Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Escorts Kubota Limited (EKL; erstwhile ‘Escorts Limited’) at ‘CRISIL AA+/Stable/CRISIL A1+’

 

EKL’s revenues remained consistent YoY in the first half of fiscal 2025 driven primarily by 4% improvement in revenues of the agri-machinery (AM) division (including contribution from joint ventures) which helped offset degrowth in construction equipment (CE) and Railway equipment (RE) division’s revenues which declined by 7% and 14% respectively.  EKL’s domestic tractor volumes degrew by 2.5% on-year in the first half of fiscal 2025, while tractor export volumes degrew by 24.7% YoY due to muted demand in key export markets. Volumes in CE segment declined by 12.6% YoY, on a high base of last fiscal due to elections, extended monsoon and delay in awarding infra projects. Operating profitability in the first half of fiscal 2025 remained stable at 11.9% (11.8% in the corresponding period last fiscal).

 

The National Company Law Tribunal (NCLT) approved the amalgamation of the joint ventures (JVs), Kubota Agricultural Machinery India Pvt. Ltd. (KAIPL) and Escorts Kubota India Pvt. Ltd. (EKIPL) with EKL vide its order dated August 21,2024. The effective date of amalgamation is September 1, 2024, and the financials for fiscal 2024 have been restated with appointed date as April 1,2023 . With completion of amalgamation, the stake of Kubota Corporation (rated by S&P, A/Stable/A1) increased to 54.1% from 53.5% earlier. The amalgamation of JVs has led to dilution in operating profitability of EKL as the operating profitability of JVs was modest due to low level of localization.

 

On October 23,2024, EKL’s board of directors approved the sale/transfer of the RE division to Sona BLW Precision Forgings Limited (Sona Comstar) for a consideration of Rs. 1600 crores. The divestment is being done to streamline operations, reallocate capital, enhance scale and efficiency of core business. The sale/ transfer of RED Business is subject to completion of conditions precedent to the transfer agreement.

 

For fiscal 2025, CRISIL Ratings expects EKL’s revenues to remain flattish, with AM segment expected to register moderate growth while the CE and RE division revenues are expected to remain muted. Operating profitability is expected at 11-12% in fiscal 2025 constrained. The operating profitability of EKL (pre-merger) for fiscal 2024 was at 13.2%. Over the medium term, the improvement in operating profitability will depend on increased localization for the products. Further, with divestment of the high margin RE division, operating profitability will moderate next fiscal, and then improve with higher focus on enhancing quality, product localization and reducing costs across all segments.

 

EKL’s financial profile continues to be strong, supported by a debt free balance sheet and robust liquid surpluses of Rs 6023 crores as on September 30,2024. EKL has committed to invest Rs.4500-5000 crores over the next 3-4 fiscals, majority of the spend will be towards setting up a greenfield plant for which cost will be incurred over a period of 2-3 years. Proposed Greenfield plant will integrate various manufacturing processes, leading to an increase in capacity across different verticals for tractor manufacturing, CE manufacturing, spare parts manufacturing, and a dedicated line for manufacturing engines for Kubota. Additionally, EKL will be investing in expanding the dealer network and has recently set up a captive Non-Banking financial company (NBFC) arm, Escorts Kubota Finance Ltd. Despite these investments, EKL's financial risk profile is projected to remain strong, as most of the capital expenditure will be financed through healthy cash accruals of Rs.800-1000 crores annually. This robust cash surplus will also serve as a cushion for both the ongoing capital expenditure and any incremental working capital needs that may arise.

 

The ratings continue to factor in EKL’s healthy business risk profile, backed by an established market position in the tractor segment, diversified revenue profile, good operating efficiency, strong financial risk profile and robust liquidity. These strengths are partially offset by high dependence on the tractor industry, limited presence in export and west India markets, modest performance of the CE segment, and susceptibility to volatility in raw material prices.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of EKL and all its subsidiaries and proportionately consolidated joint ventures (JVs) to the extent of its shareholding in these entities. The JVs, EKIPL and KAIPL have been amalgamated with EKL with appointed date as April 1,2023. All these entities, collectively referred to as EKL, have significant business and financial linkages and common management.

 

CRISIL ratings has factored in possibility of support from Kubota given the strategic importance of EKL to Kubota. Investments proposed to be made in Escorts Kubota Finance Limited (EKFL), a vehicle recently commissioned for financing EKL’s products, will be adjusted against the net worth.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Healthy market position in the tractor industry: EKL is the fourth largest player in the tractor segment in India (after Mahindra & Mahindra Ltd ['CRISIL AAA/Stable/CRISIL A1+'], Tractors and Farm Equipment Ltd ['CRISIL AA+/Positive/CRISIL A1+'], and International Tractors Ltd), backed by an established legacy of more than 80 years. It offers a wide range of tractors under the Kubota, Farmtrac and Powertrac brands. EKL also sells 10-30 horsepower tractors under the Steeltrac brand through its JV with the Rajkot-based Amul group.

 

Revamping of the product portfolio, healthy financing tie-ups and expanding dealer network have helped sustain the market share in key geographies. Products introduced to serve local needs in opportunity markets and improving dealer and financing penetration should help increase diversity in revenue and market share over the medium term.

 

The company has sustained its market share at 10-11% in the domestic tractor market with reasonable market share in eastern, northern and western markets in India, while it has relatively modest presence in the southern states. Post amalgamation of JVs, the combined share of EKL in the domestic market has increased to ~12.5%. Enhancing the distribution network and market share in the western markets could lead to faster improvement in EKL’s market position in the tractor segment.

 

EKL’s tractor exports declined by 24.7% in the first six months of fiscal 2025 driven by muted demand in key export markets. With recovery in demand and improving product capabilities, the exports are expected to improve over the medium-term leveraging Kubota’s distribution capabilities.

 

• Diversified revenue profile: While tractors are the mainstay for revenue and will continue to drive growth, the CE and railway equipment businesses contributed 20% and 11% (compared to 14% and 10% in fiscal 2023), respectively, to total revenue in fiscal 2024, adding diversity.

 

Product portfolio in the CE segment comprises earth moving, material-handling and road-construction equipment. The diverse product range and favourable sector trends resulted in healthy growth over the past 4-5 years resulting in contribution of 20% to total revenue in fiscal 2024. Moreover, the company’s dominant position in the pick-and-carry crane segment and expected benefit due to business synergies with Kubota leading to improving product portfolio will drive growth over the medium term.

 

Revenue in the railway equipment business is derived from sales of brakes, suspensions, and couplers. RE segment is in the process of being divested.

 

With the merger of JVs, product revenue has been diversified with non-tractor revenue accounting for around 17-19% of overall AM revenue compared to 10-12% pre-merger. Non-tractor business comprises of Rotavators, Harvester, rice transplanter, Bailers, Sprayers etc.,

 

• Healthy operating efficiency: EKL’s operating margin improved to 15.4% in fiscal 2021 from 6.9% in fiscal 2017, driven by the cost reduction initiatives undertaken and benefits derived from operating leverage, as well as exit from the loss-making automotive (auto) component business. However, the operating margin declined to 12.6% in fiscal 2022 due to increased material costs and moderation in tractor volumes in line with the industry trends. The operating margins further declined to 8.8% in fiscal 2023 driven by elevated raw material costs and measures taken to preserve market share. A small but gradual improvement in the performance of the CE division has also benefitted the company. Operating profitability improved to 13.2% (pre-merger operating profitability) in fiscal 2024 driven by moderation in input costs and improvement in profitability across divisions. CE division’s EBIT margins improved to 9.3% in fiscal 2024(2.9% in fiscal 2023) supported by operating leverage and benefits of moderation of input costs. Further, RE division’s EBIT margin also improved to 18.9% in fiscal 2024 (13.8% in fiscal 2023)

 

EKL’s operating profitability is expected to moderate to 11-12% for fiscal 2025 with amalgamation of JVs which have lower margins, compared with pre merged EKL. CE and RE division’s operating profitability is expected to sustain at similar levels despite muted revenues supported by stable material costs.

 

EKL’s operating profitability is likely to improve over the medium term due to better product mix, focus on enhancing higher margin exports, and with improvement in localization. The company will be setting up a dedicated engine manufacturing line to manufacture engines for Kubota which will be supplied to EKL. With localization of manufacturing, operating profitability will gradually improve. Besides, efforts to localize components in the railway products segment may also aid profitability.

 

• Strong financial risk profile, supported by robust liquidity: The financial profile of EKL remains strong, supported by sizeable networth of Rs. 9287 crores as on March 31, 2024 which is expected to improve to close to Rs.10,000 crore at end of fiscal 2025. The company also remains debt free, resulting in robust debt protection metrics. Despite the sizeable capex plans, reliance on debt is not expected to be material due to healthy annual cash generating ability, and sizeable cash surpluses (Rs. 6023 crore at September 30, 2024), thereby sustaining the robust debt protection metrics. Cash accruals are expected to be healthy at Rs.800-1000 crores per annum over the medium term (overall capex of ~Rs.4500 crores over next 2-3 years, in addition to routine annual capex of ~Rs.350 crores).

 

• Strong parentage of Kubota: Kubota is a Japanese conglomerate based out of Osaka, Japan and was founded in 1890. Kubota’s product portfolio includes tractors, agricultural machinery, construction equipment, engines, vending machines, pipes, valves, cast metal, pumps and equipment for water purification, sewage treatment and air conditioning. Kubota is the leader for combine harvesters in Asia and global leader in mini excavators. With a wide presence across 120 countries, Kubota recorded revenues of about USD 22 billion in CY 2023. Kubota is listed on the Tokyo Stock Exchange and is a constituent of the TOPIX 100 and Nikkei 225 with a market cap of over USD 14.3 billion as on November 25, 2024.

 

Kubota has invested ~Rs.10,000 crores to acquire 53.5% stake in EKL which signifies the importance of EKL to Kubota. EKL has leveraged the sales and distribution channels of Kubota to increase its export sales. EKL is targeting to cater to four key high-volume markets - USA, Europe, Thailand, and Brazil and intends to leverage Kubota’s strong presence in key markets such as North America and Europe. Accordingly, the capacity of EKL is proposed to be doubled over the medium term. Increasing exports will help EKL mitigate the high dependance on the cyclical domestic tractor market. Besides, EKL can also leverage the strong technical capabilities of Kubota to launch new products. In addition, EKL is also planning to position as sourcing hub for components for Kubota. Besides managerial and technical support, any other need-based support is also expected to be provided to EKL, should the need arise.

 

Weaknesses:

• High dependence on the cyclical domestic tractor market, and limited presence in export and west markets: In India, demand for tractors is determined by multiple variables, such as monsoon, crop prices and availability of finance etc. Around 95% of EKL’s tractor sale volumes are derived from the domestic market, which makes it highly dependent on the performance of the domestic market. For instance, operating performance was constrained in fiscals 2015 and 2016 due to slowdown in the tractor industry, leading to a fiscal-on-fiscal volume decline of 13.3% and 13.9%, respectively. Sustaining improved offtake from Kubota will help in increasing the share of exports for EKL.

 

Furthermore, EKL has limited presence in West. Expanding the dealer base and launch of new products will help in gaining market share in these markets.

 

• Modest performance of the CE segment and the JVs: The CE segment was incurring losses in the recent past due to high fixed costs and cyclicality. However, the earnings before interest and tax (EBIT) margin improved to 3.6% in fiscal 2020 from a negative 2.3% in fiscal 2017. The turnaround was led by a change in the product mix (increasing proportion of higher tonnage equipment) and cost rationalization initiatives such as vendor rationalization and price renegotiation.

 

EBIT margin for fiscal 2023 improved to 2.9% compared to 2.4% in fiscal 2022 recording a gradual improvement due to improved offtake in the fourth quarter of fiscal 2023. EBIT margins improved to 9.3% in fiscal 2024 with healthy growth in volumes of 42% YoY with healthy offtake in demand and moderation in input costs. The EBIT margin has improved to 9.8% in the first half of fiscal 2025, however the volumes have declined due to slowdown in infra projects execution and extended monsoon. The performance will gradually recover over the medium term with improvement in volumes. However, the segment remains vulnerable to intense competition and economic slowdown.

 

The manufacturing JV, EKIPL begun commercial operations in fiscal 2021 and is involved in manufacturing of high end Kubota tractors. Margins improved to ~5% in fiscal 2023 for EKIPL compared to negative8% in fiscal 2022 driven by stabilization of operations and healthy offtake. The margins further improved to ~7-8% in fiscal 2024. Presently, the Kubota engines are imported hence the margins are on the lower side. With the domestic manufacture of engines by EKL, the profitability will improve over the medium term. KAIPL JV recorded ~2% EBITDA margin in fiscal 2024.

 

• Susceptibility to volatility in raw material prices: The price of the key raw material (steel) is volatile. Operating profitability is also constrained by the limited ability to pass on any increase in raw material cost to customers in a timely manner due to intense competition. The railway equipment business is also largely tender based, limiting the scope to pass on sizeable cost changes, unless specifically covered in contracts.

Liquidity: Superior

Cash accruals are expected at over Rs.800-1000 crore annually, against negligible debt obligation, with the company being largely debt free. The company currently has cash and cash equivalents of over Rs.6000 crores. Bank limit remains mostly unutilized.  The company has almost no dependence on external debt. Internal accrual and cash and equivalent will be sufficient to fund incremental capex and working capital requirement.

 

ESG Profile of Escorts Kubota Limited

CRISIL Ratings believes that Escorts Kubota Limited’s (EKL) Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile.

 

CRISIL Ratings believes that EKL’s Environment, Social, and Governance (ESG) profile supports its already strong credit risk profile. The auto sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development.

 

Key ESG highlights:

• EKL has also clearly stated its goals to reduce Carbon dioxide emissions by 25% by FY2030 compared to 2023 levels. Further, EKL has targeted to achieve carbon neutral by 2050. EKL has also targeted to become water positive organization by 2030.
• EKL has also undertaken initiatives to conserve water by recycling wastewater which along with other conservation initiatives has led to a reduction in water consumption across divisions.
• EKL spent 1.6% PAT of FY24 for CSR activities while also spending for sustainable product development. Women contribute 16.67% of EKL’s board (three women out of 18 board of directors) and EKL is  committed to hire women across levels to improve gender diversity. 
• Over the medium term, EKL will perform supplier audits on ESG for its suppliers and will also introduce capacity building programmes on ESG for critical suppliers.
• The governance structure is characterized by 50% of its board comprising independent directors (none of them having tenure exceeding ten years), strong investor grievance redressal mechanism and extensive disclosure.

 

There is growing importance of ESG among investors and lenders. EKL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign investors/companies.

Outlook: Stable

CRISIL Ratings believes that EKL will continue to benefit from the parentage of Kubota. The association will help EKL enhance its established market position in the agri-equipment segment, besides enhancing export opportunities through Kubota’s channels. Besides, the company’s construction equipment and railway products segment will also benefit from healthy demand prospects over the medium term. EKL’s operating capabilities will also stand to benefit from its focus on enhancing quality and range of its products. The company is also expected to sustain its robust financial risk profile, despite sizeable capex plans. 

Rating sensitivity factors

Upward Factors:

• Increased strategic importance to Kubota.
• Steady gain in overall market share in tractors to over 15%, supported by better presence in southern and western markets.
• Improvement in business diversity due to better contribution and profitability of non-agri segments
• Sustenance of strong financial risk profile and robust liquidity

 

Downward Factors:

• Sharp deterioration in market share to below 7-8% due to increased competitive intensity, also affecting operating profitability.
• Sizeable, debt-funding capex or acquisition, materially impacting key credit metrics.
• Material reduction in liquidity surplus
• Weakening of credit profile of Kubota, or change in stance of support anticipated from Kubota.

About the Company

Mr H P Nanda and Mr. Yudi Nanda set up the Escorts group through Escorts Agents in 1944 in Lahore. After moving to Delhi post-independence, Escorts Agents was reconstituted into a public limited company named Escorts Agents Pvt Ltd. The company got its current name (Escorts) in January 1960. Escorts currently operates in three Business segments: Agri Machinery product segment, Construction Equipment segment and Railway Equipment segment. It has diversified into other products, such as agricultural machinery, auto components, railway equipment, industrial and construction equipment, telecommunication equipment, healthcare and software services. However, some of its non-core businesses, such as telecommunications (sold Escotel Communications in fiscal 2004), healthcare (sold Escorts Heart Institute & Research Centre in fiscal 2005), and software (in fiscal 2005) and auto components (in fiscal 2017) have been divested. Escorts also merged Escorts Construction Equipment Ltd, Escotrac Finance and Investments Pvt Ltd, and Escorts Finance and Leasing Pvt Ltd with itself in 2012.

 

In 2018, Kubota and Escorts set up a high-end tractor manufacturing capacity in Haryana through a 60: 40 JV, Escorts Kubota India Pvt Ltd. The manufacturing facility has capacity of 50,000 units per annum.

 

The company is managed by a third-generation family member, Mr Nikhil Nanda, who is the Chairman and Managing Director. It has five manufacturing facilities in Faridabad, Haryana and one in Poland. Total annual capacity is 1.7 lakh tractors and 10,000 units in CE. Currently, Kubota is the majority shareholder holding 54.07% stake, followed by 13.97% with Nanda family, and balance with public and others.

Key Financial Indicators - Consolidated

Particulars	Unit	2024*	2023
Revenue	Rs crore	10754	8443
Profit after tax (PAT)	Rs crore	1077	637
PAT margin	%	10.01	7.5
Adjusted debt / adjusted networth	Times	0.04	0.00
Interest coverage	Times	40.56	64.9

*fiscal 2024 financials are restated post amalgamation of JVs with appointed date as 01-April-2023

Any other information: Not Applicable

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Invigorated Business Consulting Ltd (Formerly Escorts Finance Ltd)	Fully (67.87%)	Subsidiary
Escorts Benefit and Welfare Trust	Fully	Subsidiary
Farmtrac Tractors Europe Spolka Z.o.o	Fully	Subsidiary
Escorts Crop Solutions Ltd	Fully	Subsidiary
Escorts Benefit Trust	Fully	Subsidiary
Escorts Kubota Finance Limited*	Fully	Subsidiary
Adico Escorts Agri Equipment Pvt Ltd	Proportionate (40%)	Joint venture
Escorts Consumer Credit Limited	Proportionate (29.41%)	Associate

*incorporated on January 09, 2024

Note : JVs – EKIPL and KAIPL were proportionally consolidated(40%) till fiscal 2023. With the amalgamation, the numbers of EKL have been restated from 01-April-2023