There was news about the government bringing some incentive program for the CE industry. Update on the same and how do you see the benefit for the company and industry?
Those initial talks have happened. So government is inclined to do PLI schemes for domestic production. But those discussions are at a very early stage and nothing has been concluded yet. Our Construction Equipment Manufacturers' Association, ICEMA is in regular touch with the Ministry of Heavy Industry. But as of now, there is nothing which we can really say conclusively. But definitely, government has the intent for domestic production and they will continue to promote localization of the products as well as the components. But not as of today, that clarity will not be available as of today. I think in the next few quarters, we will see what the outcome of those discussions will be.
Can you share the revenue growth trajectory for the next 5 years - covering key milestones, what's coming from domestic and how much will come from exports and parts supplies, and which year will see maximum growth?
The major growth in exports will come on the greenfield is up and running, and that will happen somewhere in FY '28, '29. Whether this year, we complete the land acquisition. Next year, we're going to start the project construction activity in those areas. And the initial project estimate is that we'll be starting up in Phase 1 additional capacity for the tractor manufacturing as well as for construction equipment manufacturing in that facility. The current capacity we have the existing location is around 170,000 tractors which we can also balance out and increase to 200,000. So looking at the demand scenario for the next 3, 4 years, we don't expect there will be any shortfall in the capacity at the existing location. So it's only the timeline, which will take - lead time it will take to set up the Phase 1 facility.
What kind of quantum are we expecting from this new capacity from exports - any changes in earlier estimates? Growth from the new plant on the export side?
Export, the major focus will be once we start exporting to the U.S. market. Right now, we are not exporting anything to U.S. market. The plan was once the greenfield goes live, at that time, we'll start the activity for exporting to U.S. market. And there's also a plan to shift some of the global models to India, and India will be used as sourcing for those products, so which we made only in India and will be supplying from India to the world. That's a plan which Kubota has to come back, and they are working on it right now. So Kubota is going to present their midterm business plan sometime, I think, in February or March next year. So once they made it public, then we'll also formalize it and we'll also then announce it to the public at large.
Are we planning to launch any EV tractor? And what will be our new capacity after expansion of greenfield projects?
We were already making electric tractor, but we have not launched it in domestic market because the cost of those tractors is very high, especially the battery pack itself costs you equal to the cost of the diesel tractor. In India, we don't see, it will be a really good market, especially looking at the affordability aspects of the farmers. So we were exporting those tractors to European and U.S. market. But now we have stopped that because in U.S. also the subsidies have withdrawn from the electric vehicles. In the short term, we don't see any major change in the strategy unless the cost of batteries really goes down significantly in India. Going with a large tractor as of now, it doesn't look like a viable option.
Any plan on harvester localization at any volume - or do we wait until the new greenfield comes up?
If we go with the third-party manufacturing, we don't need to wait for the greenfield, and that's what we're planning to do. Right now, the localization, what we've done is in the existing facility. But there, the space will be constant. So we'll not be able to really do much over there. Our average volume for the harvester today in the track type is about - and you've been in 2,800 to 3,000 and this year, maybe slightly higher. So the numbers are not very high that way. Like you compare with a country like China, we harvest the market is very strong, which is 100,000 units plus. The idea is to move to the wheel type harvester, which is the largest segment of the harvester market in India and also low cost as for the farmers are concerned. But right now, we don't have that manufacturing facility in India and the know-how what Kubota has is not easy to localize.
On manpower issues - Kubota also has agrirobo and drone systems. Any thoughts on those product lines for India to mechanize farming?
India still has a farm level, which is way cheaper than what you see. In Japan, the issues are totally different because they've got an aging population. So even if the people want to work in farm, they can't. So that's why they are shifting to the autonomous machine. So we don't think yes, Kubota has already developed a concept machine, which is totally autonomous, which can work actually, and it's also based on hydrogen fuel cell. But launching it in India, I think, is a far cry. I don't think that's a viable option. Looking at the current wage structure for the farm labor, we don't think it will be a viable option right now. Maybe in future, if really India sees the inflation in the farm wages, maybe that could be one thing which we'll explore.
On drone side - many companies are working on it. Any thoughts?
You're spraying it manually, also is a health hazard for the operators. So that makes sense to really go for it and you get a better precision and better coverage with drones. So in our case, like we're already using sprayers now for the larger crops, we have a boom sprayer and for orchards sprayer, so we've got a separate machines, which are already available there in India. And we are also selling some sprayers in our agri solutions business. So this is also done with the machines. You don't need to have manual labor involved over there. So for the larger field, it makes sense to use drones because in India, the small fields are there, you don't have a very large holding. So even the smaller machines still makes sense, and they are much cheaper to operate. So drones still has an expensive proposition today.
On the industry - if you can share a bit more color on what we are seeing on the ground in terms of sentiment. There has been a step-up in growth guidance from mid-single digit to low double digit. Color on regional and HP-wise dynamics and sustainability for the rest of the year?
We see an upswing in the industry. We're looking at this year to end at double-digit growth - a marginal growth in the double digits. Post the GST reforms introduction wherein 7% GST was reduced. We have seen a lot of buoyancy in the market. This buoyancy cause there, primarily account of good rainfalls and other macroeconomic positive parameters. But with the reduction in the tractor prices, this buoyancy has actually increased which actually will help the industry grow further over the next 6 months. Regionally, the industry is actually growing substantially in the southern part of the country and the western part of the country. The northern part was kind of stagnant prior to September but has started showing some positive movements. On HP, post the GST revised slab rates, we've seen a shift wherein the customer is moving towards higher horsepower - 50 HP, 55 HP or 45 HP bracket because in the price of a 38, 40 HP tractor he can now purchase a higher HP tractor.
Follow-up on market share - given South and West continue to do well, will it essentially be your product actions that help recover share? Early thoughts on product interventions over the last 6 months and how do we think about market share?
We have 3 brands: Farmtrac, Powertrac and Kubota. Farmtrac, we are doing very well. Post the introduction of the new series in January, the PROMAXX series, the market share is growing. Irrespective of the region, the market share in Farmtrac is growing. In Kubota, certain new products were introduced in early August and the initial impact has been actually good. On the Powertrac side, we were to introduce a series in the latter half of this quarter. But due to certain reasons, that's been shifted to the first half of quarter 4. That series is primarily from the Southern market perspective. We will see a definite positive turnaround on the Powertrac side. In the last quarter, we have, to a very large extent, been able to arrest this market share. Overall, the market share has not grown, but the continuous decline has been able - we have been able to arrest that in quarter 2.
On the P&L - treasury income has gone down this quarter. The railways money would have trickled in. Why has treasury income gone down and what yield should we expect going forward?
Treasury income is a blend of one, the surplus money. Second, how you do the accounting for the different products where you have invested in. So part of that portfolio, as you know, is logged into the open-ended funds, which is a mutual fund, which is subject to mark-to-market. So if you see in quarter 1, the overall yields had softened, leading to gain in the market - mark-to-market move in a positive direction. However, in quarter 2, there is some sort of hardening compared to quarter 1. So that's where you see the mark-to-market hit coming in. So if we take out this mark-to-market move, then we are in the normal trajectory. So overall, on an H1 basis, if you see, there is an improvement and the impact of R&D money, it was there in Q1 as well for 2 months, starting from May.
On the construction equipment industry - how are you seeing potential recovery, especially in the excavator business and the PNC business?
We are looking at quarter 2 as a first sign of recovery because quarter 1 has been really down. Quarter 2, industry has tapered down, the slowness has tapered down. We are expecting that by middle of quarter 3, we should start seeing the reversal of the trend. Extended monsoon is one factor; also since the industry has moved from BS-IV to BS-V, there is a price escalation for the customer and that also there was a resistance from the industry. Projects have been mobilizing slow because of the monsoons. The recent announcement by government on new projects in Andhra, Bihar, Maharashtra, Gujarat and various other projects which were nonmobilized are also starting to mobilize. So we believe that demand will pick up, especially in the later half of quarter 3 and later in quarter 4. On a year-on-year basis, we believe that industry will be lower than last year, but on a single-digit drop from last year.
Over the medium term, GST has reduced tractor prices. How does affordability play a role - can it release demand in the medium term? Any upgradation to higher segments? Any change in discount pricing trend? And on steel prices coming down, do you see margin benefit?
In the very short term, we see a positive impact of GST. We have seen a shift of customers moving towards a higher HP product - in India this is basically a 50 HP product. In a INR7 lakh product, it's a straight INR50,000 reduction. Also for smaller or marginal farmers, this is an opportunity to purchase a tractor with a lesser margin money he has to bring in. From a medium-term perspective, GST will play a positive impact as we go forward. As regards discounts, the discounts are always there during the season time. So whenever it's peak festive time, all the manufacturers, including us, give certain shops, certain discounts. And those are actually withdrawn once the season gets over and that will be the case this time around as well.
On input cost - anything on input cost going ahead?
Input costs in the last quarter, obviously, there was a bit of inflation, which is why this slightly impacted the margin. But in the coming quarter in Q3, we are going to get the benefit of deflation in these prices. And the quantum right now, we're not sure, but this is going to be a positive impact on the margin in Q3.
On the non-tractor revenue part - how do you see the next 6 to 12 months, what kind of growth can we see for that segment?
This quarter also, we saw very good growth actually. So if you look at our Agri Solutions business has grown more than the tractor business in first half and the last quarter 2. So only the other 2 business on engine and spare parts were more or less flattish in this 6 months. But going forward, obviously, the tractor growth comes down from the current level, which has been very, very steep. So you will see the impact coming into the non-tractor business, which will really improve in the next 6 months. Overall, the spread will not be significantly different. We still have about 17%, 18% coming from the non-tractor side. So we expect it may move by 1% here and there, but we don't expect to be a significant movement from this level.
What would be the inventory levels for us and for the industry after the month of October?
As of end of October, we are looking at a little less than 4 weeks of inventory levels with our dealers.
On exports - we have seen strong growth in the first half. What is driving the growth, which markets are doing well? Where do you see the tractor export market settling for us, and any guidance for second half FY '26?
Overall, Rishi, we had given the guidance of 25% plus growth on the export number given the lower base we had last year. So far, we had done better on export in the first 6 months, and we expect going forward also, the numbers will continue to look better. The market, especially which we are growing, is the European market where the supply is happening, major supply to the European market only. We also opened Mexico now where tractors will start going, some parts dispatches already happened in the first 6 months and the volume will start picking up going forward. So I think in the midterm business plan in the next few years, we have a lot of projects which are more export focused projects from R&D side on which we are working. And there's the intent to utilize the Kubota network also for export.
On the construction equipment business - we have seen a sharp decline in margins also on a sequential basis. Can you reason out what has happened in profitability and how should we think about it going forward?
One reason actually if you compare is the issue on the production level, which has been low this quarter, because you know the emission norm changes have happened. So we're still to stabilize on the volume front. And there was some inventory in the last quarter, which got cleared up. So I think going forward, in the balance second half, we expect the numbers to start looking up now. So last year, obviously, it's not comparable because we did a lot of inventory buildup. That's why the margin also improved. There's the correction which you've seen happening in the first 6 months now, especially in this year. But going forward, once your numbers start moving up and the production volume is also improving now. So we expect we should be back to high single-digit level of margin and in the balance 6 months for CE business.
Update on the new plant - where are we in terms of approvals and anything you could share?
Some land parcel, which is I think about 5%, 6%, which is still to be acquired by the government. They had some matter under litigation with certain farmers, which now the government has won in their favor. So they are in the process of completing their acquisition. So we expect within a month they have indicated they will complete the acquisition and then start the formalities for transfer of land to EKL. Hopefully, within this fiscal, we should be able to complete everything. I think it's only about out of 190 acres, they're seeing about 8 to 10 acres, which is still to be acquired by them. Balance is all done. But since the land - the parcel is coming within the overall plot area, we don't want to really go ahead until the time they confirm and complete their acquisition.
What will be the capex guidance for this year? And next year should be higher than this, right?
This year, we had done INR350 crores to INR400 crores sort of normal capex which will happen. And so far, in the first 6 months, we had spent proportionately in line, so we expect that number will happen. Normal capex is going to be in this range early. So INR300 crores to INR400 crores sot of range will continue as a normal capex. Greenfield obviously will be additional as and when that happens. So that will be a over and above this normal capex.
Our employee cost and other expenses on a Y-o-Y basis have remained flat or declined. Why and how do you see this trajectory going ahead?
Employee cost actually has gone up if you compare with the last year and sequential quarter also because our increment cycle is from 1st of July. So that's why in this quarter, July to September, we've seen the cost, which has gone up with about 8% to 9% on the manpower side. And as in percentage terms, it looks like it's the same, but overall on the fixed cost basis, it has gone up. On the other expenses, I think most of the expenses, which are variable in nature, only those have moved. Otherwise, the expenses haven't kept under check, and we expect the trend should continue. Obviously, a lot will depend on how much we spend going forward on the marketing and promotion efforts, and that will again depend on the market situation.
Can you give a breakup of how much would be the fixed expense in the other expense?
Other than the selling expenses, which are slightly variable in nature where you've got all your logistics, freight, forwarding, packing warranty, loyalty, all those expenses are coming as part of other expenses. So I would say still 50-50 sort of split can be there, 50% can be taken as a fixed and balance will be variable in nature.
On Kubota branded tractors - efforts on improving the local sourcing, current share of local sourcing, how do you see that ratio increasing next year, and how would it change once the new plant is up and running?
In the Kubota tractors, the one which we're making in India, the major part which gets imported is the engine only. And since the volume for Kubota products are not very high right now. I think it is only about 10,000 to 12,000 tractors, which are Kubota -which are using Kubota engine in India. So for that volume, localizing the engine is not a viable option for us, but the investment will be very heavy and not pay back in the short term. So I think as we mentioned, the idea is to actively move to our own local engine, and we are looking at the possibility of development of products which will be sold under Kubota brand name using our platform, Escorts platform. So that product development is underway now. So hopefully, in another 2 years' time frame, we will be launching this complete range which will be with our own engine and which will get sold under the Kubota brand name or co-branded with our brand.
What will be our updated capacity expansion - capacity after the expansion of greenfield project?
I mentioned our existing capacity is about 170,000 tractors, which we can expand to 200,000 with some balancing at the existing location. The greenfield in Phase 1, we are looking at setting up 100,000 tractors capacity in the first phase. And then the second phase may follow with another similar capacity. So I think overall, we're almost doubling the capacity from the current level what we have.
On finance penetration - you launched captive finance, how is that panning out? And on agri solution - the harvester, how much is localized? Demand etc. Progress on localization?
On the captive finance company - we have started the operation from end of November last year. And right now, we are only operating in 4 or 5 states and that too with the limited number of dealers. So this year will be more like a settling down phase. Yes, we had done good in this season time also. They're looking at expanding on a pan India business next year. And then next year, we expect the company should be able to achieve breakeven in profitability prior to the risk costs. And in the year after, we expect the company should be in profit. The penetration for captive is very low right now. The captive finance typically have a penetration of anywhere between 25% to 35%. Our idea is also to get to the similar penetration level with our own captive finance company in the next 3 to 4 years' time frame. On harvesters - right now, the harvesters are imported by us from Japan and Thailand. So there are some parts component, which we intend to make in India, which will be exported from India to Thailand. So gradually, we'll move to the high-value items. And the idea is to localize it.
On exports - ex of U.S., can we go to 25,000-30,000 in the next 2-3 years?
Not 2, 3 years because the export to U.S. will start when the greenfield goes live, which will be somewhere in FY '28, '29. So after that, we are looking at our export getting a major boost because that's when the export to U.S. will start.