By Amit Panday
New Delhi: Despite concerns about the deeper virus spread in the rural areas, the Faridabad-based tractor manufacturer, Escorts Ltd is positive about an overall growth in the domestic tractor sales this fiscal. The company is working to gain market share in the domestic tractor segment and is also working on a strategy to grow its export business, which includes launching the rural transport vehicle (RTV) in FY23 in the overseas markets and expanding electric tractor shipments to Europe and the US.
With plans to launch the RTV, in diesel and electric variants, in the export markets next fiscal, Escorts aims to position the indigenously developed four-wheeler in the USD 3500 – 4500 price range. Excerpts from the interview with Bharat Madan, CFO, Escorts Ltd:
Q: Summarising the March quarter, how does Q1 FY22 look like?
If you take into account March last year when the lockdown was imposed, the industry had lost sales for 8-10 days, which is estimated to be 40,000 tractors. However, the industry sold almost 9 lakh units last fiscal, which was a 24% year-on-year (YoY) jump. We saw a market share of 13% in the March quarter against an average of 11%. So the March quarter was good.
But April was impacted due to the second wave, which is far more severe than the first wave last year. It will definitely impact the demand. May is even slower than April as most states have implemented lockdowns and almost 70% dealerships are closed now
Q: What kind of impact will the second wave have on the June quarter earnings?
The impact on June quarter earnings will not be as much as it was last year as the lockdown duration was longer. So, compared to that the current Q1 will still be a slightly better quarter. Pressure, however, is coming more from inflation this time and the margins are stressed. So while there is no room for price hike, the demand situation is not good, as the customers are not really coming forward to buy. So opting for further price hikes would further damage the demand.
Q: Would you still go for another price hike in the coming months to pass on the commodity price increase to the buyers?
We have already resorted to price hikes twice in the recent past in line with the industry and to relieve the sharp rise in the material costs. While one hike was taken post Diwali mid-November in Q3 FY21, we took the second hike on April 1.
The challenge is that the surge in the material costs is so high, about 8% – 9% but we have increased the price only to equal about 4%-4.5%. While we have absorbed the remaining part, inflation is putting further pressure. So we expect that there could be another price hike by July 1.
Q: You said almost 70% of Escorts dealerships are shut. Aren’t the agricultural activities exempted from the lockdowns?
Yes, agricultural activities are exempted from the lockdowns. Although the states have imposed lockdowns, the tractor dealerships can open their showrooms. I think the issue is happening because either the dealer, the sales executives or their family members have contracted COVID-19 infection and that is why most dealerships are shut. It’s more about the safety of employees and their families. It’s not the question of the government allowing, they have already allowed all agricultural and related activities to remain open while following the COVID-19 protocols.
The surge in material costs has been about 8% – 9% but we have taken a price hike equal to 4%-4.5%. While the inflation is putting further pressure on our margins, we could take another price hike by July 1.Bharat Madan, CFO, Escorts
Q: Rural markets that drove economic recovery last year are witnessing a deeper spread of the virus this year. How bad is the situation and do you think the recovery may take longer this time?
Markets in the rural heartland of India such as Uttar Pradesh, Bihar, Rajasthan, Madhya Pradesh and others are witnessing a sharp rise in COVID-19 cases, and we have seen the rising numbers. On top of that the healthcare infrastructure there is not reliable. One can only imagine if hospitals in the urban areas are struggling for the supplies of oxygen and medicines, how the situation could be in the rural areas. Deeper virus spread in rural areas is a big concern for us just like it is for the industry.
However, the positive news is that all other agriculture-related factors such as productivity, output, government support, crop prices, and timely monsoons point to a good year ahead. So the rural cash flow is definitely going to be good. It is possible we see a temporary setback now and cover up later on the back of pent up demand just like last year. We are hoping for such a scenario and expect that the tractor industry may record a mid single-digit growth in FY22.
Q: How is the demand for construction equipment panning out for Escorts?
The March quarter was quite good for the construction equipment business as we recorded best-ever quarterly volumes. But business for the full year (FY21) was flat because the demand was impacted badly due to the first wave of COVID-19 and subsequent lockdowns last year.
However, the demand for construction equipment picked up after September as various infrastructure projects began taking shape. The on-ground situation currently is the same as the demand – supply is impacted. Production of these heavy machineries requires industrial oxygen, which is not available. We are finding it is very difficult to get oxygen cylinders for industrial use, which is putting pressure on the production side as well.
These are the challenges for this quarter. But overall the pipeline of infrastructure projects that the government has announced looks very promising. We are hoping that after this wave once the market normalises, demand and supply would bounce back.
Q: The order book in railway business is about INR 340 crore. How does it fare when compared to the last fiscal?
The order book this time is smaller but we are building it up. Our order book last year was about INR 500 crore. The orders have slowed down, as railways are not running to full capacity. So the buying has slowed down and the fresh tenders are not floated as frequently. However, we expect that by the end of September quarter, things will move favorably and new orders will also start coming in.
Q: Escorts had showcased a four-wheeled rural transport vehicle (RTV) in 2019. Is that project, along with other R&D projects, put on hold?
No, it is not so. We are looking at that as we are getting good export enquiries for that product. For example, Kubota has shown interest in buying that RTV. So it is under development and commercialization of the product has to happen. What we had showcased in 2019 was a prototype. The teams are working on that and other R&D projects and we have not stopped any project during this period. Instead our teams are working to build further on those product lines, taking into consideration all future requirements. On the capex side, we have not cut or delayed anything for this year.
Q: What is the planned capex for FY2022?
It is almost INR 300 crore to INR 325 crore for the full year.
Q: What is the roadmap ahead for the RTV, its tentative launch and price positioning?
The rural transport vehicle is supposed to be an off-road as well as an on-road vehicle. It is a frugal product and we are looking at a price point of USD 3,500 – 4,500 for the customers. We are getting very good enquiries for it from the overseas markets. We believe it has good export potential besides the domestic market. The platform can also be geared up in the electric format, besides the diesel powertrain that was showcased 2 years ago. That’s another advantage with this product.
For the RTV, we will look at the export markets first. We will look at launching it in the export markets next fiscal. The business case is already done and the progress is underway.
We see a temporary setback in sales due to the second wave but we will cover up with the pent-up demand just like last year. We expect that the tractor industry may record a mid single-digit growth in FY22.Bharat Madan, CFO, Escorts
Q: So the diesel powered RTV will be launched first followed by the electric variant?
Yes, the concept that was shown was diesel powered. But once we have the diesel variant ready, converting the same to electric would not be much of a problem.
Q: What is Escorts’ overall strategy for the export markets? Is the company looking at the Asian countries as potential export markets for the RTV or Europe and USA too are on the radar?
We are already seeing a good traction for our electric tractors from Europe and the USA. We have about 4,000 strong order enquiries for our electric tractors in the small category. Currently the challenge is to ramp up the production as sourcing the batteries is an issue. But we are aiming to become the leaders in this category from India. We began exporting electric tractors last year. We have exported about 100 units so far. There is ample demand but there were problems on the supply side, particularly the batteries that are coming from China.
However, while the supply is opening up from China, we are witnessing growth in demand for small electric tractors. Meanwhile, for exporting the RTVs, we are essentially looking at Europe and the Asian countries.
Our tractor export numbers are growing over years. We have grown from exporting 200 units to 500-600 units a month. We have an export order book of about 1,200 tractors, which we are not able to fulfill. The export demand is looking good and this year we are looking to export up to 7,000 tractors. The only challenge in exporting tractors to the developed countries is that the emission norms there are stricter than India. So that increases the cost of the product. However, increasing export volumes is going to be one of the key focus areas for the company.
Q: How are your plans moving under the Kubota alliance?
We have already started production of the Kubota products. Production of the Escorts branded tractors will also begin from July – August this year. We will have an additional capacity of 30,000 tractors under the joint venture by August – September this year.
Q: What are your key priorities going ahead?
Inflation is one of the major worrying factors and we are closely monitoring it along with its impact on our margins. Second key priority is to regain market share. Last fiscal we lost some market share of about 30 basis points. We need to get back to our trajectory of gaining more market share.
