Escorts: Turning around

After cutting financial and operational excesses, the company will look at expanding its market share

The North India-based tractor and construction equipment manufacturer, Escorts, has been steadily tilling the fields of productivity and is set to reap the harvest. Making the company lean and mean seems to be the mandate. A younger management and trimming of costs have been contributing to the growth.

The third-largest tractor manufacturer, with a 13 per cent market share, will be looking at growing its market share by around one per cent. This will drive tractor revenues, which contributes 76 per cent to total, at a compounded rate of 16 per cent, higher than the industry’s expectation of 12 per cent.

The construction equipment segment, which accounts for around 15 per cent of revenues, is also set to pick up with the railway and auto components business. However, Escorts gains from the fact that it has shed its non-core businesses and reduced debt. Analysts at Daiwa Capital Markets point that after divesting telecom and hospital businesses and merging the loss-making Escorts USA subsidiary with itself, the company reduced its debt from Rs 1,550 crore in FY03 (September-end) to Rs 400 crore in FY09. Its net debt to equity fell from 340 per cent to 14 per cent during the period. They expect the company to be in a net-cash position by FY11 due to low capacity expansion and strong operating cash flow.

The company has also trimmed its regular labour to 80 per cent of the total, say analysts. Escorts has implemented processes like multi-machining, which led to a significant improvement in productivity. Having cleared the ground for sound operations, the company will be looking at new launches, especially in the lower horse power segment, which is being targeted by Mahindra & Mahindra with its ‘Yuvraj’. Analysts expect Escorts to cross the critical 100,000-tractor-unit mark in September this year. Therefore, valuations are expected to be relooked at.