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Escorts Limited Q1FY15 Earnings Conference Call MANAGEMENT: MR. S. SRIDHAR CEO, ESCORTS AGRI MACHINERY MR. DIPANKAR GHOSH CEO, ESCORTS AUTO & RAILWAY PRODUCTS MR. BHARAT MADAN GROUP FINANCIAL CONTROLLER MS. JYOTI KHATUKA HEAD, TREASURY MR. SAIKAT MUKHOPADHYAY CFO, ESCORTS CONSTRUCTION EQUIPMENT MR. RAJEEV DASS VICE PRESIDENT, CORPORATE AFFAIRS & COMMUNICATION MODERATOR: MR. RAGHAVENDRA JAIPURIA - PERFECT RELATIONS Page 1 of 21 Ladies and gentlemen, good day and welcome to the Escorts Limited Q1FY15 earnings conference call. As a reminder, all participant lines will be in the listen-only mode. There will be an opportunity for you to ask questions at the end of today s presentation. Should you need assistance during the conference, please signal an operator by pressing * then 0 on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Raghvendra Jaipuria of Perfect Relations. Thank you and over to you sir. Raghvendra Jaipuria: Good afternoon. Thank you for joining us on Escorts Limited Q1FY15 results conference call. Today we have with us Mr. Sridhar CEO, Escorts Agri Machinery; Mr. Ajay Sambrani CEO, Escorts Construction Equipment; Mr. Dipankar Ghosh CEO, Escorts Auto & Railway Products; Mr. Bharat Madan Group Financial Controller; Ms. Jyoti Khatuka Head, Treasury; Mr. Saikat Mukhopadhyay CFO, Escorts Construction Equipment and Mr. Rajeev Dass Vice President, Corporate Affairs & Communication. We will start the call with brief opening remarks from the management followed by an interactive Q&A session. Before we start, I would like to add that some of the statements that we make in today s discussion will be forward-looking in nature. At this moment, I would request Mr. Dass to make his opening remarks. Rajeev Dass: Thank you Raghvendra. Ladies and gentlemen, very good afternoon to you all. Thank you for joining us on the first quarter conference call for financial year Just one minor change before I go into the details. Mr. Ajay Sambrani is not with us today, but is represented by Mr. Saikat Mukhopadhyay who is the Chief Financial Officer of our Escorts Construction Equipment business. Unlike the earlier times, I would like to dive in straight with our operating businesses and comments and presentation on that and then round it up with a group perspective during the course of this call. Starting with the Agri-Machinery business, our tractor volumes were up sequentially close to 15% for the quarter, although lower by 8% correspondingly. The industry also has degrown by 2% in this quarter compared to last year. Industry degrowth is attributable to the subnormal rainfall in the Northern and Central region and the unusual weather witnessed at the start of the quarter. To give you some perspective, our strong markets with mix are close to two-third of the industry volume degrew by 7% and the weak markets which contribute the remaining one-third of the industry volume grew by 11%. As mentioned in previous calls, we have almost vacated the sub 30 horsepower segment and aim for a market leadership position in the higher HP segments. In this regard, industry in the 50 plus HP segment grew by 5.7% and now contributes 11% to the overall industry tractor volume. In this growing segment, Escorts registered a robust growth of 66%. The FT 6055 model in this segment alone sold 787 tractors against the zero base volume. This model along with value addition in the existing models underlines our endeavor to Page 2 of 21 command a leadership position in the higher HP segments. It is also encouraging to see an uptake in our export market share which has increased to 3.1% from 1.7% last year. Tractor inventory, our dealerships have been brought down by 983 tractors. This was done keeping in mind the anticipation of a weaker monsoon. As mentioned in our earlier calls, our focus on material cost reduction is being monitored very closely along with the external consultants and we are confident that this fiscal year itself will see a significant addition to our bottom-line on the cost reduction that will be managed on our material front. Credit finance facility to tractor customers will see a significant enhancement with the tie-up in Larsen & Toubro finance and will be a key step for adding to our customer reach. The recently concluded budget was positive for the agriculture sector with government announcing an outlay of Rs. 8 lakh crores for agri credit for improving farm productivity through farm mechanization. Such initiatives will help shape sector for a more sustainable growth in the future and also provide the much needed impetus for industry participants and farm mechanizations. I now switch to the construction equipment business. The volume remained flat versus last year, but the revenue increased by 11% and stood at Rs. 121 crores. This increase is a reflection of our focus on better product mix and realization per unit. Also when compared to the last quarter, our volumes increased by 42 units and the income was up almost 10%. Focus on premium and differentiated products along with prudent cost structure and rationalization has helped improve our margins both at the corresponding and on a sequential basis. As discussed in the last quarter, we have engaged with consultants to bring down raw material cost. In the current quarter, our losses came down by 30 basis points versus last year and by 150 basis points when compared to the last quarter. We will continue to develop offer innovative products and move up the value chain in this area. This along with the ongoing cost rationalization activity, gives us the confidence to perform better than the industry in the fiscal ahead. Lastly, new government s focus on building the country s infrastructure will further boost the prospects for the construction equipment sector and aid Escorts Limited in consolidating its position in the infrastructure machinery space. Coming to the Railway division, Railway division stands to gain from the renewed focus of the government on reviving the rail infrastructure in India. Railway Board s finalization of the wagon tenders has given impetus to airbrake requirements. Also the potential introduction of high speed and long haul trains and the dedicated freight and passenger corridors augurs well for our three main new products. Looking at the quarter performance, the revenue of Rs.43 crores was down by 5% as compared to sequentially and 20% correspondingly. EBIT at Rs.1.63 crores as that of Rs crores sequentially and Rs.5.42 crores correspondingly. The order book of approximately Rs.33 crores stands to be executed in the next coming quarter. Page 3 of 21 The Auto division reported a revenue of Rs.23 crores, down 25% sequentially and 38.6% correspondingly. The loss during the quarter at Rs.9.2 crores as that of Rs.7.1 crores sequentially and Rs.3.4 crores in corresponding quarters. We continue to evaluate partners for this business. However, to reduce losses, we have introduced the VRS scheme to rationalize the blue color manpower cost and will further bring it down to industry standards within the next quarter. I now turn to a brief look in our group financial numbers before we turn it over for a questionanswer session. The turnover for the quarter increased by 15% to Rs.1,129 crores sequentially and down 4% on a corresponding basis. The material cost as a percentage of sales was maintained around 72%. Employee cost of Rs. 116 crores decreased as a percentage to sales by 100 basis points compared to last quarter. Other expenses, however, were up by 48 basis points sequentially and by 173 basis points correspondingly. EBITDA up by 24% sequentially to Rs.57 crores and down by 38.7% correspondingly. We continue to bring down our debt resulting in finance cost down by 34% compared to last year to Rs.13 crores. Our total debt outstanding as of June 2014 is Rs.376 crores. The PAT was reported at Rs.34 crores for the quarter ended June. Ladies and gentlemen, now I request the moderator to open the floor for question-answers which the team will ready to comment on. Thank you. Thank you. Participants, we will now begin with the question-and-answer session. We have the first question from the line of Mitul Shah from Karvy Stock Broking. Please go ahead. Mitul Shah: My question is on the tractor industry volume growth. In the CNBC interview, Mr. Madan said that they expect 3%-4% growth for the second half. For the first quarter industry already reported 2% decline and for the second quarter it is expected to be declined in the range of 5%-6%. So that means for full year industry will decline in the range of 2%-3%? S Mr. Mitul Shah, see the way we should see the first quarter itself is explicitly 2% down. The segment which is growing is the micro tractor that means the Yuvraj types, that is something like less than 20 horsepower tractor. If you provide for that, then the industry growth will be further coming down to something like -5%. To that extent, it was on expected lines, the 5% down expectation is what we have discussed on the last con-call. So this was on the expected lines, but what we did expect was something like marginally positive, around 3% we expected in the second quarter too. Now the way it is happening with the 51% sowing, whatever we have seen looks like it may not be even 3% or 4%. The best estimate can remain as around 0 to 1%. So to that extent, industry will go through their moderation period. You can also see CRISIL and all other reports, they are also validating the same thing whatever we expected. So the second half, the growth rate can still be around 4%, because there again the quarter 4 was very low. So with that, it can be something like 1% or 2% kind of a registration is what we should expect for the entire year. Page 4 of 21 Mitul Shah: Because sir again first half base is very high. So if we decline on that base, anyone if we grew by 3%-4% on the second half, so overall industry s growth comes down to minus 2%-3% kind of thing. S Still we really do not know. The quarter 3 and quarter 4 growth can still be very high. The quarter 3 growth can still be like as I said is 2%-3%, we really do not know. Still we do not know the impact of monsoon. So the base rate what you are saying is correct. The quarter one base rate was something like 26% which was very high. Even if it is -5%, it is not all that a bad show. If you look at it, that is not really bad from a 26% growth rate of last year. So if you look at it that way, it is going to be moderate. It is going to come down. It can happen that way, I cannot say. It will be something like a 2% type is the best you can expect for the whole of this year actually. Mitul Shah: And for sir higher HP segment, what is your view in the second half, the growth will come from the higher HP side will it be across the segments? S See if you look at the higher horsepower segment, on a long-term point of view, it is here to stay. This is what we have shared 2 years back and the same thing we are sharing now also. What started small it started growing. I think other than the micro tractor, the biggest growth is happening only on the 50 horsepower and above. We had also made a commitment that that is the segment where we want to be the leader possibly in the year 2015 and 2016 was our explicit commitment. In that way, I think 3-year back from a market share of 1%-1.5%, we become 3%, 5%, 7% and then this year the plan was to do something like 11%, we have already achieved that in the quarter one. So to that extent, we are on our way to the higher horsepower segment. There are no surprises there. But what is most important is the segment one thing below which is something like horsepower where we did had some huge market share, something like 21%-22% types some 5-7 years back and that has come down to 16%-16.5% today. So that is an area where we do have lot of action plan. We are hopeful of reversal trends there. Mitul Shah: Thanks sir. Second question is on the regional mix. In the first quarter, we have seen south growing by around 10% in all other segments. Other regions North, Central declined or remained almost flat. So for the second half if you are expecting industry growth of around 3%-4%, so which regions you do expect to grow? S I think in a way it is very difficult to guess still let me try to give you some assessment. First thing is in terms of share data, the last year last quarter the area where we operate what we call our strong market, something like 60% of India was growing at the rate of 35%. Whereas the weaker market, the 40% of rest of India which is something like Gujarat to South of India including Bengal, this we call it as weak market. And that was last year same quarter was growing at 11%, continue to grow at the same rate of 11%. There is no change in that market whereas our strong market from 35% has come down to -7%. In a way it is a shock to our own segment, but having said that there is one advantage where we operate, the half of this area is an irrigated area to that extent, I think it has a better ability to absorb shock. See this reason for my Page 5 of 21 quoting this is if you look at the States like Tamil Nadu and the States like even half of Maharashtra, they were dropping at around 30%-35% year-on-year for 2-3 years. Those things we should not expect in our market because of better irrigation facility. I would expect a much more moderate stand from -7 it should almost become marginally positive if not very high. Mitul Shah: Because sir South and Western despite reporting higher growth last year, still base is much lower as compared to last 6-7 years levels. So there is high probability this region would outperform or the industry growth would come from these regions. So what we are doing anything in terms of improving market share or strengthening the position in this regions? S I think exactly three quarters back, we have talked about an initiative to derisk the company because that is the zone where we are operating. If it becomes vulnerable what happens is just as what you call business derisking activity. We wanted to take couple of major states in South and West and we wanted to crack. I think to tell you explicitly, we targeted Andhra and Maharashtra for example. Three quarters back, we started an initiative in Andhra, we canceled something like 15 dealerships in 10 districts and those areas after three quarters against the industry growth of something like 8%, and our growth is around 30%. The reason for quoting this is, that means whatever formula we have tried out and those kind of markets seem to be working. Now we have to scale it up. Scaling costs is first thing is money and as far as the time, we do not want to upset the overall apple cart. So over a period of 2 years time, we will take it to the two States which is Andhra and Maharashtra, eventually spread it to Karnataka and other major States. So we are into an action plan. The way we have already discussed is for us to see an end benefit, it is a 2- year activity. It cannot be anything less than that. But I think initially it is showing some success in the three quarters that 10 districts of 15 dealerships are showing a huge success if have to say so. Mitul Shah: Sir my last question is on the Construction Equipment business. Revenues are up by around 10%-11% on YoY as well as sequentially and your average price per vehicle is also up by 6% on a QoQ basis. Still losses are almost in the same region and when last conference call you highlighted that losses because of some annual adjustment and which will not continue going forward. Still the loss remains close to Rs.9 crores as compared to almost Rs.10 crores last quarter and around Rs. 8.7 previous corresponding. Saikat: Mr. Shah, while the realizations have gone up, the number that you see as far as EBITDA losses are more or less on the same front because of certain exceptional expenditure that we are incurring to improve our bottom-line while the variable and average costs, we are on top of it. But over the next 3 months or so, the exceptional item of cost that we are incurring at this point of time will go over. So while the realizations are up, within this quarter we will be over this expenditure. Mitul Shah: Sir out of this 9 crores, what would be the quantum of that exceptional part? Page 6 of 21 Saikat: It is about Rs. 2 crores. Mitul Shah: Sir what will be the breakeven revenues? Of course the losses combined the ancillary and construction equipment are close to 23%, is taking roughly 23%-25% of the profitability of the tractor segment, Agri-Machinery. So what would be breakeven point or when do you expect it to be turnaround? Saikat: The green shoots are starting, we are seeing that and this quarter, the initial part of it is getting crystallized, but the main crux s of it will come in the October and January quarter where the things will come under the implementation phase. So that is the quarter to watch out as far as Construction Equipment business is concerned. Rajeev Dass: In our last conversation Mitul, we had mentioned that January 2015 is our deadline for very healthy breakeven at the EBITDA level. We are internally targeting to try to achieve that in the month of October-November itself as Saikat has confirmed to you today. The industry volumes still need to grow a lot more than they have grown till today. We are seeing visibility in the material handling space where we are seeing visibility of growth, but correspondingly we have seen some degrowth in the backhoe loader segment. But having said that, we are geared in our backend operations for new dealers and new coverage geographies with the new product DigMax II which has been very successfully received. I do feel that the target of getting to breakeven by October-November would definitely be met earlier than the earlier commitment which we had given of January Mitul Shah: Sir what would be the breakeven volume roughly, Construction Equipment side? Saikat: At about 300 volumes which is about Rs. 50 crores of turnover. Thank you. We have the next question from the line of Arvind Sharma from Citigroup. Please go ahead. Arvind Sharma: My first question would be what the pricing scenario, like in an industry is. Do you see discounts rising or incentive rising given the tractor demand has been weak as you said. I think of course this is the characteristic of this industry. Whenever the industry goes through this kind of a negative growth, there is lot of pricing pressure do happen. So that is prevalent for the quarter one. It really happened that way. But having said that, certainly we are moving our prices up from first of August. We are moving the customer prices up on an average by Rs.5,000 which may be varying from something like Rs.2,000 to Rs.8,000 kind of a thing depending on the model. We are moving the prices up. This is here to stay. I think we are more interested in keeping ourselves stirring clear up this kind of activities. Arvind Sharma: But sir, have you seen increasing incentives from the competitors? Page 7 of 21 I think here the level of activity has gone beyond the incentives. They are all advertising in the press. They are all putting at a newspaper crossing the prices actually. So it is all explicitly offered to the customers. If you look at the scenery of today except couple of brands, one is Swaraj as well as Sonalika, I think the whole industry seems to be under severe pressure where people dropping market share heavily. So these things are bound to happen. These two brands are generally an entry level brands which are attractive pricing and things like that possibly. So this is here to stay for at least three more months. Arvind Sharma: Thanks. Sir my second question would be that do you see any increase in demand from the nonagri usage of tractors? Has it happened over Q1 or do you see it happening over next 6-
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