New Delhi: Escorts Ltd founder H.P. Nanda once remarked that his “fortune came on a tractor”. His grandson and joint managing director Nikhil Nanda is hitching a ride on the same vehicle as he rebuilds the fortunes of a company that has been singed by cash-burning businesses, from healthcare to telecom.
Nanda, 36, an alumnus of the Wharton School of the University of Pennsylvania, is focusing on Escorts’ core business of agricultural machinery, including tractors, besides construction equipment and railway accessories, after steering the company out of eight non-core industries such as motorcycles, transmission axles, healthcare and telecom.
The Rs.850 crore that Escorts raised from the divestments has been ploughed back into the main business and to pay off debt. As of 31 March, the company’s debt had declined to Rs.218 crore from Rs.625 crore on 30 June 2004. Its debt-to-equity ratio was just 0.28 in the business year to 30 September 2009. (Escorts follows an October-September business year.)
Nanda seems to be doing something right.
From a loss of Rs.6.44 crore in the business year that ended 30 September 2007, Escorts swung to a profit of Rs.11.87 crore in the following year. The profit swelled to Rs.90 crore on net sales of Rs.2,157.78 crore in the 12 months ended September 2009. The turnaround is reflected in the company’s share price, which has risen 167% over the past year. The stock has climbed to Rs.184.90 (as on Wednesday) from Rs.69.15 on 18 August 2009 and an all-time low of Rs.30.65 on 2 December 2008.
Analysts are impressed. Umesh Karne, an analyst at Brics Securities Ltd, expects “most of the concerns regarding the company to fade away as the business environment improves further in the next one year”.
In a recent research report, Jignesh Kamani of MF Global Retail Research wrote that Escorts had turned around its business and made its balance sheet stronger than ever. He expects net sales to reach Rs.4,267 crore and net profit Rs.237 crore by the year to September 2012.
Ramnath S., an analyst at IDFC Institutional Securities Ltd, says Escorts will maintain growth “provided they don’t stray into unrelated business and stay focused on their core sectors”.
Escorts isn’t likely to repeat the mistake of over-diversification that led it to cede ground in its core tractors market to rivals Mahindra and Mahindra Ltd (M&M) and Tractors and Farm Equipment Ltd (Tafe), which expanded by acquiring prominent tractor makers.
M&M bought Punjab Tractors Ltd and Tafe took over Eicher Motors Ltd’s tractors division to cement their positions as India’s two largest tractor makers, with market shares of 42% and 22%, respectively, ahead of Escorts’ 13-15%.
Reducing the gap
India’s domestic tractor sales in the year ended March increased 27% to 450,000 units in a market worth Rs.20,000 crore, according to Amol Bhutada, an analyst at Elara Securities.
Escorts is trying to reduce the gap with its bigger rivals. With a diversified portfolio that includes tractors of 25-100 horsepower and three brands—Powertrac, Farmtrac and Escorts—the contribution of tractors to the group’s revenue is expected to reach Rs.3,400 crore by September 2012, from an estimated Rs.2,800 crore in the fiscal ending 30 September.
According to Nanda, sales will be boosted by a new range of applications that can be fitted to the tractors for specific crop applications. Volumes will also be lifted by the fact that one in every four tractors sold in the country is being put to non-agricultural uses such as construction and transport.
Nanda says the turnaround of Escorts began with a deep introspection by the management four years ago in the context of market liberalization and the entry of deep-pocketed multinationals.
“We started thinking what is it that we can do” to build on the firm’s strength, he says. Once they identified farm mechanization, railways and construction equipment as the company’s core sectors, “we took a call on divesting, unlocking cash and put them into the core businesses”.
With the help of Eicher Consulting Group (now part of PricewaterhouseCoopers, or PwC), Escorts initiated a large-scale integration programme. By the end of the 15-months programme, which started in April 2008, the company was able to compress costs to the extent of Rs.135-140 crore, says Nanda.
“The biggest challenge was changing the mindsets,” says Rajeev Pratap Singh, executive director at PwC, who played a key role in the turnaround. “There were strong mindsets which thought there’s no potential for change.”
Singh says the cost rationalization drive was implemented across areas of material procurement, its conversion into finished products and reduction in overhead costs. It included sensitizing people— from senior management to the shop-floor workforce—to the need for optimizing costs.
The effort yielded dividends. The company’s tractor-making unit, for instance, was able to save Rs.10,000 per unit by way of value engineering and developing common platforms that can be used to turn out various models for different applications, Nanda says.
While tractors will remain the group’s mainstay, accounting for 75% of revenue by the year ending September 2012, the group is recasting its high-margin businesses such as construction and railway equipment.
Brics Securities’ Karne says the firm’s construction equipment business will benefit from the government’s 21% higher outlay of Rs.52,220 crore for the infrastructure sector. Escorts’ railway business will gain from new orders by the Indian Railways and sales to overseas markets.
To de-risk its railway equipment business, which saw its revenue erode 17% to Rs.41 crore in the three months ended 30 June from a year ago, Escorts is changing tack. It’s diversifying from traditional rolling stock parts to advanced ones such as pneumatic and disc brakes, computer-controlled brakes and wireless brakes, among others.
Nanda says this will help address railway markets from freight to monorail and Metro to high-speed trains. These products, he says, are on a par with those produced in the US and Europe.
After meeting demand in India, the firm will look at exports. It’s presently in talks with railways in some West European countries.
Escorts’ equipment business, which has so far concentrated on material handling equipment such as backhoe loarders, is focusing on higher-volume earthmoving equipment such as compactors and high-end cranes, developing applications with technical partners in China and Japan.
In the quarter ended June, Escorts also bailed out one of its group companies, Escorts Finance Ltd, by issuing 7.1 million shares at an average price of Rs.172 apiece to a Hardship Committee, which had been formed to repay some 65,000 fixed deposit holders.
According to G.B. Mathur, executive vice-president (law) and company secretary at Escorts, the company has so far disbursed Rs.25 crore for the purpose and plans to pay an additional Rs.40 crore.
With zero liability, Escorts Finance can potentially be positioned as the group’s financing arm to provide funding for both its farm equipment and construction equipment segments, says Nanda.
In the tractors business, he concedes, one of Escorts’ weaknesses is its confinement to the northern region, a shortcoming it is trying to address by increasing its presence in the south, east and west.
“Escorts is not looking at only being a north India company,” he says. “We have the capability and ability to be a pan-India company.”