Q2 volumes to remain low; expect 3-4% FY16 sales: Escorts

Bharat Madan, Group Financial Controller at Escorts expects the tractor volume to be sluggish in the second quarter due to deficient monsoons. In an interview with CNBC-TV18, he says that festive season and base effects will boost tractor volumes in third quarter. He expects a 15-20 percent overall volume growth in FY16.Madan expects 2-3 percent margin improvement in its tractor business for the year. With better volume and sales, margins will start expanding Q3 onwards, he adds. Sales in second half will be better than the first half of the year by nearly 15 percent, he says adding that he expects a 3-4 percent sales improvement for the year. The company’s construction business will see de-growth for the sixth year in a row. There is demand coming from road and mining segment, results of which will be reflected in last two quarter numbers, he adds. Below is the transcript of Bharat Madan’s interview with Reema Tendulkar & Latha Venkatesh on CNBC-TV18.Reema: The monsoon picture is still pretty bleak. Today’s report suggests that the monsoon deficiency has risen close to about 12 percent with areas like Marathwada in Maharashtra showing you a deficient monsoon of more than 50 percent. What can we expect by way of tractor volumes in Q2 after the 16.5 percent decline in volumes that we saw in the prior quarter?A: We believe the volumes in Q2 will continue to see a degrowth. It will be something similar to what we have seen in Q1. Only sentiments we see getting improved will be Q3 onwards. So, we expect it will be a degrowth of somewhere around 14-15 percent in Q2.Latha: That point is taken, the first quarter and the second quarter would behave similarly I would assume but how are things likely to look in the second half? Are you getting a sense that you will trough out this quarter?A: In Q3, there are three reasons. First one is that the base effect will set in because from last year October the industry started declining and secondly, the festive season is now getting shifted to Q3. These two factors will play major role in terms of deciding the volumes for the third quarter and a lot will depend on how the monsoon really pans out. We have still got one more month of September to look at and last year, we saw a lot of catch up on the monsoon front actually happened in September. If this time also we see that catch up happening, maybe you will see a very good kharif output happening. As it is the area under sowing has gone up, so that is one positive sign which we see. If you see the making up of rain happen in September, probably Q3 will be a very bullish quarter.Reema: When you say bullish in Q3, could you give us a sense of what the volumes could look like, any range, any numbers?A: We can likely see a growth of almost 15-20 percent. Latha: Would your margins look considerably better since there is steep fall in commodity prices?A: We saw the effect coming in Q1 also - we got a one percent benefit because of deflation on commodity prices and that trend is continuing. In Q3, if we look at the volumes started going up, probably there will be some pressure on the commodity prices and the same deflation trend may not continue, but there will be impact on the volumes. The economies of scale will definitely come into play at that time.Latha: Do you have a debt component; is there anything that is positive in terms of lower financial leverage?A: Our debt-equity is very low; we are almost at 0.25 times. Debt is not really high, so we got that leverage to play on.Latha: What is the connection between monsoons and tractor buying? I would assume that tractors are bought by relatively well-off farmers, so does one irregular monsoon or two influence their decision so much?A: It does impact the sentiment of the people especially the areas, which are totally rain dependent for irrigation, so there the dependency is a lot. There are areas like in the North belt where it is not really rain fed areas - there the dependency on monsoons-thus the driving sentiment is slightly lower, but yes it does impact the sentiment more of the public generally at large. Reema: When I compare Escorts to say a peer like Mahindra and Mahindra Limited (M&M), your market share would be at 10-11 percent whereas something like an M&M would be at 40 percent. M&M operates at double digit margins whereas you are operating at close to about six percent in the quarter gone by. What steps is the company taking to improve margins as well as the market share close to your peers and move up the chain?A: On the margin front, we are taking lot of initiatives on the cost side, so you will see the impact coming in. From Q3 onwards, we will see the margin expansion start actually happening. If we get a little of play from the volumes side with the industry slightly moving up, it will obviously be a bonus for us. We will see actually this year we are expecting probably the margins will improve, so we will see 2-3 percent margin expansion happening on the tractor business in this year. As far as the market share is concerned, if you look at the trend in the last 10-12 years, the market share movement within the players has been very insignificant. So it is 2 percent, three percent maximum here or there. We had done lot of initiatives on that front more than channel expansion or opening new areas, introducing new products, so let’s see, we are making all our efforts so let’s see how the market share moves forward.Latha: So what is your sales growth expectations, second half over first half you think?A: Second half - we expect there will be a growth of almost 15 percent over last year. it will virtually lead to almost flattish sort of numbers for this full year, but to be on an optimistic side, if the monsoon really catches up in September and the sentiments improve, then you can probably on the upside look at 3-4 percent growth happening overall on the full year basis.Reema: I know tractors is a majority of your business but construction equipments, there seems to be a lot of traction. Could you give us a sense of how the year is panning out in terms of revenues as well as profitability for the construction equipment space?A: On construction we don’t expect much hope actually so this is the fifth year in succession we are seeing the industry going down and so far Q1 was bad and Q2. It doesn’t really look improving, but there are two sectors which we see some traction started happening - road segment and the mining segment. We are not very strong player in the mining segment.In road, we are seeing some movement which has started happening. So, Q3 and Q4 are again the better quarters for the construction equipment industries. We will have to wait and watch but as of now we don’t see major visibility in terms of numbers coming in on the equipment side.