Escorts Kubota Limited (ESCORTS) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Escorts Kubota Limited Q1 FY '26 Earnings Conference Call hosted by ICICI Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand over the conference to Mr. Vivek Kumar from ICICI Securities. Thank you, and over to you, sir.

Thank you, Barry. On behalf of ICICI Securities Limited, I welcome you all for Escorts Kubota Limited's Q1 FY '26 Earnings Conference Call. I also take this opportunity to welcome the management team of the company. 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. Sanjeev Garg, Head, Finance and Tax; and Mr. Prateek Singhal, 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 also 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 risks as outlined in the annual report and investor releases of the company. Over to the management now for their opening remarks. Thank you.

Thank you, Vivek. Good evening, everyone, and thank you all for joining us today. A few highlights of the company's stand-alone financial performance for the quarter ended June 2025 are as follows. Operating revenue from continued operation at INR 2,483.4 crores, EBITDA at INR 325 crores, up by 2.6% Y-o-Y. The EBITDA margin in Q1 now stands at 13.1%, up 69 basis points Y-o-Y. PBT before exceptional items from continuing operation at INR 417.9 crores, up by 19.3% Y-o-Y. During the quarter, there was an exceptional gain of INR 76 crores on account of sale of land and building of agri machinery spare part business division. Net profit from continuing operation at INR 372.6 crores, up by 40.0% Y-o-Y. During the quarter, the RED business divestment was concluded and the income of INR 1,601.7 crores net of transition cost from the divestment has been accounted for in the financial statement under discontinued operations. Net profit, including discontinued operations at INR 1,400.2 crores. EPS stands at INR 127.29 as compared to INR 27.63 Y-o-Y. On consolidated basis, company financial performance for the quarter ended June 2025 is as follows: Revenue from continuing operation at INR 2,500.1 crores. EBITDA at INR 321.4 crores with a margin of 12.9%, up 16 basis points year-on-year. Net profit from continuing operations are at INR 369.5 crores. Net profit, including discontinued operation is INR 1,397.1 crores. Moving on to the segmental business performance, starting with Agri Machinery business. On tractor business, in Q1 FY '26, the total tractor industry volume domestic plus export was at 3 lakh -- 3.11 lakh tractors, up by 8.7% against corresponding quarter last year. Our total volume was at 30,581 tractors as against 30,370 tractors in the corresponding quarter previous year. On the domestic front, the tractor industry in Q1 FY '26 was at 286 000 tractors, up by 9.2% against the corresponding quarter last fiscal. Industry in North and Central region show a slight growth of 0.5%, while the rest of the country experienced a substantial growth of 19.3%. This has impacted our domestic volume with our domestic volume at 28,848 tractors as compared to INR 29,409 tractors in the corresponding quarter last year. Continuing with our strategy to offer innovative products. During the last quarter, we launched PROMAXX in Farmtrac brand, resulting in an increase of our Farmtrac market share in most of the state where it was introduced, covering nearly 70% of the industry. Recently, we have launched Kubota MU series under Kubota brand in 41 to 50 HP category powered by advanced and efficient KQ4P engine. The MU4201 incorporate balancer shaft technology delivering superior comfort and smooth performance. The impact of this launch will be visible in the next quarter. Going forward, we will be launching the wetland series in the coming quarters under Powertrac brand. These product launches across all brands are expected to drive market share growth with the full year impact becoming clearly visible in the next financial year. Looking ahead with timely and widespread above normal monsoon rain and improved reservoir levels, rural sentiment remained positive and farmer cash flow are strengthening. We remain optimistic about sustained growth in the tractor industry and expect the current momentum to continue to the later part of the current fiscal. On the export front, the tractor industry in Q1 FY '26 at 25,000 -- 25,300 tractors, up by 2.7% as against 24,600 tractors in the corresponding quarter. Our export volume came at 1,733 tractors, up by 80.3% against 961 tractors in the corresponding quarter. During the quarter, sales through Kubota Global network account for approximately 52% of the total export. Nontractor revenue comprising Agri Solution business, engine business and service and spare parts business in Q1 FY '26 constitute 18% of the Agri Machinery segment revenue against 19% in the corresponding and the sequential quarter. Agri Machinery Products segment revenue came at INR 2,181.5 crores at a race to [indiscernible] crores in the corresponding quarter. EBIT margin for the Agri Machinery business were up by 92 basis points at 12.6% as against 11.7% in the corresponding quarter, led by softening in the material cost. Coming on to the Construction Equipment business. In Q1 FY '26, served industry volume comprising crane backhoe loader, mini-excavator and compactor was down approximately 14% as against corresponding quarter last year. This growth was primarily driven by the crane industry, which was down approximately 29% as compared to the corresponding quarter. Our total volume for Construction Equipment business at 1,055 machines as against 1,382 machines in the corresponding quarter. Our crane segment outperformed the industry, resulting in a market share gain of roughly 150 basis points to 41% as compared to the corresponding quarter. And mini-excavator gained strong traction with a market share of increase of around 600-plus basis points Y-o-Y, reaching 19% in the quarter. Construction Equipment segment revenue came at INR 301.5 crores as against INR 380.6 crores in the corresponding quarter. EBIT margin for the quarter ended June '25 for the Construction Equipment came at 5.8% as against 10.3% in the corresponding quarter, adversely impacted due to clearance of inventory of old emission norm products and transition to new emission noncompliant product. As our commitment to innovation and focus on introducing of new products recently, we have launched HYDRA 12 pick-n-carry crane. This model feature advanced hydraulics and a powerful engine to deliver optimal performance. With this initiative control and enhanced safety feature the HYDRA 12 is designed to offer superior efficiency and reliability, making it preferred choice for operator across diversified job sites. The construction equipment market is facing challenges due to decreased construction activities during the monsoon season, project delay and a slow sale caused by high our product pricing, following changes in the emission norm. However, with the government allocating a large budget for CapEx expenditure this year, we anticipate an increase in infrastructure products which could lead to boost in demand for construction equipment after the monsoon season. We expect to see improvement in the demand during the second half of the current financial year 2026. Moving on to the Railway Equipment business. That's the discontinued operation during the quarter ended June '25, the company transferred the railway equipment business to Sona BLW Precision Forgings Limited, Sona Comstar upon completion of the condition, specified in the business transfer agreement effective from 1st June 2025, the profit after tax from the sale of RED business at INR 1,004.4 crores has been accounted for a financial statement as income from discontinued operation. Now I will request the moderator to open the floor for the Q&A.

[Operator Instructions] The first question is from the line of Raghunandhan from Nuvama Research.

Sir, starting with exports for tractors, it has been a very strong performance in the first 4 months. There is a 63.5% growth. Can you talk about what is helping the strong exports? How do you see the outlook for this year?

Thanks, Raghu. This is Bharat Madan. So I think if you look at the numbers, the last year, our base was very low on export in this first 3 months. That's why you're seeing almost 80% growth coming in. But if you look at the numbers now, we have stabilized export at about 500, 600 tractors per month. So we expect the similar momentum will continue in the balance of the year. So it indicated we'll be looking at 25%, 30% growth this year and the total export volume over last year. But now since the base will also keep on improving for the last year numbers, so may be the growth rate will be slightly lower, as you would have noticed in the month of July also. But we expect the number now momentum will be there and will continue to be in this range of 500, 600 tractors each month.

And which markets are doing well, sir?

So major exports are to European market only because most of the compared tractors are being dispatched to Europe. But obviously, we are catering to more than 80 countries in export and obviously, the numbers will continue to be there. But the major volume is still coming from European market.

And on the UP plant construction and land acquisition, if you can give some updates on what is happening there? Do you think that this calendar year, we would get the land and commence the construction? And are you seeing any delays happening on the regulatory side?

There have been certain delays with the UP government because we have been in constant touch with them. I think there have been some delay in acquiring the land from the farmers. So still, I think from the land parcel, which we are interested in, some portion of that land is still to be acquired from the farmers. So government is committing they'll be able to complete the acquisition within the next 1 month or so. I think once the acquisition is completed by then, then our process will start. So to your question, yes, we expect we should be able to close it. So I don't know whether this calendar year, but definitely within this fiscal year, the acquisition should get completed.

Sir, on the new products, you have a very strong pipeline, PROMAXX Farmtrac has done initially well and also, you have the Kubota MU, the Powertrac paddy specialist. And I think even the PROMAXX second phase to come by end of the year. If you can talk about -- how do you expect these products to help in terms of positioning of Escorts, the market share potential and especially in the South region there where paddy specialist tractors, how they can strengthen the position there?

Yes, this is Neeraj this side. So you've rightly said the new products are actually helping us grow because the industry growth, actually, to a very large extent, is not favorable from EKL's perspective. So PROMAXX Phase 1 is doing well. And in whatever states that we have introduced, Farmtrac market share has grown, though it is early days yet and the growths are marginal, but we are seeing positive trends. Also now with the very recent introduction of Kubota and the wetland series by the end of quarter 2 or early quarter 3 in Powertrac, we should see some positivity in the Southern markets or the Eastern part of the country where the paddy is there. So we can see some positive results starting quarter 4. But next year, next financial year, would actually be the game changer in these markets.

Got it, sir. I'm just trying to understand that we have an adverse regional mix. Can the new products offset that for us? And say, H2, do you expect to grow in line with the industry on all India basis?

Yes, you are right. So the Kubota introduction as well as the Powertrac wetland series. They will, to some extent, help in bridging this industry gap that deviation is there. And also next year, a couple of other launches are introduced are planned actually. As you've already mentioned PROMAXX Phase 2 and also wetland Phase 2. So I think the pipeline is very strong, and we should see our market share growing in our erstwhile weak markets.

Bharat sir, we have started off on a good margin trajectory in Q1, so given the focus on margins, the synergy benefits, how do you see the broad range of markets for FY '26? That's the last question from my end.

So, in the first quarter, the commodity prices were soft for the tractor industry. So we don't see much impact really coming in from the inflation perspective. But now of late, we've seen the metal prices started hardening. So that impact will start getting visible now from Q2 onwards. So I think overall, our guidance for full year will still remain in the range of around 12%, 12.5% sort of margin for the overall business.

The next question is from the line Vaishnavi from Craving Alpha Wealth Fund.

I have just 2 questions to ask. The first one is related to exports. What percentage of exports revenue is rooted to Kubota network and what is our target of export revenue as a percentage of total revenue by FY '27?

I think as Prateek mentioned in the opening comments, in the first quarter, 52% of the exports happened through Kubota network, and we expect the number will only keep on improving. I think as we move forward in the future. I think overall, right now, our total export revenue is quite low. It's about 5%, 6% only for the total top line. But our midterm business target for the next 4, 5 years is to take it to about 15% level.

Can you please repeat the number again, 15% to 16%?

So right now, it's 5% to 6%. But going forward in the midterm business plan, our target is to take it to 15% level.

Okay. Sir, my second question is regarding the UP plant. When can we expect the Phase 1 of the production to commence in the UP plant?

See, right now, we are still awaiting for the land acquisition process to be completed with the government has delayed now that project by almost 6 months. So they have not been able to complete the land acquisition from the farmers. I think once they complete the acquisition, then our process will start, which will include your all testing for soil, water, environment testing and all the formalities. So we expect within this fiscal year, we should be able to complete the land acquisition. And for next fiscal year, we can start working on the construction of the facility.

The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institution Equities.

Sir, can you just update what kind of tractor industry growth expected for this year from earlier guidance of mid- to high single-digit and with the second half, particularly the base catching up, will it be still a positive trajectory? Or do you see it flatten out in the second half, sir?

Mumuksh, so we stick to our earlier guidance of mid- to high single-digit growth for the entire year. Last year, the base was very high. So in H2, the industry growth last year was close to about 15%. So this continuous growth in H2 might not be there. It will actually depend on how the ensuing season performs. So the season this year, the tractor season this year actually starts from August instead of September. And hopefully, the entire season would be over by the end of October. So post the season, an actual picture will emerge on how the industry will actually end for the current fiscal year.

Okay. And how would we, sir, delay inventory now? And for this year, what kind of dealer expansion plan from a 1,600 currently, sir?

So the dealer inventory is currently between 4 to 5 weeks. Currently, for all the brands put together. And yes, we have a network expansion plan. So we're looking at white spaces for all the 3 brands individually and working on them. So yes, over the next 3 to 4 months, the dealer count should also improve significantly, primarily in the white spaces.

Got it, sir. Sir, how has been the particularly Kubota brand being over the last 4 months and just if you can indicate what kind of growth we have seen there? And how is the profitability of the Kubota business?

Yes. So I think overall, if you look at the numbers since we got 3 brands, Powertrac, Farmtrac and Kubota. So in the last few months, the Kubota brand has not done well in the South and Western markets. So we've seen some drop which has happened because the product introduction there was delayed. I think the last product introduction they had was about 3 years ago. So that led to some issues in the channel. So now we have introduced a new product now, upgraded product as well as the new model, which will help them in growing the volume. So we expect at least in the next quarter and going forward, the things will start improving for Kubota brand. I think as far as the margins is concerned, as we mentioned to you, since the localization is still some time away, even though we started working on some of the parameters for certain equipment but mainly the engine localization is still some time away. Till the time we do that, the margins will continue to be under pressure under Kubota brand name. So -- but if you look at the margins without quarter brand, I think we are in line with the historical averages, what Escorts used to have.

Got it, sir. Sir, on the export side, how has been the initial response in the new markets like Mexico, Southeast Asia and Africa?

These are not the new market for us. We were already exporting to Mexico. So only thing is the change which has happened is the integration of the channel with Kubota network. So earlier, we're exporting directly under Farmtrac brand name and we get our own channel. But now we are synergizing the channel and integrating, and wherever one of the distributor is strong whether it is from Farmtrac or Kubota, then we are continuing with the same distributor under that brand name. So the markets are already open. So Mexico, we are exporting. South Africa, Europe, Sri Lanka, all these markets we're already exporting now. So the numbers will start improving, I think, as we move forward with the new products are coming for export market, too, which is catering to a specific market. So they will see the improvement will happen in the overall numbers. So that is one segment where we see the continuous improvement will be there on the export.

And sir, how was the input commodity cost movement for this quarter? And what is the outlook for next quarter, sir?

See, we get the impact of the commodity prices only in the lag of a quarter. So the last quarter was soft. So we saw some deflationary trend actually on the commodity side, especially for the tractor industry. Even though the steel prices started moving up, so construction equipment did have some impact. But now this quarter, in the Q2, we are seeing the negative impact will be there on tractor margins too. There's some improved increase in costs, which we have seen happening on the metal side, which will likely impact the margin in this quarter. So let's see, but it's nothing significant as of now, which we can really see as threatening as we've seen in maybe 2 years ago. So that sort of inflation is not there. It will be less than 1% impact...

[Operator Instructions] The next question is from the line of Vipul Agrawal from HSBC.

Sir, a couple of questions. First is on the channel expansion. Can you comment on network expansion of Kubota in North India and Escorts in South India? And how is it working with the existing Escorts and Kubota dealer in their respective regions?

Yes. Vipul, this is Neeraj again. So yes, we're working on both or rather 3 brands, Powertrac, Farmtrac, and Kubota. So I'll take a couple of minutes to explain. Powertrac to a very large extent is a pan-India brand. We do have white spaces in the south and some states in the eastern part. Kubota and Farmtrac to a very large extent, are very region specific and the focus at the moment is on both these brands to expand the reach. So currently, the integration is not there full hog. We're thinking of integrating on how the Kubota dealers in South can be integrated with either the Powertrac or the Farmtrac brand and vice versa in the North. So we have initiated that and working on a pilot on that integration.

Understood, sir. So just like trying to understand what is the marketing strategy for these brands in like for Farmtrac in South and Kubota in North India? Because as per my understanding, it is very tough to enter into being -- tractors being a mature industry. It is tough to crack market share of another player in a particular market or I would say in a particular village. That is what my understanding is. So what is your marketing strategy for these 2 brands while -- when you're opening a new dealership or trying to merge a dealership over there? .

Yes, right. So Vipul, your understanding is very right. So the focus is on strengthening our weaker markets, not necessarily with all the brands put together. So as I have mentioned earlier on to an earlier question, the introduction of new products will strengthen our reach and help us in appointment of dealers in our white spaces. So it's absolutely not necessary for us, for example, to appoint Farmtrac dealer in the southern part of the country, strengthening Kubota dealers, appointing Kubota dealers as well as Powertrac dealers in South. That's an example I'm giving, will help us grow market share overall for EKL. So it's absolutely not mandatory for us, and we're not thinking of growing all the 3 brands in the entire country. So depending on the suitability of the product with the application and the past presence of that particular product, we are expanding our channel.

Sure. Sir, my second question is on the discount. So right now, like Bharat sir has mentioned, first half was -- the base was low for first half and second half, the base is catching up. So how are we seeing discounts from that perspective? Like maybe to -- are we planning -- are you seeing the industry might go with higher discounts in the second half to maintain the growth momentum? Or maybe and the monsoon has been pretty good. So demand is expected to remain buoyant only in second half as well. So what's your view on the discount going forward? And any color on current discounts?

So Vipul, the discounts are not basis the industry growth or degrowth. These are seasonal. So when the season -- the peak seasons come in, customers actually expect discounts and almost all manufacturers going for slightly higher discounts. Our strategy would be to be competitive in the market. And if needed, the discounts would be there. But the discounts, higher discounts primarily to look at the industry growth or degrowth are not there. It's primarily season specific. Discounts are given during the season. And then those are -- those discounts are reduced once the season gets so.

Sir, my last question is on the farm implements. How are you seeing the penetration going over there. It has been slower than expected, what we were talking about like 5 years back, 7 years back. It has been slow -- it's far slower than what we expected to. How do you see automation happening in the implement side of the farm -- agriculture business? That's my last question.

I think the long-term trend, obviously, is what we are seeing will really follow what you have seen in the developed countries. So gradually, the things should start looking up there. And if you at our number also, like I said, in the farm segment in agri machinery also a significant portion really comes from the farm equipment now for us after this merger of Kubota JVs. So obviously, like I mentioned, still it's only about 20% of the total industry by value for the tractor industry, which is represented by farm equipment. And most of this is still with the smaller non-OEM players who dominate this industry. So I think for the OEMs to come into play with a large number, I think still it's going to take some time. We're not really seeing a major change happening there in the last few years. But we expect the long-term trend probably will be there only. Obviously, it has to follow a lot of other reforms from the government side on the land and labor. So that is still to happen. So once your reforms happen, then maybe the land consolidation will become [indiscernible] valuation will improve. That will lead to your demand for the farm equipment, too. So I think in the short term, we don't see that happening with the way the government is today and the last attend what was done by the government, which was not very successful. So hopefully, in the long run, I think these reforms will happen, which can lead to this demand coming up.

The next question is from the line of Amit Hiranandani from PhillipCapital.

Sir, first of all, congrats for the good margin performance. Sir, my question is basically from the previous participant on the farm implements thing. So at present, are we outsourcing this or we are making it in-house?

No, we are only buying it from third party. So the large part is actually imported from Kubota with the harvesters and transplanters, we are importing from Kubota from Thailand and Japan and China. So only the implement part, the rotavators, et cetera, that we are sourcing locally, the boom sprayers, baler, et cetera, they are all being sourced locally. So the third-party arrangement. We're not making anything in-house right now.

Right. And just if you can help us with the annual revenue number for this farm implements?

I think last year was about INR 600-odd crores. So we expect the number will be probably growing this year. We're seeing a good growth coming in from the back of this demand in the harvesters in the Southern and Eastern markets.

And sir, second question is on the Construction Equipment business. Just a clarification, please correct me. So this time, we have sold old emission stocks at a lower rates, right?

No. So all manufacturers since the emission norm came into play from first of January this year, so most of the manufacturers were carrying bulk inventory from last year -- from the last calendar year. So they had built inventory in anticipation till 31st December. So the major production actually happened in those periods. And in this period of January to June, the production volumes have been quite low for the new emission inventory. So most of the manufacturers have been liquidating the old emission because of that the overheads absorption has been very low on this lower production. So that is the reason which has impacted the margin. And also, 30 June was the last date for liquating most of this inventory, so which is also some of the reason for impacting the margin in this quarter. But we expect, I think once the demand picks up going forward from next quarter, the volumes will start improving both on production and sales front.

And sir, on the construction equipment margin, any steps we are taking to bring back the EBIT margin to 10%, 11% range?

So I think on a full year basis, we should be in the same margin level. I think what we had last year. And though this quarter, like I said, since this was a temporary impact of cut down on the production and also liquidation of inventory, the impact came. I think the second half normally the demand is good for the construction equipment space. So we expect we should be back with a similar margin in the second half of this year.