This article appeared in the February, 2009 issue of Wealth Insight magazine.
From one of India’s iconic corporate success stories up to the late 1980s, Escorts Ltd was virtually written off by the end of the millennium. At one time, Escorts was at the forefront of producing some of India’s most popular tractors and bikes, plus other engineering products, and the family, the Nandas, were the epitome of success — they reflected the post-Independence Indian dream.
It was surprising therefore, to see the company rising from the dead and powering into life recently causing its stock chart to soar.
Despite the run-up during the last few months, the company still presents an opportunity as its stock is trading at a discount to its peers, with its current price-to-earnings ratio (P/E) barely touching double digits at 10x and 9x FY10 and FY11 estimates.
Fallen Icon: The Escorts Group has had a chequered history. It shows that the company often preferred to power short-term goals at the cost of long-term survival — milking money initially, only to falter later on.
It started as an agency house, called Escorts Agents Ltd, Lahore, in 1944 (pre-Partition days). Brothers Yudi and Hari Nanda were anointed managing director and chairman respectively.
Since then Escorts moved into, and out of, a number of ventures with some globe-spanning multinational companies, like Ford Motor Co., Yamaha, Goetze, Westinghouse, Mahle, Massey Ferguson and many others, establishing itself as a leading Indian engineering and manufacturing company.
Thereafter, inner contradictions, competition and excess leverage pressurised balance sheets as Escorts looked to move into new opportunities being opened as India prospered and people aspired for different comforts and services. But the advance into healthcare, telecom, financial and software services didn’t pay off. Also, the inspiration behind Escorts success, the ailing H.P. Nanda died in 1999, leaving it utterly rudderless.
Makeover Mantra: The revival was made possible after a rationalising exercise that shifted focus exclusively to its core strengths. Importantly, it divested different businesses over a period of time, exiting telecom in 2004, healthcare in 2005 and software in 2006, helping ease the debt load, particularly stressful was telecom.
While the management indicates that the bad debts/write-offs have been dealt with, a true confirmation of data will come only when the annual report is released. Nevertheless, Escorts is now moving aggressively, signalling greater operational freedom.
Driving Performances: The company’s focus is back on its core strengths i.e. on agri-machinery, construction, railways and auto components, with tractors now comprising 73 per cent of its business, railways 7 per cent and construction 15 per cent.
The tractors business in India is up and Escorts is looking to increase its market share via new launches — its marketshare increased from 9 per cent in FY06 to 14 per cent now. Other agri-implements segment too is being aggressively flogged.
Railways is likely to be the key growth area though. The business is relatively small, but contribution to margins (EBITDA at 25+%) is high. The segment comprises railways equipment and auto suspension products including braking products and shock absorbers.
Escorts is looking, through a subsidiary, Escorts Construction & Engg, to capitalise on the growing importance of infrastructure space in India, which is set for long-term growth. The company is into manufacturing cranes, loaders, vibratory rollers, forklifts and more.
Uncertain Steps: The new and improved Escorts is looking strong and aggressive. But its bold march is into the unknown at the moment. Risks are plentiful too.
Management intends to scale up the railways and construction businesses over the next few years, but execution abilities are still not proven. While the opportunities are strong, Escorts seems to have a certain edge in these segments, and business is running, but history shows, that the period that follows is a concern area.
A substantial rise in commodity costs, largely steel and aluminium, could impact profitability too and lead to significant margin pressure.
Rainfall was scanty, some 23 per cent below normal, in 2009, denting rural India’s spending power. While there has been no visible impact on tractor sales, there is a possibility of volumes faltering in future.
On the whole, with debt and other issues subsiding, Escorts looks ready to win back the gloss that it acquired during the heady old days.
This article first appeared in the February, 2009 issue of Wealth Insight magazine. To read the full story, please subscribe.
This article was originally published on March 04, 2010.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
