Having successfully steered the company towards profitability, Nikhil Nanda, managing director of Escorts Ltd Nanda is now moving towards the next phase of expansion and growth.
The company which operates four business divisions – tractors, construction, auto parts and railways – is working towards addressing its weaknesses and targeting a higher market share in the domestic and international markets. Nanda discusses at length the company's future course given the sluggish first quarter with dna's Yuga Chaudhari.
Tractor sales have been impacted owing to delayed monsoons. What is your outlook for the tractor industry for the rest of the year?
The industry has been sluggish a little over the first quarter now largely due to the delayed monsoon that adversely affected sentiments. The first quarter witnessed an industry decline of 1.0-1.2% and even in Q2, July was sluggish. But September and October are months to watch out for as they are festive months. For Q2, the most important month will be September. There were lot of concerns about a month back, however, the deficiency (monsoon) has now reduced and we do not have a drought like situation as was envisaged earlier. The situation could have been a lot worse otherwise. Things are now beginning to pick up. There have been certain postponement in purchases. But we see some optimism in September, October pushing up sales, hence things could look up. However, the second half of the year would be certainly better than the first half.
While tractor continues to be biggest revenue generator for Escorts, what's the growth plans for other business divisions as they continue to post losses?
For the constructions business, the company is undergoing restructuring. The mandate for this has been given to a large consulting firm and it is my belief that by Q4, construction business will get into profit. There would be a turnaround. And by next year, construction would have a very good value in terms of profits and top line. Agri continues to be the lion's share of our profit and top line, but in the near future, construction is going to be substantial.
After the new government has taken charge, sentiments have improved. October onwards we are hoping that infrastructure activities will kick-in. Escorts has been a leader in material handling segment and enjoys a market share of 50-55%. Also, we have made entry into the backhoe loader segment, 4 years back, where we have increased our share by 2% to 5% and are looking to scale up. We have begun to appoint newer dealers across India, we will adding 30-40 dealers, to strengthen our reach, for both crane and backhoe loaders.
Moving to auto business, its has been losing capital and has been a challenge. In the current quarter, we have taken a decisive view of restructuring the company. We have about 300 blue-collared workmen. If you were to compare us to peers, we had a personnel cost of about 23% of our top line. Last month, we launched a VRS scheme and as of date 370 workmen have opted for VRS. In short, the excessive manpower which was eroding the business and making the business unhealthy has been taken care of as of this quarter. So for auto company, more than half its losses will be removed.
We are also into technological updates and are in discussions with a European company for a contractual agreement, where we will manufacture a higher range of shock-absorbers for domestic and European markets. As a combination of all these actions, by the end of this current fiscal, auto company would also break-even. Construction and auto that have been in the red for the last few years would see a turnaround.
Railway is a profitable business. Lot of the products that we have developed in the last 2-3 years, are nearing completion. We are at a stage now, where we will get substantial business from next year onwards. We are looking at profitable growth for all four businesses.
What is the road map for the tractor business? You have been focusing on the premium category and creating a niche.
The tractor industry has grown in segments like 50 horsepower (hp) and above and 20 hp and below and Escorts, as we have been saying, we are not looking at the overall market share. We are looking at premium segment. In the last two years we have grown to 8 % from 2% market share in the 50 hp category. Our strategy is now beginning to yield fruits on the back of products we've launched under Farmtrac. In the next few months we will also announce a structure, formalise a relationship to contractually source tractors under a brand called Seedtrac, which will target the 16-20 hp segment, basically helping farmers transitioning to the first mechanisation of farms. So we will have a full portfolio there.
We have been in distribution of Ferrari tractors for last two years. We are in discussions with Italian partners and are hopeful of a formal agreement other than the distribution relationship. This will allow Escorts to indigenously manufacture the top range of tractors and will also allow Ferrari to outsource the product manufactured for other global markets.
Partnerships like Ferrari, and also Porsche Designing and Porsche Consulting who are assisting us in designing the products is going to help us achieve our aspiration for both domestic market and global markets.
Tractor business, last fiscal, on a standalone basis has achieved 9% of Ebitda. We have also given a mandate to another consulting firm to add an additional 6%, which we will deliver over the next two years. So two years from now, we aspire to be one of the most profitable companies.
Where do you foresee the growth coming from?
I believe that would be in tractor exports. We are one of the weakest in the country today. Our peers have done exceptionally well of having a large or a balanced share of exports and domestic volumes. So at Escorts we see more revenues coming from exports going ahead. In the domestic markets we have been traditionally weak in the southern and western regions. We are making conscious efforts towards both, adding additional dealers and product development, to ensure Escorts become a pan India player.
This year is a repairing year but none the less we are cutting cost. I think between now and the next fiscal we would emerge as a stronger and profitable company. We hardly have any debts and are very comfortable on cash.
How is Escorts preparing to meet the requirements of global markets? Markets like Europe is a completely different market from that of India.
The value proposition of tractors what we launched at last year at Hanover is stunning. We will soon get homologation certification in place and products are now fully equipped to enter various European regions. We will also be launching products in the next quarter or so. So we have a product program for global and domestic markets. You will see duality at play, in terms of increasing market share in Indian as well as European markets. For that matter, even in the US where we will make a re-entry. We have a population of nearly 55,000 tractors in the US and we get lot of requests for the Farmtrac brand tractors. As a company we are evaluating all options for our re-entry into the US and will make an announcement sooner or later. My expectation would be, at least one-third of our top line. or more should be exported. We are setting some stiff targets.
Escorts is looking at products at 100 hp and below segments. This is a specialisation that we want to create in terms of offerings based on different applications. We are not keen to explore above 100 hp segment, while we do have some of our products. There is a substantial opportunity in this segment in the global markets, as international players have offerings of larger tractors. We have a small subsidiary in Poland and it has been learning about the different techniques and trends of the markets. In terms of positioning, there is an opportunity. Our offering is very different from multinationals and will create an interesting space for us and consumers.
While you are talking about cutting costs, what the company's capex plans?
We are working on creating a new generation of products and platforms for domestic and international markets. I am confident that this is the investment for future.