Escorts Kubota Limited (ESCORTS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Escorts Kubota Limited Q2 FY '24 Earnings Conference Call, hosted by DAM Capital Advisors Limited. [Operator Instructions] Please note that the conference is being recorded. I now hand the conference over to Mr. Mitul Shah from DAM Capital. Thank you. And over to you, sir.

Thank you, Akshay. Good evening. And on behalf of DAM Capital Advisors Limited, I welcome you all for Escorts Kubota Limited Q2 FY '24 Results Earnings Conference Call. I also take this opportunity to welcome the management team from Escorts Kubota Limited. Today, we have with us Mr. Bharat Madan, Whole-Time Director and Chief Financial Officer; Mr. Neeraj Mehra, Head Farmtrac and Powertrac Sales; Mr. Sanjeev Bajaj, Chief Officer, Executive Construction Equipment Business; Mr. Ankur Dev, Chief Officer, Railway Equipment Business; Mr. Sanjeev Garg, Head Finance and Tax and Investor Relations team. We would start the call with brief opening remarks from management, followed by an interactive Q&A. Before we start, I would like to add that some of the statements that the company makes in today's call will be forward-looking in nature and are subject to risks as outlined in annual reports and investor release of the company. At this point, I would request management to make its opening remarks. Over to you, sir.

Thank you, Mitul. Good evening, everyone, and thank you all for joining us today. A few highlights of company's stand-alone performance for second quarter ended September 2023 are as follows. Operating revenue at INR 2,046 crores, up 8.64% year-on-year. Tractor volumes at 22,024 units, down 7.1% year-on-year. Highest ever quarterly construction equipment volume at 1,577 units, up 72% year-on-year. And the railway equipment revenue at highest ever in quarter 2 of INR 234 crores, up 28.8% year-on-year. EBITDA for the quarter ended September '23, up by 72.5% came at INR 263 crores as against INR 152.7 crores year-on-year. EBITDA margins at quarter 2 stands at 12.9%, up by 476 basis points year-on-year. This is mainly led by operating leverage in construction and railway business, improved realizations, better product mix and softening in the commodity prices. Net profit, which is profit after tax more than doubled to INR 235 crores as against INR 87.7 crores year-on-year. This is after adjusting the exceptional loss of INR 54.5 crores same period last quarter. Company continues to be net debt free with sufficient available liquidity for growth and capacity expansion. Now moving on to the few financial highlights for half year ended September 2023. Operating revenue at INR 4,373.9 crores, up 12.2% year-on-year. Tractor volume at 48,606 units, up 3.8% -- sorry, down 3.8% year-on-year. Highest ever construction equipment volume at 2,950 units, up 56.7% year-on-year, and highest ever railway revenue at INR 532 crores, up 49.7%. Highest ever EBITDA at INR 590 crores, up 66.6% and margins are at 13.5%, up by 441 basis points year-on-year. Highest ever net profit at INR 518 crores, up 120% and margins at 11.8%, up 581 basis points. And this is our highest ever half yearly financial performance so far in H1. Now moving on to the segmental business performance, starting with the Agri business first. The domestic tractor industry for the quarter ended September '23 was at 2.09 lakh tractors as compared to 2.2 lakh tractors in the corresponding quarter, down by 5.8%. This is due to delayed festive season this year. Our domestic tractor volume at 20,473 tractors as against 21,396 tractors in the previous year, down by 4.3% as compared to industry drop of 5.8%. This has resulted in a marginal gain in our market share to 9.81% in quarter 2 FY '24 as against 9.66% in corresponding quarter. We will continue our channel expansion program to cover the white spaces for both PT and FT brands primarily in our opportunity markets. Our total dealer count in India at the end of September '23 quarter stood at 1,230 plus. On the export side, in quarter 2 FY '24, the industry was down 26.7% to 25,900 tractors as compared to 35,200 tractors in the corresponding quarter. Our export volumes went down by 32.8% to 1,551 tractors as compared to 2,307 tractors in the corresponding quarter. Sales through Kubota's global network during the quarter ended September '23 contributed approx. 31% of our total export volume. Segment revenue came at INR 1,394.2 crores as compared to INR 1,454.9 crores in the corresponding quarter. EBIT margin for Agri Machinery business were up by 381 basis points to 12.2% as compared to 8.4% in the corresponding quarter last year, led by improved price realizations and continued softening of the commodity prices. Going forward, all macroeconomic factors remain positive, and we expect the rise in demand momentum to continue for the remaining part of this fiscal year, and the industry likely to be plus/minus 2% compared to last year. Coming to the Construction Equipment business, our served industry backhoe loader and pick-and-carry crane and compactors were up by 37.4% in quarter 2 led by growth in crane business by 73%, compactor industry by 63% and backhoe loader industry by 28%. Our total volume, manufactured and traded products were up by 72% to highest ever quarter 2 volume of 1,577 machines as against 917 machines in the last year's same quarter. Segment revenue came at INR 415.8 crores, our highest ever quarterly revenue and went up 71.9% as against INR 241.9 crores in corresponding quarter previous fiscal. EBIT margins for the quarter ended September '23 went up to 10.2% as against negative 2.6% in the corresponding quarter, led by operating leverage, better realization and improved product mix. Growth momentum continues across all product segments, led by government thrust on faster execution of ongoing projects, coupled with increase in bank credits in the sector and positive macroeconomic environment. Going forward, we expect current growth momentum to continue for the remaining part of the current fiscal. Now coming to the railway division. Revenue for the second quarter went up by 28.8% to ever highest second quarterly revenue of INR 234.3 crores as against INR 182 crores in the corresponding quarter. EBIT margin for the quarter ended September '23 went up by 383 basis points at 18.5% as against 14.5% in the corresponding period last year. Continuing our focus on expansion and diversification of the railway product line, we successfully completed field trials for EMCBS, electric microprocessor controlled brake systems, and qualified as a development source in the last quarter. Order book for the division at the end of September '23 is approx. INR 870 crores. Now I request the moderator to open the floor for Q&A. Thank you.

[Operator Instructions] First question is from the line of Gunjan Prithyani from Bank of America.

I had 2 questions. Firstly, on the industry -- tractor industry demand outlook. If you can share some color on what we have seen in the Navratra festive season. And I think bulk of the festive from a tractor perspective should have been behind by now, right? So what have we seen on the ground? And any change in the way we were -- in the growth guidance that we were calling out for F '24? So just some color on the industry outlook.

Gunjan, this is Neeraj this side. So answering your first part of your question regarding how the Navratras work, so the retails were pretty good during the Navratras. Only at the fag end of the Navratras, the retails dipped a little bit. So overall, we were satisfied with our plans and overall retails that has happened. Coming to the second part of your question, no, the overall festive season is not yet over. A big bang festive season, Dhanteras and Diwali are still to come in. And we are looking to some very aggressive numbers in the -- in those 2 and 3 days. The third part of your question as regards to the guidance for the quarter and for the year, so we believe quarter 3 would be slightly on the positive side, though October has been a bit negative. But I believe November would be positive riding on Dhanteras and Diwali sales. And quarter 4 to a certain extent, should be more or less on a single-digit marginal growth. Overall for the year, as Sanjeev has already mentioned in his opening comments, we're looking at plus/minus 2% for the current fiscal.

Okay. Sir, just 2 follow-ups there because, I mean, the Navratra is usually bulk of the -- pretty bunched-up-demand buying period. So if you can share some numbers around what is the growth that we've seen versus last year. And Q4, are we still expecting a growth? Because I thought there is a shift in seasonality which -- shift in the 3 Navratras that fell together, there is a base effect, which is there in quarter 4. So do you still think that quarter 4 can be a growth quarter?

Yes. So again, coming to the first part of your question, retails were more or less similar to what they were last year, for us, marginally a bit higher. Navratra is not -- as I mentioned earlier, Navratra is not the end of the season. Dhanteras and Diwali are pretty big, actually very big. So we are banking on them. And it's not for this particular year, it's always been a similar kind of a thing. I guess the growth has -- overall growth has not been there because this particular period was on a very high base as compared to last year. Vis-a-vis quarter 4, quarter 4 is a high base, but not as higher base as this festive season or quarter 2, I should say. So we are optimistic that quarter 4 should be a very marginal growth of single-digit growth.

Okay. Got it. My second question is on the exports now. Of course, the aspiration on exports is pretty high in terms of we leveraging on Kubota Network and otherwise also we have been talking quite optimistically on exports. But when I look at the numbers right now, they are about 30%, 35% down. So if you can give us some color on what's dragging the exports down? And how should we see this ramping up over the next 12, 18 months? Any change in terms of numbers that we should be keeping in mind for next year because it's just fallen off a lot.

Yes, Gunjan, this is Bharat Madan. So on export front, this year, as you know, I think the markets in Europe, which is the major market for us for export has been under recessionary condition. So we're not seeing the major trigger happening on the demand side over there. So that is one of the reasons why we're seeing a slightly dip which has happened in this volume. Second, there's also some issues on the product side. We had to relay -- do the relay out of our production on the manufacturing factories. So -- which also led to some dip in those numbers in the beginning of this year. So we which delayed some of the number. So this year looks like, I think even compared to last year, only the export will see a dip, this is an industry-wide phenomenon, not just to Escorts. But I think overall industry for export is down about 26%, 27%. Even though we are slightly down more because of these numbers, which are going to Kubota has slightly fallen off this time. But on a full year basis, we expect, I think it will be, I think, slightly lower than maybe about 10% to 15% lower number this year compared to last year. And for next year, we are looking at going up to maybe somewhere around 20% to 30% growth over the current year base. So some of the development of product side is slightly delayed, and we expect from FY maybe '25, '26 will be the year where we'll see a major growth, momentum will pick up in the company. So -- but for next year, still it will be better than current year, which is looking like. But it may not be kind of number which we're hoping will happen in the initial planning.

[Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal.

A quick question on the demand outlook which you've shared 2% -- plus/minus 2% growth. And when we look at that number vis-a-vis the first half decline, it implies almost 8%, 8.5% growth for the second half. So is this 2% more of an indicative number, I mean, not necessarily that might actually play out? Is that the way we are looking at it because our commentary for 3Q and 4Q doesn't match with this 2% growth number.

Jinesh, so see, the current decline in Q2 in terms of industry does not actually present a complete and a comprehensive picture. Yes, there have been a couple of factors that have resulted in a slight decline in the industry in Q2. One is the erratic rainfall that has happened and in a lot of areas in the country, it's been efficient. The second part is we are working on a higher base compared to last year. And the third part is that the festival season has actually moved on to quarter 3. It's staggered over 3 months. So for example, September only had Vishwakarma puja, October only had Navratras and Dussehra, and November will have Dhanteras and Diwali. November, we are very sure and very buoyant that November will be a decent growth industry. And assuming December to be at a par industry, we're looking at about 2% growth in quarter 3. Now coming to quarter 4. Quarter 4 is not a very high base compared to the previous year, that is one part. The second part is quarter 4 to a certain extent, would be the last quarter of this fiscal before we get into the next year and the next year is a major year for election time. So we have this -- we have a feeling that there might be some [ shops ] or this thing from the government side, which might help a bit of a growth in the quarter 4 industry. So the base is not as high of quarter 4. And secondly, there might be a certain stock building in March due to the Navratras falling in the early fortnight or the first fortnight of April. So that might take the industry slightly on a higher side.

Got it. No, this is very helpful in terms of your explanation. Also, are we seeing -- what are the trends that you're seeing for the commercial usage or non-farm usage of tractors? Are we seeing the pickup as expected? Or that is also lagging?

No. So commercial usage is pretty decent with the government's focus or a major focus on the infra and construction activity. Yes, the focus is there. Currently, more or less 35% of the overall sales, 30% to 35%, it's just a ballpark figure, is from commercial segment. So the sales here are pretty decent.

Oh, almost 30%, 35%. Any sense how this was last year, this 30%, 35% number?

Should be more or less similar because government's focus in the last 12 to 18 months has remained on infrastructure, and that has helped the overall growth of the industry as well as the commercial sector as well.

Got it. Got it. And we haven't taken any price hike in 2Q except for the June price hike, right? Is that correct, in tractors?

No, we had taken a price hike in quarter 2 as well.

So what was the quantum and when was it taken?

The cumulative price increase is roughly about 1.7% because we've taken one price increase in Q1 and second, we have taken in the middle of September.

So both put together is 1.7%.

Yes. So the full impact of that will come in the coming quarter. So it's not fully visible in Q2.

The next question is from the line of Raghunandhan from Nuvama Institutional Equities.

Congratulations, sir, on good margin performance and wishing everyone best of greetings. Sir, firstly, on the tractor side, on the demand triggers ahead, as you indicated that the government support may play out in the coming months and also the non-tractor -- I mean, non-agri sales are also quite healthy. How do you see the demand condition? Q3, Q4, I understand is positive growth. For FY '25, though early days, do you expect tractor industry to see growth of, say, 6%, 7%, which would be the industry mean growth?

Raghu, so I've already commented on Q3 and Q4. And I think it's a bit premature to comment as of now on financial year '25. We'll wait and watch how the next 2 to 3 months pan out. And probably during the next call, we can give you a better perspective for financial year '25.

Sure, sir. On the railway side, last quarter, we had shared an expectation of 16% to 17% full year margin. But given the performance in the first half, would you see a better number for the full year? And what is supporting this margin upgrade?

Raghu, this side Ankur Dev here. So basically, this good margin is coming from 2, 3 factors. One is that we are having a better product mix. As we mentioned in the last call, we are having good revenue from spare part sales also. And obviously, we had seen some softening of the commodities in the quarter 1. So all this is resulting into these kind of margins.

Got it, sir. And to Bharat sir. Sir, on the company's vision, can you highlight status of certain key items: A, amalgamation of Kubota Agri, when is the approval expected? B, in terms of entering into new export market, what is the status or when do we enter markets like U.S. and Brazil? And C, on export of component to meet Kubota's global requirements. Any progress there?

Sure, Raghu. So I'll just respond to your first question. I think which about your amalgamation...

Amalgamation of Kubota Agri.

So we have got the order from NCLT asking us to go ahead with convening the meeting of shareholders and creditors of both the companies. So on the 2nd of December, the meetings are scheduled to be held. So after these meetings, we get the approval, then there's a second motion, which will be filed with NCLT, which will happen by middle of December. And after that, you can say roughly in Q4, we expect the order from NCLT should come in for approving the merger. So hopefully, before the end of this fiscal year, we should have this merger completed.

Great, sir. On entry into new export markets, U.S., Brazil...

For the U.S. market, as I mentioned in the beginning, so there is some delay on the product side because the kind of product they are looking at, we need to develop those products right now. There's some changes which are being done by the R&D team. But we had a visit from the U.S. team recently in this month only. And they had lot of expectation actually from India, which is a very positive sign. And they are looking at India being a big sourcing base for them to be able to compete in that market with a lot of Koreans demand, which is coming up in U.S. market and they are competing with those established players. So they need support from India, especially from the Escorts side to vendors providing those products to them. So they have shown like good interest. And for us also in our midterm business plan, U.S. was one of the bigger markets where we expect the exports will start picking up. So I think this, like you mentioned, may not be next year. So next year, we don't expect U.S. will be able to open the product development will take some time. But FY '26 is the time and we think the export to U.S. will also start. And that will be a big driver for us in terms of the volume.

Got it, sir. And component exports, any progress on product development validation?

Yes. So the work there has already started. So we expect I think some movement will happen within this fiscal in Q4. Yes, I think the things will start. But the team is already in place. And they are working on with the suppliers and then the Kubota team in terms of their requirement. So hopefully, you'll see the numbers will start coming in from next year itself.

The next question is from the line of Abhishek from Dolat Capital.

Sir, you are looking for the merger Kubota Agriculture Machinery India Private Limited, which is a low-margin business. So how do you see that turnaround in the margin? And how much the current localization in that business?

See, there are 2 JVs, which we are looking at merging into this company. So one is a manufacturing JV, which is EKI, Escorts Kubota India Private Limited. And second is the sales company, which is Kubota Agriculture India Private Limited. So both of these will get merged into Escorts. The idea was to have a single entity structure in India, which will do all the business for both the JV partners, for the local promotors as well as for Kubota. So that is one of the key driver. I think in terms of localization, right now, the sales JV is importing some of the tractors and farm equipment, which we're not manufacturing, like growing harvester, transplanters and some of the other smaller tractors. And in the manufacturing JV also, the major thing, which is being still imported is the engine, which we are getting from Kubota, which is a plan to localize now. So once we go with the greenfield facility, the Kubota engine will be one of the initial thing which we intend to localize, but that will be a major cost reduction item in the overall margin front for this JV. So initially, when you merge this company, obviously, since they are still more or less breakeven or minimal negative operation, but I think gradually, the idea is to optimize on the cost structure and look at the ways where we can improve the margin and bring them to the same level as where the Escorts stand. So that really will happen, that's the plan which we have shared in the midterm business plan. I think when the merger gets completed, then the synergies around integration will start coming in.

Okay, sir. And sir, in previous con calls, we were talking about some contract manufacturing business, some Kubota Global. So when can we expect this sort of business for Escorts Kubota?

For finished products or...?

Yes, for finished products.

So like I mentioned, it's not going to be a contract manufacturing, but it'll be a sourcing arrangement, which they will source the Indian works from Escorts Kubota. And like you mentioned, it can be -- it will be going to the U.S. market, European market, African market and also to some of the countries in Asia where Kubota needs those products. So we're always exporting to Kubota, actually. If you look at our export numbers, even now, it's roughly 30% exports are happening to Kubota Network only. And that number will only continue to grow in future as we develop our products, as we mentioned earlier. So -- and we start our open export to U.S. market, which will happen from FY '26. So numbers will keep continuing to go up.

So any business, can we expect post FY '26 only? Or can it be possible in FY '25 as well?

So like I mentioned, Europe, we're already exporting. So even now this year also, we exported roughly 30% sale has happened to Europe, which is to Kubota Network only and that will continue to happen even next year. So U.S. is the new market for us because we had exited that market way back in 2008. And after that, we have not entered that market. So now we intend to enter that market through Kubota only. So which will happen in FY '26, when the product requirement which they have is ready at our end.

Okay, sir. And my last question on the inventory side, how much is the current inventory at a dealer level? And what is the industry level inventory for tractor segment?

So currently, we are -- at the dealer level we are at about 4.5 to 5 weeks, which is going to come down in November end. At this point of time, it is -- for me to comment on the industry figures, it's a bit difficult. But I believe our stock levels with the dealers are at a pretty decent level. And these we intend to bring down further by the end of this month, once the season tapers down.

Sir, the inventories are at a higher level, can we see some sort of the discounting pressure in the coming days, sir?

So see, discounting because of high inventory is not a phenomenon or a regular phenomenon, higher discounts normally happen during the peak season time. So once the season gets over, the discounting levels also are brought to normal regular levels. So I don't see this as a one-off scenario wherein additional discounts are to be given to reduce the inventories. It's a peak season phenomenon for everyone, for almost all the industries and the discounts are brought to regular levels once the season tapers down.

The next question is from the line of Chirag Jain from Emkay Global.

Sir, just wanted to check on the broader thought process for setting up the captive financing arm. All these years, we have been operating with independent financiers. So how this would help us in terms of enhancing the market share gain in the domestic market, probably if you can share some idea around that?

So this has been one of the, I think, issue which has been raised, I think, pointed again that all -- most of the manufacturers, OEMs in India have their own captive finance arm, and we are the only one who were not having that arm. And if you recall, we had this tie-up with DLL earlier, DLL India, which was earlier working as a exclusive captive finance provider for our company, and it worked for about 4, 5 years. And during that period, we actually had a peak market share. It went up by almost 2% when those financing solutions were available. So idea is to obviously help in the overall market growth. So there are certain areas where the current financing options are not available, if we don't get from the other financiers. And second, the turnaround time is not really what we required it to be. So that put some pressure on the working capital. And as a result, we feel we'll be losing some of the customer base, which we should not be doing. So this captive finance arm will definitely is going to help us in reducing the turnaround time and also in terms of helping us in our expansion of our market share growth going forward. So right now, I think the board has already approved the setting up of the company, and then we'll go to RBI and apply for the NBFC license. We're in the process of establishing that company. So hopefully by end of this quarter we'll be ready with the company. And next quarter, in Q4, we should be making an application to RBI for getting this license.

And would this be restricted only to our tractors or apart from our tractors, it can, let's say, finance other product segment as well because most of the other captive financing arms while they started as a pure captive arm but over the years...

So this is meant only for captive financing. So this will be for tractors, farm equipments as well as construction equipment. So basically, the product category in which company is operating and we will be doing only our brands. No outside brand.

Understood, sir. Second thing, in terms of the overall competitive scenario if you can throw some light, what we understand that, let's say, Mahindra or Swaraj, who are market leaders, they are going -- getting quite aggressive, especially on the Swaraj brand. And same is the case with Mahindra also with their Oja brand of tractors. So how the overall competitive landscape is shaping up from a let's say, 2, 3 years perspective? Any thoughts around that?

So see, this competitive scenario has remained -- or have been there for quite a few years. It's nothing new here. So yes, the brands that you mentioned have come in with some new product lines, which has given them some good impetus both in terms of volume and market share. In the coming months, we as well are looking at some product launches in both the brands, especially on the Farmtrac front. So we feel that as we go forward, these new launches will actually -- and these are top of the line launches with some change in overall look of the tractor as well as the features. So we feel, as we go forward, this will help us compete in the major segments of the industry as well as in the major markets, where these -- applications of these brands are prevalent.

The next question is from the line of Mumuksh Mandlesha from Anand Rathi. Mumuksh, sir, your line is not clear.

It's better now?

Yes, please go ahead.

Happy festive season to the management. Sir, can you talk about the reasons why we are seeing the strong growth in the Construction Equipment segment? And particularly what is driving the crane segment to do much better? And how do you see the FY '25 growth, particularly post the election as they may be still slowed on the CapEx side from government?

This is Sanjeev Bajaj. Thank you for your question. So first part of your question, this current year, the growth is largely coming from the speed of the project and the government's urgency on completing lot of infrastructure projects and their commitment to fund these projects. So -- and it is driving both because of the government urgency and at the same time there is a performance linked incentive for contractors also to finish the job in time and get rewarded. So this is fueling the overall growth in construction equipment. We see that for the current year will look similar to what we've seen in the first half of the year, and it will continue to be at the same growth rate. And the only catch here is that next year we are going to get into election. And also, there is an emission norm change which is originally slated from April. But it is also expected to get deferred. So there is a bit of uncertainty in terms of how it will pan out. So maybe for next year, the best time to estimate will be when we get closer to Q4 of this financial year. But for the current year, it looks like on the macro demand side, there is no change going to happen and it will continue to have the same growth which we've seen in the first half of the year.

And sir, can you talk about the farm implement growth plans for the company for next few years?

Yes. So I think, as you know, Escorts stand-alone basis, right now, we are not a very strong player in the Farm Equipment segment, but this Kubota JV, which is getting merged into Escort. So they've got a strong business on the harvester and transplanter side. So even though we are in the process of developing some products and there are some good orders, which we expect will start coming in Escorts also from next year. I think post-merger, it will become a sizable business for us. And there's also a good intent from the management side to grow that business further. So today, I think the sale JV in Kubota has close to INR 300 crores sort of top line coming from the farm equipment side. And Escorts is still small at work doing INR 50 crores, INR 60 crores sort of top line which is retail. So -- but combined business will be obviously strong and there's an intent to grow and get into the new category as well. So I think if you look at our midterm business plan, there's a good aspiration to grow that business maybe to INR 1,000 crores sort of top line in overall business. So we see very good potential into that category.

Got it, sir. And sir, lastly, how do you see the raw material cost going ahead, particularly due to increase in steel prices, sir?

Hello?

Yes, can you hear me, sir?

Yes, we lost you in between.

Yes. Sir, how do you see the raw material cost going ahead due to increasing steel prices?

So as of now, I think the first 6 months, we did not see much pressure. So softening is only which happened. Even though off late we have seen some impact has started coming in and especially in the construction equipment, we've seen some impact, which has happened now. So obviously, if there's a strengthening of prices, it will have a impact. So -- but we don't expect the inflation will be to the extent what we've seen in the last 2 years. So right now, the position where we are sitting across all businesses, I think we've been able to pass on the entire inflation has been fully absorbed now, and it's all been passed on to the market. So I think as of now, most of us, all businesses are sitting on a clean slate. So if some more inflation comes in, obviously, we have to see the market and see if we can pass it on to the market but we don't think it will be a major pressure looking at the market dynamics right now.

The next question is from the line of Jaimin Desai from Emkay Global.

Firstly, I wanted to check on the Construction Equipment segment margins, very strong performance there in this quarter. Wanted to know, what are the factors driving it? And how do you see the sustainability of these levels of margins?

So yes, Mr. Desai, thank you for your question. Sanjeev Bajaj this side. So see, the margin aspect of the business has been good this year. And primarily, whatever price increases we've taken in the start of the year so that has -- recovery has been very good, primarily because of higher demand in the market. So price stabilization has been good. Also on the commodity side, first 6 months did not see any increase, in fact there was a slight deflation. So although there is a bit of inflation, which is looking like coming in last 1, 1.5 months. But we see that in the current demand cycle, really it should be -- we should be able to pass it on. It will not impact the overall margins going forward for the rest of the year also.

Okay. So broadly, we can maintain the current level of margins at about double-digit -- early double-digit levels?

Yes. So we should look at it from an H1 perspective, because quarter-on-quarter, there would be variation because the volumes are very different. On an H1 basis, we should be able to continue till the end of the year, that's what it looks like.

Okay. And with respect to the Railway Equipment division, can you provide medium-term outlook on both growth as well as margin trajectories for that business?

Ankur Dev this side. So as we have mentioned in our previous calls also, we are continuously launching new products, and we are trying to get into products for the new type of rolling stock, which India Railways coming up with, namely the Vande Bharat trains. So with the launch of these new products, we feel that we will be able to maintain the double-digit growth in the current year as well as the near future also. In terms of margins, we believe that we should be able to maintain the margins plus/minus 100 or 200 basis points from the current levels.

Okay. And just last question, if I can squeeze in. Is there any update on the time line for the emission norms implementation in the below 50 HP tractor category? And what would be the ballpark cost increase that we can expect whenever it is in [ effect ]?

This is Neeraj this side. So these would be actually the TREM V norms. And the current scheduled formal launch is from April '24. So -- but what has actually happened was the TREM IV norms had got delayed by about 18 months or so. So -- and it takes time for the various upgraded technologies to get established in the market. So from TREM V perspective, there is, I believe, a discussion going on if the TREM V norms can be extended further from April '24. Coming to the cost impact, the cost impact would be substantial. At this point of time, it's very difficult to comment on that, but I think it will be in the INR 1.25 lakhs for TREM V, because on those set of tractors, we will be moving from TREM III to TREM V. TREM IV set of tractors which are above 50, the increase would not be that substantial. So this is just a ballpark figure.

Sorry, sir, I lost your voice there for a second. Can you repeat the number in terms of cost increase?

So it's a very -- it's pretty early to comment on the numbers, but what the numbers that I had shared was that as in the sub-50 HP segment, we'll be -- those are currently TREM III tractors. So from TREM III we'll be moving to TREM V. So the increase would be substantial. In case of TREM -- in case of tractors, which are 50 HP and above, the increase would be less because an increase has already been taken and passed on with effect from January '23. So in case of sub-50 HP tractors, the increase could be above INR 1.25 lakhs.

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

My question is on the broader CapEx at a consol level. So first half we had invested just about INR 51 crores in CapEx. What we expect CapEx for the full year FY '24 and potentially for FY '25 given our growth plans?

So Jinesh, FY '24, initially, we have indicated it will be INR 300 crores to INR 350 crores. But the first 6 months, we've not seen much of the CapEx, in terms of cash flow and the commitment has been given for those CapEx, but the cash flow hasn't happened, and we don't expect it will be to that extent even on the full year basis. So maybe it will be somewhere in the range of INR 200 crores to INR 225 crores actual cash outflow, which will happen. So the most of the cash flow will get carried forward to next year, to next fiscal.

Okay. Okay. And so effective next fiscal we could see bunching up and could be close to about INR 200 crores to INR 250 crores?

Yes, next fiscal will be higher. So I think we'll give that guidance once our internal budgets are approved.

Okay. Okay. And secondly, on the railway side. So we used to share this data on new product contribution to revenues, how it would have trended in 2Q, would that have come down to support margins or any direction or any number which you can share on that?

Sorry, contribution to revenue for railway products?

New product contribution to railway revenues.

Okay. Okay. New product contribution to overall revenue in Railway.

Right.

Yes, Ankur Dev this side. So yes, so new product contribution to the overall revenue is on a higher side. And as we have mentioned, it is more than 60% as we are continuously launching new products and the railway is also building up the new rolling stock. So obviously, those -- all those fall in the new products category. So it is more that the conventional products are going down now so it's almost stagnant now. So no growth happening. So all growth which is coming is all coming from newer category.

The next question is from the line of Raghunandhan from Nuvama Institutional Equities.

Firstly, to Neeraj sir. Sir, can you talk about those new products in Farmtrac. You said specific applications they should cater to. And would that be focusing on the opportunity markets, what are the applications which are being prioritized? Would it be like the below 30 HP or the paddy specialist? Some color if you can share there.

So thank you, Raghu, for your question. So at this point of time, it will not be very prudent to give too much of detail. But in FT, a new -- altogether a new range is in the offering. These will be actually very high-end technology advanced products, which will actually be targeting emerging specialized applications. For example, an application like a creeper application. So it's altogether a new series, and this would be in the 50 HP and above category. Also, we are looking at some introductions in both the brands. So we're looking at introduction in both the brands, Farmtrac as well as Powertrac in the utility segment as well. So from a Farmtrac perspective, these will -- the differentiators will actually be game changers, and -- both in terms of technology. And when I talk about technology, it's about hydraulic, it's about transmission, it's overall vehicle and also about -- and the second part is also about the styling and the looks.

Got it, sir. And my second question was on construction equipment. Sir, you alluded to the emission norm change in April. If you can talk a little bit more about it. And I understand there could be a deferral. If you can just give some color on what is the norm change? And what could be the price increase?

Yes. Thank you. So we were -- we have 2 range of products and there are 2 emission norms prevailing right now on the products. So there are 50 HP and below and higher than 50 HP. So 50 HP and below is still on BS-III level and 50 HP and above is on BS-IV level. So it is slated to go to all to BS-V level from April '24. So this was the original plan, which there are discussions with ICEMA and other entities with the government in order to defer it. However, there is yet to have any official confirmation on it, but there is only a discussion. Now products which are moving from BS-III straight away to BS-V, the impact could be anywhere between 6% to 8%, although it is too early to estimate. But for a customer, probably it could be, say, around 8% to 10%. Whereas the products which are moving from BS-IV to BS-V, the impact will be much lower, maybe about 4% to 5% only or even lower. But these are pretty early estimates because most of the manufacturers, they are yet to showcase the final version of those variants and also most of the manufacturers they are into the testing stage of these variants. So the final cost flow and the final market price is yet to be decided and also will be dependent on when actually the deferment happens, when actually the product is to be launched.

Got it, sir. Just lastly, again to Neeraj sir. Sir, if you can talk about that Escorts Farmtrac Powertrac dealers were offered a chance to set up Kubota dealerships in terms of working towards cross-selling. So any progress there? And how are you looking at the synergy or cross-selling opportunity?

See, you mentioned it correctly, there is a huge opportunity in cross-selling. Kubota products have their own strengths and so do Powertrac and Farmtrac brands. So we are studying on -- or working on this model on how the current set of dealers, they ought to have actually the bandwidth to sell the additional set of tractors. So over a period of time, we might look at this cross-selling aspect of the tractor business. But as of now, it is pretty early days.

The next question is from the line of Mitul Shah from DAM Capital.

Sir, I have a question on this last 1 or 2 months' performance during ongoing festival. In terms of region-wise color, if you can indicate that which are the geographies are still continue growing healthy and which geographies are indicating some weakness because of the monsoon deficit or a drought-like situation, especially in South and West?

So see Mitul, South has actually degrown from a festive perspective and so has the Eastern market. There has been growth -- some growth in the northern markets. West has been a mixed bag, whereas Maharashtra has dropped considerably in terms of volumes. Gujarat has been a surprise package wherein the industry has done well. So also Gujarat industry has risen on the subsidy aspect of the business. That's one market across the country which has risen well on the subsidy business. So it's a mixed bag. West, Gujarat has grown. Maharashtra has degrown. East market has degrown. Southern markets have degrown. Central and the northern markets have grown. UP to a certain extent, it's the biggest market in the country. But UP to a certain extent, has been at par. It's neither degrown or grown.

Sir, then going forward in next 6 months where we are indicating plus/minus 2% for full year. So what we are assuming in terms of geography wise performance post this drought situation in Telangana and Karnataka, particularly? And lastly, a follow-up on to that, as these northern markets are growing, then since we have a much higher market share in those markets, can Escorts grow disproportionately or can it outperform to the industry?

So you're very right. We are very sure that Q2 has already shared before also that -- sorry, Q3, will be ending the industry at about approximately 2% to 3% growth. November will be the main driver of the industry growth because of this extended season and extended festive season. Coming to quarter 4, I've already shared, we're looking at a very marginal growth in quarter 4 on account of a lower base compared to last year. Now on the second part of the question, in terms of Escorts market share and Escorts being stronger in the northern markets and the central markets, you're actually right. Our intent -- we have -- if you look at not the last couple of months, but the H1 performance, Escorts, overall from the release figure has grown by about 0.3% market share in H1. Market share in the auto industry especially tractors is a bit sticky. And over the last 6 months, only 3 major players have grown in market share and EKL is one of them. Our focus this year has primarily been on the retail side. And our retail market share is substantially higher or has grown higher than the release market share. So yes, also quarter 3 and quarter 4 are traditionally our higher market share quarters. And yes, you are right, we have that aspiration to outperform the industry in quarter 3 as well quarter 4.

Lastly, what was the inventory at the beginning of festival and what its target for end of November post festival?

I can comment on the EKL inventory. So at the beginning of the festival, we have taken it up to about 5, 5.5 weeks. We intend to bring it down to about 4 weeks at the end of November.

Ladies and gentlemen, due to time constraint, we will take last question from Jinesh Gandhi from Motilal Oswal.

Sorry, one last question on the railway business side. So we have seen a continuous decline in order book from almost INR 1,100 crores to INR 870 crores. Is this primarily reflection of a slower tendering pace from the railway side? Or is there something else over here?

Yes. Can you quickly repeat. I was...

So Jinesh, these are outstanding orders. And as you know, the pace of execution has increased. If you look at the numbers also in the last 2 quarters, the growth has been almost close to 50%. So the pace of execution of the orders has increased. As a result your outstanding order book has gone down. But we keep getting the orders continuously and that's why executing it faster. So that is leading to the increased turnover, but the order book may not look very healthy, although the execution has increased. But otherwise, I think it's a very strong visibility in terms of the orders placed.

Okay. So orders have come back to normal levels to pre-COVID, the pace of ordering?

Yes, that's correct.

Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to the management for closing comments.

So thank you, ladies and gentlemen, for being present on this call. For any feedback and queries, please feel free to write in to us at [email protected]. Thank you very much and wish you all and your families a very happy and prosperous festive season and a New Year. Thank you. Good evening.

Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.