V.S.T. Tillers Tractors Limited (531266) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to V.S.T. Tillers Tractors Limited 2Q FY '21 Post Results Conference Call, hosted by Batlivala & Karani Securities India Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Annamalai Jayaraj from B&K Securities. Thank you, and over to you, sir.

Thanks, Imba. Welcome to V.S.T. Tillers Tractors Limited 2Q FY '21 Post Results Conference Call. From V.S.T. Tillers management, we have with us today Mr. V. T. Ravindra Executive Director; Mr. Antony Cherukara, Chief Executive Officer; and Mr. Pankaj Khemka, Vice President, Finance. I will now hand over the call to V.S.T. Tillers management for the opening remarks to be followed by a question-and-answer session. Over to you, sir.

Yes. Good evening. Ravindra here. Mr. Antony will take this forward.

Yes. Good evening, everyone. And with me is Mr. V. T. Ravindra, the Executive Director of the company; Pankaj Khemka, the CFO of the company. In Q2, we have had a turnover of INR 220.39 crore. Compared to the previous year, it is a 37% growth year-on-year. The EBITDA has increased to 19.98% compared to the previous year of 8.28%. And operational EBITDA, if you remove the other income, is at 17.12% compared to previous year of 2.43%. PBT is at INR 40.96 crore against previous year of INR 9.6 crore, and profit after tax is at INR 30.03 crore against previous year of INR 6.39 crore. On the sales numbers, in quarter 2, we did 7,924 power tillers compared to previous year quarter 2 of 5,611 power tillers. On tractors, we did 2,751 tractors this quarter 2 against last year 2,201 tractors. The overall revenue for H1 is at INR 366.63 crores against last year of INR 300.56 crores. The power tiller revenue for quarter 2 is at INR 111.85 crores against last year of INR 72.41 crores, tractor at INR 86.02 crores against last year of INR 52.86 crores, parts at INR 20.45 crores against previous year of INR 19.77 crores, and Mysore Precision Component division at INR 1.18 crores against INR 1.07 crores of last year. So cumulatively quarter 2 at INR 220.39 crores against last year -- last quarter of INR 146.24 crores. So with this opening remarks on the performance of the company, I open up for questions.

[Operator Instructions] Our first question is from the line of Nishith Shah from Aequitas Investments.

Sir, I wanted to understand what is -- so I wanted to know more about the tie-up with Pubert. And what is the update, recent developments any?

Yes. Pubert, we have started selling Pubert weeders in India. In fact, it is progressed to SKD right now, and we intend to start CKD assembly by quarter 4 of this year.

And any updates on volume. How many have been sold in Q2 or planning to sell in Q3?

We have to date sold about close to 1,000 numbers of power weeders, 930 to be precise.

Okay. Sir, my second question is I wanted to understand how much would be the Chinese inventory of tillers in the system as of now.

I mean we don't sell any Chinese tillers, so we don't have any inventory. Industry, it is quite difficult for me to give you a number, per se. But I would say that more or less the inventory would have completely run out by now.

Okay. And now there are no chances of importing, right?

Yes, that is what the government regulation says.

Okay. Sir, and what is our market share for tractors and tillers for the segment for the quarter?

Yes. This is, again -- for the quarter, we have increased tractor market share by 0.7% for the less than 30 HP segment, and we are at 10.4%. And tillers, we have increased market share considerably, and we are at 55.4% market share.

Okay. And sir, I wanted to know about dealer addition we did during the quarter. And how much would be the dealer inventory?

Dealer inventory has gone down substantially from earlier last year same time levels of about 2,400 tractors in the dealer inventory. We are at about 1,400 tractors in dealer inventory. So it has considerably come down. The inventory of power tillers again has gone down at a dealer level. The number of dealer additions on tractors this year alone has been about 75 to 80 number. And on tiller side, it has been over 100 numbers this year so far.

Okay. And how much would be for higher HP?

Higher HP, currently, we are selling at about 100, 120 dealers across the country. We are not having exclusive tractor dealers for higher HP alone, but for all the tractors we are having dealers. So around 120 dealers are currently selling higher HP tractors.

Okay. And sir, what would be the number of higher HP tractors sold during the quarter versus last year?

In H1, we have sold about -- just give me a second. I'll just give you a number. 433 number we have sold.

And last year would be?

Last year whole year was about 260.

260 whole year.

For whole year, yes.

Okay. And sir, any provision for bad debts did we take during this quarter?

Yes, we have taken a provision of about INR 4 crores.

INR 4 crores. And sir, my last question is, what is our outlook going forward for tractors and tiller segment and growth expectations? And are there any supply constraints or that is now -- or there are no supply constraints now?

I didn't understand what you mean by outflow -- supply range outflow? What is -- what do you exactly mean by that?

Sir, how do we see the tractors and tiller market growing?

Okay, demand -- market demand, you're asking, is it?

Yes.

Okay. Market demand at least in the near-term looks positive. Quarter 3 looks positive, but it's quite difficult to predict on quarter 4.

Okay.

And as far as supply chain constraints are concerned, it's better than Q1 and early Q2 levels, which has improved considerably. But still, there are issues in terms of the supply chain not able to meet the demand that is coming up.

Okay. And sir, any update -- sir, my last question. Any update on the subsidy front?

There are few states that have released subsidy, which was mostly pending subsidy that is Karnataka is one. Then Assam is another one, which has released some pending subsidy. Other than that, there is no fresh subsidy announcement from any state.

Our next question is from the line of Hitesh Bhargava from B&K Securities.

Sir, regarding the market share, you have indicated that our market share for tiller during the quarter has increased to 55.4%. And on the other side, you also indicated that the Chinese inventory has come down. So from going forward, we can see this going above 60% levels. How is it -- I mean, how is the market share going forward can be there, is my first question?

Okay. So the answer to that is we are focused on actually growing the industry. So as I said last time, we are working with some importers who wanted to continue in the business. And hence, we will be supplying to them. We have already signed an agreement for supply. It's 1 of the main importers, earlier at least import from a specific country. Going forward, we are also talking to a couple of people. So we expect market share to be at about 55% to 60%. That is what we expect. But we are going to utilize our capacity manufacturing tillers for various brands.

Can you give some quantum? What will be the value in the revenue terms or volume terms, which we got the new orders from our competitors?

So 1 particular manufacturer we have signed with normally sells 3,000 units of tillers in the market. And another 1 we are in talks with sells about 2,000 to 2,500 tillers in the market.

Okay. And anymore you may get? I mean there are chances -- are you in talk with anymore -- I mean any more OEMs as well?

No, only these 2 we are in talks with right now.

Okay. Sir, actually, in our annual report, we have indicated that our long-time -- I mean, in the 5 years, we are supposed to reach the vision of INR 3,000 crores. Can you just give us what are the road map or what are the key areas, which the company is going to concentrate to attain this going forward?

Yes. Strategically, the key directions that we have taken is, number one, we are moving beyond the power tiller business to create a small farm mechanization business, that is point number one. Point number two, we are focused on building leadership in the compact tractor segment with the larger coverage and larger range of products being launched in that segment. Point number 3 is our focus on higher HP segment, is to increase capacity and launch tractors under the V.S.T. brand and also the V.S.T. Zetor product development that I have spoken to you earlier about. And number 4 is we are building our precision implement business out of our Mysore facility. And we are also looking at global distribution business -- to grow that business going forward. So these are some of the steps that we are taking in this direction.

Okay. And regarding the supply of tillers to our competitors who were previously dependent on Chinese. So what would be the margin there for that? Will it be similar to what we will be getting in the normal or they are margin dilutive?

No, it will be almost the same kind of margins that we are getting in the normal business.

So in that case, are they going to sell these new tillers, which they get it from us at a higher price than the regular Chinese tillers?

Yes. It will be -- because there are some product specification changes.

Okay. Okay. And regarding these Precision Components, which you are talking, can you just talk more upon this? And how is -- what you're going to do there? And how is it coming currently? How much is that revenue share? And how much is the future target and how you're going to attend all these things?

See, we have always been manufacturing rotary tillers in our tractor plants. So we have shifted the rotary tiller manufacturing to Mysore to lay more focus on that. Rotary tiller, which is attached on to a tractor, is a big business in India. So we want to exploit that area and also look at possible tie-ups with certain international players in this segment. We are already in talks with them, but it's too early to announce anything. Second is, we are looking at the sprayer segment. Our tractors are used in the vineyards and row crops where spraying is a major application. There are precision sprays that is available, which is currently imported by our pharma in India, some at a very large cost. So we are again in talks with few players to manufacture those electrostatic sprayers in the Indian market. So we are in talks on that as well. So these are 2 segments that we have identified, but we are looking for more opportunities, especially on precision implements.

Okay. And can you just talk upon how is that subsidy neutral tiller, which we are working? What is the progress over it? And can you just talk more how it will actually help us in improving market share also?

Yes. We have launched the subsidy neutral product only in 1 state, which is in Tamil Nadu. We have got very good response, initial response in Tamil Nadu. Tamil Nadu was a state wherein the government, when they had and announced that subsidy will not be given this year or very little subsidy will be given this year, hence, we decided to launch. And it's just 1 month, and we have got very good response in that market. And as I said earlier, it is not on market share. We are more interested in creating the industry because as leaders now, we are very clear that the business of power tillers will grow only if the industry grows, and we are focused on that. So this will help us grow that -- grow industry in Tamil Nadu. And similarly, we're looking at a couple of states where we will be launching in November and also in December.

Sorry to ask this, sir. But when you say subsidy neutral tiller, you are meaning to say that you're going to reduce the price of the existing tiller or changing -- can you just talk more on when you say subsidy neutral tiller how does it actually work?

Yes, I'll explain to you. There is a tiller, which is available at a price of INR 1,75000. That is INR 1,75,000 to the farmer. So typically, a farmer gets a subsidy of anywhere between INR 40,000 to INR 50,000. So the farmer gets to own the tiller having spent about INR 1,25,000. That is how subsidy works. So what we are trying to do is make a tiller available to the farmer at about INR 1,25,000 to INR 1,35,000 in that range. So that it is as good as for him getting a subsidy.

Okay. So are we compromising on something for this? I mean, on the profitability part?

Profitability in the sense, there will be a certain lower profit on this particular unit. But I would -- I think this we have said earlier that we run our plants at 50% to 60% utilization. So that is what we are focused on, increasing utilization to it. And hence, if you look at the whole, the profitability doesn't go down.

Okay. And can you talk about the remaining implements? How is it doing? I mean you are talking about the weeders. How about the rice transplanters and reapers? And also the GroTech -- the solutions business, which we were also touching upon in our annual report. Can you just talk on that as well?

Yes. So as I said to your previous question that the strategic direction that we have taken is moved beyond power tillers and into small farm mechanization. So we want to offer to the farmers all mechanization products, farm mechanization products between 1 to 2-horsepower to 16 horsepower. So this will include weeders, light, medium and heavy-duty weeders. It will include brush cutters. And we are looking at various other implements and applications in this segment as well. We have already launched brush cutters also. Similarly, then we are looking at the entire power tiller range. So this encompasses mechanization from 2, 3-horsepower up to 16 horsepower. So we will be creating hubs across the country. Initial target is to create 1,000 hubs across the country and transform this business entirely into a small farm mechanization business. That is point number one. And your question was on GroTech solutions. As I said, these are crop specific solutions that we have developed working with some third-party companies on sugarcane and on ragi, on rice. We have a particular partner in UP for sugarcane, another partner in Andhra Pradesh for rice. And we are increasing the number of farmers who are subscribing to these solutions. And eventually, we want to evolve this business model, aggregating using digital tools. This is a way forward, but it is work in progress for us at this point in time.

Okay. Sir, I have 2 questions. Can you just talk -- I mean, give the revenue breakup of this quarter?

Just a minute. For this quarter, yes. Yes. So in power tiller, it is about INR 111.85 crores, tractors it is INR 86.02 crores, then spare parts is about INR 20.45 crores, Precision Component division about INR 1.2 crores. And totally, it is INR 220.39 crores.

I mean the last question regarding our gross margin. So I mean, over the period, it has come down -- I mean, almost reached to our normal levels of couple of years back. So will the current gross margin levels may sustain? And also our EBITDA margin, what is the sustainability? Can you just talk upon this? Sustainability of the current performance?

The margins will come down because we intend to spend for growth.

Okay. On the gross margin part?

Yes. Yes. At the contribution level, we'll get better. But at the EBITDA level, we will be slightly lower because we will be spending more money on growth in terms of product development, in terms of brand building and in terms of market promotions.

Okay, sir. And last question, sir. During this quarter, how many new dealers we have expanded into North India?

I don't have an exact number on North India. Can I get back to you on this?

Okay, sir.

We will get back to you on this, yes.

We'll take our next question from the line of Mukesh Saraf from Spark Capital.

My first question is just continuing on the margins that -- like you had mentioned that you will improve your gross margins, but you would obviously be doing a lot more, say, brand building, A&P kind of activities, so your margins might come off from the current 17% levels. But what kind of margins do you have in mind as a margin range that you think you can sustain at? Because if your gross margin improve you will be looking to kind of sustain at some level of margins?

Mukesh, we have spoken about it earlier. I told you that we would be at about 14%, 15%.

Okay. So yes, so you'll maintain that 14%, 15% range?

Yes, yes, yes.

Okay. Got that. And secondly a quarter back question you had mentioned that you had started seeing initial trend of some of the farmers buying the tiller without the subsidy, without waiting for the subsidy because there was -- and they were in a situation where they could buy it. Do you see that continue? Or was that just a one-off kind of an event where you saw some farmers buy without subsidies? Or you see that continue even now that people are not waiting for the subsidy to get announced?

Yes, that is continuing, but the percentage has come down. See those June, July period, we saw it is as high as 45-plus percent. Now it is at around 29% to 30%. But it's still continuing, which is a welcome thing compared to the previous years.

Right. Right. Right. So the third question is on these weeders, et cetera, that you are mentioning that you want to get into in a big way. Currently, it is imported. You are going to move to CKD from an SKD. But when is the plan to start manufacturing, not just weeders, even the other implement that you have mentioned? How is the time line that you plan for manufacturing these?

Yes. Right now, product development is on in terms of manufacturing and also in terms of localizing. So we expect to manufacture them by next financial year.

All of them, sir, the weeders, the cutters and all of them or just weeders?

I mean we are not going to do everything, that is for sure, but there are specific models that we would want to manufacture in India.

Right. Right. Right. Understood. And the repower -- that venture of yours, that is going as per plan? You'll start doing the initial manufacturing sometime end of this year, beginning next year?

We are in the product development phase now. So as I said, it will be available in the market only by '22 or early '23.

So initially, you were mentioning that you might see some products starting next year, that's FY '22? But...

Yes, FY -- I mean, late FY '22, that is -- okay '21. Yes, late -- I mean, I'm talking about last quarter of next financial year or early, then -- I mean, early part of FY '23.

Okay. That's when your first products will start coming out?

Yes, yes.

Okay. And just the last question. The previous quarter, you had given a basic outlook of, say, 15%, 20% growth in tillers and 10% to 15% in tractors. How do you see that now? Any kind of change in that outlook?

Right now, we are clocking better growth than I had told you. But as I said to the previous person that quarter 4 is a little heavy to us right now. I think as we move forward, it will get clearer. I mean it's typically in terms of the harvest and the procurement that is happening now. Whether it will continue into Q4 is what we are looking at. That is one. Secondly, there is an aspect of subsidies, which normally comes in March, which may not come this year. So these are the 2 aspects that we are looking at into quarter 4.

Our next question is from the line of Kunal Sabnis from VEC Investments.

Sir, my first question is on the tillers sales volumes...

Sorry to interrupt. If you're on a speaker mode, can you switch it to handset, please and speak?

Is it better?

Yes, sir.

Great. So my first question is on the tiller volumes. The previous sense was that most of the sales were dependent on subsidies. And that basically was completely opposite what happened the rest of the year. Now with the previous speaker, you mentioned that the proportion of sales of nonsubsidy tillers has had gone down. But if the thought process changed in this particular segment that can sales still happen without subsidy or I mean how can you explain the such high amount of sales that happened on a nonsubsidy basis?

Yes. So definitely, there is a trend change wherein sales is happening without subsidy being announced or released. That is very evident. Otherwise, growth that we are seeing now would not have happened. Now what has aided this? I think 2 things. One is the need of farm mechanization because nonavailability of labor and, secondly, better cash flows in the hands of the farmer in the first 2 quarters of this year with better procurement happening and better minimum support prices and better -- I mean overall better cash flow to the farmer. So I think these are the major drivers that we have seen. And as I said to the previous person also, it is -- the trend has definitely changed compared to previous years.

Right. Is the subsidy neutral product tiller also playing a role in these sales? Or that's still a miniscule portion of Q2 numbers?

No. These are miniscule portion of the Q2 numbers, but our theory is holding good because the first state that we launched and the only state we have launched so far we are getting extremely good response.

Right. Right. And as you mentioned that you are not sure if -- how Q4 will shape up, but this change in thought process at the farmer level should aid -- I mean, there shouldn't be a drastic drop in volumes, right? I mean, is that thought process correct on the products delivered?

Yes, that's what we are expecting.

Got it. Sir, on the margin front, if you could explain a bit the 17% -- I mean, the bump up was much higher than the steady state guidance, which also looked kind of out of reach 2 quarters before. So what has driven the 17% margin?

Kunal, you will have to -- I mean, I think we had discussed this earlier, and I had told you that we will be almost back to normal. But while having said that, definitely, there is a 3% to 4% cost reduction in this COVID time because travel is not happening, because certain marketing, advertising, sales promotion events that we had planned we have not put in place. So definitely I would subscribe 3% roughly on that. So we are at about that 14%, 15% that I have been talking about.

Got it. Perfect. So yes, my question precisely was on that extra 3% to 4%, but that's because of the cost factor. Sir, my final question on the other income. Is there a portion of mark-to-market on the investments in that INR 9-odd crores?

Yes, there is. It is about INR 7 crores. Mark-to-market appreciation is how much, INR 6 crores to INR 7 crores, yes, roughly about that. How much? INR 4 crores for quarter 2 on mark-to-market.

INR 4 crores?

Yes.

Our next question is from the line of Kaushal Shah from Dhanki Securities.

Yes. Congratulations on the great set of numbers. Sir, most of my questions have been answered. I had 1 question on the new dealer additions. You mentioned this time added around 80 dealers for tractors and around 100 dealers for tillers. So is that number correct?

Yes, that is right.

Okay. And these are exclusive dealers? I mean, when I say mutually exclusive in the sense, is that total number 180 or there would be dealers who would be selling both the products?

No. Total number is 180. It is exclusive, independent dealers for tractors, independent dealers for tillers.

Okay. Okay. And sir, if I have to just move very, I would say, basic math that, let's say, these 100 new dealers. If they would potentially do maybe even 5 tillers in a month and the remaining part of the year, we have, let's say, about 5 months left. So potentially, can we see an additional sales of around maybe 2,000 tillers coming? I'm just thinking...

But yes, that is something we have sort of a speculation. So no, but, see, our effort is to increase sale at every dealership. So -- and we don't see any dearth of farm mechanization requirement. So given these 2 demand drivers, I think, what, your assumption should be right.

Sure. And just 1 last confirmation on the EBITDA margins. Did you say that around 14%, 15% range is sustainable?

14%, 15% looks sustainable. Unless there is a particular event that we -- get us to spend more to sustain the business.

Our next question is from the line of Devanshu Sampat from Yes Securities.

I just wanted to know what's your total dealer count as of date? And what's your target for the end of the year and maybe next 2 to 3 years, if you have something in mind?

Yes. So dealer count is at about close to 300 for tractors -- close to about 330 to 340 for tillers. We are continuing to grow the network at about 15 dealers a month for tractors and about 20 dealers a month for tillers. And we will continue to grow that, which I have shared with you. Our tractor, we are looking at growing to about 700 dealers. And for the small farm mechanization, we are wanting to grow up to about 1,000 numbers.

Okay. And in terms of your vision to grow by 6x over the next 4, 5 years, so just wanted to understand this strategy. Do you expect to contribute substantially by then from the ones that you've listed out? And where does exports or contract manufacturing stand within this strategy? Or in terms of the expectations?

Yes. I think this kind of growth can happen only if we fire on all cylinders. So growing in the marketplace to increase coverage and increase network is 1 and the forward strategic directions I have already spelled out to you. So working on compact tractors, increasing the range of products in compact tractors is equally important. Getting to grow the small farm mechanization by creating a range of products between 2 horsepower to 16 horsepower is equally important. The exploiting the potential in precision implement is equally important. Also creating a distribution business using our spare parts distributors and retailers is equally important. So this kind of growth is only possible if we fire on all cylinders. So the focus is on each of these businesses to grow as fast as possible. And we have created the profits and the concept to drive the businesses individually finding leaders for driving these businesses that has already been put in place. So I think that answers your question.

Okay. And any update on the contract manufacturing deal that you were planning with the company in France? Is there any...

Yes. So I answered -- yes, I'll repeat again. We have signed a contract with 1 particular -- I mean supplier or brand in the market, which is about 3,000 in number. And he does about 3,000 tillers...

No, that's about the tillers, right. I'm talking about the French company that you were in talks with.

The power weeder. The power weeder, as I said, we have moved to the SKD, and now we'll be moving CKD by quarter 4. And eventually, we want to increase the range and start manufacturing also. So that work is in progress.

Our next question is from the line of Chetan Cholera from Pragya Equities Private Limited.

Yes. Most of the questions are answered. Just repeating the -- I think you might have answered. Regarding Zetor 50 HP and up to maybe 75 HP, will be ready by which year?

FY '22, end of FY '22 or early FY '23.

Okay. So I think initially, we were planning quite earlier, right?

No. This has been the time lines. We have had a 2, 3-month delay, but that is more than recoverable because of COVID-19, and we couldn't travel and testing. But I don't think that has affected the project.