| Escorts Limited | ||||||
| Ratings Reaffirmed; CP withdrawn | ||||||
| Rating Action | ||||||
| ||||||
| ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank loan facilities of Escorts Limited (Escorts)at ‘CRISIL AA/Stable/CRISIL A1+’. The rating on the commercial paper programme has been withdrawn on company’s request as there is no outstanding commercial paper and no requirement of future issuance in near term due to healthy cash surplus. This is in line with CRISIL’s withdrawal policy.
The ratings were upgraded to 'CRISIL AA/Stable/CRISIL A1+' from 'CRISIL AA-/Positive/CRISIL A1+' on February 18, 2021. The rating action followed improvement in the business risk profile driven by healthy market share in tractors and higher-than-expected demand for tractors in the domestic market, which will translate into revenue growth of 16-17% (higher than earlier expectation of 9-10%) for Escorts’ tractor division (77% of revenue in fiscal 2020) in fiscal 2021. The company’s domestic market share increased to 11% in the first nine months of fiscal 2021, with share in the south market rising to 5.4% from 4.8% in fiscal 2020. Growth in fiscal 2022 is likely to remain at mid-single digit level for tractor segment, supported by higher realisations. The strong financial risk profile and liquidity will support in case of lower-than-expected growth in fiscal 2022.
The construction equipment (CE) business segment (15% of revenue) is expected to witness revenue growth in the second half of fiscal 2021, arresting overall decline at 20-25%. For the railway equipment segment (8%of revenue), revenue is expected to remain stable due to slow execution of existing orders and subdued order inflow. Order book remains at Rs 330 crore as on December 31, 2020. Overall, revenue is expected to register 10-11% growth in fiscal 2021. Operating margin has seen significant improvement in the current fiscal as a result of favourable product mix and price hikes in the tractor segment; cost control measures across segments; and improving profitability of the CE business in the second half of the fiscal. The operating margin is expected at 16-17% in the current fiscal, as against 10.9% in the previous fiscal, thereby leading to healthy cash accrual of Rs 700-800 crore in fiscal 2021.
The business risk profile will remain healthy, with market share of 11-12% in tractors, improving performance of the CE segment and healthy outlook for the railway equipment segment. Over the medium term, revenue is expected to grow at 8-10% with steady growth across business segments. The operating margin is expected at 12-14% and annual accrual at Rs 750-800 crore.
The strong and improving financial risk profile complements the healthy business risk profile. Escorts has generated healthy annual accrual in the recent past and prudently funded its capital expenditure (capex), leading to minimal debt on its balance sheet. The preferential allotment of equity to Kubota Corporation (Kubota) during fiscal 2021 has further solidified the financial risk profile and bolstered liquidity considerably (cash surplus is over Rs 2,500 crore). Future capital spend, barring any large acquisition, is expected to be moderate at Rs 250-300 crore per annum, and met largely through internal accrual and cash surplus, obviating the need for material debt addition. Therefore, debt protection metrics will remain strong.
The ratings continue to factor in the company’s healthy business risk profile, backed by an established market position in the tractor segment, diversified revenue profile, healthy operating efficiency and strong financial risk profile and liquidity. These strengths are partially offset by high dependence on the tractor industry, limited presence in export, west and south 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 Escorts and all its subsidiaries and proportionately consolidated joint ventures (JVs) to the extent of its shareholding in these entities. All these entities, collectively referred to as Escorts, have significant business and financial linkages and common management.
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
Escorts 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+/Stable/CRISIL A1+'], and International Tractors Ltd), backed by an established legacy of 70 years and domestic market share of 11% during the first nine months of fiscal 2021. It offers a wide range of tractors under the Farmtrac and Powertrac brands. Escorts also sells 10-15 horsepower tractors under the Steeltrac brand through its JV with the Rajkot-based Amul group.
Revamping of the product portfolio over the past three fiscals, 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, such as west and south India, and improving dealer and financing penetration should help increase diversity in revenue and market share over the medium term.
In March 2020, Escorts announced the acquisition of 40% stake through preferential issue in Kubota Agri Machinery India Pvt Ltd (KAI), the marketing and sales venture of Kubota in India, for a consideration of Rs 90 crore (completed in October 2020). The existing 40:60 JV of Escorts with Kubota, Escorts Kubota India Pvt Ltd, will continue to operate as planned earlier. Trial runs at the JV have commenced, and commercial production is expected to start by the end of March 2021. With increased collaboration of Escorts with the Kubota group, the company’s market position in the high-end utility tractor market is likely to improve in both the domestic and exports markets.
While the company has 11-12% share in the domestic tractor market and reasonable market share in eastern, northern and western markets in India, it has relatively modest presence in the southern states, which are witnessing better growth than Escorts’ main markets. Therefore, its market share has witnessed nominal gains only in the recent past. Enhancing the distribution network and market share in the southern and western markets could lead to faster improvement in Escorts’ market position in the tractor segment.
While tractors are the mainstay for revenue and will continue to drive growth, the CE and railway equipment businesses contributed 15% and 8%, respectively, to total revenue in fiscal 2020, adding diversity.
Product portfolio in the CE segment comprises earth moving, material-handling and road-construction equipment. The diverse product range resulted in compound annual growth rate (CAGR) of 11.7% during the three fiscals through 2020. Moreover, the company’s dominant position in the pick-and-carry crane segment and increasing tie-ups improving product portfolio will drive growth over the medium term. Furthermore, through the JV of Escorts with the Tadano group to manufacture rough terrain and truck-mounted cranes, the market position of Escorts in the rough terrain cranes segment is likely to improve.
Revenue in the railway equipment business is derived from sales of brakes, suspensions and couplers. This segment’s revenue registered CAGR of 18% in the three fiscals through 2020. Substantial orders of over Rs 330 crore as on December 31, 2020, provide strong revenue visibility.
The operating margin improved to 10.9% in fiscal 2020 from 6.9% in fiscal 2017, driven by the cost reduction initiatives undertaken over the past three fiscals, benefits derived from operating leverage and exit from the loss-making automotive (auto) component business. Reduction in raw material cost, due to value engineering and low employee cost, should help sustain profitability.
Small but gradual improvement in the performance of the CE division has also benefitted the company. However, in the first nine months of fiscal 2021, the margin of the CE and railways segments were impacted. Nevertheless, overall profitability improved to 16.4%, from 10.8% in the corresponding period of the previous fiscal, due to favourable product mix in the tractors division and cost control measures undertaken across segments. Operating margin is expected at 12-13% over the medium term.
The financial risk profile will remain healthy over the medium term, supported by sizeable networth (expected over Rs 3,500 crore in fiscal 2021), minimal debt and comfortable debt protection metrics. Cash accrual is expected to be comfortable at Rs 700-800 crore and will sufficiently cover capex of Rs 200-250 crore in fiscal 2021.
In July 2020, Escorts issued new equity shares to Kubota on a preferential allotment basis pursuant to which Kubota held 9.1% of Escorts’ paid-up share capital. Total investment stood at 16 billion yen (Rs 1,042 crore). Subsequent to the preferential allotment to Kubota, Escorts is in the process of reducing its share capital from the shares held by the Escorts Benefit and Welfare Trust, such that Kubota’s stake in Escorts will increase to 10%. Equity infusion by Kubota has strengthened the financial risk profile and liquidity. The company has cash surplus of over Rs 2,500 crore currently and utilisation of fund based working capital lines is also minimal. Going forward, liquidity should remain robust. In the recent past, Escorts has been on the lookout for acquisitions to enhance its product offering across segments, mainly in the railway equipment segment. Mid-sized bolt on acquisitions are a possibility but can be accommodated without impacting the financial risk profile, given robust liquidity. The company is in the process of drawing up its medium-term plans for investment in various businesses, including enhancing collaboration with Kubota. As the company is operating at almost optimal utilisation within the tractor segment, it may undertake material investments for enhancing the product profile. The quantum of investment and utilisation of proceeds received will be key monitorables. Weaknesses
In India, demand for tractors is determined by multiple variables, such as monsoon, crop prices and availability of finance. Around 96% of Escorts’ tractor sale volumes are derived from the domestic market, which makes it highly dependent on 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 13.7%, respectively. Share in overall export volumes was low at 4-5% over last few years. Furthermore, the group has limited presence in opportunity markets. However, by expanding the dealer network, the company was able to gain market share during the downturn.
The CE segment was making loss 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 rationalisation initiatives such as vendor rationalisation and price renegotiation.
Revenue and EBIT margin were impacted materially in the first half of fiscal 2021 due to Covid-19; however, performance started improving from the third quarter. Given high input costs and considerably fixed-cost intensive nature of operations, profitability will remain vulnerable to intense competition and economic slowdown. Furthermore, despite the turnaround and improvement in profitability in fiscal 2020, the operating margin is lower than that of peers (6-8%).
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 accrual is expected at Rs 700-800 crore against negligible debt obligation. Cash and equivalent was at Rs 2800 crore as on September 2020. Bank limit remained unutilised over the six months through January 2021. The company has minimal dependence on external debt. Internal accrual, cash and equivalent and unutilised bank lines will be sufficient to fund debt obligation as well as incremental capex and working capital requirement. |
Outlook: Stable CRISIL Ratings believes Escorts will continue to benefit from the improving market position in the agricultural equipment segment and performance of the CE segment over the medium term, while maintaining its strong financial risk profile and robust liquidity. |
Rating Sensitivity Factors Upward Factors
Downward Factors
|
About the Company Mr H P 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 segments: tractors, construction equipment and railway equipment. 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. During fiscal 2109, company has also entered into a JV with Tadano group to produce specialised cranes.
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 1.2 lakh tractors and 10,000 units in CE.
For the nine months ended December 31,2020, net profit was Rs 606 crore on revenue of Rs 4,786 crore, against Rs 344 crore and Rs 4424 crore, respectively, in the corresponding period of the previous fiscal. |
Key Financial Indicators (Consolidated)
|
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
|
Annexure – List of entities consolidated
|
| Annexure - Rating History for last 3 Years | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| All amounts are in Rs.Cr. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||||||
|