Japan’s leading tractor manufacturer Kubota Corp.’s strategic move to pick up a 10% stake in Escorts Ltd, for a technology partnership, has been well-received.

The Escorts stock has rallied 11% since the news broke on Friday against the Nifty 50’s fall of 5%.

“The entry of a global tractor player as a strategic investor or partner is a positive development for Escorts in terms of future product development, technology absorption and international footprint," said analysts at Antique Stock Broking Ltd in a note to clients.

To begin with, Kubota infused 1,000 crore at 850 per share, which is a hefty 48% premium to the market price on 19 March.

Shot in the arm.
Shot in the arm.

Besides, Escorts will invest about 90 crore in the existing joint venture between the two companies, which was set up in 2018 to manufacture high-end tractors.

Escorts’ market share, which has remained at 10-12% for several years, can now get a boost. With the help of Kubota’s new product portfolio and technological expertise, it can enter into newer regions in the domestic market. Escorts can also help indigenize technology and act as a global sourcing hub for Kubota.

Meanwhile, the Japanese firm will gain through cost-effective production in India for domestic and emerging markets.

According to the company’s management, the proposed capital reduction to the extent of shares held by the Escorts Benefit and Welfare Trust (treasury shares) will ensure no increase in equity capital.

However, analysts have not been considering treasury shares in estimating earnings. So, an earnings dilution is on the cards.

Further, there are risks to earnings from the Covid-19 pandemic. “We reduce FY21E EPS by 10%/5% respectively, factoring in the issuance of shares to Kubota and a marginal reduction in our tractor volume assumptions," said a report by Emkay Global Financial Services Ltd. EPS stands for earnings per share.

The upshot though is that the Japanese manufacturer’s increase in stake may buoy Escorts’ valuations, provided the uptrend in tractor sales continues in the quarters ahead.

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