Escorts expects positive surprise from construction equipment business

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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A positive market has helped engineering firm Escorts post positive results, said CFO Bharat Madan.

“This time the industry has done pretty well. So most of the growth is coming from volume,” he said.

Talking about the price hike, he said, “We had done price increase in first quarter also, so roughly 50 percent of the inflationary trend which we face on the commodity side, the balance we had passed on in July. So hopefully this quarter we will not that impact coming from inflation.”

Shares in engineering firm Escorts jumped about 4 percent after it posted a near 93 percent surge in first-quarter net profit.

On business front, Madan said, “All the businesses are doing extremely well compared to last year so our guidance of 100 bps improvement is intact even now.”

‘We expect positive surprise from construction equipment business going ahead,” he added.

On full year basis we expect margin close to 17-18 percent range in railway business, he further mentioned.

Watch Here: Expect positive surprise from construction equipment business, says Escorts

Edited Excerpt:

Q: The results were operationally better than expected, EBITDA was better than expected. Can you tell us what went right?

A: This time the industry has done pretty well. So most of the growth which has been coming from volume which is what is happening on the offering leverage side and to some extent we have some pressure on the cost side too because of inflation coming in, otherwise the margins could have been better if you look at the Q4 margins which we had. So we missed some numbers there in the tractor business margin which we were expecting could be close to 15 percent plus but with inflation and some mixed issues we missed some of the guidance on that part.

Q: Will you be passing on the raw material cost to consumers in the form of price hikes in the months to come?

A: We had done price increase in first quarter also, so roughly 50 percent of the inflationary trend which we face on the commodity side, the balance we had passed on in July. So hopefully this quarter we will not that impact coming from inflation.

Q: You hold on to your guidance of 100 bps improvement in margins in FY19?

A: We still maintain that because all the businesses are doing extremely well compared to last year so our guidance of 100 bps improvement is intact even now.

Q: The revenue from construction equipment, I know it’s not your giant sector, it’s a small sector but it is fairly good. Do you think you will be doing Rs 250 crore every quarter?

A: This is one sector which can give positive surprises. The kind of growth we are seeing on the infrastructure space is huge but there can be some slowdown because as we move closer to the election period there will be some slowdown on the infrastructure spending from the government side because it was largely driven from public spending but generally we think this sector can give us very positive surprise going forward.

Q: Who is placing orders with you? Is it largely government?

A: It’s largely public spending like the road sector is doing extremely well, the mining has also picked up. So both the sectors are in demand.

Q: What accounted for the improvement in railway equipment margins? Did you get more orders or is it more operational leverage?

A: It was a combination of better product mix this time because it basically depends on what order we execute. So orderbook size continues to be Rs 300 crore plus as of end of June which will get executed over next 10-11 months but overall this time we had good mix and some good export orders which we got lead to better margins in the segment this time.

Q: So Rs 300 crore plus orderbook is just for railway business is what you are talking about, right?

A: Yes.

Q: What about the construction equipment business. What is the orderbook there?

A: Construction, we do not maintain the orderbook because it’s more like a retail sale. We expect the year will give us close to 20 percent plus growth in construction segment too.

Q: Also incremental orders that you are getting in railways and construction, do they come with higher margins because we have seen this time the railway equipment business has – the margins have substantially improved. On an average what kind of margins do you see there?

A: On a full year basis we expect the margin will be close to 17-18 percent range in this business though there are new large product orders which we have which we need to execute in the balance of the year where the margins will be slightly lower because a lot of import content still is there in those, margins surely will improve.

Q: So 17-18 percent margin in the railway segment is what you spoke about?

A: That is right.

Q: For the tractor business itself, wanted to understand from you, if you look at the margins on tractor business is 14.1 percent that you have seen. You did mentioned to us that this time around there has been slide because you couldn’t pass on the entire raw material cost but on an average basis what kind of tractor margins do you hope to clock in for the rest of the fiscal?

A: This year we are expecting we should be able to be somewhere around 14.5 percent to 15 percent operating margin range for tractor business. So this quarter as in pretty close to that but in next quarter Q2 may not be as good because the volumes will not be as bullish as we had seen in the past two-three quarters because the goods and services tax (GST) transaction issue, but Q3 we expect again will make more than the shortfall in Q2.

Q: Can you hold on to this 9-11 percent industry growth target for the full year?

A: We are revising it upwards now. So we are looking at the growth, so we expect the industry should give anywhere between 12-15 percent growth for the full year.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow