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Edited Transcript of ESCORTS.NSE earnings conference call or presentation 29-Jul-19 11:30am GMT

Q1 2020 Escorts Ltd Earnings Call

Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Escorts Ltd earnings conference call or presentation Monday, July 29, 2019 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ajay Mandahr

Escorts Limited - CEO of Escorts Construction Equipment

* Bharat Madan

Escorts Limited - Group CFO & Corporate Head

* Dipankar Ghosh

Escorts Limited - CEO of Railway Equipment Division

* Shenu Agarwal

Escorts Limited - CEO of Escorts Agri Machinery

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Conference Call Participants

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* Abhinav Ganeshan

* Amar Pratap Singh

The Dun & Bradstreet Corporation - Manager

* Gunjan Prithyani

JP Morgan Chase & Co, Research Division - Analyst

* Hitesh Goel

Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst

* Jinesh K. Gandhi

Motilal Oswal Securities Limited, Research Division - SVP of Equity Research

* Mihir Jhaveri

* Mitul Shah

Reliance Securities Limited, Research Division - VP of Research

* Pravin Yeolekar

CIMB Research - Analyst

* Raghunandhan N. L.

Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst

* Riken Gopani

Infina Finance Private Limited - VP

* Sabyasachi Mukerji

IndiaNivesh Securities Limited, Research Division - Research Analyst

* Sameer Deshpande

Fair Deal Investments Limited - Owner

* Siddhartha Bera

Nomura Securities Co. Ltd., Research Division - Associate

* Vijay Sarthy T.S.

Anand Rathi Financial Services Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Escorts Limited Q1 FY '20 Earnings Conference Call, hosted by Emkay Global Financial Services Limited. (Operator Instructions) Please note that this conference is being recorded. I now hand the conference over to Mr. Raghunandhan N.L. from Emkay Global. Thank you, and over to you, sir.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [2]

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Thank you, Neerav. Good evening and on behalf of Emkay Global Financial Services, I welcome you all for Escorts Limited Q1 FY '20 Earnings Conference Call. We thank the management for providing us this opportunity. I also take this opportunity to welcome the management team from Escorts Limited. Today, we have with us, Mr. Shailendra Agarwal, Executive Director, Escorts Limited; Mr. Bharat Madan, Group Chief Financial Officer and Corporate Head; Mr. Shenu Agarwal, CEO, Escorts Agri Machinery; Mr. Ajay Mandahr, CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh, CEO, Railway Equipment Division and Investor Relations team at Escorts Limited.

We would like to start the call with brief remarks from the management followed by an interactive Q&A session. At this point, I would request Mr. Madan to make his opening remarks. Over to you, sir.

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [3]

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Thank you, Raghu. Ladies and gentlemen, a very good evening to you all. Thank you all for joining us on the earnings call for first quarter ended 30th June 2019. I'll start with a snapshot of company's standalone quarterly performance, which is as follows: turnover at INR 1,423 crores against INR 1,511.3 crores last year is down by 5.8%, which is primarily due to drop in tractor and construction equipment volumes.

Tractor volumes went down by 14.1% to 21,051 tractors as against 24,494 tractors last year.

Construction equipment volume went down by 20.7% to 1,067 machines as against 1,345 machines last year.

EBITDA at INR 142.4 crores against INR 185.5 crores last year is down by 23.3%. EBITDA margin now stands at 10% against 12.2% last year.

Finance costs went down by INR 1.6 crores to INR 5.9 crore as compared to quarter ended March 19. The total debt outstanding as of June 19 is INR 124 crores down from INR 277 crores in March 19. Net debt, however, continues to remain negative at INR 409 crores.

PBT stands at INR 129.1 crore as against INR 179.1 crore last year same quarter. The company reported a PAT of INR 87.5 crores versus INR 120.7 crores last year on a stand-alone basis. PAT margin now stands at 6.2% versus 7.9% last year. EPS is reported at INR 7.31 as against INR 10.10 last year same quarter.

Now moving onto segmental business performance. Starting with the Agri Machinery business. Domestic tractor industry volumes went down by 14.7% to 1.91 lakh tractors as compared to 2.24 lakh tractors in previous fiscal same quarter. Our domestic volume went down by 15.9% at 20,122 tractors as against 23,939 tractors in previous fiscal same quarter due to channel inventory correction. The current channel inventory at the end of June '19 stands at about 3 to 3.5 weeks' level, which is a comfortable level. Industry in our strong markets de-grew by 2%, whereas industry in -- de-grew by 31% in the opportunity market of South and Western India.

The sentiment of the farmers and the industry have been dampened; firstly, due to delayed monsoon season and lower sewing, lower reservoir levels in western and southern regions, low subsidy sales in southern and western state and slowdown of commercial activity.

Our domestic market share stands at 10.5% for the quarter ended June '19, against 10.7% last year.

During the quarter ended June '19, besides industry regrowth, the company also carried out production cut to control all inventories and improve liquidity that adversely impacted operating margins. The EBIT margin for the Agri Machinery segment stood at 10.9% for quarter ended June '19 compared to 14.2% last year, and 13.1% in March '19 quarter. Even though monsoon was delayed and slow initially, but of late it has picked up momentum, and it's spreading across India. But overall, tractor industry sentiments continue to be negative as on date.

Industry in Q2 FY '20 is likely to fare better than Q1 due to start of festival season from September 2019. The full year FY '20 domestic tractor industry growth [so] will depend upon how overall monsoon fairs and the pickup in the festival demand and government trust and policies on agricultural sector. Escorts though stands on a better footing in view of this low-channel inventory levels and a strong market performing better and also in view of improved product offerings and sale processes.

Coming to the Construction Equipment business, our served industry, backhoe loader, pick and carry cranes and compactors de-grew by 27% in first quarter FY '20. Our total volume manufactured and traded products combined in the quarter ended June '19 correspondingly were down by 20.7% to 1,067 units as against 1,345 units in quarter ended June '19 leading to overall improvement in market share.

EBIT margin in spite of volume drop have marginally improved to 2.5% for quarter ended June '19 as against 2.4% in previous fiscal same quarter.

Construction Equipment industry has been seeing some slowdown on account of financing issues and delayed payments on ongoing infra projects. However, with continuous focus of current government on infra development, we expect the industry will see the revival soon, and we continue to be optimistic on the outlook for this segment in medium to long term.

Coming to the Railway Division, revenues at INR [118.1] crore went up by 34.1% as against INR 88.1 crore in previous fiscal same quarter. This quarter we had better product mix compared to March '19 quarter that resulted in EBIT margin moving up to 20%. Order book for this division is around INR 400 crores that will get executed in next 13 to 15 months. For FY '20, we expect Railway Equipment segment to grew -- to grow at 15% to 20% level, though margin for the segment may come down due to higher share of new products and overall revenue.

Now I request the moderator to open the floor for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Gunjan Prithyani from JPMorgan.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [2]

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Just on the industry, how are you looking at the remainder of the year? I do appreciate that this quarter was extremely bad. But is there any outlook that you can share for the year? And the other thing I'm just trying to understand why have there been such a huge divergence in the growth trends in your strong markets in south and west? Is there -- I mean is there anything specific, which is because I would have thought the monsoon is an issue across the board. Farm sentiment has been issue across the board. So why is there such a huge difference between the 2 regions? And how is the competitive intensity panning out given the demand is so slow? Just your thoughts on few of these?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [3]

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Okay. This is Shenu Agarwal. So let me answer all the 3 questions that you have raised. So first on the overall industry estimate. See, right now, we're in a wait and watch situation because the industry has dropped more than what we were -- what anyone was expecting in the last 2 months. The primary reason is as we said is for this excess shortfall is the delayed monsoon or the overall lower monthly behavior. Not just delayed monsoon, but also the spread of monsoon that we have seen this time is a little bit weird or unusual than the previous year. So I would say a lot of it will depend on how monsoon fairs in the remainder part of the monsoon season. And we will have a better idea towards -- probably towards the end of August how it will go. However, in quarter 2, we are a little bit fortunate that the festival season is preponed this time as against last year. And there are some auspicious days occurring in September because of which we will see some positive industry movement in the next quarter as compared to Q1.

As far as the spread of the industry is concerned or distribution of industry is concerned, one of the factors, which is going against us right now, or against the industry is that we're also sitting on a high base, so in the last 3 years, the industry grew very, very rapidly. So 3 years ago, we were at about 4.9 lakhs, and last year we ended at about 7.9 lakhs roughly. And this was a kind of unprecedented growth in the industry. And the industry really grew quite a lot in South and West in this period of 3 years and prior to that. And therefore, South and West is -- other than other factors I mean South and West is also sitting on a higher base -- base of industry. And therefore, the slowdown is more prominent there. But other big reason is the water reservoir levels, which are really bad in parts of South and West, which has really brought down the sentiment and also the real sewing and other things underground. So of course, if the industry -- if the monsoon is better or is better-than-expected let us say then South and West could also see a better rebound in times to come.

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Gunjan Prithyani, JP Morgan Chase & Co, Research Division - Analyst [4]

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And how is the competition behaving right now, I mean you guys have got to inventory fairly aggressively, is that where the market is? Or you're seeing this down thing in the market and inventory corrections still being made?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [5]

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See, I don't think the competition intensity has changed dramatically. Of course, in pockets people are playing kind of different strategies. But overall, it is not and at least speaking for us, we have not participated in any excessive discounting in quarter 1. Yes. So as far as inventories are concerned, I think everybody is concerned about inventories, but as Bharat also said in his opening comments, our inventory -- we took a correction of inventory in quarter 1, we have built up some inventory in Q4 of last year because of the Navratras that was slated in early April. But those Navratras didn't work well for the entire industry and therefore, we took, I think, a wise decision to let's cut back that inventory and bring us to normal levels of 3, 3.5 weeks of inventory -- delayed inventory. I mean it's hard to say about competition what they're doing, but everybody in the industry is concerned about it. I think our stocking levels, at dealership level, are probably the best in the industry in terms of number of days right now.

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Operator [6]

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

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [7]

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Sir, there were some news flow that July there is some improvement in tractor sales because of the pickup in monsoons. Can you just shed some light on it is there a Y-o-Y improvement that you're looking at it? And when you talk about dealer inventory coming down to 3 weeks to 3.5 weeks. Was the retail decline significantly lower than wholesale volumes in this quarter?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [8]

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Yes. In quarter 1, our retail was much better than the wholesale because of the correction in the inventory. So on retail level, we did much, much better than that industry did. Of course, we don't have retail -- we don't share retail data among competitors. So -- but overall we did much better on retail. Sorry, what was the other question?

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [9]

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So July basically, any trends on July that because monsoons have been descending in July, there is some pickup. So have you seen any positive traction?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [10]

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Yes. Nothing major really we have seen on the ground so far. Of course, July is yet to be over. But if there is an improvement, there is some marginal improvement in some pockets of the country, but nothing's really major.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [11]

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Okay. So basically then even if your August was -- so even if the monsoons are normal, what kind of growth rate can we look at? Because we're not seeing any major improvement in prices and rural economy is really under big stress. So that is what we want to understand even so in a case where there is normal monsoons and August and September picks up significantly. What kind of growth can we look at? Or it could be declined as here?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [12]

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Hitesh, as I said, it's hard to say, I mean, we'll have to wait and watch and see how the monsoon fairs really and more than the overall monsoon situation, what is more important is the spread of the monsoon especially in areas where water reservoir levels are very low. Yes. So August, we don't see much of a sign of improvement. As you know, tractor industry, although monsoon is very, very important, but tractor industry has lag effect with the monsoon. And therefore, if there is any positive sentiment build-up happens that we will see only in the festive period which starts in end of September. Because right now, there is no work that needs to be done in the farms, I mean, there is no tractor really required. And that is why like July and August are in any case lean periods, right? So the best hope is end of September we may see a kind of reversal of the plan.

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Hitesh Goel, Kotak Securities (Institutional Equities) - Associate Director & Automobile Analyst [13]

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Sorry, in clarification, you said tractor will grow in second quarter FY '20. You mean decline will be lower in -- than the first quarter? Or you expect to grow?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [14]

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Most probably, yes. Most probably we don't see right now, there is like a positive growth that we will see in Q2 as compared to last year same quarter, but the growth -- or the degrowth will be smaller in Q2 as compared to Q1.

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Operator [15]

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The next question is from the line of Mihir Jhaveri from Avendus Capital.

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Mihir Jhaveri, [16]

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Just want to ask you on the demand side. When you said that the festive season will be strong, we have very strong base anyways form October given that the last year second half was very good for us. So how should we look at it in that sense in terms of demand kind of just adding to what Hitesh was asking you in terms of demand, how should we look at it? And secondly, question to Madan, sir. When we went -- they -- he had spoken that there is -- there was a regulation change which will happen, which the state government implemented in Bihar with regards to registration of tractors, which was earlier not relevant. So can you just throw some light on that, what is the situation in other states? And what is the inventory out there in that sense? These are my 2 questions.

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [17]

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Let me respond to the first, this is Shenu and then I'll have Bharat respond to the second one. The second half of demand last year was actually not that great, right? So there is an opportunity that we see in terms of revival of industry only because of that fact. Because in last year until about October or November, the industry was going very, very strong, I think, between 15% to 20% month-on-month basis growth. And then after November, the industry started kind of declining or the growth started slowing down, with I think February, we actually started seeing a negative growth and January was pretty much flat and December also was very, very small, right? So actually, second half of the year, the base was not as high as the first half, right? So therefore, if the sentiment improves and the festival season clicks, I mean, there is a chance that the second half could better.

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Mihir Jhaveri, [18]

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No. Sir -- sorry, I just missed it, sir, because if I see your numbers, you've grown 29%, 56%, 27% to the 13%, 12% for the last year from October to February. So am I missing something where is [the base], which is lower?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [19]

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Yes. I was more talking about the industry. So of course, we increased our market share substantially in second half. And therefore, you'll see our numbers better, but I was talking more from the industry point of view.

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Mihir Jhaveri, [20]

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Okay, okay, okay. Right, sir. Sir, my second question with -- for Madan sir, with regards to the registration effect, which was there in Bihar. So what's the situation?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [21]

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Yes. Let me wait and answer that. So see this new registration rules I mean, they are there, but the enforcement is very, very different in different states, right? So Bihar, we saw a kind of huge drive by the local government to enforce this law, and therefore, we saw some problems with the dealerships and which reflected in the industry as a whole. But the situation stays same as it was earlier. There is no like positive or negative movement in this regard. So Bihar is still kind of better on enforcement than other states. But since it has become a law now, so we expect that in times to come it will be enforced in pretty much all over the country.

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Mihir Jhaveri, [22]

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Okay. And sir lastly, in terms of construction equipment, sir, is it fair to say given that we had a weak quarter -- for the full year we might be flat or negative in the construction equipment as well for this year? Or how do we look at it?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [23]

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Ajay, are you there online?

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Ajay Mandahr, Escorts Limited - CEO of Escorts Construction Equipment [24]

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Yes. I'm there online.

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [25]

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If you can respond to that?

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Ajay Mandahr, Escorts Limited - CEO of Escorts Construction Equipment [26]

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Yes. See -- if you see the industry, and the industry is minus 27%, and we are minus 20% roughly. So we have gained market share there. And generally, if you look at the H2 side of the construction equipment, probably you get that high demand on that side between starting from October onwards and March is the strongest month. So we expect the recovery to happen because now the demand side is strong if you look at. It's basically the financial crisis that has happened because of NBFC, which is basically more money required in the market than what is available. So we think there would be a positive [unturn] even that will happen from H2 onwards. And we will retain. We will keep growing our market share in those markets.

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Operator [27]

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The next question is from the line of Pravin Yeolekar from CJ -- CIMB.

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Pravin Yeolekar, CIMB Research - Analyst [28]

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My question was with respect to tractor ASP. We have seen a sharp spike in tractor ASP Y-o-Y and Q-o-Q basis around 6%. So could you just help us to understand what has led to this sharp spike in ASP?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [29]

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So Pravin, let me compare with last quarter, see there are 2 reasons for this. One, is we're looking at the overall revenue for the segment. So there is a 2 portion to that revenue, one is the tractor linked revenue and second is the non-tractor business which we do in Agri. So on non-tractor, we've seen 23% growth this time, non-tractor when you say it relates to spare parts, lubricants, engine and implement sale, which we do. So that has an impact of about 20,000 on realization at this time if you're looking at the overall realization, and when the tractor per se, there is a recovery in realization of close to INR 10,000 to INR 11,000 per tractor, which is partly on account of the price increase, which we took in the beginning of April this time and also on account of the mix improvement compared to sequential quarters in March, which has happened, which is roughly INR 5,000.

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Pravin Yeolekar, CIMB Research - Analyst [30]

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Okay. So follow-up on this. What is the contribution of non-tractor revenue?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [31]

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So non-tractor this quarter is about 10%, which normally used to be 8% -- 7% to 8% level.

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Pravin Yeolekar, CIMB Research - Analyst [32]

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Okay, okay, okay. And the second question is to working capital. How is the working capital situation for this quarter as compared to the 4Q?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [33]

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So I think as you've seen the impact on the margin this time as this is one of the decisions we said, there is a drop in margin. So it's not just the sales volume which got impacted by the industry going down by 15%. So second impact, which is a significant more of that -- we also cut down production to control our inventories to reduce our working capital, this quarter. So as you can see the debt level has come down from INR 277 crores in March to INR 124 crores in June. So which means a lot of relay to working capital has happened during this quarter, which essentially has come from the inventory side. Our production this quarter was 20% lower than the sales volume and sales still was 15% down because the industry going down. So that's why you see the negative impact on the margin is definitely steep this time, though it was the same sales and production number, the margin drop would not have been that significant.

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Pravin Yeolekar, CIMB Research - Analyst [34]

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Right. And sir, lastly, on the tractor industry growth. As -- could you quantify what was the -- like what was the total impact of this on the 1Q growth level because of tractor subsidy-driven states because we have seen this year there has no continuation of this tractor subsidy. So could you please quantify what was the impact on 1Q would have?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [35]

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Yes. So subsidy impact has largely come from South and Southern and Western states, largely Southern. It was last year, there were some very aggressive subsidy schemes in the South of India. So I don't have exact data right now, but let me say roughly speaking, about 10,000 tractors would have been impacted in quarter 1 because of lack of subsidy or slowdown in subsidy schemes at the industry level.

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Pravin Yeolekar, CIMB Research - Analyst [36]

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Could you see the similar impact in the next 3 quarters because of there is no continuation of tractor subsidy for many states or renewal contracts?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [37]

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Yes. Yes, speaking in the industry level, some impact would be there because we don't see any major subsidy schemes coming in, in quarter 2. Although there is one large subsidy program that is getting -- that is going to be unveiled in Assam. And that's quite a substantial one, which may happen in quarter 2, right? So -- or it may go to quarter 3 even. So -- but chances are, it will happen in quarter 2. It will start in quarter 2, and then major volumes you'll see, or major impact will come in quarter 3 and quarter 4.

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Operator [38]

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The next question is from the line of Mr. Raghunandhan N. L. from Emkay Global Financial Services.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [39]

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Sir, just wanted to understand how is the competition intensity in the domestic tractors?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [40]

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So competition intensity in our view is very similar to what we had in the recent -- few recent quarters. I think I mean, other than some pockets where few players are taking on different strategies. I mean overall at the country level, we don't think it has been more intense than it was before. Yes, speaking on our -- like speaking for Escorts, I mean we have not participated in any extra discounts, et cetera, in quarter 1 as compared to before. We're still focused on the retail sales through ground activations and through new products and other means.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [41]

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Understood, sir. Sir, this is to Bharat Madan, sir. Sir, is there any impact on Ind AS 116 accounting changes? And also can you provide some color on the margin expectation for both the tractors and construction equipment segment this year?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [42]

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Sure. Adoption of 116 standard on leases there is minor impact of about 54 lakh this quarter. So about 29 crores of additional liability will just -- get deducted on the balance sheet because of this standard adoption, but no significant impact we believe, [on that.]

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [43]

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So this 54 lakh would be at the PBT level, right sir?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [44]

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Yes, especially in the interest cost.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [45]

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Understood. And sir, on the margin outlook broadly what range do you see for both the segments?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [46]

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So margin outlook I think if you look at the tractor business though this quarter we said -- so obviously, some effect on the operating leverage which will play out depending on how much we see the drop happening in the industry volumes. So roughly we said for every 10,000 tractors, we see 1% movement happening in the margin, plus or minus. So that will have an impact on the operating level. Obviously, the first quarter obviously had an impact because of the production cut we took. So going forward, hopefully the production scale number continues to be the same, so we expect the margin recovery will happen from the current level, our first quarter margin. So overall I think if you compare with the last year, yes, to some extent, whatever effect of volume will come on the margin trend then definitely [we'll] be there. The company is taking steps to also look at its cost structure and then cut down wherever possible and improve the efficiency, so that will also play out towards the end of the year. So but yes, so overall if you look at the margin wise, I think compared to last year definitely there is some pressure on the volume this quarter -- this year on the tractor numbers. On Construction Equipment segment, we expect [fully] the margin overall profile should not change significantly even if we continue with the flat sort of volume on the number front, still adding margin, we'll be slightly better than last year.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [47]

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Understood, sir. And on the Railway side, sir?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [48]

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So on railway like you said, we're looking at a good growth number, we already had a good opening order plan of 490 crores-plus, and that will get executed during the next 12 to 15 months, so -- but the mix of the Railway segment will be slightly negative. Like you said, it's going to be more orders in the new product category, which may have some impact on the margins. So we expect still the margin level will be in the range of 17%, 18-odd-percent on operating level on Railways business this year.

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Raghunandhan N. L., Emkay Global Financial Services Ltd., Research Division - Senior Research Analyst [49]

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Can you share also the exports outlook for tractors?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [50]

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Yes. In Q1, we have done much better on exports, even -- I mean better than last year, of course. But also better than the exports industry, which is India exports -- which is exports out of India. I think like we have told you earlier that we have invested a huge amount of money and resources in new products for exports. And that thing is now getting to show an impact. So going forward also, we expect a decent growth in exports volume, roughly the estimated -- that we should do minimum 20% over the last year.

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Operator [51]

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

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [52]

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My question pertains to our gross margins, if I look at this quarter on Q-o-Q basis, we have seen gross margins deteriorating...

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Operator [53]

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Sorry to interrupt Mr. Gandhi, can you please speak a bit louder?

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [54]

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Yes, is it better?

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Operator [55]

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Yes, go ahead.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [56]

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Yes. My question pertains to gross margin, so in this quarter, we saw quarter-on-quarter marginal decline in gross margins despite the commodity prices coming off. So is it just the mix reflection? Or there is actually some bit of pressure on cost as well?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [57]

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Hello, Jinesh. I think like you mentioned, there are 2 reasons for this, the prime reason, one: obviously, is operating leverage impacts with our industry has gone down by [15%,] so that sales volume impact on margin is roughly 160 basis points to 170 basis points. And the second impact is because of production cut, which we took in this quarter. So it led to the under absorption of manufacturing overhead, which was another 160 basis points to 170 basis points. So this is one-off, which has happened in this quarter. So that won't continue, but yes. the operating leverage impact will continue depending on how the volume performs overall.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [58]

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Okay. But we did see any commodity-related benefit in this quarter?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [59]

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Very marginal, so there is no significant benefit, there is very marginal impact of the commodity price. So there is no inflation pressure as of now, so some prices have come down but that's less than I would say, 20 basis points, 30 basis points impacts in this quarter.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [60]

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Okay. And do we expect any benefit in coming quarters, particularly considering that commodity prices are basically down in the last 6 months?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [61]

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Yes, definitely I think there is -- the pressure on commodity sides has eased out, so going forward, we expect benefit will continue and that again will depend how the [thing] get affected in the margin will depend on how the competition reacts to those changes in the commodity prices.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [62]

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Sure, understand, Secondly, with respect to BS-VI (inaudible) norms for greater than 50 HP, so that is applicable from April 20, right?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [63]

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October 2020.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [64]

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October 2020. And any sense of what would be our contribution from greater than 50 HP?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [65]

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[26%] of sales comes from more than 50 HP as of now.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [66]

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Okay, okay. We have -- for industry this would be [what --] close to about 20%?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [67]

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Industry is at about 7% and we are at about I think 4% or 5%.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [68]

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Okay, okay, understood. And lastly, for Construction Equipment business, while we expect second half to be better than first half overall, would we be looking at decline in that business on Y-o-Y basis on volume terms? Or you expect some bit of recovery, which will offset for first quarter decline?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [69]

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So I think as Ajay mentioned, we expect normally H2 does better in Construction Equipment segment and we expect the recovery clearly will happen in (inaudible). So this can actually make up for the shortfall on the first half on [the Construction Equipment side,] so overall fairly -- we can look at very marginal de-growth on the (inaudible) flat industry. (inaudible) industry will further flat volume, on a full year basis.

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Jinesh K. Gandhi, Motilal Oswal Securities Limited, Research Division - SVP of Equity Research [70]

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Okay. And with respect to CapEx for this year, what kind of CapEx investment do we expect?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [71]

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CapEx like I said, we are planning for about 250 crores to 300 crores sort of CapEx and major part of which is one-off CapEx which is on the capacity expansion side and also in terms of setting up some capacity for the joint venture which we have formed with Kubota Corporation. So that itself will be close to 140 crores, 150 crores and the balance 100 crores to INR 150 crores is on the normal CapEx which we're doing for the businesses on the product side and the normal CapEx.

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Operator [72]

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

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [73]

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I have 2 questions. One is on the tractor side, we're hearing discounts level in various schemes related to extended offer has started increasing in last few days. So due to slowdown, is it like a kind of price or a type of situation are you facing by other players?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [74]

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Yes, Mitul, this is Shenu. So as I said, it is like a discount, we haven't seen like major discounting, they are increase in discounting at the industry level of course, there are 1 or 2 players that do sporadically into some markets, they have come up with some offers in quarter 1. But as far as we're concerned, we are, I mean, in the same ballpark as far as discounts incentives are concerned as we were before, right?

So even with that situation, as we know we have had a pretty good kind of pretty good streak at the retail sale level. I mean our number is not showing in wholesale as we reduced quite a bit of dealer stocks this time, right?

So we are going to continue with that philosophy because we have a lot of fundamentals going in our favor. I mean we have mentioned about those in the past like your distribution, some new products in [Aachar] and rice. Some of the projects we are doing in our weakened opportunity markets where we have really grown market share even in Q1 substantially.

So those things are going in our favor, so we don't need to resort to this. Of course we have to wait and watch how competition reacts in the future.

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [75]

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So even July is similar to Q1 or there is marginal increase in July, towards the end of July?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [76]

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I think overall at the industry level, July would be similar and the similar range as Q1 in terms of degrowth over last year.

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [77]

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Sir, my second question is on the new products if you can throw some light across the segments, railway as well as construction and tractors also?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [78]

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I'll talk about the tractors and then Ajay and Dipankar can talk about the rest. So new products we had for -- the products we launched in the recent past was one in the Aachar category, which is a smaller compact tractor. Now that product is going fairly well. Of course, initially we were going a little bit slow just to make sure that we see the right customer feedback and establish the product in the right manner.

But having done that now, and received -- receiving very good customer response, we are now accelerating that to gain substantial market share in Maharashtra and other parts of the country where it is sold.

On the [rice] special, we are still in a little bit of a cautious mode. We want to really get some deep-rooted feedback from the customers about the performance and reliability of the product. And before we accelerate, we want to make sure that we have the right product in the market. But that will continue maybe for another one season and after that we will accelerate that as well.

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [79]

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So in Europe it is how much giving now?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [80]

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So Europe it is a [ramp in purchase] as you know Euro 50 also received the Best Tractor of the Year Award for last year. I don't have the volumes, Mitul, right now, but I will give you those separately on Euro series, but Euro is like a craze almost because it has done really, really well in the last couple of years since we launched it.

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [81]

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Yes, sir. Other segments?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [82]

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No. So these are the 2 or 3 products, the Euro series of course pans throughout the horsepower spectrum. Atom is on the lower side of the horsepower spectrum focused on some specialty applications of all [shipment] areas. And then the Euro 45, which is our [rice] Special tractor, is focused mainly in the rice markets.

And about construction, Ajay, would you say?

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Ajay Mandahr, Escorts Limited - CEO of Escorts Construction Equipment [83]

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Yes. In construction, we are looking at portfolio expansion. I won't give you the specifics, but 3 new launches in H2 in crane and one in earth moving. So those also will come during the H2, they are under trials now, and the launch dates are in October.

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Mitul Shah, Reliance Securities Limited, Research Division - VP of Research [84]

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On the railways, sir?

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Dipankar Ghosh, Escorts Limited - CEO of Railway Equipment Division [85]

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Mitul, this is Dipankar. For the railway part, I mean we have actually got approval for 2 major brake systems, so they are going in for a trial -- the [free] validation trial. So we expect that they should be commercialized within 1 year, I think by next year. While few of the other new products, which we had already commercialized last year, so they are as of now -- we have quite a significant order booking for those types of brake systems and couplers. But one of the brake systems has an input content where the margins are less but for the other brake systems in the couplers, we have a very healthy margin. So we should be able to continue with the product journey whatever we have started for the last 2 or 3 years.

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [86]

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Mitul, I will answer for the Euro series, so Euro series is now comprising of about 50% of the Powertrac brand volumes, that is Q1 data.

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Operator [87]

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(Operator Instructions) The next question is from the line of Riken Gopani from Infina Finance.

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Riken Gopani, Infina Finance Private Limited - VP [88]

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Firstly, I would like to understand about the financing in the tractor segment. So could you throw some light about what percentage of our tractors are now financed by the captive? And also any specific trends that you are seeing in terms of the asset quality in that book, if you could throw some light on that?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [89]

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Yes. So captive -- I mean it's not really captive, it's like a virtual joint venture as you know with the other group. So that part of the financing is penetrating well. I mean it is increasing year-on-year and month-on-month and right now, I think we're close to about 15% to 17% of overall penetration. I mean, you know that they are not all -- in all the states where we operate and therefore, that expansion as goes along then we will have better penetration.

But other than that, we have -- we worked with a lot of host of other finance companies like all the banks and major NBFCs. And the financing is not an issue as you would have heard that it is an issue, especially with NBFCs and some other automotive segments for tractors being a priority sector -- segment. We're not facing any difficulties at all right now.

So financing is not an issue. I mean, financing is available for tractors for every manufacturer, every brand. And I think we don't see any problems even in the future.

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Riken Gopani, Infina Finance Private Limited - VP [90]

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Understood. So you're also confirming there are no specific asset-quality trends in terms of the farmers are paying or anything on their particular book?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [91]

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There are no major changes we have seen in the recent times.

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Riken Gopani, Infina Finance Private Limited - VP [92]

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Understood. The second question that I wanted to get an answer for is with regards to the fact that you have said that the inventory level is now comfortable for you. So going ahead, should we again start seeing Escorts growing ahead of the industry from Q2 onwards?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [93]

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I mean, the answer is of course, yes. I mean, we have done that for the last several quarters. We have always been ahead of industry, I mean, since last many quarters. And this quarter was a unique quarter because as I said we had correct some stock, and it was a right thing to do. Because at this time, the industry is overall down 15% in some markets down like 30%, 40%, 50% also, right? I mean, dealer profitability becomes a challenge. And this is a time where we thought we need to support dealers and one way of supporting them among other things, we are doing is to reduce their interest burden.

Most of the working capital of the dealers is financed through banks or financial institutions. And therefore, it gives a remaining high stock their profitability is at stake, especially with these lower volumes. So we went ahead and took that call that we will reduce the dealer stock and bring them to some reasonably good levels.

So going forward, this issue is not going to be there because we are at 3, 3.5 weeks of inventory right now, and I mean we may increase a little bit in September because of the festive season demand because the demand would be significant at that time, we will have to put something in dealer stock at that point in time, but that would be only temporary.

But yes, I mean, market share you should -- we hope we should -- you should see some improvements going forward.

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Operator [94]

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The next question is from the line of Siddhartha Bera from Nomura Securities.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [95]

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Sir, my first question again is on the inventory side, can you indicate how much will be the inventory at the company build?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [96]

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Yes. So we have -- as Bharat has said that we have reduced significantly, and that is reflected in our cash position and debt position. So right now, we're at about 2 to 3 weeks of finished goods inventory inside the company.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [97]

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Okay, 2 to 3 weeks finished goods inventory, okay. And the inventory calculation is based on the retail data or the wholesale data?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [98]

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Wholesale data.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [99]

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On the wholesale numbers? Okay. So for the last month wholesale numbers, we calculate the inventory levels?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [100]

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That's right. The reason is we need to plan how much we need to bill to the dealers, so we need to keep that sort of inventory level.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [101]

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Okay, okay, okay. Got it. And secondly sir, is the number of impact on the EBITDA? So can you just indicate how much was that?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [102]

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Impact of EBITDA because of production cuts which we took.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [103]

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No, no, sir, because of the change in lease accounting, the impact on EBITDA.

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [104]

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So EBITDA -- so overall on a PBT level, level of costs have gone up about INR 54 lakhs in this quarter, which essentially is effectively the interest cost. So EBITDA has improved by that much amount with the cost restricted to depreciation and interest line.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [105]

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Yes, but would you have the number of how much the EBITDA was higher because of this change in this accounting?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [106]

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So INR 1.3 crores higher.

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Siddhartha Bera, Nomura Securities Co. Ltd., Research Division - Associate [107]

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INR 1.3 crores. Okay, sir. Okay.

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Operator [108]

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The next question is from the line of Sabyasachi Mukerji from Centrum broking.

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Sabyasachi Mukerji, IndiaNivesh Securities Limited, Research Division - Research Analyst [109]

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On the competition you are saying that you are facing similar level of competition for the last 2, 3 quarters and there hasn't been any aggression from the competition, but when I see your market share on a sequential basis that has gone down from 15% to 10.5%. Is it something on the -- on some regions that you're facing the competition? Or it's a pan-India level? And your outlook on it?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [110]

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Yes. So I think in our industry it is better to compare market share on a quarter-to-quarter basis, which means like same quarter previous year because there are significant shifts in the market share from quarter-to-quarter on a sequential basis, right?

So normally quarter 4 is like very, very healthy for our company. Last year, I think in quarter 4 we touched market share of about 15%. So -- and the year before that, if you look at quarter 4 again, you will see the market share in the range of 13-plus percent, right, while the average last year was close to like 11.8%, right?

So I mean, you have to just look in the right context and sequentially it may not give a right picture.

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Sabyasachi Mukerji, IndiaNivesh Securities Limited, Research Division - Research Analyst [111]

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Okay. And on the pricing front that you mentioned April, you took a price hike, what was the amount of price hike if you can mention like?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [112]

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Yes. The hike was roughly about 1%.

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Sabyasachi Mukerji, IndiaNivesh Securities Limited, Research Division - Research Analyst [113]

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Okay. And do you intend to take any price hikes in the near future?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [114]

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No, nothing right now.

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Operator [115]

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(Operator Instructions) The next question is from the line of Sameer Deshpande from Fairdeal Investments.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [116]

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Sir, regarding this working capital position you mentioned that the working capital is not fairly comfortable, which we had stressed in the 31 March, '19 it was I think due to 2 reasons was on the higher inventory, which you have corrected now. And also the amount had been blocked with -- for GST, which was around INR 170 crores, INR 180 crores. So has this money got released now?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [117]

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For GST obviously, this continues to be a challenge. We have received some refund from GST, which is about INR 30 crores to INR 40 crores so far I think in the -- by end of June. But the money, which is still stuck continues to be in this range, which is further recognition which has happened. So it continues to be in the range of INR 170 crores, INR 180 crores which is still recovering from the government. So frankly, if the money had come back on time this entire debt position would have been actually negative, [zero debt for me] if that was the case.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [118]

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Now I think you mentioned now we -- our net debt is negative. So it is some INR 124 crores-odd is the working capital loan, and we had some INR 200-odd crores in the balances?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [119]

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So we had INR 409 crores of negative debt, so which means our cash position likely is one -- INR 409 crores plus INR 124 crores, so about INR 533 crores of cash on the balance sheet, at which net of debt is about INR 209 crores.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [120]

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INR 409 crores. So it is quite comfortable now because that money can be used for the CapEx without raising any loan as such, that level. How is the position of the debtors now in terms of days?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [121]

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So debtors, so there are 2 issues, one is institutional debtors which have also come down, so good thing is we also recovered INR 40 crores, INR 50 crores from institutional outstanding which is as of end of March. So on the retail side, the liquidity pressures will continues to be with the channel, which is the reason actually we took this correction in the channel inventory too to actually ease out the pressure on this front. So we expect I think by end of specific year, we should be back to our normal levels with the retail too. So as of now, this continues that we have some pressure on the liquidity side.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [122]

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Some 50, 55, 60 days and odd is roughly the...

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [123]

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No, no. So our debtors are not that high, on an average, debtors have always been in the range of 20 to 30 days maximum. So this time it'll be close to 28, 29 days sort of level on tractor side.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [124]

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20 to 29. And the construction equipment in the last -- after the March results, it was expected that we will report this growth of around 15%, 20%. And with the margins for the construction equipment to be 5%-plus, so -- for EBIT level. So now after this weak Q1 has this changed anything?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [125]

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No, so the margin 5%-plus is like Ajay mentioned at the beginning because normally you have very strong H2 in the construction equipment business, where the volume growth is high. When you look at margin profiles, in March quarter, our margin in construction business was close to 7% plus. So you will have high margin in the second half of the year, but in the first half of the year, the margins are typically low, but if you look at even compared to last year when despite of the fact that the volume actually has gone down by 20% this time still the margins are marginally better than last time last year same quarter.

So overall, we expect a guidance, which is therefore about 5% margin will be maintained on a full year basis for [concession] (inaudible) time.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [126]

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And the last one is this -- our realizations for the tractor, if I compare for the Q1 compared to the last year's Q1. There has been -- realization has gone up by about 8%. So from [INR 4,87,000] to [INR 5,25,000] per tractor. So there was an effect of rise in prices or is that change of product mix, which is affecting?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [127]

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No. So like you mentioned, I think in the beginning, so obviously, one is the change of prices because there is a inflation, which got passed on to the market. And that impact is close to 5% to 6% on account of prices. The balance is on account of the increases in nontractor revenue because you're looking at the overall segment revenue and dividing it by the overall volume for tractors.

But actually, I'll say confident of 8% to 10%, which is actually from the nontractor revenue side, which is essentially on account of spare parts, lubricants, engines, and implement sales which happens. So that has also gone up where the company has been focusing on -- in terms of its Vision 2022 to also drive up its volume coming from these initiatives, which are also good margin businesses. So which is the result you're seeing actually on the top line, and you should look at the [average realization] on a segment level basis.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [128]

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And have you started this implement also sales, are we trading there or we are producing? Farm implements.

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [129]

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Implements we have started in a small way, right now, with only 1 product so far. So there is a lot of products which are in the pipeline, and it is a mix of some manufacturing but largely trading right now.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [130]

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That segment can be a very large segment also as I think -- along with the tractors that can also be a quite large segment no? For our...

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [131]

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Yes. We're working very seriously on it, we have a road map of like which products we want to get into which markets and what is going to be our strategy. So although it needs some time and patience to develop a good line of products, but we're very serious about it, and we're working on that.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [132]

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And I think at the AGM it was mentioned about these electric tractors which we expect to launch by March, that is the end of this year. So we will be the first in India as well as in the world for this?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [133]

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Hopefully, it's (inaudible) there is still time to be -- time left, so we don't know what will happen. But we are very seriously driving this technology and making it more affordable and making it more relevant to the Indian as well as global farmers. And hopefully, by the end of the year, we will launch it commercially, though it will be at an initial kind of level of commercial launch. And over the years, we will further improve this technology, so it can go to [masses].

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Sameer Deshpande, Fair Deal Investments Limited - Owner [134]

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In this draft policy means the government is likely to announce it has been declaring a draft policy for some time, it includes commercial vehicles, so does tractor also come under commercial vehicles?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [135]

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No, tractors don't come under commercial vehicles.

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [136]

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Offload vehicles..

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [137]

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Yes, they come under offload vehicles.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [138]

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Offload vehicles, so this scrappage policy will not benefit tractors?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [139]

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Sorry, which policy?

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Sameer Deshpande, Fair Deal Investments Limited - Owner [140]

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The scrappage policy with the government?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [141]

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No, no, it won't benefit tractors.

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Sameer Deshpande, Fair Deal Investments Limited - Owner [142]

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It won't benefit tractors. And this BS change, or BS-IV or we are -- we are currently under BS-IV, no?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [143]

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We're under current under BS-IIIB, and we are going to BS-IV from October 1, 2020, but that is limited to tractors above 50 horsepower. For tractors below 50 horsepower, there is no notification yet.

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Operator [144]

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(Operator Instructions) The next question is from the line of Abhinav Ganeshan from SBI Pension Fund.

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Abhinav Ganeshan, [145]

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My question was that sequentially (inaudible) market share in tractor, that has dropped a fair bit. So would you say that -- can you give some ballpark number where it will rest if I look at an average or something with that?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [146]

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Yes. So as I just explained that it is not tractor industry, particularly not in the industry because of a lot of differences with respect to automotive industry. It is not kind of right to compare sequential market share, it's better to compare market share quarter-to-quarter, which means this quarter versus same quarter in the last year. Because of a lot of things that are different in our industry such as our industry is more Festival-driven, our industry is -- I mean it's a kind of a lot of variety I mean in terms of trades et cetera.

So I would suggest that you compare it with the quarter -- same quarter previous year, and that will give you a better picture.

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Abhinav Ganeshan, [147]

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And one more thing, I just wanted to understand your outlook for the next say, 12 to 15 months on the tractor, how -- what are you seeing in the -- your insights would be -- try to...

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [148]

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Yes, so as we said that right now, we're kind of waiting and watching. I mean it is -- I mean a lot depends on how this monsoon fairs in the next about 30 to 45 days because most of the current condition of the market is related to water. And therefore, we need to wait and watch.

Having said that, July and August, we don't see any revival really. But there is a pretty good chance of a revival around the festival season, which starts at the end of September. But I think we will be in a better position to give a, estimate going forward -- for going forward in about 45 days from now.

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Operator [149]

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The next question is from the line of [Laxmi Narayan] from [Katawan]

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Unidentified Analyst, [150]

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During the -- in the start of the call you mentioned that the stock of the vehicles have actually gone up because of last few years of increase to [Indian] tractor from something like [INR 4,90,000] to [INR 5,90,000-odd] right? So is that a utilization issue in terms of tractors if you actually look at it whether as a utilization of the tractors that are there, and the [tractor industry] is very high that implementing tractor demand will be muted for a longer time especially in festival season or (inaudible)?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [151]

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No, no, this is not the case, I think when we said that our base is high, we just meant tractor industry operates at a CAGR of 6% to 7% normally. But in the last 3 years the CAGR has been upwards of 15%. And therefore -- I mean therefore the industry grew rapidly in the last 3 years as compared to our historical averages.

And we just clarified that this could be one of the reasons that industry has slowed down a little bit in the last few months. As far as like utilization or saturation levels are concerned, we think we are like really far away from that.

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Unidentified Analyst, [152]

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And how much of business is coming from nonagricultural, is there a broad number you track because in addition to agriculture you think some other activities that have actually kind of led to a slowdown?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [153]

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Yes. So like if we talk about tractor industry, that is affected because of purely commercial activity that percentage might be really low, maybe 5% to 10%. But a lot of decision-making about tractor sales or tractor purchase is now based on this -- now based on the fact that a lot of tractors' usage is now being done in commercial activities, right?

So if a farmer intends to buy a tractor at any given point in time he also looks at what other additional opportunities for generating income out of the tractor other than the land he owns. And that percent is very high. I think that would be around maybe on a national leverage, maybe around 40% or so where the decision-making is affected by the commercial use of the tractor as well.

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Unidentified Analyst, [154]

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And how much for our tractor volume is directly due to subsidies? And how much is for the industries because some of the tractors that are -- because you purchase (inaudible) subsidy. So what is the mix for us and for the industry?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [155]

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Yes. So Q1, I mean there have been no significant subsidies gained by and large. So for Q1, I mean everybody is like -- that's at pretty much zero, industry as well as Escorts.

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Unidentified Analyst, [156]

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Got it. And annually how much it will be for us on a regular basis?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [157]

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Annually, it varies quite a lot. Last year was a good year for subsidy because of the large scheme in that time as there was a large scheme in a couple of states in the South. So last year the subsidy led sales would be somewhere around like 70,000 to 90,000 tractors in that range, and this includes some other states like Maharashtra. T.

His year Q1, we haven't seen any subsidy sales but in Q2 we will see some coming in as I explained earlier, especially in Gujarat, which has already start come 1st of July and the (inaudible) which about is about begin.

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Operator [158]

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(Operator Instructions) The next question is from the line of Vijay Sarthy from Anand Rathi Financial Services.

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Vijay Sarthy T.S., Anand Rathi Financial Services Limited, Research Division - Research Analyst [159]

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Could you help me understand what was the dealer inventory in tractors by November 2018 or rather the festive season that concluded last year? What could have been the dealer inventory, if you can help me?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [160]

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We'll have to look for the number, we were not prepared for a November number, tractor...

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Vijay Sarthy T.S., Anand Rathi Financial Services Limited, Research Division - Research Analyst [161]

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It will be lower than the current average, if you remember, sir?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [162]

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No, think pretty much similar, maybe. Just give us a moment and we'll see how much.

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [163]

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At the end of October, beginning of November we were at roughly 5 weeks of inventory, which is now down to 3, 3.5 weeks.

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Vijay Sarthy T.S., Anand Rathi Financial Services Limited, Research Division - Research Analyst [164]

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Okay. Okay. Great. So as long as we're at 5 and below we shouldn't have any problem as an industry level -- both as company as well as industry level, right? Am I right?

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [165]

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Yes, so I think Shenu mentioned, I think what we were trying to do was to look at the liquidity issues or at least the channel also with the industry has already grown significantly higher in the last 3 years. So obviously the base has gone up significantly and the working capital requirement from dealers, also has gone up. So in order to ensure in these times we include the profitability for dealer so we have taken a conscious call to cut down on the channel inventory, which is I think we'll try to maintain it at these levels.

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Vijay Sarthy T.S., Anand Rathi Financial Services Limited, Research Division - Research Analyst [166]

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DO you see any disproportionate figures at the industry levels between last time and this time in the festival season? Or do you think this is the same case for everybody?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [167]

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It's hard to say, I mean, our competition what we know or can guesstimate, and then we could be wrong here also that industry would probably be about 4.5 to 5.5 weeks of [build-up] stocks right now.

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Operator [168]

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The next question is from the line of Amar Singh from DNB.

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Amar Pratap Singh, The Dun & Bradstreet Corporation - Manager [169]

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Yes, so when you talk about this quarter performance, the revenue is not much of a worry because to an extent better than what was expected and went down by 5%. But on margin front, the decline is very significant. So if you could help me with some of it could be because of destocking that you did, some of it could be because of plant shutdowns, but in other regions, apart from (inaudible) if you can breakdown this lower margin for me please, sir?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [170]

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Yes, I already explained I think at the beginning of the call I believe with that portion. So we said there are 2 reasons for the margin decline this time, one obviously, is the volume decline in the sales side, which is exactly because of the industry going down. And second was the conscious call for the company to cut down on inventory because of which we took a production cut in this quarter, and the production this time is down by 20% compared to the sales numbers. So on the sale (inaudible) is down 15% because the industry going down. And second the production is down further 20% over the sales number, which leads to the unabsorbed overheads during this quarter, which is the impact we're facing on the margins front.

So this is a one off correction which has happened. Going forward, the production scale number will more or less be the same. So we don't expect the balance of the year will see this sort of margin decline. So if we have not done the production cut this time, the margin will be 12% plus on the tractor business as well.

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Unidentified Analyst, [171]

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Okay, okay. So we see quarter [accelerating] Forward in the remaining 3 quarters?

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Shenu Agarwal, Escorts Limited - CEO of Escorts Agri Machinery [172]

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Yes, so we think that margins will not be that low, which we have seen in the first quarter, which was a one-off thing which is done because of production cuts.

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Operator [173]

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As there are no further questions, I'll now hand the conference over to the management for closing comments.

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Bharat Madan, Escorts Limited - Group CFO & Corporate Head [174]

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Thank you, ladies and gentlemen, for being present on this call. For any feedback and queries, feel to write to us at investorrelations@escorts.co.in.

We'll meet again in next quarter. Thank you very much, and have a very good evening.

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Operator [175]

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Thank you very much. On behalf of Emkay Global Financial Services, that concludes this conference. Thank you for joining us, you may now disconnect your lines.