Escorts Kubota : Concall Transcript February 2023 Your browser does not support the audio element.

"Escorts Kubota Limited

Q3 FY '23 Earnings Conference Call"

February 08, 2023

MANAGEMENT: MR. BHARAT MADAN - WHOLE-TIMEDIRECTOR AND

CHIEF FINANCIAL OFFICER - ESCORTS KUBOTA

LIMITED

MR. HARISH LALCHANDANI - CHIEF COMMERCIAL

OFFICER - AGRI BUSINESS - ESCORTS KUBOTA

LIMITED

MR. SANJEEV BAJAJ - CHIEF EXECUTIVE -

CONSTRUCTION BUSINESS - ESCORTS KUBOTA

LIMITED

MR. ANKUR DEV - CHIEF EXECUTIVE - RAILWAY

EQUIPMENT DIVISION - ESCORTS KUBOTA LIMITED

MR. PRATEEK SINGHAL - INVESTOR RELATIONS -

ESCORTS KUBOTA LIMITED

MODERATOR: MR. SAKSHAM KAUSHAL - PHILLIPCAPITAL INDIA PRIVATE LIMITED

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Escorts Kubota Limited

February 08, 2023

Moderator:Ladies and gentlemen, good day, and welcome to the Escorts Kubota Limited Q3 FY '23 Earnings Conference Call hosted by PhillipCapital India Private Limited. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touchtone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Saksham Kaushal from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Saksham Kaushal: Thanks, Vikram. Good evening, everyone. And on behalf of PhillipCapital, I welcome you all for Escorts Kubota Limited Q3 FY '23 earnings conference call. I also take this opportunity to welcome the management team. Today, we have with us, Mr. Bharat Madan, Whole-Time Director and Chief Financial Officer; Mr. Harish Lalchandani, Chief Commercial Officer, Agri Business; Mr. Sanjeev Bajaj, Chief Executive, Construction Business; Mr. Ankur Dev, Chief Executive, Railway Equipment Division; and Mr. Prateek Singhal from the Investor Relations team.

We would start the call with brief opening remarks from the management, followed by 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 releases of the company. Over to the management for the opening remarks.

Prateek Singhal: Hi. Thank you, Saksham. This is Prateek Singhal. Good evening, ladies and gentlemen, and thank you all for joining us on the earning call for the third quarter and 9-month ended 31st December 2022. Few highlights of the company's standalone performance for the third quarter ended December 2022 are as follows: revenue from operations during the quarter was up by 14.8% at INR 2,263.7 crores as against INR 1,971.5 crores in the previous fiscal.

On the sales volume front, tractor volume was up by 10.7% to 28,025 tractors as against 25,325 tractors last year same quarter. On the Construction Equipment, volume were up by 5% to 1,209 machines as against 1,151 machines in the last year same quarter. EBITDA for the quarter ended December '22 came at INR 190.3 crores, down by 31.7% as against INR 278.6 crores last year same quarter.

EBITDA margin for Q3 stood at 8.4% as against 14.1% last year same quarter. Margin adversely impacted mainly due to steep inflation, adverse product mix, coupled with price rationalization in our strong market. Other income during the quarter include a non-recurring item of INR 12.5 crores on account of contract termination recovery from erstwhile Tadano JV. PBT at INR 241.4 crores as against INR 268.8 crores last year same quarter. Net profit at INR 186.4 crores as against INR 201.5 crores last year same quarter. Company continues to be net debt free with sufficient availability liquidity for growth.

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Escorts Kubota Limited

February 08, 2023

On consolidated basis, company financial performance for the 9-month ended December 2022 is as follows: turnover at INR 6,214.2 crores, up by 15.2% year-on-year; EBITDA margin at 8.8%, down by 509 bps as against 13.8% in the last year same quarter; profit before tax and exceptional item at INR 610 crores as against INR 735.4 crores last year. EPS stands at INR 38.85 as against INR 55.48 last year same period.

Now moving on to the segment-wise business performance, starting with the Agri Machinery business. The domestic tractor industry during the quarter ended December '22 was up by 10.5% year-on-year to 2.47 lakh tractors. This is primarily attributed to positive farmer sentiments, led by above normal monsoon, better crop prices, ample finance availability, and better rabi sowing year-on-year, approximately up by 4-odd percent. During the quarter, industry in our strong regions of North and Central grew by 7.6%, whereas industry in our opportunity region of South and the Western India grew by 13.5%.

Our domestic volume grew by 12.3% Y-o-Y basis at 26,181 tractors as against 23,321 tractors in the last year same quarter, higher than industry growth, resulted in marginal gain in the domestic market share to 10.6% in Q3 as compared to debt of 10.4% last year same period. The company continued its channel network expansion during the quarter, primarily in our opportunity market, and our total dealer count in India at the end of December 2022 stood at 1,200 plus. Tractor export industry export volume was down by 14.4% to 29,300 tractors as compared to 34,000 tractors last year.

Our export volume was down by 8% at 1,844 tractors as against 2,004 tractors, resulted in increased export market share to 6.3% as against 5.9% in the same period last year. This is driven by our continuous focus on new product development and on expanding our distribution network through new channel partners.

Sales to Kubota's global network is also gradually increasing, and during Q3 contributed more than 35% of the total export volumes. Segment revenue for the Agri Machinery was up by 12.4% at INR 1,708.9 crores as against INR 1,519.3 crores in the corresponding quarter previous fiscal.

EBIT margin for Agri Machinery business stood at 8.3%, mainly impacted by steep inflation in commodity price, adverse product mix, and impact of price rationalization in certain products and geographies. The growth trend in the domestic tractor industry is likely to continue in Q4 also and industry volumes are likely to cross 9 lakh tractors and may register a new peak.

Coming on to the Construction Equipment business, our served industry comprising of backhoe loader, pick and carry cranes and compactors was up by 29% in Q3, mainly led by backhoe loader industry, which is also up by 29%, Crane industry is up by 35% and compactor industry up by 12-odd percent. Our total volume comprise of both manufacturing and traded products was up by 5% to 1,209 machines as against 1,151 machines in the same quarter last year.

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Escorts Kubota Limited

February 08, 2023

	Our export was adversely impacted due to unfavourable economic condition in our strong
	market of Nepal and Bangladesh. Segment revenue for the Construction Equipment went up by
	10.7% at INR 306.1 crores as against INR 276.5 crores in corresponding quarter previous fiscal.
	EBIT margin for the Construction Equipment business in Q3 has become positive and came at
	2.2% as against negative 2.6% in the preceding quarter and is expected to improve further in Q4,
	which is a peak sales volume period for the Construction Equipment industry.
	Going forward, on the back of robust demand led by increased capital spending by the
	government on various infra projects, including smart city development and irrigation projects,
	we expect growth momentum to continue in coming months for material handling and the
	Construction Equipment machinery.
	Coming on to the Railway Equipment Division. Revenue for the third quarter went up by 43.4%
	to our ever highest quarterly revenue of INR 249.3 crores as against INR 173.9 crores in the
	corresponding quarter. EBIT margin for the quarter ended December '22 stood at 13.1% as
	against 14.3% in the corresponding period last year.
	Continuing our focus on expansion and diversification of railway business product line, we also
	got the first-ever order of split brakes Discs, HVAC system and Train 18 damper during the
	quarter. Order book for the division at the end of December 2022 stood at a healthy and the ever
	highest level of more than INR 1,000-odd crores. For FY '23, we expect the Railway Equipment
	business segment will continue to grow at the similar pace.
	Now we request the moderator to open the floor for the Q&A.
Moderator:	We have a first question from the line of Gunjan Prithyani from Bank of America.
Gunjan Prithyani:	Yes. I have two questions. Firstly, on the margin side, if you can just give us a little bit more
	colour, because there's clearly a huge operating leverage on a sequential basis and there was also
	expectation of the RM easing or the steel easing, which was to reflect in this quarter. Both of
	these are very significant positive drivers on a Q-on-Q basis. So I'm just trying to understand
	what really took away all the benefit and we have a flat EBIT margin here?
Bharat Madan:	Yes. Thank you, Gunjan. So this is Bharat Madan. So I'll just pick up. There are 2 or 3 reasons
	actually for this margin, which has been more or less flattish compared to the sequential quarter.
	One obviously, reason was in the Q2, we had obviously much higher production because we're
	building inventory for the festive season. So while the sales numbers are high in this quarter, the
	production volumes are much higher in the previous quarter.
	So as a result, the leverage, which we get from the production overhead absorption was actually
	there, which was almost accounting for 1% to 1.25% in terms of the margin improvement, which
	happened in Q2. So if you remove that impact, actually, the margin in Q2 would have been much
	lower at maybe about 7-odd percent compared to that, if you really compare with this period.

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Escorts Kubota Limited

February 08, 2023

Now second, on the price increase, which was factored in the Q2, actually happened after the main festive season is already over. So we actually took a price increase, which was somewhere towards the end of November. So the full impact of that price increase did not come into this quarter, but by the time more than 60% volume for the quarter had already happened. So that's why we could not get the full impact of this price increase also.

And as far as the deflation is concerned, as you know, in the tractor industry, the major raw material is not really steel. Steel only constitute about 17% of the total material cost for us. So major costing which comes is more from the tires and the casting, which is actually bigger than scrap, where the prices have gone up by almost 50% to 57%. Now those impacts have yet to come in for the industry. So some softening did happen in the last quarter, but it's very, very marginal.

And we're expecting some softening will further happen in Q4, which can help us in getting better margin probably going forward. But as I mentioned, I think the material cost has actually been going up in a very, very steep manner. And we are still carrying unabsorbed material inflation as of end of December to the tune of 1% to 1.5%, which has not been passed on to the market and it doesn't look like it will get passed on right now looking at the condition of the market. But overall, we expect I think it'll take few quarters before you really see the normal margin coming back to the system. So I think until that time, we will have those challenges because the deflation is happening in a very, very soft manner while this inflation was very steep. It happened right in the first quarter in the beginning of the year.

So the entire year's margins are getting impacted with the Q1 inflation, which happened because of the geopolitical situation. The price increase happened on a staggered manner, which is also in the range of 1.5% to 2% each quarter what we had done. And in Q4, as of now, we don't see any indication of further price increases happening. So we have to really watch the situation what happens in Q1 next fiscal how the industry really reacts. And if we actually see the softening continues on the commodity side, maybe you will see some opportunity where the margins probably will start recovering.

Gunjan Prithyani: Okay. And mix also, Bharat, sir, if you can talk about, because if I think -- I mean, largely I get the sense that operating leverage was offset by this quarterly adjustment that you mentioned, 1.25% or so, but there is also an adverse mix that you all called out. So what is that?

Bharat Madan: So essentially, if you look at our market share, it has gone up in the sub 30 HP segment. So normally earlier we used to track the less than 40 HP and more than 40 HP segment, where still the more than 40 HP segment, there's not been major change. But within less than 40 HP segment, the market share actually has gone up in 21 HP to 30 HP segment for us.

Now, normally in the less than 30 HP segment, the realizations are lower than probably what you get in 30 HP to 40 HP segment, which is why the impact is coming. I think there's almost differential of about 1,000 odd tractors, where the additional volume has come in, in this segment, which has actually impacted the realization. If you look at even the average realization

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