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

Thank you, Faizan. Good afternoon, everyone. Welcome to the V.S.T. Tillers Tractors 1Q FY '22 Post Result Conference Call. From V.S.T. Tillers' management, we have with us today, Mr. V.T. Ravindra, Managing Director; Mr. Antony Cherukara, Chief Executive Officer; and Mr. Pankaj Khemka, Chief Financial Officer. I will now hand over the call to V.S.T. Tillers management for their opening remarks to be followed by Q&A session. Over to you, sir.

Good afternoon, everyone, and thank you for being with us here today. Happy to take you through the earnings call and give you a brief before we go -- get into the question-answer session. In quarter 1, we had a revenue of INR 193.60 crores, which is a growth of 32.39% over previous year. The operational EBITDA was at INR 25.39 crores, which is 13.11%. And EBITDA, including the other income was 18.11%. The PBT is at INR 31.20 crores, which is 16.12%, and profit after tax is at INR 24.01 crores, which is a growth of 40.7% of the previous year. In quarter 1, we did power tiller volume of 6,729 tillers against the previous year quarter 1 volume of 5,186 tillers. And the revenue in the power tiller business was INR 94.47 crores against the previous year revenue of INR 72.41 crores, which is a growth of 30%. In the tractor business, we did a volume of 2,048 tractors against previous year volume of 1,766, and revenue was INR 69.41 crores against previous year revenue of INR 52.86 crores, which is a growth of 31%. And the parts business was at INR 28.39 crores against previous year of INR 19.77 crores, which is a growth of about 44%. This is the initial brief on the performance, and now we could move on to the question-answer session. And with me also is Mr. V.T. Ravindra, who is the Managing Director of the company; and Pankaj Khemka, who is the Chief Financial Officer of the company. Thank you. Over to you, gentlemen.

[Operator Instructions] The first question is from the line of Ram S. from Spark Capital.

Sir, firstly, I wanted to have your outlook on the power tiller and tractor volume growth for FY '21. And also, I wanted to know how are the B2B supplies of power tillers? How's that segment of the business progressing?

I thought that you had asked for outlook for FY '22, right?

That is correct.

Yes. So the FY '22 outlook we're looking at this positively. And currently, as I said, we have a growth of about 30%, and we expect to be in that range of growth this year, considering that we have launched new products in this segment. Also, our coverage is growing up. Our number of dealership appointments has increased. And the tractor business, of course, is very highly competitive. We have seen a growth of about 30% in the first quarter. However, I am looking at a growth of about 10% to 15% in the tractor segment, considering again the new product launches and the coverage increases -- increase that we are doing. And the second part of the question, I think you were asking on -- I missed the second part of your question. Can you come again on that, please?

The contract manufacturing of power tillers...

Yes. The contract manufacturing, yes. So that is -- as I said last time, we are engaged with 2 importers who are importing earlier and now that is going steadily. The volume in first quarter both put together was about 500 to 600 numbers. So that is only likely to increase as we move forward. We are also looking at 1 more possible OEM, and that should be concluded in this quarter.

Excellent. Sir, my second question is on power weeders. Now we have a tie-up with Pubert and in conjunction with Pubert, we plan to introduce power weeders in India. Any update on that tie-up and where we are at this point in time?

Yes. The tie-up continues and the sales volume and the coverage on that is increasing. The growth is good in that segment as well. Last year, as you know, we did about 1,700 to 1,800 volume. We expect to -- as I've said in my earlier calls, we should be able to do upwards of 5,000 power weeders this year. However, the work with Pubert has to go a long way because travel not happening to France or for them to visit us in India, that has been an obstacle to take the alliance or collaboration to the next step. So that we have -- that's still awaited.

Right. Perfect. And sir, my last question is something that I have observed in the annual report. So if I look at the breakdown of other income, there is a line item called write-back of credit balances. And this line item was about INR 10 crores in FY '21, about INR 14 crores in FY '20. So could you tell us a little more about what exactly is being written back? What are these balances pertaining to?

Yes. I will request CFO to get into the details of this one and give you the answer on that.

Yes. See, in quarter 1, we have written back approx INR 2.9 crores of write-back, which are basically, these are all 3 years old provisions, which were carried on books. We reviewed them and we found that it is no longer required. So we have written it back in the first quarter.

Okay. Would you be able to give an estimate of how much would this write-back figure be for FY '22?

More or less, it is done. We don't see any significant jump in write-back values for the remaining 3 quarters.

[Operator Instructions] The next question is from the line of Jiten Shah, individual investor.

Yes. This is Deepane here. I had a couple of questions. Firstly, as far as your outlook is concerned, you said about 30% growth in the dealer segment. Now how do you see the situation on ground right now? Has the monsoon kind of increased the demand? And there are also talks about the rural income increasing over the last couple of months. So if you can just give us some more insight into how the ground situation is for tillers as well as on the tractor front, that will be great?

Yes. The monsoon spread has been quite okay this year. We were all expecting that, although the last few weeks has been a little touchy, but we expect that the monsoon to be normal this year. That is number one. And the area of sowing also is almost equivalent to last year already. So I don't see any issue in terms of the sown area of crops or the monsoon. Now as far as rural sentiments are concerned, all of us know that the Wave 2 hit rural compared to Wave 1 badly. And hence, it had an effect of consumption going down during that period of April, May. But I would say that consumption is almost back. And in fact, the report -- latest reports have been saying is that the rural consumption is at, in fact, better than the urban consumption. And we kind of see the same sentiments on the power tiller as well as the tractor sales figures. However, there is a challenge that all of the industry is facing, which is the commodity inflation and hence the increased price that is passed on to the consumer, which could become a dampener going forward. Otherwise, the sentiments look positive.

Okay. So that brings me to the next question, sir. How's the raw material situation right now? And how do you see the margins panning out? And also yesterday, on the media, there was a comment that you could be reaching a turnover of about INR 1,000 crores in the current year. So if you could just validate that, sir?

Yes. So see, we -- as we have mentioned even in the annual report, we have a vision of achieving INR 3,000 crores by 2025. And we aspire to the second milestone maybe this year. And as per that aspiration, we should be crossing INR 1,000 crores this year. As of now, we are on path to get that done. However, there is always this COVID Wave 3 that is there in the air, which is an unpredictable situation for any one of us. So that is the only risk that we see going forward for this year. And the commodity inflation in the last 3 to 4 weeks, it stabilized a bit, but it's again an unpredictable situation there on the -- which is more influenced by international price movements. So it is, again, totally unpredictable at the moment.

Okay. But as of now, do you hope that to achieve our -- to maintain the margins at the last year levels or maybe improve them?

We are striving to improve the margins, of course. And for that, like I have said before, also in various calls, we have done a lot of -- apart from the -- addressing commodity inflation through price increases that is just 1 method. But we've been working in terms of increasing efficiency, cost reduction, that has also played a role in terms of our operational EBITDA being maintained at where it was, if you look at it, and in fact, bettered it in quarter 1.

The next question is from the line of Vimal from Union AMC.

Sir, I appreciate your vision to sort of reach INR 3,000 crores in -- by FY '25. But -- so if I were to look at this company's history and if I were to look at the segment that it is operating in the power tiller segment, the segment has historically faced the -- faced ill effects of -- the inefficiencies within the government because it's a subsidy-sort-of-driven product. And how do you see this changing? I mean we have had issues with this for a very long period of time. And what suddenly changes for us in the next 5 years that we're sort of keeping such a vision? If you could just take us through what steps is the company taking? And what is the road map for reaching this INR 3,000 crore of top line in FY '25? The second part to that question itself will be what happens to profitability? I hope you are keeping an eye on the kind of operating leverage that this turnover can generate. So are we looking at meaningful margin expansion along with this as well?

Okay. So first part of the question is on the subsidy. See, like earlier earnings calls also I have mentioned that there is a trend change in terms of how subsidy is viewed by the consumer. The big trend shift that has happened is consumer doesn't base his purchase decision currently on the subsidy. Earlier years what used to happen is only when the subsidy is declared, people would come forward and purchase the power tiller. Now what we see is the farmer goes ahead with purchase of the power tiller and he waits for a subsidy, if at all it comes. So probably, the reason for that and what we have analyzed and understood is, over the years, the farmers have not got the subsidy on time. So they realized over 3 to 4 years that there is no point in waiting. So 1 big shift that I'm seeing is the purchase decision itself has -- the trend has changed, point number one. Now coming to our power tiller business growing, yes, we are leaders in this industry with over 53%, 54% market share in quarter 1. So we realize that we have to grow the industry and the potential is there because a small and marginal farmer really needs this machine because this is only affordable product for mechanization for him. Otherwise, a tractor comes at INR 5,00,000 upwards. So -- this is the larger and the larger segment in India in farming is a small and marginal farmers. So there is a huge potential. And in this regard, we have started launching newer products now. We're launching 16 -- we have already launched rather 16 HP power tiller. We are also launching a 9 HP very innovative product into the market this year. So that is -- these launches plus our increased coverage of dealerships. Earlier, we used to operate with about 200 active dealers. Today, as of end of quarter 1, we have about 450 dealers in power tillers. And they continue to increase and increase the coverage in the market. So all these put together, we believe that the power tiller and small farm mechanization business can grow. That is point number one. Point number two, V.S.T. is no more a power tiller company alone. We have a large play in the tractor business. We are the seventh or eighth player in the industry, with large focus on the compact tractor segment which is the industry size of last year of about 90,000 where we have about 10% market share. We are trying to increase the market share there and increase coverage by launching of newer products in that segment. Apart from that from last year, we have also entered into higher horsepower space, which is the large industry, which is almost 800,000 size. That segment of the business is also growing. And like last earnings call, I mentioned we have taken also other initiatives of getting into precision implement business, that business is also growing. So put together, all these strategies put together is what we want to scale up and get to INR 3,000 crores.

So sir, precision implements, could you highlight more? What exactly these machines are? What do they do?

Yes. So we have started with rotovators, and this manufacturing and assembling has started in Mysore. We are also in talks with a couple of foreign companies where we want to collaborate with them for further technology in the rotary application space. Secondly, we have also got into sprayers and because that sprayer segment is something natural for us because most of the compact tractors that we sell go into inter-row cultivation like vineyards and other row crops and orchards and all that application. So that segment, which we were already operating in, we want -- we are getting in with sprayers there. And secondly, we are also looking at technology in spraying by talking to people who can help us get into electrostatic sprayers and things like that. That also work has started and business is progressing. And I think 1 more part of the question you had spoken about is the profitability. Yes, we have an eye on profitability. However, as I said earlier also, we are gunning for growth how -- the profitability will be maintained at 12% to 14%, which I have mentioned before.

Sir, I appreciate your intent to maintain profitability. But looking at the long-term trend, I mean, INR 3,000 crores of top line. My assumption is that your certain fixed costs would grow at the same pace. So assuming that operating leverage will kick in, your margin should essentially expand. And if at all, you don't see them expanding, some portion of your variable costs are sort of going up. So which line items are sort of moving here, sir?

That's why I said there is a band for the margin from 12% to 14%. We will be more tending towards the higher part of that slab and slightly probably above it also when the operating leverage is very good. But however, in the initial phase of growth, we all know that the OpEx requirement is also pretty high because you have to scale up your presence in the market, you have to scale up your spend on the brand, you have to scale up your advertising spend. So these things will definitely be an expenditure which we will have to do going forward, and hence, this band of margin that I'm talking about.

Right. And sir, your -- the largest tractor player in India has -- is also going very aggressive on farm mechanization as a business opportunity. How are you fending off that competition, sir?

We are not obviously being the largest player and much, much bigger than as we are not in direct competition. But what we've really looked at is, can we look at technology? That is why we are getting into precision implements. So that is why I want to bring in technology in the rotary space, not just get into broad-based implements, which will go with the tractor. So we are looking at very niche segments in the rotary space, where there will be decent volumes and very good margins. Similarly, in the sprayer space where actually, we are leaders in the compact 4-wheel drive segment where maximum of this spraying application happens. And that eventually -- since the prime mover is ours, the tractor is ours, we should be able to easily capture the sprayer segment as well. And there is also a lot of technology that can be brought into that space. However, that is work in progress for us.

Right. Sir, last question. Most of the products that you have highlighted -- most of these products are sort of localized, right? I mean is there any product that you are sort of importing right now currently and probably looking to localize it once you achieve scale, or how is it...?

Yes. That's what I said. Definitely, we are looking at technologies that can be brought in. We are in talks with a Japanese company. We are in talks with a European company. So both these technologies, we are doing a lot of trials at this point. And I can't say anything at this point because the routes that will be taken is under discussion even now. So once that is finalized, I will come out and tell all of you what we are doing.

Right. And this 12% to 14% margin band is after considering the technologies brought here and manufactured here, right?

Yes, yes, yes.

The next question is from the line of Devanshu from Yes Securities.

Sir, I had a few questions. One is to do with exports, right? Sir, am I audible?

Yes, yes. You're audible.

So we did about 450 tractor volume exports in FY '20; I think, about 680-odd in FY '21, if I'm not mistaken. And we've already crossed about 400 in the first 4 months of this year. So can you give a sense on what is the outlook? And if you can explain how we are expanding and whether this is all through Zetor?

No. None of this is through Zetor. However, the Zetor alliance is helping us to expand in Eastern Europe through references using their warehouses for keeping or keeping a couple of tractors of ours where the prospective dealers can visit and take a look at the tractor. So this kind of work is happening with Zetor, but it is not being sold through the network of Zetor. Now the reason for growth is purely our distribution expansion in Europe and in Africa. So we have expanded into Eastern Europe as was the plan stated to all of you earlier. And also, we have expanded our network in Africa compared to earlier. So you're right, we have seen good growth in exports, and I think that will continue this year.

So are we looking at about 1,000-plus, 1,200 -- 1,000, 1,200 volumes this year?

Yes. That is what we're looking at.

Okay. Sir, then coming to another broad question. If the MD or you can choose to answer this. So V.S.T. Tillers is clearly trying to move to the next level, right, in terms of efficiency, products and scale. So when you look at some of the good companies in other sectors who are pretty much attempting to do the same, they've built a strong CXO team around the senior management, and they've also been incentivized through ESOPs. So I just wanted to get a sense of how are we building a team around the MD and the CEO? And do we plan to issue ESOPs linked to the financial progress of the company?

Yes. I'll request MD to take this question.

Yes. So on the management bandwidth, we are building a lot of strength there. So you would have seen the change happening over the last 2 years itself. We are professionalizing the whole management team, and we -- and looking at -- building the strength there to take it to the next level. So ESOPs, that's something that the Board will have to take a decision. Yes, we have some thoughts on that, but nothing finalized on ESOPs as of now.

Okay, sure. And sir, in your INR 3,000 crore vision, do inorganic opportunities fit in anywhere? And if so, in which segment are we looking at?

Yes, we are looking at inorganic opportunities, presently something that is in the agriculture and similar sectors, so that it's easier for us to handle.

Can we expect an announcement anytime soon in this year?

Yes, I'll elaborate a little bit on that. See, we're looking at the farm-farmer rural market canvas and evaluating opportunities. But it's too early to announce anything at this point. But definitely, it is again something we are working on.

Okay. Okay. Sure. And then last question. Your employee costs have risen on a Q-o-Q basis, even if I knock off the VRS that we paid in the previous quarter. So is there any more component of that? Or can we expect the run rate to be what it is right now? And maybe if you can just explain as to the reason for the jump?

See, the employee cost as a percentage has definitely come down, if you compare year-on-year compared to previous quarter 1. And compared to even quarter 4, it's slightly down, if you leave out the onetime expenses, which is given in the note for quarter 1, which is a leave encashment of the VRS employee, which is given in the note. So it is about 8.83% actually.

After reducing the ...

After reducing the leave salary onetime expense for the VRS settled employees. So it has actually gone down. And I don't think that going up.

So this INR 18 crore figure should be -- could be run rate for the next few quarters, right?

Yes, yes.

The next question is from the line of Smitesh Sheth from Raedan Securities.

Yes. Yesterday in the media interview, there was some mention about the real estate parcel, so could you give some details about what is the size of it? And what are the eventual plans for it also, maybe in next 1 year, 2 years? And how do we plan to monetize it, sir?

Yes. So this is a land parcel, which was having the manufacturing facility for us. Now that has shifted to Hosur. Right now, we have our corporate office in this place, and we don't intend to do anything at this point in time because this is not the right time for real estate. And definitely not in the next 1 or 2 years, probably beyond that. Let's -- I think there will be the best time to realize the full value of this at a later stage.

Sir, what is the size of it in terms of the area or something?

I don't have an exact figure, but it's around 20 acres.

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

Sir, if you can share the higher HP tractor numbers for the quarter?

Yes. We have done about 170 tractors of higher HP.

Okay. And so, if I recollect your guidance, we were planning to do around 1,000 numbers for the current year. So -- in the higher HP category, so I think that should be doable, right?

Yes.

Okay. Sir, the next question was on the tiller volumes. Obviously, we've done a great performance over there. Even on tiller side, the contract manufacturing part, where we have done roughly around 600 numbers, so there also, I think we have guided for something like INR 3,000 number volume for the current year. Now considering that we've done 600, do you think that can also be -- is an achievable number?

More or less, we will be there.

Okay. Okay. And so your volume number for the current year, which you mentioned earlier too, which is this 30% growth that includes this number also, correct?

Correct. Yes.

The next question is from the line of Anand S. from B&K Research.

I just wanted to ask some bookkeeping questions. What was the tiller and tractor revenues for the quarter?

Tiller revenue was INR 94.47 crores, tractor revenue was INR 69.41 crores.

And what is the export volume, sir?

Export volume was 264 tractors for Q1.

Yes. And in the tiller's space, what's our market share, sir, for the quarter? Any changes we could see, any improvement?