Escorts Kubota Q2 FY27 Earnings Call: Cuts FY27 Industry Outlook To Degrowth, Rs. 2,000 Cr Greenfield Planned

Strong Top Line, Sharp Margin Compression

• Revenue of Rs.3,231.4 Cr (continuing operations), +16.3% YoY — Q2 FY 2026-2027 standalone; EBITDA at Rs.292.4 Cr with margin at 9.9% vs 13.1% in Q2 FY 2025-2026 and 11.2% in Q1 FY 2026-2027, hit by commodity cost inflation and higher manufacturing overheads.
• Net profit of Rs.255 Cr vs Rs.321.2 Cr YoY — PBT from continuing operations at Rs.344 Cr vs Rs.431.1 Cr; EPS at Rs.23.18 vs Rs.29.19 YoY.
• H1 FY 2026-2027 revenue of Rs.6,410.3 Cr, +21.9% YoY — EBITDA Rs.647.8 Cr (10.1% margin); net profit Rs.642.4 Cr; EPS Rs.58.38 vs Rs.63.07. H1 FY 2025-2026 included a Rs.76 Cr exceptional gain (land/building sale) and RED divestment impact; excluding the gain, net profit grew 2.2% YoY — reported PAT not directly comparable.
• Domestic tractor volume of 32,628 units vs 32,329 — marginal EKL growth against an industry decline to ~2.66 lakh units from 2.75 lakh (-3% YoY), driving a 48 bps market share gain on refreshed products, launches, channel effectiveness and retail execution.
• Non-tractor revenue at 22% of agri machinery segment revenue — up from 17% in Q2 FY 2025-2026 and 19% in Q1 FY 2026-2027; Q2 revenue mix: pure tractors ~65%, construction equipment ~17%, non-tractor agri 18%.

Inflation Outpacing Price Hikes by ~5%

• Commodity inflation of ~8-9% by Q2 FY 2026-2027 exit — up from ~5% in Q1 FY 2026-2027, against cumulative price hikes of only ~3.5% (1.5% in April 2026, ~2-2.5% end-August 2026), leaving a ~5% net margin drag on the tractor business (CFO Bharat Madan).
• Commodities are ~75-80% of the cost pressure — the remaining ~20% from manpower and process/conversion cost increases incurred in FY 2026-2027; Haryana contractual manpower costs rose 35% effective April 1, 2026.
• Further 2-3% inflation (steel, rubber) from Q3 FY 2026-2027 — a new ~3-3.5% price increase (varying by model) effective mid-November 2026 gives limited Q3 benefit as festive volumes are largely done, with full realization in Q4 FY 2026-2027; cumulative pass-through reaches ~6-7%.
• ~4-5% price under-recovery in FY 2026-2027 — inflationary pressure of ~11-12% till December (Q3 FY 2026-2027) vs ~7% hikes taken; management confirmed price action will follow if commodity prices stay at current levels, irrespective of the demand cycle.
• Four price increases taken in CY 2026 — roughly one per quarter, the latest in October 2026 (Q3 FY 2026-2027); almost 90% of inflation passed on till H1 FY 2026-2027, with further hikes contingent on industry response and Q3-Q4 FY 2026-2027 inflation.
• Cost-reduction program limited to ~1% savings per year — spanning R&D, design and procurement (recurring annual target); realization is difficult in the inflationary environment, and meaningful commodity-linked savings are expected only when prices soften, which management hopes may begin after Q4 FY 2026-2027.
• Other expenses rose 22% YoY / 14% QoQ — output exceeded sales by 20-25% amid seasonal inventory build; the ~1.5% inventory benefit reverses in Q3 FY 2026-2027 when inventory sells.

FY27 Guidance Cut to Single-Digit Degrowth

• FY 2026-2027 industry guidance revised down — to a marginal single-digit degrowth, from the mid-single-digit growth guidance raised in the previous call; management confirmed this implies almost double-digit industry decline in H2 FY 2026-2027, with slight degrowth in both Q3 and Q4 FY 2026-2027.
• Industry swung from +17% to steep declines — ~17% growth over April-August FY 2026-2027, then ~-18% in September 2026 and ~-16-17% in October 2026, on a very high base (strong Q3/Q4 FY 2025-2026, GST impact from September FY 2025-2026) plus the El Niño monsoon impact post-September FY 2026-2027.
• Regional divergence in Q2 FY 2026-2027 — West degrew ~21%, South saw marginal degrowth and MP was in degrowth, while North and East posted marginal growth; a 13% rainfall deficit vs normal and reservoir levels at 70% weigh on reservoir-dependent West and South markets.
• Inventory correction underway in Q3 FY 2026-2027 — October 2026 retail of ~150-151K units vs billings of ~140K implies ~10-11K units of stock correction; a decent correction was executed in October with the balance planned for November 2026, having held stock for Dhanteras and Diwali.
• Management does not expect any month to degrow 20-22% — viewing the analyst's Jan-Feb scenario (high base from the year-ago period) as too steep; the analyst flagged possible paddy crop destruction in north India over the next 2-3 months from untimely torrential rainfall, and expects H2 FY 2026-2027 declines of ~30-35% in Maharashtra and further declines in Karnataka, while Gujarat may improve on subsidies expected over the next few months.
• North expected flattish to marginally degrowing in H2 FY 2026-2027 — northern industry grew ~6% in Q2 FY 2026-2027; the entire H2 degrowth expected from the west and, to an extent, the south.

CE Shines; Agri Margins and Exports Under Strain

• Construction equipment revenue of Rs.536.2 Cr, +58.6% YoY — EKL volume of 1,764 machines, up ~54% YoY vs 1,146, against industry growth of ~20%; EBIT margin at 7.9%, up 411 bps YoY and 250 bps QoQ, on operating leverage and timely price increases.
• CE growth to moderate to high-teens in FY 2026-2027 — management cites high base and increased costs; government infrastructure and development initiatives continue to provide a supportive demand environment. Per Sanjeev Garg, industry H1 FY 2026-2027 grew ~20% and H2 FY 2026-2027 growth is expected at ~15-16%, with FY 2026-2027 ending on a positive note; H2 typically contributes almost 60% of annual industry business (period unspecified).
• Agri machinery revenue of Rs.2,690.1 Cr, +10.6% YoY — but EBIT margin at 7.8% vs 12.8% in Q2 FY 2025-2026 and 10.8% in Q1 FY 2026-2027, impacted by product mix, inflated commodity costs and higher overheads; pricing action and cost efficiency expected to support margin recovery from Q4 FY 2026-2027.
• Exports declined to 1,389 tractors vs 1,548 YoY — despite industry exports rising 16% to ~29.6 thousand units, as growth concentrated in higher HP segments where EKL presence is limited and key export markets are undergoing correction; EKL is working with Kubota to strengthen the export portfolio and expand target international markets.
• H1 FY 2026-2027 exports down ~14-15% — on European channel correction and compact tractor pressure; October (Q3 FY 2026-2027) showed good growth but run-rate is only ~500 units/month; with the order book in hand for the next 6 months (H2 FY 2026-2027 into early FY 2027-2028), FY 2026-2027 exports are flattish at best, with recovery possibly beginning in FY 2027-2028.

4WD Momentum, New Launches and Kubota Localization

• 4WD volumes up ~3x over the last 6-7 months of FY 2026-2027 — per Neeraj Mehra, the 4WD segment is growing faster than the industry, with EKL gaining share on new 4WD introductions across all three brands (FarmTrack Pro Max, a new Kubota series, PowerTrack DigiTrack); management estimates 4WD at 17-18% of industry volumes as of Q2 FY 2026-2027 (excluding the Maharashtra orchard/lower-end sub-segment), concentrated in 45-50 HP.
• 4WD lineup gaps to be covered "to a very large extent" — especially in PowerTrack and Kubota brands, via new 4WD launches lined up over the next 6-8 months; a new PowerTrack 4WD range is slated for launch in January, i.e., Q4 FY 2026-2027.
• ProMax and DigiTrack each contribute 20-23% of their brand's sales — ProMax made FarmTrack pan-India; DigiTrack (in market 3-4 years) recently added 4WD variants, driving substantial PowerTrack growth.
• Two Kubota-brand series introduced in FY 2026-2027 — partly to meet emission norms effective October 1, 2026 for the <25 HP segment and partly to enter new segments, improving contribution margins and expanding in northern/central India; further products planned for FY 2027-2028, though near-term focus is scaling current launches.
• <25 HP emission-norm change cost under 4% — coupled with model upgrades; per Bharat Madan, the change has not impacted demand, with any segment impact driven more by subsidy/GST factors; the segment (per Rajan Shuk, probably the second-fastest growing) remains under 2% of the total portfolio and geographically concentrated.
• Kubota localization on track — spanning tractors and farm machinery such as rice transplanters, including use of Escorts engines, for launch "in coming few quarters" as per schedule.

Margin Recovery From Q4 FY27; Rs.2,000 Cr Greenfield Planned

• Margin pressure to continue in H2 FY 2026-2027 — given the lag between cost escalation and price recovery; pricing measures and cost control expected to progressively mitigate inflation and support margin improvement from Q4 FY 2026-2027 onwards. Major cost pressure has occurred till Q2 FY 2026-2027 with spillover into Q3, while from Q4 FY 2026-2027 only a "very soft increase" is expected, if at all.
• No FY 2027-2028 guidance — Neeraj Mehra said Q1 FY 2026-2027 was a very bullish quarter for the industry, so Q1 FY 2027-2028 could see some impact, but giving full-year FY 2027-2028 guidance "might not be prudent" at this point.
• Normal capex of ~Rs.350 Cr guided for FY 2026-2027 — tracking broadly on plan; ~Rs.400-450 Cr already spent on greenfield land acquisition (completed as of the Q2 FY 2026-2027 call).
• Greenfield project of about Rs.2,000 Cr over 3-4 years — construction likely to begin in FY 2027-2028 and spread over the next two years, phased as tractor factory first, then construction equipment plant, then spare parts warehouse; annual phasing not yet finalized as project costing is underway; FY 2027-2028 normal capex guided at ~Rs.300 Cr.
• CE margins expected to sustain at current levels — citing good demand momentum and a typically strong H2, though steel prices impacted CE significantly more than tractors.
• Kubota export arrangement on principal-to-principal basis — per Bharat Madan, the margin extended to Kubota is similar to what independent distributors receive, with no additional preference given to the group.
• Midterm tractor outlook remains optimistic — management remains optimistic on the midterm tractor industry outlook supported by agriculture economy fundamentals, despite near-term headwinds (high base, lower subsidy support in certain markets, El Nino disruption, commodity escalation largely negating the GST reduction benefit).