VST TILLERS TRACTORS LTD (VSTT) Q2 FY23 Earnings Concall Transcript

VST TILLERS TRACTORS LTD (NSE:VSTT) Q2 FY23 Earnings Concall dated Aug. 16, 2022

Corporate Participants:

Annamalai Jayaraj — Batlivala & Karani Securities India Private Limited — Analyst

Antony Cherukara — Chief Executive Officer

Noel Vaz — Asian Markets Securities — Analyst

Pankaj Khemka — Chief Financial Officer

Analysts:

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Bharat Sheth — Quest Invest — Analyst

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Sonal Gupta — L&T Mutual Funds — Analyst

Devanshu Sampat — Yes Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to the Q1 FY ’23 Conference Call of V.S.T. Tillers Tractors Limited hosted by Batlivala & Karani Securities India Private Limited. As a reminder, all participants lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Annamalai Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you, and over to you, sir.

Annamalai Jayaraj — Batlivala & Karani Securities India Private Limited — Analyst

Thank you. On behalf of B&K Securities, welcome to V.S.T. Tillers Tractors Limited 1Q FY ’23 post results conference call. From the management team, we have with us today, Mr. V.T. Ravindra, Managing Director; Mr. Antony Cherukara, Chief Executive Officer; and Mr. Pankaj Khemka, Chief Financial Officer.

I will now hand over the call to the management for opening remarks to be followed by questions-and-answer session. Over to you.

Antony Cherukara — Chief Executive Officer

Good evening, everyone. This is Pankaj Khemka, CFO of V.S.T. Tillers Tractors Limited. For the opening remarks, V.S.T. Tillers Tractors Limited has done a revenue of INR235.98 crores, a growth of 21.89% year-on-year. Overall EBITDA stood at INR19.3 crores, which is 8.1% against 18.11% year-on-year. Operational EBITDA stood at INR23.73 crores. Operational EBITDA by percentage is 10.06% compared to 13.11% previous year same quarter. Profit before tax stood at INR12.68 crores compared to INR31.3 crores previous year same quarter. PAT stood at INR10.05 crores, which is compared to INR24.01 crores previous year same quarter.

With respect to volumes, tillers volume for this quarter one was 9,161 numbers compared to 6,729 numbers previous year same quarter. Tractor volume was 1,687 numbers compared to 2,048 numbers previous year same quarter.

That was the opening remarks. Now we can shift to questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from the line of Noel Vaz from Asian Markets Securities. Please go ahead.

Noel Vaz — Asian Markets Securities — Analyst

Hello, am I audible?

Operator

Yes, please go ahead.

Noel Vaz — Asian Markets Securities — Analyst

So regarding — hello, can you hear me?

Operator

Your voice was breaking. Please, start again.

Noel Vaz — Asian Markets Securities — Analyst

Yes. Sorry about that. I just had a query regarding the upcoming TREM regulation. Is there expected to be any impact on the tractor retail sales? Or is [Indecipherable] if there is any impact is going to be very temporary in nature. So that’s my first question.

Pankaj Khemka — Chief Financial Officer

Which regulation are you talking about?

Noel Vaz — Asian Markets Securities — Analyst

TREM.

Pankaj Khemka — Chief Financial Officer

No, no. We don’t — there is no impact on us from the regulation.

Noel Vaz — Asian Markets Securities — Analyst

Okay. Thank you for that. And so, secondly, is that — actually, one thing that is there is that we’ve seen a very strong traction for power tillers. So going forward, are we expecting this momentum to pick up even further? Or is the strong growth will continue at this rate? What is the best — better way of looking at it?

Pankaj Khemka — Chief Financial Officer

Yeah. The rate of growth in small farm mechanization will continue because there is a large demand for small machines considering labor is not available. So we expect this growth momentum to continue.

Noel Vaz — Asian Markets Securities — Analyst

Okay, thanks. Thank you. It seems, that’s all from my side.

Operator

Thank you. We have our next question from the line of Arjun Khanna from Kotak Mahindra Asset Management. Please go ahead. Mr. Arjun Khanna?

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. Thank you for taking my question. My first question is with respect to the tiller business. So if you look at the Company margins, they have been on the lower side. So I just want to know that the contracted B2B power tiller business, was it a fixed price contract? And could that price be revised? If you could explain that first, sir? Thank you.

Pankaj Khemka — Chief Financial Officer

Yeah. To specifically answer, it is not a fixed price contract. It is — pricing is revisable. And in fact, in the month of July, we have had a price revision. In the first quarter, we didn’t take a price revision for power tiller. And that is why you would see that the operational EBITDA was affected by roughly about 3%. But now, we have taken the price correction.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And what would be the quantum of price increase both for the retail market to the customer and to the B2B? Is the price revision similar?

Pankaj Khemka — Chief Financial Officer

It’s the same. It’s similar.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

And what would be the quantum, sir, as a percentage?

Pankaj Khemka — Chief Financial Officer

Roughly about 1.5% to 2%.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure, sure. That’s helpful. Thank you. My second question is in terms of the tractor piece, you did mention that the new TREM regulation won’t impact us since it’s for 50-horsepower and above. But I would assume that the new Zetor range possibly could have been with new products in that range. Was that a wrong understanding, sir?

Pankaj Khemka — Chief Financial Officer

We have the first phase of product, which is coming in the 45-horsepower and 49-horsepower categories from Zetor. So it will also be below the 50 HP. The Phase 2 products, some of the products will be above 50 HP. At that point in time, we are ready for the Stage V regulations.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Perfect. That’s helpful. In terms of the Zetor range, so if you look at the last few quarters in terms of tractor sales, the numbers have been slightly underwhelming given that we were looking at adding a lot of dealerships and expanding the scope of business. Just wanted your comments on that, sir.

Pankaj Khemka — Chief Financial Officer

Yeah. We’ve continued to add dealerships in quarter one as well. However, our two key[Phonetic] markets, which is Maharashtra and Gujarat, the retail sales were low. And as said before, we go by the retail sales and hence our billing reflects the retail sales in the market. So since these key predominant markets in the industry had slowed down, you see a slight decline in our tractor volumes. But we expect with the coming of the festival season that should pick up.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. That’s heartening to hear. In terms of other units, if you could give us a revenue, say, of the power weeder, the brush cutters, what volumes did we do?

Pankaj Khemka — Chief Financial Officer

Just a second. So, for weeders we did 891 numbers for quarter one FY ’23.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

I’m sorry, sir. If you could please repeat, the line was little disturbed.

Pankaj Khemka — Chief Financial Officer

Weeders 891 numbers, weeder.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure, sure.

Pankaj Khemka — Chief Financial Officer

Brush cutters is about 365 numbers.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sir, we were earlier talking of possibly exponential growth in these lower-priced products over the power tillers. We haven’t quite seen that ramp up. So where is it that possibly we need to improve upon?

Pankaj Khemka — Chief Financial Officer

The whole of last year, we did lesser than 2,000 numbers. So this year, in the first quarter itself, we are close to about 900 numbers. And we are quite confident that we will be growing exponentially this year. We should — we have — we are looking at upwards of 5,000 numbers this year in power weeders, which we usually achieve.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And just to understand, in terms of margins, would margins be similar to our projected or our ambition of 13% to 14% for the Company?

Pankaj Khemka — Chief Financial Officer

Yeah, it will be in that range.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. The last is just a bookkeeping question. If you could give us the revenues for tillers and tractors and the other businesses? Thank you.

Pankaj Khemka — Chief Financial Officer

The — for quarter one, the revenues for the small farm mechanization is INR135.13 crores and tractors is about INR67 crores.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. Thank you.

Operator

Thank you. We have our next question from the line of Bharat Sheth from Quest Invest. Please go ahead.

Bharat Sheth — Quest Invest — Analyst

Hi, sir. Thanks for the opportunity. Sir, can you give some color on, one — first on the subsidy from the state government on the tiller, how it’s — whether new subsidiary has been announced or it’s same old rate?

Pankaj Khemka — Chief Financial Officer

So there is very little influence of the subsidy on the tiller business, as I have shared before also that customers now buy — the basis of the decision of purchase is not based on subsidy anymore. However, we expect the subsidies to continue this year as well. We don’t see any drastic decline, neither we see any drastic growth in terms of subsidies. So it will be more or less the same level with last year.

Bharat Sheth — Quest Invest — Analyst

Okay. And sir, can you give some color — more color on the particularly tiller side on the competitive scenario and as well as our tractor where some of the large players have started launching small tractors. So how it’s really overall playing out?

Antony Cherukara — Chief Executive Officer

Yeah. So let me start with tiller first. Tiller is all about creating the industry. So you see in the quarter one, the tiller business has grown by almost 40%. So — and that, I think — I don’t know whether 40% will continue or not. But definitely, like I said before, 15% to 20% is expected growth in the power tiller business this year as well. So that will continue, that growth momentum will continue in the tiller business. And it will be, like I said earlier, it will be guided based on the scarcity in labor that is there in the small farm operations. So that will drive demand for small farm mechanization.

Coming to tractors, predominantly two states are the key for compact tractor industry, which is Maharashtra and Gujarat. This year, the Maharashtra and Gujarat industry has slowed down in terms of the compact four-wheel drive tractors. Hence, this affected our retail sales. However, with the monsoon playing out reasonably well and coming of the festival season, we expect the demand to pick up in these two markets and the retail should be back to normal. So that should help our compact tractor sales.

Apart from this, we are also getting into the higher horsepower segment in the latter part of this year with the launch of the VST Zetor range of tractors. And all the product launches we are coming on with two to three new compact tractors in the next two quarters. In Q3 and Q4, we’ll be launching about three compact products, which is in line with the best offering that is available in the market, and we expect to recapture the volumes in these markets.

Bharat Sheth — Quest Invest — Analyst

And sir, can you give also more color on competitive landscape?

Pankaj Khemka — Chief Financial Officer

The competition continues to grow in this segment. The number of products that is what like I told you, some of the new players, especially MNC players who have come in, have launched specific products, for which we didn’t have an answer until now. Now we have that answer, and we will be launching those products in the coming two quarters. So the competitive scenario in the tractor industry will continue to be intensive. However, we are well-equipped to fight that intensity with competition, especially in the compact tractor space with our new launches that is expected in the next two quarters.

Bharat Sheth — Quest Invest — Analyst

Okay. And sir, if you can give more on tiller also, like Kirloskar also has launched tiller a couple of years back. So how this competitive landscape in tiller is playing out?

Pankaj Khemka — Chief Financial Officer

We are driving small farm mechanization industry. Like I said, the growth that has been dropped in the small farm mechanization industry is primarily driven by VST. So we have seen a 40% growth in the tiller volume this year in Q1, and that drive will continue. We have to launch several products in this segment, which we are continuing to do so, which will serve various crops and various geographies of the country. We are also looking at innovations in this area, which we will be talking to you in the next quarter.

Bharat Sheth — Quest Invest — Analyst

Okay. And sir, if pan-India, if you can give like, say, penetration of the tiller, and which states are having high, vis-a-vis, which states are still low? And are we looking for geographical expansion within India?

Pankaj Khemka — Chief Financial Officer

Absolutely. So South, East and West are more or less reasonably covered by the tiller industry. However, the power weeder industry is across the country. So we are expanding the network across the country.

Bharat Sheth — Quest Invest — Analyst

Okay. So on tiller side, do you think, I mean, say, Northwest and Northeast still not penetrated full?

Pankaj Khemka — Chief Financial Officer

North[Phonetic] is not penetrated still. North is the area where we have not been able to penetrate and we are working on it.

Bharat Sheth — Quest Invest — Analyst

Okay. Thank you very much, sir.

Operator

Thank you. We have our next question from the line of Nikhil Rungta from Nippon India Mutual Funds. Please go ahead.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Yeah. Hi, sir. Thanks for the opportunity. Sir, most of my questions have been answered, so just a couple of them more. Sir, now we are already, say, 12 months to 15 months in the system post giving our guidance of INR3,000 crores of revenue by FY ’25. So now as on date, will that guidance stand at INR3,000-odd crores? Or it would be revised?

Pankaj Khemka — Chief Financial Officer

See, definitely the INR3,000 crore milestone stands. However, I should also say that the day after we declared the vision of 2025, INR3,000 crores may not had a single normal year. We got hit by COVID two years, supply disruptions after that. So there could be a delay of, at least, a year or so. We are working on it. We are also — I mean, buoyed by the fact that the primary intention of getting VST to a growth part has been achieved by the statement of the vision.

I’m very happy to say the last three years the CAGR has been more than 25%, which the Company has never done historically. So the primary objective of stating in a very aggressive vision has been achieved. But at the same time, it is important that we achieve that milestone. So we are working on it.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Okay. Okay. And sir, just quickly on the MTM losses. So what would be the book of investment as on date? And is this primarily in the equity part or the debt part we are investing into?

Pankaj Khemka — Chief Financial Officer

The investments are a mix of both equity and debt.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Okay. And what would be the size of investments?

Pankaj Khemka — Chief Financial Officer

It is around INR450 crores.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Okay, okay.

Pankaj Khemka — Chief Financial Officer

You’re talking about our treasury investment, right?

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Right, Right. Wherein we have booked MTM losses of around INR67 million in this quarter compared to around INR73 million income in the last year.

Pankaj Khemka — Chief Financial Officer

Okay. Yeah. Yeah. Yeah.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

So you mentioned the book size is around INR50-odd crores?

Pankaj Khemka — Chief Financial Officer

INR450 crores I said.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

INR450 crores?

Pankaj Khemka — Chief Financial Officer

INR450 crores.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Okay, okay. And sir, last thing, on the land parcel which we have, what have we decided there now?

Pankaj Khemka — Chief Financial Officer

There is no decision yet. As I said earlier, we will be unleashing its value. Definitely, we will let you know.

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Okay. Sure. Sure, sir. That’s all from my side. Thank you, and all the best.

Operator

Thank you. We have our next question from the line of Sonal Gupta from L&T Mutual Funds. Please go ahead.

Sonal Gupta — L&T Mutual Funds — Analyst

Yeah. Hi, good afternoon, sir. And thanks for taking my question. Sorry, just on the — I mean — I’m sorry, the line was probably not very clear. So you said small farm revenues of INR175 crores this quarter?

Pankaj Khemka — Chief Financial Officer

I will tell you, exactly INR135.13 crores.

Sonal Gupta — L&T Mutual Funds — Analyst

INR135 crores. And this would — and the parts revenue would be, sir?

Pankaj Khemka — Chief Financial Officer

Parts is around INR26 crores.

Sonal Gupta — L&T Mutual Funds — Analyst

Parts would be INR26 crores. And the tractor was INR64 crores?

Pankaj Khemka — Chief Financial Officer

INR66 crores — INR67 crores.

Sonal Gupta — L&T Mutual Funds — Analyst

INR67 crores. Okay. Sorry. Yeah, sorry. And sir, again, coming back to the strategy on tractors, given that while we have a small base and you are expecting new launches to come in. But I mean, like is this the — I mean, you’re coming post the festive season, is that the right time to be coming into the market?

And then what is — I understand that you’re coming up with new products and the Zetor range. But still just trying to understand like given the intense competition in the space, what we are hearing is that there has been discounting pressure also in the tractor space. How are we — how are you looking to compete in the space? And how will you sort of differentiate yourself? Hello?

Operator

Hello, sir? Ladies and gentlemen, please stay on the line. I will reconnect the management team.

Pankaj Khemka — Chief Financial Officer

Hello?

Operator

Yes, sir. We can hear you. Please go ahead.

Pankaj Khemka — Chief Financial Officer

Yeah. Yeah. So can we — can I go ahead [Technical Issues].

Operator

Sir, your voice is breaking.

Pankaj Khemka — Chief Financial Officer

[Technical Issues] Can you hear me?

Operator

Sir, I’ll disconnect and reconnect. All right. Please disconnect this line.

Pankaj Khemka — Chief Financial Officer

Yeah.

Operator

We have reconnected the management team. Sir, please go ahead.

Pankaj Khemka — Chief Financial Officer

Yes. So can I go ahead with the answer for the question on the tractor business?

Sonal Gupta — L&T Mutual Funds — Analyst

Yes, sir.

Pankaj Khemka — Chief Financial Officer

Yeah. Okay. So what I was saying is we don’t go by building inventory or discounting. We have been following a strict regime of — one is cash and carry, and second is driven by retail sales. The focus is on the dealer profitability, increasing more rotations for them. And the second aspect is to give unique value proposals in terms of the functionality of the tractor wherein we are focused, which is a four-wheel drive compact space. So that is where we have been focused on. And I’m very happy to say that, in that particular segment, per se, we have not lost the market share.

Now certain new offerings have come from competition for which we have really higher [Indecipherable] going into the festival season for the compact tractor segment. In the higher horsepower series, the launch will be in this quarter four of this financial year. That is as per plan. And the plan — I mean, the progress is as per plan.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it, sir. So is this going to again be launched in, I mean, these key markets that you have? Or are you like — I mean…

Pankaj Khemka — Chief Financial Officer

The higher horsepower will be launched across India, especially in the northern market where we were not operating.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. Okay. And in terms of, sir, just coming back to the question on the parts business, right, like that was one of the key pillars that we’re looking at and that, I think, given that the synergies with your tiller business, it seems to work quite well. So just to — could you sort of, I mean, guide us on what sort of next steps because it seems the parts revenues have not really grown year-on-year? So just trying to understand like what are you planning to do here and what will be the next steps?

Pankaj Khemka — Chief Financial Officer

Let me clarify, a couple of years back, two years back, our revenues in the parts business used to be roughly about INR50 crores — in the region of INR50 crores. Last financial year, we closed — that is FY ’22, we had revenue from the parts business of about INR91.37 crores. So definitely, there has been a very good progress.

Now, like I have said before, this is one of the key pillars of what business we are building in terms of rural distribution. So, we have digitized this entire network, and very happy to say that we have also bought into the business of electric pumps. We have launched electric pumps in two markets only, which is in UP and Bihar. And this is a completely new digitized way of doing business. We are in the feet on the street also, using a mobile phone, which is connected to the distributor, which is connected to the warehouse. So this entire digital distribution network is being built. And in the future, we expect this business to grow multiple times.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. Got it. So this is not — so then electric pumps is a sort of a slightly different business, right? So then it is not linked to like…

Pankaj Khemka — Chief Financial Officer

It is a distribution business.

Sonal Gupta — L&T Mutual Funds — Analyst

Correct. So it’s not linked to the…

Pankaj Khemka — Chief Financial Officer

Serving the same segment of customers, which is farmers.

Sonal Gupta — L&T Mutual Funds — Analyst

Sure. But then would you be using the same channel as your power weeders, etc.?

Pankaj Khemka — Chief Financial Officer

No, no, no. This is a totally different distribution network, which is a digital network that we are building.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. But then we — I mean, so then we will — I thought that this ride on the synergies that we have in terms of tillers and…

Pankaj Khemka — Chief Financial Officer

There will be some synergies definitely. Some distributable products like the small power weeders, 2 HP, 3 HP, might also get sold into distribution. We have not started as yet, but I see that happening in the near future.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. And sorry, sir, so just to clarify, then the strategy for like these other components, like power weeders and brush cutters and other components, that will still be through the tiller channel, right?

Pankaj Khemka — Chief Financial Officer

Tiller channel and some of the products will also be taken up by the distribution channel, whichever is — like for example, classic products that can be distributed is the brush cutter because the brush cutter is available in almost every counter. So wherever it is a counter or over-the-counter kind of sales, those products will be taken into the distribution network also. That will also be available in the tiller network.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. Got it.

Pankaj Khemka — Chief Financial Officer

But wherever the intensity of service is there, installation is there, parts availability, those kinds of products, which in the previous network that is sales, services and parts, that will continue to be specifically in the dealer channel as well as the tractor channel.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. Got it. And just lastly, with the sort of price increases that you’ve taken and given the fact that the steel prices are now showing a moderation, do we see like your gross margins getting back to the previous levels, like your EBITDA margins improving back to the 12%, 13% range?

Pankaj Khemka — Chief Financial Officer

Yeah, we will do that. Like I said to the previous gentlemen, we will be able to meet our margin guidelines of 12% to 14%.

Sonal Gupta — L&T Mutual Funds — Analyst

Got it. Got it. Great, sir. Thank you so much.

Operator

Thank you. We have our next question from the line of Arjun Khanna from Kotak Mahindra Asset Management. Please go ahead.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Thank you for taking my question again. Sir, I just wanted to understand how has been the performance of this Branson Tractors which we had launched? From the market, we have an understanding it hasn’t quite taken off. So what are the key learnings we have got for that before launching Zetor, if you could help us, sir?

Pankaj Khemka — Chief Financial Officer

No, it is — these are two very different segments. The Branson is a compact higher horsepower tractor, and it is a very different tractor compared to VST Zetor, which is a high horsepower utility tractor. So as far as Branson is concerned, we have seeded about 30 to 40 tractors across India in various markets. And there is good feedback on the performance of the product. And we expect to launch a series of products in the coming future based on the Branson range.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Would this be indigenized, sir? Or…

Pankaj Khemka — Chief Financial Officer

It will be indigenized.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. So we could see a significant price reduction?

Pankaj Khemka — Chief Financial Officer

Yes, yes. Compared to the important product, there will be a significant price reduction.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And for the Zetor also, while launching it in terms of pricing with competitors, would it be at a significant discount from the leader? Or what is the key plan with which we would be launching the product?

Pankaj Khemka — Chief Financial Officer

See, this will be a premium product. Like I have said before, the VST Zetor will be a premium range, which will compete with multinational products or the high-end products from the large manufacturers. So it will be a premium positioning product.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. My final question is in terms of volumes. So, for our plant, given that we aren’t quite seeing the scale up, so generally, if one looks at, say, EBITDA margin, so what do you believe for us to be in that band of 12% to 14%, should probably be the operating volumes for the tractor business?

Pankaj Khemka — Chief Financial Officer

See, the operating volume in the current volume, we will be at 12% to 14%.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Even doing say five — 600 a quarter in tractors?

Pankaj Khemka — Chief Financial Officer

Not 500, 600 a quarter, it is about — anywhere between 1,600 to 2,000 tractors a quarter.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Right. Around 600 a month. Perfect, sir. 2,000 a quarter. So even if we do around 8,000 units, you believe we could be in that range?

Pankaj Khemka — Chief Financial Officer

Yes, margins are protected. Like I said before, there are various projects that we have undertaken. The strength of the Company is in frugal engineering, frugal manufacturing. And the philosophy, which has been applied in the small farm mechanization, especially the power tiller, where the company has always been constrained in terms of pricing, that kind of — that frugal mindset is applied to the tractor business as well. So that is the strength of the Company.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And like we have taken a price hike of 2% in the tiller piece, has there been any price hike taken in the tractor piece also?

Pankaj Khemka — Chief Financial Officer

Yes, we have taken a price rise at roughly about 2% [Technical Issues] 1.5% we have taken in the tractor.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And if raw materials do possibly come down, do you think that would be passed on with the lag?

Pankaj Khemka — Chief Financial Officer

Yeah. It is — there is a cooling off effect as we can see, but it’s pretty volatile. For example, in Q2, so far, there has been a cooldown, but it is said that in Q3, the commodity pressures will be there. So — however, like I said, we are focused on ensuring that our guidance on margins is maintained.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. So just carrying forward form here, maybe you could help us. So on the existing business, if you look at the tiller, volumes have been strong. Tractors, if it does ramp up, say, maybe not this year, next year, maybe move closer to 10,000 units to 12,000 units as we had envisaged for growth. Should margins possibly be at the higher end of that range then? Operating leverage…

Pankaj Khemka — Chief Financial Officer

We will be investing more of those margins into our growth, which we are continuing to do. We are getting already for the transition of technology to electric. We are getting ready to launch more new products. We are getting ready with innovative products. So you will hear a lot from VST in the coming quarters. So all these [Technical Issues] so we would be — I mean, like I said before, the 12% to 14% margin is what we are — we are saying will be maintained. And the rest of it, we will be using it for growth.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. So, just to understand that, sir. So the fair way of looking at it would be our existing products that may have margins of maybe 16%, 17% EBITDA and we would be deploying 200%, 300% for the incremental growth projects such as prototyping, R&D, etc. Is that the right understanding?

Pankaj Khemka — Chief Financial Officer

Absolutely.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. And how much would the growth capex so as to speak would have been done in FY ’22?

Pankaj Khemka — Chief Financial Officer

FY ’22 was about INR40 — INR50 crores roughly.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. So of the top line of what we see in FY ’22 of almost INR854 crores, we are saying we spent roughly INR50 crores. And would all of that be written off from the P&L? Or would that be largely capitalized?

Pankaj Khemka — Chief Financial Officer

Largely capitalized. Most of them have got capitalized — most of them have got capitalized on the [Indecipherable] as on March 31, 2022.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

So that’s on the capex front. So a lot of the R&D prototyping, won’t that go through the P&L also?

Pankaj Khemka — Chief Financial Officer

You’re asking the split between the revenue spend and the capex.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Right. Right.

Pankaj Khemka — Chief Financial Officer

So what we told you is the capex. There will be some amount of revenue spend also in terms of product development, especially there are large parts of product development which cannot be capitalized. For example, product validation is a large amount of expense, which is not capitalized. I don’t have the exact numbers now, but there is a significant spend on the revenue side also.

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Even a ballpark would be fine, not looking for an exact, sir. Would we have some sense? We could show for FY…

Pankaj Khemka — Chief Financial Officer

Can I come back to you on that?

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Sure. No issues, sir. Thank you so much for this.

Operator

Thank you. We have our next question from the line of Devanshu Sampat from Yes Securities. Please go ahead.

Devanshu Sampat — Yes Securities — Analyst

Yeah. Hello, sir. Good afternoon. Can you hear me?

Pankaj Khemka — Chief Financial Officer

Yes.

Devanshu Sampat — Yes Securities — Analyst

A few questions. Sir, firstly, can you elaborate a bit more on your comment on the — on us focusing on dealer profitability, right? So you must be working with an ROI number, or you must have done a study internal. So how does that work for VST tractor dealers? And how — as for your internal study, how does this compare to peers?

Pankaj Khemka — Chief Financial Officer

Yeah. So what we have focused on is rotating the inventory, rotating the assets for the business, which means the EOP supply chain we have built over the last two years, it is due to supply to the dealer only if the consumption happens at the dealer end. So for example, a dealer has a 30-day or 45-day inventory, which is maintained in its dealership. And when that — let me say that is 10 tractors. Now if two tractors are retail, only then two tractors get built in. So in essence, he doesn’t have to worry about working capital management, he doesn’t have to worry about the cost of capital, he doesn’t have to worry about carrying [Indecipherable] inventory. That is point number one.

Point number two, what we are assuring the dealers is you can join us — join VST and get an assured ROI of 30% to 40%.

Devanshu Sampat — Yes Securities — Analyst

Okay. Okay.

Pankaj Khemka — Chief Financial Officer

So I believe it’s going to be the key differentiator going forward. All the dealers who are joining us are very happy with this way of working. They’re focused on building and getting more customers rather than worrying about their cost of capital.

Devanshu Sampat — Yes Securities — Analyst

Sure, sure. And there was a very conscious strategy of separating the tiller, which eventually became the implements distribution and the tractor business, right? But then, at some level, these do also do go hand in hand. So are we rethinking that? Or this is something that is still working for us?

Pankaj Khemka — Chief Financial Officer

No, there is no rethinking. The tractor channel remains separate, the tiller channel remains separate, the distribution network remains separate. All these three network remain separate. Only thing is some of the small farm mechanization products, which are distributable, in the sense, these are over-the-counter kind of products, that will be sold in the distribution network also. As of now, we have not started it. But going forward, it is likely that it will happen.

Devanshu Sampat — Yes Securities — Analyst

So what all comes under distribution channel right now? You said pumps and…

Pankaj Khemka — Chief Financial Officer

It is spare parts, oil and pumps at the moment.

Devanshu Sampat — Yes Securities — Analyst

Okay. Okay. So can you give the dealer count as of today? And what is the target we have for the year-end for all these three, if you can cover all these…

Pankaj Khemka — Chief Financial Officer

Yeah. The tractors dealer count at the end of quarter one was 357. The tiller dealer count is 577. These are the dealer counts.

Devanshu Sampat — Yes Securities — Analyst

Okay, okay. And do we have a target that we have set? And if — are we on track to achieve that?

Pankaj Khemka — Chief Financial Officer

Yes, we should be able to further accelerate with the launch of the higher horsepower tractor, especially in the VST Zetor in North. We have not really aggressively expanded in the North, which we will be doing in the latter half of this year.

Devanshu Sampat — Yes Securities — Analyst

Sure, sure. Okay. Coming to — I wanted to just touch upon the focus that we have on the penetration of financing, right, financial services, especially across — so we did this with certain products. But has it had a rub-off effect on the other categories as well? Can you give us a sense on how that has shaped up over time?

Pankaj Khemka — Chief Financial Officer

Yes. Financing is a key aspect, especially the retail financing [Technical Issues] product to the end consumer. So we have created several tie-ups. Some of the recent ones are with IndusInd Bank, with Axis Bank, with HDFC, with Kotak. And many of the banks, we have now tie-ups for selling our tractors and also the small farm machines. So it will be a key aspect, and we are making good progress in that area.

Devanshu Sampat — Yes Securities — Analyst

So in the previous quarter, if I’m not mistaken, the number was around 5%, right? So can you share that number for this quarter?

Pankaj Khemka — Chief Financial Officer

Which one, 5%? I didn’t get you.

Devanshu Sampat — Yes Securities — Analyst

I might be mistaken, but there was — you had given a certain number of — you’ve given a figure in terms of how many of our products are getting financed. Maybe about the tiller products you were talking about that we’re seeing increase in financing availability. So can you just share that number as of this quarter?

Pankaj Khemka — Chief Financial Officer

The percentage finance of tillers is still about 4% to 5% only.

Devanshu Sampat — Yes Securities — Analyst

4%, 5% only. Okay.

Pankaj Khemka — Chief Financial Officer

[Speech Overlap] it will move to 2%, 3%, now it has slowly moved to 4%, 5%.

Devanshu Sampat — Yes Securities — Analyst

Okay, okay. Got it. Got it. And sir, just a final question on capital allocation and thoughts on the returning cash to shareholders, right? So you said we have about INR450 crores of cash. We’re generating roughly about INR100 crores of free cash annually, and our cash flow position is definitely very stronger than before. And from your comments earlier, you mentioned that this is how it is likely to be going ahead. So any thoughts on if the promoter would like to comment on the returning cash to shareholders or on the overall valuation of the company and capital allocation?

Pankaj Khemka — Chief Financial Officer

I think the focus of the Company as well as the promoter has been to grow the company. So in terms of investment, we are looking at opportunities of growth, both organic as well as inorganic. So we would like to utilize this cash for growth. And definitely, in the near future, you will hear more about it.

Devanshu Sampat — Yes Securities — Analyst

So you’re talking about a possible acquisition sometime this year?

Pankaj Khemka — Chief Financial Officer

Yes. We are exploring those opportunities.

Devanshu Sampat — Yes Securities — Analyst

Sure, sure. Okay. That’s it from my side. Thank you. All the best.

Operator

Thank you. As there are no more questions, I would now like to hand over the call to the management team for closing comments. Over to you, sir.

Pankaj Khemka — Chief Financial Officer

Yeah. Thank you, everyone, for coming over for the call today. We look forward to interacting with you after the closure of Q2. Until then, thank you, and goodbye.

Operator

[Operator Closing Remarks]

Duration: ?? minutes

Call participants:

Annamalai Jayaraj — Batlivala & Karani Securities India Private Limited — Analyst

Antony Cherukara — Chief Executive Officer

Noel Vaz — Asian Markets Securities — Analyst

Pankaj Khemka — Chief Financial Officer

Arjun Khanna — Kotak Mahindra Asset Management — Analyst

Bharat Sheth — Quest Invest — Analyst

Nikhil Rungta — Nippon India Mutual Funds — Analyst

Sonal Gupta — L&T Mutual Funds — Analyst

Devanshu Sampat — Yes Securities — Analyst