Can you also talk a bit about specifically on the Kubota brand scale up that was anticipated in terms of expanding the geo reach, trying to reconfigure the product so that pricing is more suitable for Indian market. Where are we on that journey as far as the Kubota brand goes?
On Kubota brand, we have both Agri Solutions and tractors. In terms of tractors when we talk, you're right, we've had some gaps. And this year, we are poised to launch multiple products to some of those gaps and quite upbeat about improving position in the market with the Kubota brand as well. On Agri Solutions, we last 2 years, we've been launching newer products, newer technologies. And this year as well, we are planning to expand our portfolio in harvesting segment as well as planting segment. So yes, both in coming quarter and a little later part of the year, we have quite a robust pipeline of products getting introduced this year.
On a full year basis, can we keep it flattish? Or do you see that there is probably some hit on a full year basis?
It depends on the certain costs, which are going to be permanent, especially the costs led to energy and manpower. So as you know, in Haryana, the minimum wages have been increased by almost 35% for contract levels. And in UP also where our larger vendor base is situated, there also the costs have gone up by almost 22%, 23%. So this is something which obviously will be a permanent increase. So we had taken about 1.5% sort of price increase in April across various brands on tractor side and also on construction equipment side. But this is not really sufficient to take care of any of these price increases. So we are still talking to many other players and also suppliers to see how much, because there are many costs which are onetime impact. So our effort will be to maintain the margin on a full year basis.
The non-tractor share in Agri segment is a meaningful part. Can you indicate what kind of a growth you expect in farm implements in FY '27 or the next 2, 3 years due to rising mechanization? And also for the Kubota brand -- tractors were expected with Escorts engines. When is this expected to happen?
On Agri mechanization farm machinery other than tractors, in past 3 years, we've been growing a pretty robust 35% plus kind of a CAGR. And we continue to look at this segment at least in 20% plus kind of the next 3 years outlook, largely because it's the kind of product pipeline we have and the channel we are expanding, also the newer products, which we'll be introducing every year. Now coming to tractors, I won't want to talk about specific time line on localization, but we've continued to improve and introduce newer products. This year, we almost planned about 8 or 9 newer products with 3 or 4 new segments we'll be covering when it comes to tractors.
In that context, the FY28, again, it will be a challenge to turn around from a negative growth second half into a positive territory?
The tractor industry has been kind of cyclical. So if you look at the industry over the last 8 years, leaving aside the last year, it has been alternated in a growth and a de-growth. So 1 year, it's been its growth, the next year, it de-grows, then it grows, it de-grows. So over the last 8 years or 9 years, that has been the cycle. Yes, the growth has been higher than the de-growth of the previous year. So it's very early to comment on financial year '28. But financial year '27, even after our guidance of a flattish kind of an industry would be -- still be a very, very high base of 11.6 lakhs, 11.5 lakhs, 11.75 lakhs industry.
My first question is on the industry growth outlook. How are you internally planning for fiscal '27 for the tractor industry growth? And there are a bunch of new products that you've launched in the last couple of quarters. Can you also talk us through a bit more on those products and how they can sort of help strengthen the market share improvement going forward?
As already mentioned in the opening comments, we expect the industry to taper down over the next few months. The overall guidance for financial year '27 is kind of a flattish industry, 2%, 3% up, 2%, 3% down. That is what currently we are looking at. Overall, from the tractor business perspective, I think we are very confident. Over the last few months, there have been product launches across the three brands and a few other launches are planned over the next 3, 4 months. Plus we have utilized last year in taking certain corrective actions in developing the channel. So both from the channel perspective as well as on the product side, we are well placed. Certain product gaps have been covered. So financial year '27 from a market share perspective and volume perspective looks pretty positive irrespective of the outlook of the industry.
Is it fair to assume that we are confident of a positive growth irrespective of whether industry is a mild it has been?
Absolutely, absolutely. So the products will actually help us tremendously. There were major product gaps. So we have introduced the paddy special tractors for the southern markets, which was a major gap. And it's early days yet, but the bleed in South in terms of market share has started to drop. And we this year intend to see or we will see a gradual increase in market share in these markets. Plus certain other product gaps, we intend to cover over the next 3 to 4 months. So we are actually pretty confident from the new product perspective side.
My last question is on the margin performance. It clearly seems a bit underwhelming when I look at the quarter-on-quarter EBIT margin decline. Can you give us some color on what really happened in this quarter? And how should we think directionally -- because I'm assuming a lot of cost pressure from steel hasn't showed up in this quarter, right?
There was a bit of obviously, some pressure had come on the inflation side, but it's not much in this quarter, as you mentioned. I think most of it will happen in the coming quarter. So it's mostly issue on the mix side with the new product sale actually had gone up and there's also some increase in the non-tractor revenue slightly was up. So there, the margins are lower compared to the tractor business. Going forward, we do see pressure will be there on the commodity side because we're still getting a lot of request from suppliers for the passing on of input cost increases. I know procurement team is still in discussion to finalize those numbers. But I'm sure it's going to be significant in the coming two quarters.
Can you talk about the region-wise performance, which regions should be relative outperformers or underperformers in FY '27? And how will that be beneficial for Escorts?
In FY26, industry growth in the northern and the central part of the country was close to 16%, 17%, which are our stronger areas. And in the western part and in the southern part of the country, the overall growth was about 30%. FY27 should be to a certain extent good from EKL's perspective because the growth in the last fiscal has not been in line with the overall growth of the industry in the northern and the central part of the country. Overall, as we have mentioned, a flattish outlook or a marginal 2%, 3% growth for financial year '27. The major hit will actually come in terms of industry in the western part and the southern part of the country. North should be more or less stable or no growth kind of a scenario.
Approximately how much is the commodity impact expected in the near term as a percentage of sales? How much price hike was taken in April?
Commodity right now, is still not finalized. There is still negotiation happening by the procurement team with all the suppliers. But the indication we are getting is varying because it depends on commodity to commodity like tire suppliers are asking for 15%, 20% hike. Steel has already gone up by 7%, 8%. The base metal, both copper, aluminium, magnesium, we're seeing the similar double-digit pressure. And then there are process costs. So we don't know where it will really end. But I think our feeling is it will be somewhere the 5%, 6% sort of cost increase can happen. So we had taken about 1.5% sort of price increase in April across various brands on tractor side and also on construction equipment side.
Capex and investments expected for FY27?
Normal capex is in the range of INR350 crores, INR400 crores only. So last year also, I think we spent about INR311 crores on total capex in terms of cash flow. The greenfield is going to be larger investment, which we expect should be -- I think this year will be only about roughly INR500 crores, somewhere around that. This will include the land development bond. The land initial payment we already made and I think balance payment will happen probably within this quarter.
Investment into captive finance division, how much has it been so far? And how much more is required?
So far, we had invested INR 200 crores in the capital and additional approval was taken for additional INR500 crores. Broadly, we are injecting as and when they need it. So by the year -- this year end, we expect maybe additional INR 300 crores will go and balance INR 200 crores will go next year. This obviously depends on the portfolio and how much AUM they were able to maintain and grow.
With regard to the tractor industry outlook, when you are talking about a flattish or 2%, 3%, what is the type of quarterly volatility you are looking at? And what's the exit considering a high base in the second half?
Last year, the overall growth was 23%. But quarter 1, the growth was very subdued. It was about 9%. So I think we will see a growth in this year -- sorry, in this quarter. And then this growth will, to a certain extent, taper down. And H2 would be a substantial negative growth because the base is very, very high. Also, the impact of the monsoons wherein the forecast has been a subnormal monsoon this year. So the impact will also come in H2. So H2 would probably be a substantial de-growth basis these reasons. But H1 should be at par kind of a scenario.
How is your R&D spend has changed post Kubota coming on board? And what is the extent of help you are getting from the global partner?
The major capex which will increase actually is on the product side. So I think out of INR300 crores, INR350 crores, majority of this will go on the product development side. So even last year, I think almost INR 200 crores would have been spent on the product development. And next year also will be INR200 crores to INR250 crores will continue to be spent on this. There are certain projects which are totally done locally, especially in our own platform, our own brand. But there are certain products which are running jointly with Kubota R&D team. And they're also helping us like this paddy special tractor; the involvement was also there because Kubota is specially in the paddy tractors.
What percentage of global Kubota sourcing will shift to India by FY30?
We don't know how much of their global sourcing will shift, but obviously, our plan is good. So I think by FY30, so last year was not very high. There's some new production, which was supposed to start, did not start because of quality issues. So that was delayed. But now I think we started exporting in the last quarter there. So, we expect anywhere between maybe INR500 crores to INR1,000 crores kind of number should happen by FY30 on component export from India.
Where will ROIC improvement come from? Will it come from margins on capital allocation or asset turn?
It will be essentially the operating leverage will be at play and also the cost effort because the company is working on cost realization equally, both on the productivity improvement, efficiency improvement on the shop floor. So, we introduced Kubota production system on the line, and that is going to help in further improving productivity and improve quality. So, I think all these factors will lead to gradual improvement in the cost structure. And we're also looking at rationalizing multiple product platforms to reduce our supply chain complexity.
What is the outlook for the construction equipment going forward? Because last year our capacity utilization has been only 47%. And whether these cranes and mini excavators are likely to do well in the current year?
Last year has been a little subdued for the overall industry. Now what is our anticipation is that this year, had there not been these West Asia prices challenges and supply chain issues, we would have seen some growing demand in this quarter itself. The signs of that could be seen in the last quarter of last financial year, industry picked up came up to the last year's level. But over a longer period in 2 to 3 years' time, we see there is a turnaround just around the corner because we believe that the capex, which the government is every year committing, that capex will -- as it gets invested, it will bring a lot of growth for the overall industry. On cranes and mini excavators, our market share growth is visible even in the last year where the industry was going down. We have gained 2.7% market share in cranes. And also, we've maintained our number 1 position in the country in mini excavators.
Is there any export potential for the mini excavators and cranes?
Not for mini excavators per se because today, whatever mini excavators we are selling, it is currently fully imported from Japan. But on cranes, there are a few countries who use this type of cranes, largely Africa and Southeast Asia and SAARC countries. So those are the countries where we are definitely exporting, and we are continuously increasing our channel distribution presence there. Our export used to be about 3%, 3.5% of total revenue. It is moving upward of 5% to 6% now, and we expect this to grow to 10% by 2030.
What are the plans to utilize this big amount of cash -- about INR7,000 crores of cash on the balance sheet?
We have made the announcement for investing in the greenfield facility, which we just acquired in the process of acquiring land and the initial payment has been made. And then we have planned for Phase 1 and that project itself is more than INR 2,000 crores -- and then this Phase 1, the expansion will happen. So overall plan, I think over the next 7 to 10 years will be to spend more than INR5,000 crores on this greenfield project. This will include both tractor as well as construction equipment and maybe going forward, even the Agri solution will also get added to this. We have plans to do this. And in addition, there is also going to be the investment in the captive finance company. So initially, we mentioned INR 700 crores of capital has been earmarked for finance company.
Any aspirations with respect to how much the loan size is likely to be by year-end for the captive NBFC?
As I mentioned, we'll keep putting the capital based on the loan book size only. We're not going to give the capital in advance to them. So as and when the portfolio increases, we'll keep on investing. So, our approval from the Board is to invest up to INR700 crores of capital. And so far, we've done INR200 crores investment into that entity. The portfolio is already more than INR100 crores today as of end of March. So obviously, the portfolio is growing as they're expanding the reach in various states and more dealers are getting on boarded.
With respect to this model, what is the ROE aspirations that we have with respect to the capital NBFC?
The long term, if you look at most of the captive finance companies, the long-term ROE will be somewhere between 1.5% to 2%. But the basic purpose of captive finance is to help the main business in growing market share and increasing volume. So that is the primary objective. It's not that we'll be going non-captive and focus more on the profitability. But at the same time, we don't want to be in a losing proposition. So, business has to be sustainable. So, it should be reasonable return and at the same time, also help the main business to grow.
Can you elaborate on your view on the monsoon and El Nino effect and the subsequent effect on the rural purchasing power?
The primary reason would be the high base. But apart from that, the forecast of monsoons and the impact of El Nino. So, El Nino impact to a certain extent, currently, what we see is that it will impact to a certain extent, the probability is about 70%, 65% to 70%. Plus, if you see the reservoir levels currently, the rains that had to happen in Q4 of the last fiscal, the January, February, March period, the rains were also much lower than what they normally are. So, the reservoir levels are lesser or the levels are lower than last year or for the last 10-year average as well. So, the rainfall level, plus we are looking at an increase in the commodity prices. So one of the reasons for growth of the industry last year was the GST impact, which came in September and after which the industry grew exponentially. So, if the commodity prices come into the increase comes into effect in this year, of course, the purchasing power or the benefit of the GST is likely to go away.
How much financing and the interest rate plays a part in the buying decision of the farmers?
70% sale for us is on financing only. So, without financing, the sale will not happen. So retail is dependent to a large extent on this financing availability.