Rating Rationale
December 05, 2019 | Mumbai
Escorts Limited
Ratings Reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.1000 Crore
Long Term Rating CRISIL AA-/Stable (Reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.100 Crore Commercial Paper Programme  CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has reaffirmed its 'CRISIL AA-/Stable/CRISIL A1+' ratings on the bank facilities of Escorts Limited (Escorts); its rating on the commercial paper programme has been reaffirmed at 'CRISIL A1+'.
 
The ratings continue to reflect Escorts' healthy business risk profile, backed by an established and improving market position in the tractor segment, diversified revenue profile, and healthy operating efficiency. The ratings also factor in a strong financial risk profile and liquidity, with minimal dependence on external debt. These strengths are partially offset by high dependence on the cyclical tractor industry, limited presence in West and South India, weak-though-improving performance of the construction equipment segment, and exposure to volatility in raw material prices.
 
During fiscal 2020, revenue to decline by 7-8% due to decline in tractor (contributes 77% of revenue) and construction equipment (15%) volumes, which will be offset by growth in railways (8%). Increasing reach of dealers in opportunity markets for tractors is expected to result in lower-than-industry decline in tractors in fiscal 2020. Also, strong growth in exports albeit on low base should partially offset the impact. Regular introduction of new variants/refreshers and enhancing the product portfolio should benefit Escorts to continuously outperform the industry. This is also reflected in gain in the domestic market share by 27 basis points to 11.16% during year to date fiscal 2020. Furthermore, healthy order book in railways and continued expansion of product portfolio is expected to remain one of the key growth drivers. Overall profitability to moderate marginally due to negative operating leverage and impact of product mix in fiscal 2020.
 
Thus, cash accrual may remain healthy at Rs 400-450 crore during fiscal 2020, though lower than earlier expectation. Financial risk profile should remain robust, with healthy cash surplus of Rs 640 crore as on September 30, 2019, and minimal dependence on external debt. Escorts is likely to incur capital expenditure (capex) of Rs 200-250 crore and investment in joint ventures (JVs) for enhancing its product offerings in the medium term. Debt protection metrics is likely to remain comfortable, with low dependence on external debt.

Analytical Approach

CRISIL has combined the business and financial risk profiles of Escorts and all its subsidiaries and proportionately consolidated 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 - Details of Consolidation, 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:
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 Interactional Tractors Ltd), backed by an established legacy of 70 years and domestic market share of 11.16% during year to date fiscal 2020. It offers a wide range of tractors primarily under the Farmtrac and Powertrac brands. Escorts also sells 10-15 horse power 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 (including a JV with De Lage Landen Financial Services India), and an increasing dealer network have helped improve market share in West India (10.72% in the first seven months of fiscal 2020 against 7.8% in fiscal 2016) and sustain the share in other 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 add to the market share over the medium term. With partnership of Escorts with Kubota Group, the market position of Escorts in high-end value utility tractor range is likely to get benefitted in domestic and exports markets.
 
* Diversified revenue profile
The construction equipment and railway equipment business contribute 17% and 6% to total revenue in fiscal 2019, respectively. Product portfolio in the construction equipment business comprises earth moving, material-handling, and road-construction equipment. The diverse product range has resulted in compound annual growth rate (CAGR) of 28% during the three fiscals through 2019. Moreover, the second largest position in the pick-and-carry crane segment and increasing tie-ups improving product portfolio should drive revenue growth over the medium term. Further, with the new JV of Escorts with the Tadano group to manufacture rough terrain cranes and truck mounted cranes, the market position of Escorts in rough terrain cranes segment is likely to improve.
 
Revenue in the railway equipment business, the most profitable segment, is derived from sales of brakes, suspensions, and couplers. This segment has increased at a CAGR of 20% in the three fiscals through 2019. Substantial order book of over Rs 500 crore as on September 30, 2019, provide strong revenue visibility.
 
* Healthy operating efficiency
Operating margin has consistently improved (to 11.58% in fiscal 2019 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 lowering employee cost, should help sustain the margin over the medium term. Additionally, there was an operating level breakeven in the construction equipment segment in fiscal 2018, and the margin was 3.6% in fiscal 2019. In the first half of fiscal 2020, despite decline in scale, margin remained stable. The railways business continues to be profitable, with margin of 19.8% in fiscal 2019. Overall profitability is expected to improve to more than 11% over the medium term.
 
* Strong financial risk profile, supported by robust liquidity
Financial risk profile is marked by low debt and comfortable debt protection metrics, with gearing at 0.19 time as on March 2019. Cash accrual is expected to remain comfortable at Rs 450-550 crore, and should be more than sufficient to meet modest capex of Rs 200-250 crore per annum in fiscals 2020 and 2021. Financial risk profile is likely to remain robust over the medium term, despite any small- or medium-sized acquisition for inorganic growth. Size and funding of such acquisitions will continue to be monitored. Additionally, company has cash surplus of Rs 640 crore as on September 30, 2019. Going forward, liquidity should remain robust at over Rs 500 crore in the medium term.
 
Weaknesses
* High dependence on the cyclical domestic tractor market and limited presence in South and West India
About 96% of the volume of tractor sales is derived from the domestic market. Demand for tractors in India is determined by multiple variables, such as monsoon, crop prices, and availability of finance. For instance, operating performance was constrained in fiscals 2015 and 2016 due to a slowdown in the tractor industry, leading to a fiscal-on-fiscal volume decline of 13.3% and 13.7%, respectively. Furthermore, the group has limited presence in its opportunity markets. However, with increasing dealer network, the company was able to sustain market share during cyclical downturns.
 
* Weak, though improving, performance of the construction equipment segment
The performance of the construction equipment segment, which accounts for 17% of overall revenue, has improved: earnings before interest and tax (EBIT) were Rs 11 crore in the first six months of fiscal 2020. The division has been loss making in the past due to high fixed costs and cyclical nature of the business. EBIT loss was 4-5% during the three fiscals through 2017, which has improved to 3.6% and 2.6% in fiscal 2019 and the first six months of fiscal 2020, respectively. The turnaround is led by a change in the product mix (increasing proportion of higher tonnage equipment) and cost rationalisation initiatives with vendor rationalisation and price renegotiation. The margin is expected to gradually improve to 3-4% over the medium term. However, this business has high input costs, is considerably fixed-cost intensive, and faces competition and economic challenges. Furthermore, despite the turnaround and improvement in profitability, the operating margin is still lower than that of peers (6-8%). While the segment has been able to bring down losses, sustenance of growth and improved profitability will remain a key monitorable.
 
* Exposure to volatility in raw material prices:
The price of the main input (steel, in the construction equipment segment) is volatile. Profitability is also constrained by the limited ability to pass on any increase in raw material costs to customers in a timely manner, given the competitive nature of the industry.
Liquidity Strong

Liquidity is likely to remain healthy driven by expected healthy annual cash accruals of Rs. 450-550 crore and cash and equivalents of Rs. 640 crore as on September 30, 2019. The firm also has minimal average bank limit utilisation of 43% (limit of Rs 339 crore for 12 months ended October 31, 2019). The company has minimal dependence on external debt. CRISIL expects internal accruals, cash & cash equivalents and unutilized bank lines to be sufficient to meet its repayment obligations as well as incremental capex and working capital requirements.

Outlook: Stable

CRISIL believes Escorts will continue to benefit from the improving market position in the agricultural equipment and performance of construction equipment segment over the medium term, while maintaining its strong financial risk profile and liquidity.
 
Rating sensitivity factors
Upward factors
* Sustenance of improved operating performance of construction equipment segment leading to overall operating margin to more than 12.5%
* Sustained increase in scale of operations, driven by improvement in product diversity, and market share gains in tractors
* Maintains its solid financial risk profile and robust liquidity position
 
Downward factors
* Decline in operating performance due to cyclical downturns, leading to overall operating margin of less than 8%
* Sizeable, debt-funding capex or acquisition, materially impacting key credit metrics
* Material reduction in liquid surplus

About the Company

Mr H P Nanda started the Escorts group through Escorts Agents in 1944 in Lahore, and moved to Delhi after independence. Escorts Agents was converted 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 had also 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), software (in fiscal 2005), and auto components (in fiscal 2017) have been divested. EL also merged Escorts Construction Equipment Ltd, Escotrac Finance and Investments Pvt Ltd, and Escorts Finance and Leasing Pvt Ltd with itself in 2012.
 
The company is managed by third-generation family member, Mr Nikhil Nanda, who is the Chairman and Managing Director.
 
It has five manufacturing facilities in Faridabad (Haryana) and one Poland. Total annual capacity is 1 lakh tractors and 10,000 units in construction equipment.
 
For the six months ended September 30, 2019, net profit was Rs 189 crore on revenue of Rs 2774 crore, against Rs 222 crore and Rs 2,942 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators
Particulars Unit 2019 2018
Revenue Rs crore 6255 5067
Profit after tax (PAT) Rs crore 478 347
PAT margin % 7.6 6.8
Adjusted debt/adjusted networth Times 0.19 0.05
Interest coverage Times 39.58 19.84

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size 
(Rs.Cr)
Rating assigned with outlook
NA Commercial Paper Programme NA NA 7 to 365 Days 100 CRISIL A1+
NA Working Capital Facility NA NA NA 339 CRISIL AA-/Stable
NA Non-Fund Based Limit NA NA NA 341 CRISIL A1+
NA Proposed Short Term Bank Loan Facility NA NA NA 59 CRISIL A1+
NA Proposed Long Term Bank Loan Facility NA NA NA 261 CRISIL AA-/Stable

Annexure - List of entities consolidated
Names of Entities Consolidated Relationship Extent of Consolidation
Escorts Finance Ltd Subsidiary Fully
Escorts Securities Limited Subsidiary Fully
Escorts Benefit and Welfare Trust Subsidiary Fully
Farmtrac Tractors Europe Spolka Subsidiary Fully
Escorts Crop Solutions Limited Subsidiary Fully
Escorts Benefit Trust Subsidiary Fully
Adico Escorts Agri Equipment Pvt Limited Joint Venture Proportionate (40%)
Tadano Escorts India Private Limited Joint Venture Proportionate (49%)
Escorts Kubato India Private Limited Joint Venture Proportionate (40%)
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  100.00  CRISIL A1+      17-12-18  CRISIL A1+    --    --  -- 
            16-11-18  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  659.00  CRISIL AA-/Stable/ CRISIL A1+      17-12-18  CRISIL AA-/Stable/ CRISIL A1+    --    --  -- 
Non Fund-based Bank Facilities  LT/ST  341.00  CRISIL A1+      17-12-18  CRISIL A1+    --    --  -- 
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Non-Fund Based Limit 341 CRISIL A1+ Non-Fund Based Limit 321 CRISIL A1+
Proposed Long Term Bank Loan Facility 261 CRISIL AA-/Stable Proposed Long Term Bank Loan Facility 116 CRISIL AA-/Stable
Proposed Short Term Bank Loan Facility 59 CRISIL A1+ Proposed Short Term Bank Loan Facility 79 CRISIL A1+
Working Capital Facility 339 CRISIL AA-/Stable Proposed Term Loan 155 CRISIL AA-/Stable
-- 0 -- Term Loan 20 CRISIL AA-/Stable
-- 0 -- Working Capital Facility 309 CRISIL AA-/Stable
Total 1000 -- Total 1000 --
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Tractor Industry
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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