota. Sir, I wanted to get a sense of your product development collaborations, considering one of the focus is to improve share in the Southern and Western in India. Is there anything in specific that Kubota can bring on table on that front?

See, as you know, we started our collaboration with joint manufacturing, manufacturing, manufacturing Kubota products and Escorts products. Over the time, they are also looking for developing channel, and they have their channel worldwide. So globally, they will sell our products also complementary to their products in terms of pricing, in terms of application. So what we are looking for jointly is that wherever we want to grow in global market or in domestic market, where we can -- want to grow jointly, Kubota and Escorts power tech Farmtrac brand, we can develop new products, which can be positioned very well in global or in the domestic market. So we have shortlisted some of the projects that still -- and we are working for a joint team, but in long term, we are looking for a lot of opportunities of looking from our side, frugal engineering, supply chain development and the kind of sense we have from their side, their design expertise. They are among the worldwide leaders. So that is synergy. But we will make some road map in the coming years to draw in and there's a lot of synergy in developing joint products.

Got it, sir. Sir secondly, I also wanted to get a sense of your capital allocation. What do we plan to do with the cash that is significant right now? That is my second question.

Yes. So long term, as you know, that first is that we want to enhance the capacity and create the world-class plant for joint manufacturing. That is EKI, Escorts Kubota India Private Limited. So there right now, we have invested -- we have targeted INR 300 crore investment. And right now, how much? Right now much we have done?

290.

So more or less INR 300 crores we have done or we'll be doing in next few months. So we will be creating a capacity of 50,000, but over time, a lot of new products will be coming in from Kubota side and from our side also to be produced there. So there's a tooling development, supplier development and all the kind of development work will be there to produce tractors there and the continuous improvement of the products and processes. So that is one big investment, we'll continuously investing on that JV plan. Secondly, as we supply them tractors for global market, especially -- specifically, not so much for domestic market, but especially for global markets, they will like to improve quality of our products. And there also, they have agreed with us that they will like to work together in supply, quality development, in vendor development, in the kind of supply chain and also in the manufacturing plant development or improvements. So we might have to invest something on the plants as well as for our plants to really make our projects further improved for global markets. So that is one area. So it can be paint shop. It can be engine assembly because tomorrow, they may think of manufacturing jointly engines also. They're still not clear, but over the time, engine manufacturing also can be part of our joint partnership. Then in the long run, as Bharat said, that we are looking for implements manufacturing, so whatever -- whenever they decide for manufacturing implements, harvester India, they will look either for sourcing and assembly of implement. Then construction can be a long-term plan of excavators. And similarly, component aggregate is one big area that they are looking for that, that India to be the manufacturing hub. That is their wish and vision. And for that, if they start doing that, there's a lot of tooling and vendor investment in terms of component and aggregates. So similarly, emerging technology. So I will say a lot of investment can come in over time. So that is the area where we are thinking and that will be very much utilized. Rather, we'd like to make profit out of the JV over the years to really invest that into this partnership.

The next question is from the line of Hitesh Goel from Kotak Securities.

Yes. First of all, congratulations to the management for the tying up with Kubota. It's a global brand and actually this tie-up would be very fruitful, in my view, in the longer term. Then I wanted to understand going back, what kind of -- have you developed any 5-year plan on your product development CapEx. Because capacity utilization is already low. Generally, tractors don't grow more than 6%, 7% CAGR in India. So I think this is more for exports. So if you can shed some light in 5 years, what can be your export ambitions and also what kind of product development CapEx will be required to achieve those ambitions? So really, I'm trying to understand the 5-year CapEx allocation and product development and what is export plan?

So it's a very dynamic process, though, but we are looking for a process and we are planning some products and investments and some kind of new product development, also the improvement projects also. So we are looking for a plan first up to 2023 and then the 2027. And I think broad plan, I want a sound plan, broad plan should be ready in next 2 to 3 months. And that will have -- bring some clarity of the kind of investment we are doing year-on-year on this partnership for different initiatives. So right now, yes, we have something in mind. We have started initiating discussions also. So it is not that -- it has not been discussed. We have understood well what kind of synergy and what kind of initiative business partnership we'll be doing. But as far as the plan is concerned on the numbers and the values and the investment, we will come out within the next 2, 3 months for the next 3 to 5 years. And that will, of course, we can't be firm on year-on-year, we will work on that.

The next question is from the line of Mitul Shah from Reliance Securities.

And congratulations for a such a strong strategic alliance what are being well arranged in this space. So my question is, is there any discussion of any scope for Kubota increasing stake further from 10% -- to another 10% or 20% or 27%, which is still remaining stake with that? That's my question.

So Mitul, this is Bharat Madan. So I think as you know, I think the relationship with Kubota, we have been discussing for last now more than 4 years, and the relationship actually was fructified only about a year ago when we set up this fantastic JV with them. And obviously, over this last 1 year, the trust between the 2 companies have grown very well, and the relationship actually is looking very strong. So I think there's a confidence and trust element in both the partners, which has what led to this relationship getting strengthened further. And they agreed to invest 10% in Escorts. Now whether we'll go from 10% to a higher number or not, I think it's very difficult and speculative as now. But yes, the idea is the relationship should strengthen in future and the kind of synergies which we are looking at with Kubota, both on the product side and on the various categories like Shailendra mentioned on the implement space, on export potential and global sourcing of components from India. They do INR 30,000 crores of buying for their component for the tractors globally. And even if India gets even 10% of that, it's a huge number, I think, we're looking at. So I think the potential is huge, I think, in this partnership. So that's why we thought it will be very fruitful to strengthen this relationship further where we are actually tied to each other in both the companies. So we also further tightened the relationship very early. It was only manufacturing JV. We were 40% partner. So now they have also agreed to allow us to enter into the sales company, where again, we are going to get 40%. The strengths of both these products, I'm sure it's going to help the company and reach new levels of heights. And I think the benchmark which will be set, I think by these companies, I think are going to set a real, I think, benchmark for future, I think also development.

In Kubota India, is their scope that it will eventually become a part of the JV company and everything comes under one roof?

Not right now. It's a separate entity.

That is the synergy. But as of now, there's nothing on record, but as of now, they're working independently. But yes, in the future, if the synergy is doing much, which is more logical to happen. So we think, yes, that could be one potential element which will happen.

Sir, lastly, on the cash again. As we had already spent INR 300 crores for 50,000 capacity, and as earlier pointed out, industry grows by 7%, 8% CAGR over long term. So another 50,000 volume capacity means nearly 6 years growth kind of a scenario. You don't need major CapEx for capacity expansion excluding the product development. So still this INR 1,000 crore plus and existing cash of around INR 1,400 crores cash compared to our regular CapEx being around INR 100 crores or less. So it's a very big size there. So any concrete thought on this?

So Mitul, I think as Shailendra mentioned because we are jointly working with Kubota, I think in the next 3 to 4 months, the business plan will be ready for the next 5 years. The feasibility studies are being done now. And like you said, we are looking at expanding into the area of implements. We plan to set up the joint R&D center here in India. And right now, in the manufacturing JV, we are only starting with the 2 models there. And I think as the business grows, still they are importing a lot of models from Japan and Thailand, but I think those models will get localized. We are also exploring the potential of maybe in future getting into the engine manufacturing facility in India, which is another bigger business globally. And I think as the relationship grows, the ideas are there on the table. And I'm sure I think once the things are being put to the paper, and we're looking at the feasibilities there, I think gradually the developments will happen. And I think in the next 3 to 4 months, we'll get more clarity into the cash deployment and how the capital allocation will happen over the next 4 to 5 years. But this is one of the key steps in our plan, I think, which we talked about, I think the plan which we're working on for 2027, which will be in partnership with Kubota.

And sir, just reconfirming. You earlier stated that alliance will work for construction equipment segment also. Is it what I heard is clear?

Yes. So they have shown interest in some of the construction equipment segment, like including backhoe loader, and Kubota is a global leader in the moving segment and the mini-excavator series. So they are interested in sourcing a lot of components from us and a lot of products from us for the global market, too. So there's one potential area which they see where there's some synergy exists with Escorts. So like I said, so they are still in the phase of putting down the details on paper. The feasibility studies are still being done. But as I think we go forward in the next 3 to 4 months, I think we'll have better clarity on which products and which priorities will be first undertaken, and then we'll share it with you.

Just to -- yes, I'm Shailendra Agarwal. Just to clarify that construction equipment, we have many products. And as far as the crane is concerned. Crane, they are not interested. We'll be doing on our own and for that higher-end cranes like truck cranes and rough terrain cranes, we have a partnership with Tadano. So this construction does not anywhere related to that business of cranes what we are looking for within our company and outside as JV with Tadano. So this is more on as Bharat rightly said on the excavator side and in the longer term and main backhoe loaders sales and joint manufacturing.

The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.

My question I think refers to the 10% stake. Would Kubota be getting Board seats? And if yes, how many?

Sorry, come again?

Board seats, Board seats.

Board seats.

Yes. So they will be getting 2 Board seats with the nonexecutive access, will be coming on Board.

Okay, okay. Second, you touched upon implements. So this implements business would be largely through Kubota India? Or this would be either through JV or through Escorts?

Yes, as we -- yes, I'm Shailendra Agarwal. So as we have created a JV already for manufacturing of tractors. So whatever, whenever we decide on basis of feasibility and business case or implements, including harvesters, we will decide to be manufacturing in JV only. That is what probably the purpose. But yes, as far as the sourcing base and as far as the manufacturing is concerned, that they can take support of Escorts and suppliers also. That means the some of the manufacturing will be joint venture, not Kubota India. There's nothing like -- company like Kubota India, and it will be JV only.

Look, the company where we took a stake, that's the Kubota India, right?

No. That was a company [indiscernible]. So we have a JV base for the manufacturing. And this was the sales JV with another partner. We're shifting now with the JV and we are getting into the partnership with Kubota. So now in both manufacturing and sales company, we will have a 40% partnership.

Okay. So the sales company, who is the -- so how much stake Kubota will be having?

So right now it's a partnership with Sumitomo, which is 60-40 JV. And the Sumitomo fairly is looking for an exit. So then they'll buy out Sumitomo and become 100% company. And from that stake, we'll buy 40% from Kubota.

Okay. Okay. Understood. And can you also touch upon on the component business, which we talked about? So that is effectively -- are we looking to get into the component manufacturing as well?

Yes. So I'm Shailendra Agarwal. So component business is one of the biggest business. They already initiated with their company in India before they had a partnership with us. So they already initiated. And there's a saving of around in the range of 30%, 40% compared to Japan and maybe 25% compared to Thailand. So that is what we are manufacturing and we have worked very well by developing components in India for their products, but we are manufacturing in JV. So in future, they have a plan of exporting and developing components from the JV to their other manufacturing plants also. So there is no firm plan still, but we have done some initial feasibility study. And if found feasible for quality, for cost and all other aspects of logistics, this can be a good manufacturing base for supply chain components from India to their plants in Japan, U.S.A. or Thailand.

Okay. Okay. So just to clarify. Yes?

Sorry to interrupt, sir. But for any follow-up, request you to rejoin the queue. [Operator Instructions] The next question is from Raghunandhan of Emkay Global.

And congratulations on strengthening the relationship and partnership with Kubota. Sir, my first question was on the current status of the joint venture. Can you update on these 3 areas on the production side, on the joint product development side and on the export side?

So as far as the manufacturing side is concerned, it's very much doing well and we are planning to roll out tractors, few tractors in July and by September, October, we are planning to have regular production from that plant. And so the facilities are under construction and equipments are under installation. This is doing well. As far as the joint development is concerned, it's still as we already covered in our discussion recently with few of the members, that we are still working on a business plan. And once we work out the business plan and we work out the kind of priority of products we need to be jointly developing, right product, right quality and cost and what is required in the market as for application, so we'll be deciding it all. So right now, there is no kind of segregated that this product or that product. So we are still working on the product requirement. But we have identified the process. We have identified the structure. So that is clear as for the product development. Third point you asked?

Export?

Export.

Export, we have 3 phases. So the first one is phase where our products are already ready, like South African market, Thailand market and some of the Europe markets. So these markets, we already initiated a few numbers in this year as a trial. And next year onwards, there will be regular supply of tractors from Escorts to their channel globally. And there will be -- then we start regularly and the next year plan would be a few hundred number of tractors to be exported to them through their channel. So we are making that, then we'll make the company business plan. It is very much -- there will be some numbers up to 2023 what we are planning to export.

My second question...

Sir, for any follow-up, request to rejoin the queue, please. The next question is from the line of Riken Gopani from Infina Finance.

And congratulations for the transaction. Sir, just one thing I wanted to clarify. One, will there also be any potential management appointments from the Kubota side going forward at Escorts?

No. So like I said, there are 2 Boards seats which have been given to them, [indiscernible] management seat as [indiscernible].

Okay. And this is basically -- there will be replacement also from the current Board members and we'll get to see, so this is an expansion of the Board itself?

So we're not sure that it can also lead to expansion. So -- but we need to maybe restructure at an appropriate time, maybe towards the closing time. I think we'll do that.

And the timeline, sir, by which you expect this transaction to get completed?

So like the transaction is subject to the approval of shareholders, which will happen maybe towards the end of April. And then again, there's some regulatory approvals required, which probably are likely to come by end of May or middle of June. So tentatively, I think by the end of June or beginning of July, we should be able to conclude this transaction.

Got it, sir. And sir, just cash that we are setting as a part of this transaction. If I'm understanding this correctly, this is going to be under some sort of a 5-year plan for any potential business plans, right? Is that how you guys are thinking about it? Or what the thinking is there?

Yes. As we said that already, we have started investing on the JV, and this will be, of course, a 5-year plan, as you rightly said. But over time, we will be utilizing in the next 3 to 4 years. There are a lot of investment in these products and in the plant, our -- in JV. We'll be very well covered in the next 5 to 7 years plan.

The next question is from the line of Prateek Poddar from Nippon India.

Just one question. When you say global sourcing up for Kubota. This sourcing up goes into the JV or into the stand alone Escorts? That is question number one. And what do you mean by global sourcing. Is that about Kubota's production will be shifted to India to leverage the low-cost benefits, which comes out of India? That is the way to think about it?

See, right now Kubota is sourcing the components from the sales company, which is where we are going to invest 40% now. So they're already doing about INR 175 crores to INR 200 crores of export of components to their plant in Thailand. Now we are also starting to export tractors from Escorts Limited through the global network of Kubota, so which will be essentially the tractors manufactured by Escorts, but it will be sold under the Kubota brand, which is E Kubota in the global network. Now as we also go into the manufacturing JV and do a joint development of product, so there'll be potential ways for those products also in the global market and then those products will also get sold in India. And I think like just now we mentioned the production in that JV is going to start only from Q2 of -- quarter 2. So again, once the production starts, so yes, there is a potential opportunity to export those models, which can be also sold through their network in their brand in other countries. So I think overall, in every company including the sales company, manufacturing company as well as in Escorts, there is an opportunity for export. That is something I want to mention.

So just to summarize this, the sales company would look after components. The manufacturing JV will look after contracts.

So I think this is a current structure, but yes, gradually, I think as you move forward. So whichever company is producing it, so they'll be exported from that company.

So because the manufacturing company has complete supply chain, the sourcing of component and the development of component. So naturally, the manufacturing company will be doing in future all the global sourcing as and when needed. So first, they will focus on what are the products being manufactured in JV. And then in the longer run, there will be more and more components if they find feasible, they will exporting as global sourcing. And this will be part of our 5 years plan.

Okay. So immediately, in your doc...

Mr. Prateek Poddar...

Yes, just a clarification, and then I'm out. Immediately, just to understand, most of the benefits will accrue in the manufacturing JV and in the sales entity, not in the stand-alone Escort entity and maybe in the medium to stand-alone Escort entity, right?

So like I said, the tractors, which we are making and exporting though group global network of Kubota under a co-branding arrangement, are being exported from Escorts. And there's a plan to do exports of 4,000 to 5,000 tractors in the next 3 to 4 years, which will go from Escorts. Once the manufacturing JV start manufacturing their product and develop their vendor base here in India, the component and the product sourcing will start from that manufacturing JV to the global country.

The next question is from the line of Priya Ranjan from Antique Stockbroking.

Just one follow-up of last question. I mean you said that around INR 150 crores or INR 200 crores of component sourcing is happening towards the sales entity. So are we doing kind of -- I mean the sales entity is doing trading of those components, or they are also manufacturing?

See, they were doing this trading only when the JV was not existing. Now we have manufacturing JV, which is doing supply chain sourcing and manufacturing. So over time, it may take 6 months, 1 year, all the sourcing will be shifting to this JV only, manufacturing JV only, not the sales JV. So it will be continued from the manufacturing JV that we have with Kubota.

But that manufacturing JV will also manufacture those components or it will keep sourcing from outside and then transferring it to Kubota?

Yes. So right now, it is more of an assembly plant. So manufacturing of component and machining is not there. But in longer term, yes, it can be a manufacturing base also. Right now, it can be mostly from the supplier end and can be developed then exported. So as when the need based it can be there.

Okay. And just the secondary part on the transaction part. Why we have not thought of canceling the entire treasury stocks or the cost benefits that favors [indiscernible]?

Like you said, in the capital structure was to be maintained. So -- and they wanted a cleaner deal through a preferential allotment, which is a more transparent structure and governance where it makes more sense, but this will go through the shareholders' approval route. So they preferred that structure, which is why we are actually giving a preferential allotment to them through trade shares allotment. And subsequently, we cancel the equivalent number of trading shares to make sure the capital structure doesn't change.

But I mean in various discussion with investors and -- I mean, we have always been discussing that eventually this treasury shares will have to be canceled out and have to be given to some others.

No. So I think if you look at the past history, I think we had sold 3% of our trading stock in December 2017. And again, this time in a way, we are canceling 10% of the trading stock, with 13% of the shares is already taken care of. The balance 17%, which is left, definitely will be used to make sure the company's growth objectives are met, and this 13% also which has been there is also going to be used for the future growth objectives of the company. The development and other investment, which we're going to do along with Kubota, is obviously going to support the company in achieving greater heights and the future growth strategy.

Okay. Just lastly on 2 questions. One...

So for your follow-up, request you to rejoin the queue, please. The next question is from the line of Shashank Kanodia from ICICI Securities.

Sir, we are a cashless company and we're generating in excess of INR 500 crores of cash flows for the EC 4, right? And in the best case estimates also under the JV route or stand alone operations, our CapEx line would eventually reports itself. So can't we share this wealth with the shareholders, might be shareholders because as I said this, our dividend payout has been very dismal in the past?

I think if you look at the last 2 years, the cash flows fell. Only the last year, we were able to generate good cash flows because of the squeeze in the working capital. But the year before was really bad, and we actually had a lot of issues on the working capital structure and also because the tax issues, the GST accumulation happening on the balance sheet. So overall, this business, which is cyclical in nature, has [ losses and value ] built into this, which needs a huge amount of cash and as a working capital. So that's -- this obviously was there. But yes, as we grow further, so the money which we are taking from Kubota actually is earmarked for working with them and developing and growing the business of both the companies in India. So that business is -- that money is not money, which will be required or will be available for distribution. The money which the company is going to generate in the future and as a free cash, that is the money which will be available for the shareholders, for the growth objectives, for the other businesses, as well as for distribution to the shareholder [indiscernible]. So as we grow further, definitely, as your cash flow improve, which we have been saying also in the -- to the investors earlier, so we'll obviously be looking at the better distribution of dividend to the shareholders.

Great. And sir, post this transaction, the Trust will hold -- continue to hold 17.5% stake in the company, right?

Yes. That's right. [indiscernible]

All right. Are we in the eligible limits to classify the under promoter shareholding?

So we have been declaring it under promoter shareholding. There's one of the -- I think logic given by SEBI was because these are directly impacting the control of the promoters, so that's why we've been declaring as a significant beneficial order in the name of the promoter. So the declaration turning to be like that even though it's not likely held by promoter, but the beneficiary in this case is the company, but they're still classified as a promoter getting the shareholding.

The next question is from the line of Jigar Shah from Maybank.

Congratulations on the transaction. And I just wanted to clarify that the INR 1,050 crores are all coming into the company. Is that understanding correct?

Yes. INR 1,042 crores, roughly.

The next question is from the line of Bharat Gianani from Sharekhan.

Congratulations for partnering with the [indiscernible] tractor manufacturer. So I just wanted to understand like post this partnership plan, as you highlighted, that most of the business now, I mean would be done through the joint venture only. So what role now does the Escorts stand-alone business play? I mean what I'm trying to understand is that what should we look now of the window of opportunity from an Escorts stand-alone business perspective? Because the things that you pointed out, the combined manufacturing or the [indiscernible] manufacturing, and also the other thing that you pointed out, that is mostly will be done in the JV only. So what will be the role of the Escorts stand-alone business? If you can just shed some light on that.

So I think just to clarify, we didn't say that everything will be done in the JV. Whatever is in relation to the Kubota brand or in relation to their products will be done in the JV. Anything to do with in Escorts products and Escorts brand will be done in Escorts. So in the future the growth will happen in both the areas. In their products as well in our product category. The investment will happen in both the company and Escorts as well as in the JV. And those manufacturing in the JV will happen for their product range and obviously because of that reason, so whatever manufacturing will happen in the JV and the products will get exported, along with that there'll be opportunity to export the component also to the other companies globally. So it's not that as to all the investment will go into JV or all the growth will happen only in the JV now. The investment will also happen in Escorts, and Escorts will also grow its own product range. So both the investments will happen and both the growth story will continue.

Sir. Okay, fine. That's fair enough, but then I think there's some -- so basically, construction equipment, every business that you -- say -- be it the component business or the construction equipment business or the [ implemented ] business that does not necessarily happen whenever we feel like we have sort of a different kind of area as in the Escorts stand alone, that will be done through Escorts' stand-alone business. Is that what you're saying, right?

Yes. So like I said, our branded products and our technology-led products, which are there, both on the brand of Powertrac or Farmtrac or Escorts, they will continue to be made in Escorts only. And in the sales company where we're investing 40%, they are already selling implements, and the turnover is close to INR 250-odd crores on the implement, which includes basically harvester, combines and transplanters, which is a big number compared to I think what has cost us today, which is very small number. So I think -- overall, I think in the areas of implement, so even in the certain equipment where they're seeing potential, we are in the process of putting together a business plan, which will be there for the next 5 years. And then the next 3 to 4 months, we should be ready with that master plan. And then, obviously, we'll share with the investors in terms of where we want to spend this money and how the allocation will happen and which company will get what.

And I think this is a good strategy. That's all.

The next question is from the line of Mukesh Saraf from Spark Capital. .

Just one.

Mr. Saraf, can you speak closer to the handset, please?

Yes. Am I audible now?

Yes.

Yes, sir.

So just want to take -- are we looking to invest in the JV? Now, like further invest in the JV in the now in the near term itself from this INR 1,000-odd crores that we've got?

Yes. So as of now, we planned INR 300 crores, and that is what we have planned for capacity of 50,000. That is what we plan, and we will do that. But as and when needed, there will be some new products coming in, new segments of horsepower will be produced of MU as well as our tractor. So there can be some investment always required in manufacturing of the Kubota tractors, both supply development and in-house manufacturing and for manufacturing of Escorts products also. There can be some manufacturing investment required in the JV. So yes, as of now, yes, but we'll continue investing on this JV on an incremental basis. Yes. Yes.

Right. And so further, I mean, what you had already announced earlier in terms with regards to the JV, you will do the investment. But in the immediate -- you don't have any plans to immediately invest out of those categories.

Immediate, it can be next year also because there's a lot of products coming in. So it can be investment, continuous investment. As we are doing in Escorts time to time on the manufacturing as on new product development. Those kind of investments will continue, even in the JV also.

Next question is from the line of [ Ritesh Chira ] from [ Lucky Investment ].

Sir, just one clarification on this manufacturing JV. So in short, we said that capacity will be 50,000 tractors?

Yes. Capacity is 50,000 and need-based, we will manufacture Kubota tractors as well as Escorts tractors. It can be Farmtrac brand or a Powertrac brand.

So if it is Farmtrac or Powertrac, it would be made for Kubota's export or...

No. Not as a rule, but it will be on outsourcing basis. And where we can outsource and as a capacity that is there with us and they will manufacture our product also.

So the line which we have there is flexible. They can also produce Kubota product. They can also produce Escorts product, depending on who needs what. So that flexibility is available in the JV.

But there's no rule that whatever they produce, they will export or -- it's nothing like that. They can export the product they produce in Escorts' plants also, and maybe what they produce, that can be sold in domestic market also.

And the INR 250 crore equipment business which you mentioned, the implement, that's a part of Kubota India, right?

Yes. The sales company.

So Kubota India would have INR 250 crore of equipment plus INR 130 crore of component sourcing that it does on behalf of Kubota. So is that correct?

No. So the sales company last year had a turnover around INR 920 crores, all of which -- its INR 25 crores for the component export and balance of IND 250 odd crores of implement and the balance were tractors.

Tractor sales in India?

That's right. So about 10,000, 12,000 tractors odd they did last year.

So those were imported and sold into India?

That's right. So some of those models now we will start manufacturing in the manufacturing JV from July or August this year, and then they'll start selling to the sales company when the production starts and the import will stop then.

Okay. And even construction equipment will be imported, right?

So construction equipment is still being looked at from the feasibility study perspective. So right now, yes, there's an intent to go into that field, and there's intent to do some sourcing of those products when they do joint manufacturing with us. But as of now, like I said, it's still in the planning shape. So maybe another 3 to 4 months, we'll have more clarity, and we'll come back to you with it.

So just last year, with INR 900 crores revenue, what will be the EBITDA and profit of this Kubota India?

So right now, since it's only a trading organization and that too most of the stuff are likely getting imported and not being made in India, so margins have been pretty low. But like I said, as we start manufacturing in India, the margins will improve, which is the plan.

The next question is from the line of [ Akil Singh ] from Nomura Securities.

This is Akhil. Congratulations on the transaction. I just had one small question. Is there any kind of restriction on Kubota to increase their stake further? Or in future, they can think about increasing the stake as well?

Obviously, there are restrictions. They can't increase the stake without the consent of the promoters. But the control continues to remain with the existing promoter of the company. So that restriction definitely is part of the agreement, which we have with them.

Okay. So if they need to increase their stake, they will need to take a consent from the promoters?

Yes.

Yes.

The next question is from the line of Ankit Suchanti from Axis Securities.

Congratulations on the JV. My question was related to the manufacturing of -- selling of Kubota tractors in India. Where do they exactly sell right now? And which are the primary markets that they are present in?

So their stronger markets in the southern and western region, where we are actually weak. So that's why we said this partnership is very, very complementary to each other. We are very strong in the northern and central market, and they are pretty strong in southern and western market.

Okay. So rice tractors and specific to those...

Yes. Yes, there are products which are light -- lightweight tractors, so they are known for vineyard, orchard, compact tractors as well as for paddy tractors.

Okay. Then they should prove good strong holding in the western and southern markets for us also, great.

Yes, yes. But they have -- what they are producing in our joint venture, they have multi-utility tractor also. So -- but still we'll be complementing very well with the kind of product they are selling, but we have different channels and so there is no -- as far as the...

So there could be synergies in selling also, right? The channels could be merged in the future because you have a 40% stake right now?

Right now, there is no kind of plan of combining or any synergy. But yes, we can learn from each other. They can learn how efficiently we are managing our channel and efficiency cost per tractor and all that. We can also learn from the system processes. But yes, as far as the back end is concerned, manufacturing, joint development, product development, sharing of aggregates, those kind of opportunities are there for us to improve our products.

Okay. And my second question was related to exports. Any particular areas you can highlight on African and European markets that you said that you will be exporting from July onwards, if I'm correct?

Yes. Yes. So right now, there, we have products are more or less ready, and we are continuously improving as far as the emission norms also is concerned. It's the South Africa market and European market and just the beginning of Thailand market, some of the applications. So these are 3 markets. Over time, we will work on markets where we will have, over there, we will select Turkey where we'll have to create some joint manufacturing. And ultimately, to U.S. market, where we'll jointly develop the products.

Next question is from the line of [ Iqbal Khan ] from [ Presell ].

Sorry, I couldn't -- I -- my answers were -- I mean my questions were answered from the previous questions.

The next question is from the line of Sameer Deshpande from Fair Deal Investment.

Congratulations for the very good use of the treasury stock you have done. To raise the money for the future products is really good and the rate will move up and will definitely help us going forward in that. So I would like to know what is the farm implement size market and what is the standing of Kubota particularly in these harvester combines or transplanters, which you say they are selling about INR 200-odd crores. So do these products have a significant potential in India? Or are there any other farm implements also? Because these other 2 items are like harvester combines and transplanters, they are very large capital-intensive items, and they need a large farm size, which in India is not the case, where you have small farms. So what are the other products, which will be useful in farm implements in India from that Kubota? Can we get any more technology in that?

Shenu, would you like to respond to that?

Yes. This is Shenu Agarwal. So as we have said, we have identified this area as a major strategic opportunity between the 2 companies to develop this implement business. We are working on a road map of what kind of products we will have. Of course, some products are already there with Kubota, which we can look at. But we are not going to be limited on those 2 products only, which is harvesters, transplanters. We are looking at a bouquet of products and implements investments. So that road map is being worked out, and we'll be able to throw some more light in it as we go along.

So that will help in improving the productivity, particularly.

Definitely, yes. Definitely.

Got you. And I think Kubota is also in construction equipment. They have the small backhoes, et cetera. So will that also form part of our product line going forward?

Right now, to my understanding, backhoe is not their product. Backhoe is complementary which they want to use our products, but mainly, they are into excavators, small excavators.

Mini, mini excavators.

Mini excavators, they are the world leaders.

So mini excavators?

Mini, a 3-ton, 4-ton kind of excavator. So right now, the business is not so much in India. It's 1,000 in a year. But they hope that in future, that can be growing business where like the worldwide business is quite big as far as Kubota is concerned.

The next question is from the line of Jinesh Gandhi from Motilal Oswal Securities Limited.

Just to clarify, given the 3 separate entities in India now for Escorts and the JV, the manufacturing JV will eventually be doing manufacturing of tractors and components, whereas implement sales will happen through the sales JV. Is that correct understanding?

Yes. So manufacturing JV will have tractors or in future implements or construction equipment, whatever scope comes in over time. So they will continue -- even the sourcing of components will be done by manufacturing JV, and all sales shall be done by the sales JV, which is Kubota brand.

Oh Kubota brand, sales in India and...

Yes, yes, yes.

Secondly, you also mentioned about the money which is coming through by the shared sale will be used for developing all the 3 businesses?

No, no, no. So it's mainly related to the future products, which we'll jointly work on from Kubota for manufacturing of Kubota tractors and for Escorts tractor, for improving Escorts plants, so mainly agri investment, whether it is Kubota or for Escorts, it is agri -- it should be agri in nature.

Sure, sure. And lastly, can you give any update on any supply chain disruption, which you are witnessing because of coronavirus?

So right now, we have some imports from China. But I think over time, that will solve it. We don't see any kind of big disturbance from the China disturbance as of now.

The next question is from the line of Priya Ranjan from Antique Stock.

Just one thing on the Kubota -- just one thing on Kubota. How much export they are doing from Thailand or Japan as of now?

We don't have an idea. The idea [indiscernible] is not whole company in which we are interested -- invested. So at least in Japan, it's the owned company and Thailand, they are the ones as well as there is a JV. But we don't have [indiscernible].

Thailand, they have high majority. So it is difficult to say how much percentage, but it's a very major -- majority market.

And in Thailand, they were almost 80%.

Yes. Almost 80% you can say, around that.

I mean we will be complementing the Thailand plant? Or I mean it will be just additional?

So there's a product identification, which has been done, which they want to source from India for Thailand market. So those products will get exported from India to Thailand.

So right now, we are still in feasibility and development stages.

Next question is from the line of Riken Gopani from Infina Finance.

Just 2 questions. Firstly, what is the current investment that has gone into the JV, manufacturing JV?

So we already invested INR 300 crores from Escorts side. We have 40% partner. So INR 120 crores has been invested from Escorts in the last 1 year and INR 180 crores has come from Kubota.

So this should have been primarily towards the capacity creation, right?

Yes, that's right.

And what have you outlaid as the plan for the next 3 years from that JV?

So that, again, depends on what sort of product development happens over there. So right now, we are starting with 2 models of Kubota in that company, which again will have requirement of the product development CapEx, which are being incurred in the JV next year and then the year after. And as the product portfolio grows, obviously, the investment requirement will also grow in that entity. Right now, like mentioned in the sales company, the other models are actually getting imported now. But as the volume grows and it makes sense to do the manufacturing in India, so that localization will happen and that will need investment for them. And that will also help them in growing their margins. Right now, the imported products do not really give them enough margin as they're still being traded and exposed to a lot of exchange rates. So -- but once we have the sourcing in India and localization happens, then the margins will also improve in that term.

Okay. And this manufacturing JV, which will support either ours as well as the Kubota's requirements. Is there a set up for ROE that has been predetermined that this entity should make this much ROE or so? Or how does -- how is that arrangement going to take shape in the longer term?

So we had a short-term plan where we said in the first year or 2, the JV should not incur any losses. So they'll be transferred by [indiscernible], which will help us in absorbing, both the partners, their own product costs. But as we go forward and the volumes increase, then obviously, the JV will start absorbing the cost and then we'll start working on some market structure. But as of now, it's not in place.

Understood. Okay. And sir, just one clarification. Is there any sort of call option as a part of the agreement that Kubota gets in terms of further increasing stake by treasury shares or any other structure?

No. There's no call option again with Kubota.

The next question is from the line of Hitesh Goel from Kotak Securities.

I had one clarification. You said that this INR 1,000 crores, which are coming from Kubota, will only be used for making products in the JV and for the product development in JV?

No. We said only for agri business, both for Kubota and Escorts.

In the JV, basically?

No. No, not JV. JV and Escorts Limited. We can use both companies for agri business, agriculture business, tractor and implement and all of the businesses, either for agri -- either for JV, Kubota JV or for Escorts Limited. It can be used anywhere.

But it will -- this money can -- you said will not be used for dividend payout.

Yes.

So the INR 1,000 crores which is coming is basically ...

The company has enough free cash, I think, to use that. So we don't need really bank...

And we have a lot of investment plan over time. We'll be investing a lot on the JV and the coming new products.

Okay. So because -- I mean the asset turn, generally, is a 3x in this business. So I mean are we looking at a INR 3,000 crores kind of business in the next 5 years? So is this INR 1,000 crores investment because why is Kubota bringing such a big investment upfront when the balance sheet is already good. That is what I want to understand. Because, I mean you have not crystallized your plan, but if you can give us some sense on the plan because it's a very big investment compared to the size of Escorts' side now. And what can this investment lead to in terms of revenue and all if you can and you know, and your revenue crystalize plan and maybe tell the investors. That will be quite useful.

So Hitesh, like we mentioned, so both the companies are actually in the process of putting together the business plan for next 5 years. So next 3 to 4 months, we'll have more clarity and where the capital allocation is happening, which product category we are going into, which company will do how much investment and how much revenue streams will come in. As it is, they are already doing INR 1,000 crores in the sales company. So Escorts already has about INR 5,000-odd crores agri business in Escorts. And the -- look at the last 3 to 4 years if you see, both the companies, Escorts as well as Kubota, have grown market share in India. So we think the growth potential is huge. And the interest of the revenue generation, which will happen from the INR 1,000 crore investment, in my view, I think it will be more than 3x.

[Operator Instructions] The next question is from the line of [ Shaukat Ali ] from Asian Market Securities.

Just wanted to know one thing about who holds the 40% stake currently in KAI which you are going to get later?

Yes. Right now, it's a JV with Sumitomo Corporation, which is another Japanese company. And we believe Sumitomo wants to exit the JV, and Kubota will buy out the stake in that company and become the 100% arm. And once they do that, from Kubota, we'll buy 40% stake into that JV.

The next question is from the line of [ Bhaumik Bhatia ] from Birla Sunlife. [Operator Instructions] We move to the next question from the line of [ Jeet Motwani ] from Pinpoint Asset Management.

Just one clarification. So this manufacturing JV, you said they're setting up a capacity of 50,000 tractors, right?

Yes.

And until now, Escorts invested INR 140 crores and Kubota has invested INR 160 crores, right?

Yes.

No. INR 120 crores and INR 180 crores, this is 60:40 JV. INR 300 crores investment has gone into the JV, out of which INR 180 crores is from Kubota side and INR 120 crores from Escorts side.

INR 120 crores from your side, INR 120 crores from Kubota side?

INR 180 crores from their side. They are the 60% owner of the JV.

Okay. So now this is a company which will basically you're saying will manufacture components for global sourcing and any new products. So this is the manufacturing company which will do all implement manufacturing, which is not related to tractor business for Escorts India, right? Just to understand.

No, no, no. What we said is the manufacturing JV is set up to make tractors, which will be used by both Kubota as well as by Escorts. Kubota-brand tractors will get sold through their own sales company, which is the company in which we are now going to buy 40% stake and Escorts brand tractors will get sourced by Escorts and will be sold through Escorts only. In the future, if any manufacturing happens for new products in tractors or in the implement space or in the construction equipment space or if any component sourcing happens, and that will happen through this manufacturing JV only.

Okay. So the 3 new lines can be component manufacturing, construction equipment and agri implement for which the manufacturing will be done in this company?

That's right.

Okay. Now suppose if the capital requirement of this manufacturing company for all further requirements are, say, INR 500 crores or, let's say, INR 1,000 crores. You will invest on -- say, if it is INR 1,000 crores, Escort Limited will invest INR 400 crores, right?

So we'll invest 40% of that.

40%. Whatever investment, 40%.

Okay. So in that case, the INR 1,000 crores that is coming to us, of which INR 400 crores, will go as our share of investment. It's not that the entire INR 1,000 crores will be used?

No, no. Like we mentioned, so we're still in the process of making those business plan for the next 5 years. And once the plan is ready in 3 to 4 months, we will share it with you where the capital is getting spent.

Sir, my question is that INR 1,000 crores, if the requirement is INR 1,000 crores. Just a moment, it's still a clarification. For INR 1,000 crores, Kubota will bring fresh INR 600 crores, escorts will invest INR 400 crores, right?

See, we did not say this INR 1,000 crores is going to be used entirely in the JV. We said the INR 1,000 crores can be used in Escorts and in the JV.

But your share in that JV, if it is INR 1,000 crores, will be INR 400 crores, right?

Yes. So the balance INR 600 crores can be used in Escorts. So the money can be used, whether in Escorts, or it can also be used in manufacturing JV.

Next question is from the line of Shyam Sundar (sic) [ Sriram ] from Sundaram Mutual Fund.

Congratulations on this partnership, sir. Escorts is buying a 40% stake in the sales entity. Given the sales channels are meant to be kept separate between Escorts and Kubota, how does this Escorts investment in the sales entities, what is the strategic intent of this picking up a 40% stake in this Kubota sales entity? Sir, if you can throw some light on that. How does it fit in the overall scheme of things?

So whatever profitability we monitor and manage in the JVs, it has to be end to end. So from the product development to supply chain, sourcing, manufacturing, transfer pricing and finally, sales in the market. And so what we are saying is that it's a complete ownership and the joint management of the JV, so that we can grow it profitably. And also, there's a synergy of how we can learn from each other best practices. Whether it is on the back end on the frugal engineering and the kind of supply chain base we have in the front end. They can learn from us how efficiently we manage our front end, how we manage our dealers, and we can learn from them some development of dealers and the kind of quality of dealers. So those kind of learning can be there. But overall, managing sales as well as manufacturing is advantageous in terms of better [indiscernible] and doing -- growing the JV profitability, adding value, both in sales and manufacturing.

Okay, but the sales channel will be kept separate for Kubota and Escorts India?

Yes.

We take the last question from the line of Jay Gupta from JM Financial.

Congratulations on the deal. While all of my questions have been answered, one question, sir. Kubota has a Siam Kubota leasing in Thailand, which is quite successful. So how -- what's the plan in terms of leasing business? Are we trying to draw synergy from Kubota in that front also? Just a general outlook.

So Kubota Siam is successful. Yes, it has been working together there for the last 40 -- more than 40 years, and that's a long, long story. And Siam has been very influential in Thailand as well. So similarly, we want to make the story big and just not a JV for tractor manufacturing, we want to be big in terms of complete mechanization of tractors, in terms of crop solutions or maybe longer-term implements and other businesses. So we also want to make it a bigger story in the coming years.

I now hand the conference over to Mr. Madan for closing comments.

Thank you, ladies and gentlemen, for being present on this call. For any feedback or query, please feel free to dial in to us at Investor Relations at escorts.co.in. Thank you very much, and have a good evening.

Thank you. Ladies and gentlemen, with that, we conclude today's conference. Thank you for joining us, and you may now disconnect your lines.