Ladies and gentlemen, good day, and welcome to the Escorts Kubota Limited Q2 and H1 FY 2025 earnings conference call hosted by DAM Capital Advisors Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star, then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Mitul Shah from DAM Capital Advisors Limited. Thank you, and over to you, sir.
Thank you, Del. Good evening, all. On behalf of DAM Capital, I welcome you all for Escorts Kubota Limited's Q2 and H1 FY 2025 earnings conference call. I also take this opportunity to welcome the management team from Escorts Kubota Limited. Today, we have with us Mr. Bharat Madan, Whole-time Director and Chief Financial Officer; Mr. Neeraj Mehra, Chief Officer, Tractor Business Division; Mr. Sanjeev Bajaj, Chief Officer, Construction Equipment Business Division; Mr. Ankur Dev, Chief Officer, Railway Equipment Business Division; Mr. Sanjeev Garg, Head of Finance and Tax, and Prateek Singhal, Head of Investor Relations and ESG. We will start the call with brief opening remarks from the management, followed by Q&A.
Before we start, I would like to add that some of the statements made by the company in today's call will be forward-looking in nature and are subject to risk, as outlined in the annual report and investor release of the company. Over to management for their opening remarks. Thank you.
Thank you, Mitul. Good evening, everyone, and thank you all for joining us today. The current fiscal year marks a significant milestone for our company as we celebrate 80 years of spreading prosperity and impacting lives, sharing key milestones that we have achieved in the current financial year that are aligned to our midterm business plan shared with you all earlier. Got approval from National Company Law Tribunal (NCLT) for the scheme of amalgamation consolidating Escorts Kubota India Private Limited (EKI) and Kubota Agricultural Machinery India Private Limited (KAI) into Escorts Kubota Limited (EKL). This marks a significant step towards becoming one of the largest Indo-Japan machinery equipment collaborations operating from India. We obtained the certificate of registration from RBI for Escorts Kubota Finance Limited (EKFL), and we are gearing up to become operational for captive finance of EKL products in the current fiscal year itself.
We inaugurated a state-of-the-art export hub spanning over 58,000 sq ft in Faridabad, exclusively dedicated to supplying components to Kubota Group Company worldwide. The quarter-ending September 24 marked the first reporting period following the merger of Escorts Kubota India Private Limited and Kubota Agricultural Machinery India Private Limited with Escorts Kubota Limited. All figures for the current quarter, as well as the earlier period, have been updated, considering the merged financials of EKI and KAI with EKL to make meaningful comparisons. Here are some key highlights for EKL's standalone financial performance for the quarter-ending September 24: Operating revenue at INR 2,476.2 crore, EBITDA at INR 267.6 crore, marginally up as against INR 266.7 crore year-on-year. The EBITDA margin in Q2 is at 10.8%, almost similar to last year's level. Post-merger margin dilution impact is there, as the merged entities are currently not as profitable as EKL was pre-merger.
However, we are actively working to improve post-merger margins by focusing on integrating synergies, enhancing our product mix, and implementing cost rationalization measures. PBT at INR 310 crore, up by 5.6% YoY. Net profit at INR 326.7 crore, up by INR 53.2 crore YoY. This growth was primarily driven by one-time impact of INR 91 crore approximately, resulting from a change in long-term capital gain provision, as well as the impact of brought- forward losses of the amalgating companies. EPS stands at INR 29.7 as compared to INR 19.4 YoY.
The company continues to be debt-free, with enough liquidity on its balance sheet to support future growth plans. The company repaid debt of INR 347 crore approximately of amalgating companies EKI and KAI upon merger. On a consolidated basis, the company's financial performance for the quarter-ending September 2024 is as follows: Total revenue at INR 2,488.5 crore as against INR 2,477.7 crore year-on-year.
EBITDA at INR 264.7 crore with a margin of 10.6%. Net profit at INR 324.2 crore, up by 54% as against INR 210.5 crore YoY. Moving on to the segmental business performance, starting with agri-machinery business. On tractor business in Q2 FY 2025, the total tractor industry domestic export was at 2.35 lakh tractors, at par with that of the corresponding quarter last year. Our total volume was at 25,995 tractors as against 26,241 tractors in the corresponding quarter. On the domestic front, the total tractor industry in Q2 FY 2025 was at 2.10 lakh tractors, almost at par with respect to the corresponding quarter last year. Our domestic tractor volume stood at 24,768 tractors as against 24,690 tractors in the corresponding quarter. Our domestic market share in Q2 FY 2025 stands at 11.8%. We have currently around 1,500 exclusive dealers for our Kubota Farmtrac and Powertrac brands.
For FY 2025 full year, we expect the domestic tractor industry to continue its growth trajectory with mid-single-digit growth. The industry experienced record-breaking growth in October demand due to a concentrated flexible period, and also driven by our rainfall, our average rainfall, and higher water level reservoirs, and stipulated higher crop yield, increased crop production, higher MSPs, and improved terms of trade. On the export front, the tractor industry in Q2 FY 2025 came at 24,500 tractors as against 25,900 tractors in the corresponding quarter. Our export volume came at 1,227 tractors as against 1,551 tractors in the corresponding quarter, impacted primarily due to challenges in our key market of Europe, which are experiencing recessionary conditions. During the quarter, sales to Kubota Global Network accounted for at least 20% of our total export sales.
With the merger of our agri-machinery product revenues getting diversified, non-tractor revenue now accounts for around 17%-19% of our overall agri-machinery revenue as compared to 10%-12% pre-merger. Non-tractor business comprised of agri-solution business. We are offering a wide range of agri-machinery mechanized applications such as rotavator, harvester, rice transplanter, baler, spares, and more, all under Farm Power and Kubota brand. Engine business specializes in high-performance diesel engines with power output range from 7.5 kVA-58.5 kVA in an Escorts engine. These engines are primarily supplied to Genset OEM, with third-party engines also being used when needed. Additionally, our Kubota engines are supplied to Construction Machinery OEM in 10 kW-55 kW range. Service and spare part business catering to a wide range of agri-machinery products, ensuring that our customers have access to the support they need for their equipment.
For global sourcing by Kubota Group, by leveraging China Plus One strategy and cost efficiencies of Indian manufacturing, Kubota is partnering with EKL for a robust global sourcing strategy. With EKL's well-established large vendor base and frugal cost structure, along with a skilled workforce, Kubota is looking at India as a key sourcing base for goods and services to meet their global requirements. The potential of sourcing from India is enormous and establishing a first-party export warehouse this year is a step towards achieving the larger objective. By clearly distinguishing between our tractor and non-tractor business and making these independent business verticals, we intend to unlock the full potential of each business through focused strategies and efforts going forward. On the revenue side for the segment, agri-machinery was up by 5.3% to INR 1,884.2 crore as against INR 1,789.4 crore in the corresponding quarter.
EBIT margin for agri-machinery business division was at 9.1% as against 9.2% in the corresponding quarter. Coming on to the construction equipment business, in Q2 FY 2025, served industry volumes of cranes, backloaders, mini-excavators, and compactors were down by approximately 2% as against the corresponding quarter last year. This degrowth was primarily driven by crane industry, which was down approximately 18% as compared to the corresponding quarter last year. Our total volume for construction equipment business was at 1,394 machines as against 1,709 machines in the corresponding quarter. Construction equipment segment revenue came at INR 379.9 crore as against INR 440.2 crore in the corresponding quarter. EBIT margin for the quarter ending September 2024 came at 9.3% as against 9.9% in the corresponding quarter.
As we move forward in the fiscal year, we expect an increase in demand due to government initiatives to stimulate the economy and upcoming changes in the emission norm regulation starting from January 1st, 2025, which may result in pre-buying opportunities. Overall, the outlook for the later part of the fiscal year is optimistic. Moving on to the railway equipment business division, revenue for the quarter-ending September 24 came at INR 211.2 crore as against INR 234.3 crore in the corresponding quarter. EBIT margin for the railway segment for the quarter-ending September 24 came at INR 15.2 crore. Our order book for the railway division at the end of September 24 stands at more than INR 1,100 crore. This order book, however, includes BMBS orders for the freight wagon for approximately INR 382 crore, supply of which has been temporarily on hold by RDSO.
In line with our strategic focus on agri and the construction equipment sector, we have made the decision to divest our railway equipment business to Sona Comstar. The purpose of this sale is to streamline our operations, reallocate capital, and enhance the scale and efficiency of our core businesses. The selection of Sona Comstar as a buyer and pricing of the deal were the result of a comprehensive competitive process that involved multiple potential buyers across the globe and was facilitated by a reputed global investment banking firm. Now, we request the moderator to kindly open the floor for the Q&A.
Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Gunjan Prithyani from Bank of America. Please go ahead.
Yeah. Hi, team. Thanks for taking my question. I mean, when I look at the farm business, of course, there's been a huge change with the merger of these two companies. I mean, for the benefit of the group at large, if you can just give us some sense on what was the revenue and EBIT for the companies that got consolidated. And also, directionally, how to think about margin. I mean, of course, Prateek spelled out a few measures, but how should we think about margin recovery or margin build-out from here? Because it's just a pretty big reset down, right? So if you can give us better color on the two subsidiaries' financials, then how do we see the margin shaping up going forward?
Hi, Gunjan. This is Bharat Madan. Sir, as we have been indicating in our earlier calls too, these two JVs at a combined level were more or less break-even operations, and they had about 2,000 crore of sales as a top line with very nominal operating margin. So that's why we had indicated this will lead to about 1.5%-2% dilution in the overall margin on a short-term basis till the time we work on the profitability improvement for these companies. The major issue there, obviously, is the contribution with the material cost levels are high. The reason is because many products are still getting imported from outside, so as a result, the margins are not really high. So as you localize those products, obviously, the margin improvement will happen.
So that's a process which will continue in the next now two, three years, which is what we are working on. And large part will also depend on the Indian localization, which will happen once the greenfield facility gets set up. So till that time, obviously, these numbers will remain under pressure. At the same time, there are some synergies which will come from the integration of these companies now with Escorts, especially on the overhead parts, the manpower and other fixed overhead which are there. It's also almost 10%- 11% of their top line, which can get rationalized. So a lot of common functions, obviously, which will get performed. So those cost savings will start coming in. So we expect, I think, in the next one to one and a half years, you'll see, I think, the improvement will start getting visible.
So ideally, it's to go back to the level of margin what Escorts had, which is, again, at the entity level, we're looking at 12%- 13% sort of margin. So that's the sort of margin which we intend to continue to maintain. And after the registration, there is a put in place. But in the long run for tractor business per se, we have been indicating the mid-teens sort of margin, including these JVs. So that will be the thought process when we go for the localization as well.
Okay, got it. Just to be clear, this 12%-13% margin that you're mentioning factors in the localization of engine, or 12%-13% is basically synergies and some interventions which are low? I mean, I'm just trying to get what is low-hanging versus engine localization. The greenfield plant will still take time, right? So that potentially, I'm assuming, is two years out. So what is?
Yeah, so 12% is a low-hanging one. But in the long term, we said it will be mid-teens. So once the engine etc. also get localized.
Okay. And the 1%- 1.5% drag that you, sorry, 1.5%-2% drag that you mentioned, when I look at actually the numbers this quarter, it seems a bigger drag. So is there anything in the underlying business besides the drag from these two subsidies? Is there anything else to call out? Because if I look at just, let's say I'm not even looking at adjusted numbers. I'm just looking at quarter-on-quarter margin decline. It seems pretty steep, even factoring the operating deleverage. So anything else from a cost perspective that we should bear in mind was dragged down or impacted the margins in this quarter?
So this quarter, Gunjan, so normally, it's the weakest quarter for the industry. So that's why we see the bigger impact in the margin here. Dilution looks more. But like I said, on a full-year basis, it will remain in the range of 1.5%-2% only, maybe less than 2% now, somewhere around 1.5%. So the next two quarters, you will see actually it will be more positive. It will not be that much negative impact what you saw in this Q2.
Okay. Okay, that's good to know. And second, again, a bit more strategic around this merger now concluded. I think this was one of the last steps we were sort of waiting for to conclude before we could start executing in full flow on our mid-term targets. So now, with this behind, would you want to sort of call out what is it that can play out more comfortably? Is it exports? Is it components? Some bit of update on the mid-term strategy or targets that we had laid down. How do we see the progress from here on those metrics?
Yeah, so I think, Gunjan, as Prateek mentioned in his opening remarks, these two companies which we merged are not totally dependent on tractors. So tractors, for example, was only 60% of the business roughly. And the balance, 37%-40% was coming from the non-tractor side. So which is a positive side. So your dependence will not be only one product line. So there are other product lines and verticals which we have now created, which is for spare parts and service, for the engine business, for the agri solution, for the implement harvester transplanter line, or for the global parts sourcing. So these four verticals which have been created will continue to be the growth driver, other than the tractor business, of course, which will be there.
So dependence will also be then more on the other verticals, which we also expect will be a good line for growth purposes. So in these all verticals, we expect the growth should be significant in the coming years. And we'll see very large potential across all three verticals, especially on the parts part and the engine part.
Okay, got it. Just last question, outlook on the industry. We had even your competitor reports sometime back, and they have the guidance on the industry. So just trying to get your thoughts on any change from your perspective on industry demand looking far more stronger and there being upside to the guidance that you all are giving for the industry?
Hi, Gunjan. This is Neeraj Mehra. So we are positive on the industry. We feel that fiscal year 2025 will probably end with the growth of about mid-single digit. So mid-single digit growth we are looking at for this fiscal year.
Okay. Okay, I'll join back to queue . Thank you.
Thank you. The next question is from the line of Raghunandhan N.L. from Nuvama Research. Please go ahead.
Thank you, sir, for the opportunity and festive greetings. Sir, continuing on the margin part, so was there any other impact on the margin with reference to commodity cost, either in Q2 or expected in Q3? And also, in terms of the margin improvement. Localization is a very important trigger. So if you can share, in terms of the greenfield plant, what is the current status? When is the construction work expected to start? Any thoughts on the timelines?
So look on the greenfield. Obviously, like I said, the localization will, to a large extent, depend on the greenfield plant going live and kicking. So as we indicated last time, so we have submitted an expression of interest to the UP government now, but the Rajasthan government was not able to give us the assurance for the water supply so we had to withdraw the expression of interest from Rajasthan. And now we are discussing with the UP government, and the discussions have been very positive. So we expect within the next six months, we should be able to close on the land part. And if we get the land allotted in the next six months, then we expect within the next two and a half years, we should be able to go live on the commercial production on the tractor side.
So I think our original plan of FY 2027-2028 remains there. So we are still sticking to that. So hopefully, that will come on time if it's allowed.
Got it, sir. And any near-term issues, sir, on the commodity cost? Was there any impact?
Sir, Q2, we had seen some inflation, but very nominal. It will not be significant because it didn't have price increase in the first quarter in anticipation. So especially on the rubber side, the tire prices have gone up. You would have seen in the tire industry also. So both the environment issue and the normal natural rubber price going up. So the short supply and the cost were going up. So there's a pressure on that front only. But it's not something significant which will lead to any major disruption. So this quarter also is more or less softness only in the commodity. We don't expect to be any significant change on the material cost side.
Got it, sir. In terms of the mid-term business plan, a couple of areas where I will request some update. One is in terms of the entry into export markets like Brazil and the U.S. Would you expect that to happen at the beginning of FY 2026? Second, on the new product launches, Farmtrac Worldmaxx had come out. How is the initial feedback? Apart from that, what other new products can we expect in the coming months?
So on export, I think level of first priority is to cater to the Mexican market and Southeast Asian market for which the products are being developed now. So as we mentioned earlier, from this fiscal year end, we'll have the product ready partly for the European market. And next year, we'll have the products available for the Southeast Asian and Mexican market too. And that will start. I think the exports for the American market and South America will largely depend on the greenfield facility because those products are right now not in our portfolio. So they will obviously come up along with that. But we expect from Q4, you will see a growth momentum should start on the export front. So far, exports have not done well because the European market, which is our largest market, has been under pressure.
But now, from Q4, we expect the numbers will start improving.
Got it, sir. Neeraj, sir, if you can talk about the new products?
Yeah. Hi, Raghun. So first, on the Worldmaxx thing, so as you know, Worldmaxx was a slightly higher horsepower product, and primarily for a niche segment. So we have gone slow and steady on that, and the initial response has been very, very good. And seeing the initial response, we now intend to extend the geographies. Currently, it was restricted to certain geographies only. Going forward, we also intend to introduce a new range again in the Farmtrac brand. This should be out by about January, February. It's a 41 HP-50 HP segment range where we had certain product gaps both on the two-wheel and four-wheel front. So it will massively cover those gaps and help us grow volumes and market share in key markets. So that should come around February.
Got it, sir. My last question was on the tax rate. Bharat sir, the tax benefit what we have got this quarter, given the accumulated losses and the merger impact, how much more tax benefit can we expect in coming quarter or for full-year FY 2025? What could be the tax benefit that we could book?
So I think the tax impact has all been taken now in this quarter. So all credit forward losses benefit has flown into this quarter. And for the trading income side, also the tax impact on the capital gain has also been considered. The only good thing will be, I think, going forward, since the trading income is still large from the P&L, so your effective tax rate will go down from 25% to maybe 22%-23% level. So that will be continuing going forward.
Got it, sir. Thank you so much. I'll fall back to the queue.
Thank you. The next question is from the line of Amit Goela from RaRe Enterprises. Please go ahead.
Hello.
Hello. Yeah, Amit, you can hear me.
But just one question. We keep reading or hearing that crop prices are good. Rains have been good. Crop prices are good. Rural India is doing better. But at the same time, we keep seeing that there's solid pressure on consumption. You're talking of mid-single digit growth. What exactly is happening? And can you give us some color or can you tell us exactly what you are seeing and what you are experiencing on that side?
Okay. I'll ask Neeraj to respond to this. But just to give you an idea about this mid-single digit, if you look at the first six months, the industry hasn't been flat. So when you're talking about the full year, which means the second half has to go in double digit to give you mid-single digit sort of growth. That means the growth momentum will start from October, which we already seen has happened. October has been very good for the industry. We expect the similar momentum will continue in the balance five months also. We think the green shoots are already there. Rural recovery is happening, and we've seen that happening in October, and we'll continue going forward. But maybe Neeraj can also shed some light on this.
Thanks, sir. Thanks, sir. Thanks.
So, okay.
Mr. Amit, does that answer your question?
Yeah. Can Neeraj also explain what he's trying to say?
Yeah, yeah, yeah. So i, Amit. So Bharat sir has already explained what has happened in the past six months and how we see the industry over the next six months, but overall, the rainfall has been pretty good. So it's been 8%-10% surplus growth. The major issue was the reservoir levels. So the reservoir levels at this point of time are between 85%-90%. So now that impact will actually culminate in growth in H2. So that is why we are a little bit positive on a double-digit growth in H2. Also, looking at the initial impact of the kharif crop, the output is positive, and the Mandi arrivals have started happening in October. And the output is higher than last year. MSPs of the Rabi crops with respect to last year are also slightly higher.
Government's focus on infrastructure as well as on the agri sector remains there. So all these combined together, and it might look like a single digit growth for the entire year. But we need to look at the fact that the last year base was not a low base. We ended the last year at about 875,000 units for the industry. So mid-single digit growth will take it to about 920,000-925,000 which is probably the second highest ever in the history of India in terms of the industry. So we think it's a positive, and this will move further forward for the next year.
Okay. Thanks, Neeraj. Neeraj, can you throw some light also on what's happening on the agricultural equipment side?
On the agri equipment side, see, we had earlier we were operating with a single brand, which was FarmPower. Now, with Kubota coming in, our focus on the agri equipment side, primarily we were focused on the rotavator business. And now, with Kubota coming in, the combine harvesters and the planter business and rice crop planters. So all these, including the sprayers as well as the super seeders. So the portfolio has, to a large extent, increased. We are hopeful for a very positive growth in the next six months and the subsequent year also.
So Amit, Kubota actually has almost grown more than 100% on this business of agri solution this year in the first six months. So the harvesters growth has been significant. So overall, if you look at value terms also, it's more than 100% growth what Kubota has seen.
We expect this will be a very positive growth driver for us going forward.
Thanks, Bharat. All the very best here.
Thanks. Thank you.
Thank you. The next question is from the line of Shubham Patel from JP Morgan. Please go ahead. Mr. Shubham, your line has been unmuted. Please go ahead with your question. As there is no response from the participant, we'll move on to the next question. The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.
Yeah. Thank you, sir, for the opportunity. And sir, firstly, can you help us understand how was the festival period good for the tractor industry and for us, sir?
So the festival period was very good. Probably for a single month, the best-ever industry figure as well as for us. So as Prateek has mentioned, that we did highest-ever sales in the month of October. This was primarily due to the fact that all the festivals had combined together and were falling in a single month. So we have done our best-ever sales this festival season.
So if you compare this festival period to festival period, would it be double digits, sir?
Sorry?
If you compare festival period to festival period last year, last year it came around from October- November, and this year from October to start of November. So that growth would be double digits, sir?
Yes, yes. That growth is double digit. It's a decent double digit.
Okay. And sir, how would be now the dealer inventory post the festival period, sir?
Our current inventory levels are between 35 days-37 days of stock on an annualized basis.
Which would have come down post the festival period, sir?
Yes, substantially.
Got it. And sir, how do you see the region-wise trends, sir? Particularly, we're seeing Gujarat and Rajasthan with the heavy rains had a dent in the volumes earlier. So how do you see the trend region-wise, sir?
So see, in quarter two, the industry in the eastern part of the country, except Bihar, grew tremendously. Especially Chhattisgarh, Jharkhand, West Bengal, it grew tremendously. It was primarily driven by, to a certain extent, some subsidy sales and certain stops given in Chhattisgarh. But with pretty adequate rains happening, we feel that west and especially south will actually pick up now. West has already started picking up. Gujarat is a slight concern, but Maharashtra is doing pretty well for the past three, four months. And last month, though it was not part of H2, in October, the industry in the southern part of the country was pretty good. So as the reservoir levels are now all right, close to a level of 85%-88%, we feel that the south industry will also move.
So which also would give support to the Kubota brand, which has matured last year in terms of the tractor volume, right, sir?
Absolutely. Absolutely.
Got it, sir. So in this quarter, in the Q2 quarter, the other expenses and the employee costs have increased Qo Q despite the lower revenues. Any reason for the increase in both these expenses? Any one of them, sir?
Hello?
Hello? Sir, can you hear me?
Yeah. So sorry. I think we lost you in between. No, so they were likely so the other cost basically improves the contractual manpower. So as you know, this quarter typically is a quarter where the production levels are very high and the sale number is low. So that leads to high contractual manpower cost. And it's happening both across the construction equipment business as well as on the tractor side. So the sale typically happens in the next quarter in the season time, which is happening in October. But the inventory buildup had started in the Q2. So that leads to the higher contractual manpower cost, which is more variable in nature linked to production and not linked to sale. But we'll see this getting diluted in the next quarter.
Understood, sir. Sir, lastly, on the construction equipment, sir, it has been negative till now, sir, for the industry and for us. How do you see the recovery going ahead, sir?
Sanjeev, can you respond to that?
Yeah, yeah. Hi, Sanjeev is at the side. So first half of this year, we've seen a little subdued performance of the industry, primarily because of the elections in the first quarter and then heavy rains in the second quarter and extended monsoon till September in many parts of the country. And the overall speed of the project's execution was evidently very slow. So therefore, buying has been less. But we believe that from Q3 onwards and in Q4, these things will turn around. We also expect that there will be some pre-buying before the BS V norms cutting, which will be from first of January. So that also will add to some demand in Q3 as well as Q4. So at an overall level, I think there will be some correction of slower growth in the first half.
Yeah. Thank you. Yeah. Thank you so much for this opportunity.
Thank you so much.
Thank you. Participants who wish to ask a question, they press star and one. The next question is from the line of Priya Ranjan from HDFC AMC. Please go ahead.
Yeah, thank you. Just my question is on the construction equipment.
Sorry to interrupt, sir. Could you come a bit close to your handset?
Yeah. Can you hear me now?
Yes, sir. You are audible.
So my question is on the construction equipment. We are closer to around double-digit margin. And what is the path to maybe mid-teen margin in the construction equipment? Because the profitability from the past has substantially improved. But I think for the full company to have a double-digit margin, I mean, does mid-teen margin with this segment also has to go to somewhere around mid-teen margin. And longer-term outlook in terms of growth, I mean, which are the segment? Because back home, we are still not able to grow meaningfully in terms of market share. So what are the levers of growth in that segment?
Yeah. So I will respond to this in terms of the actions which we are taking to improve the margin. But I mean, the direction of mid-teens would be probably Bharat sir would be able to respond better. So you are right. Currently, we've improved from very low levels in the past few years to 10% around that. And the next levers for growth would come from, of course, the industry is expected to grow tremendously over five years- seven years because of the focus of the government on infrastructure. And we believe that the overall construction equipment, which was 1.37 lakhs last year, will go to more than 2 lakhs by 2030 and around that. So therefore, there is an opportunity in terms of volume, which will come to us. And we represent close to 50% of the total industry.
So in that way, the opportunity will be available for us also. Going forward, I think, as you said, backhoe loader. So there is a lot of work being done on backhoe loader because this product is now getting ready for sales in global channels, including the Kubota channel worldwide. And we are coming up with a new platform of backhoe loader along with the BS V introduction, which will happen in the first quarter of next year. So that is going to make this product more globally acceptable and will lead to larger volumes. Even on the crane side, the product portfolio is being worked out for mid-term business plan. And we are expecting that there will be industry growth, and there will also be a need for larger models, which, of course, will contribute more in terms of margins.
We have a heavy plan of introducing new models in the coming time.
Do you see the financing arm as a lever in this segment as well?
Yes definitely
Because probably the competition doesn't have the financing arm mostly.
Yes, yes. So we believe that financing arm will definitely help us, especially in the retail segment, especially on the backhoe loader side, where first-time buyers and first-time users' number is quite high in the industry. Crane financing is still not a problem because they have quite consolidated customer base. But a large volume headroom is available on backhoe, and the financing will really help in that area.
Understood. And just on the, you mentioned about 50% addressable market. I mean, you are serving as of now. So in the next two year, three years, what is the kind of addressable market you want to capture with that?
We will be looking at expanding the current range of products. And apart from that, there are opportunities of bringing some more products from Kubota, like Kubota also does skid steer loaders and compact track loaders. So there is a possibility of bringing those products also. We are doing a market study on that. And apart from that, there are other avenues which our R&D and our product planning function are working, which can expand the portfolio. But it is too early to give an indication on that.
Sure. Bharat, can you?
Yeah. So just to respond on the margin question. So yeah, I mean, so obviously, we don't expect with the kind of portfolio which we have today on the construction space. The margin, I think, will be somewhere around this high single digit or maybe just on the double-digit number. We won't look at going up to mid-teen. But when you look at the crane portfolio, I mean, among all three businesses, return ratios I think are the best for the construction equipment space even now. I mean, if you look at the capital employed, very, very low in this business. And the kind of return which we are generating, I think, is the highest ever among all three businesses which we have today. So even if we are able to maintain these levels, we'll be very, very happy if we are able to get these.
But we don't see major uptick in the volumes given the limited segment we operate in in this space. And backhoe is the largest market where we are a very nominal player. So unless those volumes go up to the level which actually gives a push, otherwise, it will be difficult for us to go beyond these margin levels.
But because some of the components in the crane, etc., is already doing mid-teens margins, so I mean, so that's why I was wondering whether it's possible.
Yeah. So it all depends on the mix, I think, what we sell. So if we go to the higher-end mix, better, then we will see a better opportunity there. But that, again, keeps on changing. So I think as of now, we've seen the best so far is only the double-digit, just double-digit number. So let's see. I think if we are able to cut costs somewhere, maybe we'll be able to do something better there.
Sure. Okay. And on the export side, I mean, the end market has been pretty bad. But as you mentioned about with the new product launches, etc., in the Southeast Asia and probably Mexico, so can we expect very, very high growth next year? Because some of the markets might not be doing well at this point of time. But I mean, when the thing changes, it can be very high because your number is very, very small at this point of time. So can we expect a very substantial jump in the numbers? I mean, the growth will look very high, but I mean, on the absolute term, it will be like, say, mid.
Yeah. It's quite possible. But as you rightly mentioned, the base is very low for us. I think this year we'll be doing close to 5,000, but that will be more or less same level as last year. So it's not going to be a major number for us if you look at the industry perspective. So if you look at top of this number, the industry's export will start picking up from next year, then definitely the smaller numbers will give you a very high base in terms of the growth number. But I think, as we mentioned, our idea is to keep growing this number because export is one area where we want to have more focus on. And it's much easier compared to the domestic market. So that's one area which we'll continue to remain focused on. And I think we should see that sort of growth.
Maybe it will likely hide double-digit growth, which will be there next year on this.
Sure. And just lastly on the Kubota, after this amalgamation, the brand Kubota last year has suffered because I think the South has been weak. The South and Western market was weak. So how should we look at the brand? I mean, how should we look at the Kubota brand doing in next six months to nine months, I mean, 12 months?
So, good thing is, like you rightly mentioned, the markets where Kubota was strong were degrowing. So that's why we have seen a decline in the market share. But when we've seen the revival now in the South and Western market, they have grown very well. They have done better than the industry growth in October. So we expect the next six months to 12 months should be good, actually, even from Kubota brand, because that market will perform, outperform. So I think we should see the good performance coming from Kubota brand also there.
Okay. Thank you. All the best.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants, please limit yourself to two questions per participant. The next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.
Yeah. Hi. My question pertains to the industry outlook which we have given. So if I look at the growth for the industry till October, it would have been close to 4.5% or so. So are we looking at the remainder of the year to grow at about 5%-6% only, or that number is low given the positives which we are looking at?
Hi. This is Neeraj Mehra. For H1, the industry was more or less flattish at about 1%. October actually grew by about 23%-24% overall. For the balance period, we're looking at a double-digit growth for the industry. Overall, what we're looking at is a mid-single-digit to a marginal high single-digit growth for financial year 2025.
Got it. That's very good. And secondly, Mr. Bharat, if you can also talk about how our standalone business performed, excluding merger, that will give us some reference points within the previous quarters, that way. So if you can share revenue-based stuff or revenue-based EBITDA stats for standalone excluding merger, that will be helpful.
Sorry, your voice is not very clear, Jinesh. Can you repeat your question?
Yeah. Referring to the standalone business performance, excluding merger, if you can share the broader numbers, revenue, EBITDA stats, that will be useful.
Okay, so we are not actualy captured this specific quarter where we did the consolidated numbers. But like you mentioned, so roughly, if you look at the performance, it's more or less similar, so I think in the overall basis, the company had done close to similar 12%-13% sort of EBITDA, which was more or less similar as last year, so the impact of the merger obviously has been the dilution. So this quarter, dilution impact is slightly higher because it's a very low revenue number, but going forward, we expect the dilution will be slightly lower. So we expect about 1.5% dilution on a full-year basis will happen when you end this year.
Okay. Okay. Got it. No worries. Okay. Great. Thanks. Thanks and all the best.
Thank you. The next question is from the line of Vijay Sarthy from Subhkam Ventures. Please go ahead.
Thank you, gentlemen. Just two questions, sir. One, so with respect to your railway business, the business is actually in structural growth, and there's a tailwind ahead. Given that, why is that we sell at just 10 x of our current annualized PAT when business is very ripe? I just wanted to understand that thought process. Second question is, given that we are operating close to around 60% utilization and the fact that we can address our exports from the existing plant, do we need the new facility? Why this urgency? Thank you.
So I respond to your first question. I think, as you mentioned, so yes, the multiple has been low. It's about 12 x actually of the PAT for the railway business if you look at this. So obviously, the expectation for everyone was very high. But we have run a very competitive process where we had almost 34 buyers, potential buyers, and not only in India, across the globe, including some private equity players who actually are interested in this line of business. But the interest which we seen was not very strong. So the issue with most of the multinational players was they got a parallel product range which is competing with us. So they don't see much value into our existing portfolio. So their interest was very low. So the value also which we got from the table was very, very low.
The idea was to look at a player who is totally new to this line. For him, every product we make will be valuable. So, which is why we went to the local players now, where we saw some interest. And Sona appeared to be the highest bidder among all the other local players. And that's why we went with Sona. The idea is also that our focus on the railway business has not been that high. We have been now concentrating on setting up the greenfield, setting up a captive finance arm, and focus from Kubota perspective will always be on the core businesses. So this is one business which has the potential to grow. But because of our focus not being there, this will not reach its full potential.
So the idea was to go to a partner who can actually do full justice to the business and take it to the rightful potential where the business deserves. So I think it was in that interest only. We thought it would be good now to, I think, take care of this business and divest it to Sona. So valuation-wise, expectation is one. But second is what do you get from the market? That's also another thing which we need to keep in mind. When we also started, we had very high expectations. But when we came to reality, there were issues obviously around, and there's genuine reason for the buyer's side. We can't have a value coming from the same product line. The railway doesn't allow you to sell in the same product category with two different brands in the same entity. So there's a restriction there.
So this kind of business is very unique, and it's its own complexities, which is not something which is easily understood by the industry. So that's why we decided to go with this. And we think this is a good value. And there's also need something on the table for Sona. And that's the incentive for them to also grow this business further. And it's good for our employees, our customers, and everyone.
Okay. On the second question, sir.
So, second, on the capacity utilization. So, if you look at our total numbers today on a combined basis, we are almost at 125,000-130,000 tractors selling annually. And our capacity today is about 170,000. So, which means it leaves very little scope actually to grow. But if you're looking at industry growing next year also to double-digit, then you will have very limited scope, especially when you go to seasonality also in this industry. So, you will actually hit your peak very soon. So, we don't see even if there'll be much scope actually. If you don't set up the industry greenfield now, then you will be left out of place. So, I think we'll start the work now so that in the next three years or four years whenever project is ready and with greenfield capacity expansion happens, unless we are able to cater to that market.
Otherwise, the entire growth plan for export and domestic which is there in place, so that won't be able to be very fulfilled.
So for the next six months, we can surely see some amount of land allotment, and then we will have the capital equipment ordered. All of this can happen in the next six months.
Capital equipment order will not happen. First priority is to get the land. Right now, so far, whatever discussions we had with the UP government have been positive. They've assured they'll be able to help us and get the land allotted. If that happens, obviously, the ordering will start after the land allotment is done.
Correct. So next year at this time, we would have done the ordering of capital equipment. Am I right?
Yeah. We hope so.
Okay. Thank you, sir.
Thank you. The next question is from the line of Shubham Patel from JP Morgan. Please go ahead.
Hello. Good evening, sir. So just a question from my side. That's the drag in dilution impact of Q2 versus Q1 is coming to around 1.6%. But when we compare with Q2 of current year with Q2 of previous year, the drag is coming to 2.9%. So the dilution impact is appearing higher. So can you just elaborate? And point number two is that, sir, second where will the inventory levels be at higher level? So what is the amount of inventory credit that is sitting right now on the P&L eligible in the current quarter?
Sorry. So first, I think your question is on the dilution. In Q2, the dilution you're saying is more than the dilution in Q1, right?
Sir, the Q2 versus Q2, the comparison, the dilution impact is appearing 2.9%, and Q2 versus Q1, it is appearing 1.6%, so dilution impact is around 1.3% higher than we see in the previous year, so if you can just elaborate any specific reason for the same?
Yeah. So last year, obviously, they had the positive EBITDA. And this year, they didn't have this EBITDA. And most of it is basically because of the issues around the product costs which are getting imported. But that is why I said they were importing the product. So they sit on a high inventory level. And that obviously has an impact if you're carrying inventory with a high buying price, and that impact comes in the quarter. But going forward, the price reduction has happened. Because of this, the positive impact will start coming in from Q3. So if you look at the full-year level, we expect the dilution will be about 1.5%. It will not be the same what we see in Q2.
Okay. And sir, what is the amount of LOH credit that is sitting i nventory products b ecause since Q2, we'll be building up the inventory. So compared to Q1, we will have got the inventory gain benefits here in the P&L.
Yeah. So whatever production has happened in Q2, the positive impact of that has already come into this. So the sale number will obviously happen in Q3, but you'll not get the production benefit here. But then so are your costs also higher. Like someone mentioned the question about other costs. Why are the other costs higher? The production level is higher, so your costs are also higher. So that actually neutralizes the impact of higher production with the higher costs. But in Q3, when you get a higher sale, obviously, there'll have some positive impact.
Mr. Shubham, does that answer your question?
Yes. Yes. Answers my question.
Thank you. A reminder to all participants that you may press star and one to ask a question. The next question is from the line of Mitul Shah from DAM Capital. Please go ahead.
Yes, sir. Thank you for the opportunity. Just before going for the questions, I have one clarification on the margin side. Current reported margin is roughly 10.8%. If we take out the railway business, it comes closer to 10%. So we earlier guided that over the next two, three years, once this new plant localization, etc., it will go to 12%-13%. So this 10% will go to 12%-13%, or right now, we are considering railway business as a normal continued operation.
In two, three years' time, obviously, railway business will not be there because we expect within the next one year, I think the diversion should get completed. So what we mentioned is without railway business.
Okay, sir. And now, question on the second half. In terms of double-digit growth, as we highlighted for the industry, which are the regions or geographies we'll see much higher growth? And also, after this combined entity and after merging of the Kubota, which are our opportunity markets and which are the stronger markets? Because without Kubota, South and West Maharashtra was earlier considered to be weak or opportunity. But now, Kubota already has 7%- 8% market share in Maharashtra and Karnataka. So combined entity, what is the situation now?
Hi, Mitul. This is Neeraj Mehra's side. First, on the industry side, we feel that overall industry will grow across the country, but the higher growth will come in from South and the Western part of the country. The second part, as regards to which are our opportunity markets and strong markets. At the beginning of the year, we have started our focus on West to be our growth market for the next couple of years. Now, with Kubota coming in, we feel that South and West are the two markets where we will focus more and where we see an opportunity to grow substantially. Because over the last couple of years, we have had put in place our channel strategy for both Maharashtra and Gujarat and also a couple of states for South.
With Kubota coming in, we think that our growth in South and West will be higher than what it has normally been.
Okay. So last question on your policy on the cash strategy on that. We are already having about INR 5,000-6,000 crore kind of a cash. Another bits of cash will generate from the sale of railway business about INR 1,400 crore-INR 1,500 crore. So by end of next FY 2026- 2027, it goes to INR 8,000 crore-INR 9,000 crore kind of a cash, whereas CapEx requirement is also much lower, even if we consider land acquisition and all. So what would be our strategy or what is our thought process on the cash management going forward?
So there are three important, I think, spends which will happen. So I think we indicated, I think, in earlier calls also. So one, obviously, we have already done is the debt repayment after the mergers. We have about INR 350 crore of debt which we repay for the JVs. Out of all liquidity on the balance sheet.
The greenfield project we are estimating will cost somewhere around INR 4,500 crore, which we will obviously spend over the next four years' time if not up front. Then our finance company, we have earmarked INR 700 crore of capital for that to grow. Now, this put together takes care of almost INR 5,600 crore-INR 5,700 crore. In addition, there will be normal capital which will continue. What we are banking on really will be the disposal proceeds which will come from railway and the normal cash generation which will happen every year, which will be in the range of, I think, if you look at the last few, maybe INR 600 crore-INR 800 crore of free cash will get generated each year. That is the capex which obviously we need to use, and we already indicated our dividend distribution policy now, which we have now increased.
We said we'll take it up to 40% level of the retained earnings. And also, I think we'll have to keep discussing. I think on railway proceeds, we are not really made up our mind. So this discussion has to happen in the board. But that is still some time before we get the money into the company after we get all the approvals. But yes, I think that's, as you mentioned, so that's one obvious thing which will happen.
Thank you and all the best. Thanks. Thank you.
Thank you. The next question is from the line of Zubin Pruseth from Karma Capital. Please go ahead.
Hi, sir. So apologies if this question has been answered. I joined this meeting late. So now that we've sold off our railway business as well as we've seen a delay in terms of the greenfield capacity for engines, we just wanted to know if, of course, there will be some changes with respect to our midterm plans which we had set in the beginning, two, three years down the line. So just wanted to know if there are any revised targets that the company is thinking about. Because in the midterm plan, we did have certain numbers for the railway division as well. But now, we've also seen changes happen to the entire setup. So just wanted your thoughts on that.
Yeah. So that's right. We had mentioned. So we will be working on the revised midterm business plan, looking at the current scenario and whatever developments have happened so far in the last two years. So we expect, I think, next year we should be able to come up with this revised plan. Obviously, first, we need to discuss the board level. We are planning to do sometime in towards the end of this fiscal year. And then after that, surely we'll be able to share it with all of you.
Sure, sir. Thank you so much.
Thank you. Is there any further questions? I would now like to hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen, for being present on this call. For any feedback or queries, please feel free to write us to investor.relations@escorts-kubota.com. Thank you very much and have a good evening. Thank you.
Thank you. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.