Escorts to cut frills to turn more lean, profitable
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Last year, Escorts decided to merge three group companies — Escorts Construction Equipment, Escorts Finance & Investments and Escotrac Finance Investments & Leasing — with itself. The intent was to streamline the group structure and integrate various businesses. As part of the streamlining process, areas like human resource, raw material sourcing and IT support were taken up on a priority basis. "Post the merger, Escorts has been on an aggressive cost cutting mode," Nikhil Nanda, joint managing director, Escorts, told FE. "We have been identifying areas of synergies and rationalising processes." Escorts spent R419.78 crore on its workforce in the year ended September, 2012.
The company is also aiming to save cost and create space for newer businesses by releasing operational space at its four plants in Faridabad, Haryana.
"The plan is to vacate one-third of our operational space at our four production sites in Faridabad to save cost and at the same time enhance production efficiencies," said Nanda. Moreover, the group plans to utilise the released space for other alternative business opportunities in the farm and crop solutions business. Currently, Escorts has a production capacity of 95,000 units at its four plants together, which it plans to take to over 1.20 lakh units per annum in the next three years.
Since tractors under the agri-machinery business make 75% of the top-line at Escorts and construction equipment the remaining, the group aims to enhance its profitability from these segments with a focused approach towards premium products.
During the December quarter, the company sold 17,106 tractors, an increase of 32% sequentially. Total Escorts agri-machinery sales stood at R845.7 crore in the December quarter, on revenues of R1,028.2 crore. "We want Escorts to be the most profitable tractor company in the next two years and to achieve that, we are undertaking a slew of initiatives, from cost cuts to improved premium and high technology products," said Nanda. "We want to make good profits with good margins," he said.
Except for the agri-machinery business where Escorts posted 9.4% growth in Ebitda margins in the December quarter, the other businesses saw negative Ebitda margins.
Premium tractors in the range of 50 to 80 horse power (hp) would be the company's focus, with the export market in mind. In the construction equipment segment too, the company plans to upgrade its range with better technology and offerings.
Escorts sells tractors (25 to 80 hp) under its premium brand — Powertrac and mass brands — Farmtrac and Escort. The company said it will be launching a new product under a global brand in the premium tractor segment by the end of this month.
"Low crop yield, rising cost of labour and shortage of farm labour and rising cost of labour is expected to boost demand for the tractors," says a Kotak Institutional Equities report on January 1. However, in the short term, the demand for tractors is expected to remain subdued as farmer profitability is likely to remain flat on sharp rise in input costs and muted crop price.
Currently, the premium tractors (50-80 hp) make around 6% of the total tractor market in the country and is expected to double this year. Some of the other makers in this segment include Mahindra & Mahindra (M&M), John Deere, Sonalika and TAFE.