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Escorts focuses on premium products in profitability drive

LiveMint logoLiveMint 18-05-2014 Shally Seth Mohile

Mumbai: Since 2007, Nikhil Nanda, managing director at Escorts Ltd, has steered the company towards profitability through a series of initiatives which included divestment of non-core assets, unlocking value and ploughing the proceeds back in the core business. Nanda is now embarking on a drive to improve profitability through the introduction of high-end products.

As part of the strategy, the Faridabad-based farm machinery and engineering firm plans to manufacture Ferrari tractors locally. The company is also working with Porsche Design and Porsche Consulting to introduce next-generation tractors.

The associations with premium global brands, Nanda said in an interview on 13 May, are part of a larger plan to redefine tractors as a product and improve profitability at Escorts.

“We want to be at the top end of the pyramid,” said Nanda.

“Whatever products we have launched in the last 18 months is in synch with that and even in the future it will be the same,” he said.

Meanwhile, to bring down variable costs, Escorts will soon bring in one of the top four consulting firms. The restructuring will include shutting down one of its four manufacturing facilities over the next one and half year, reducing headcount and outsourcing con-core functions. Over the last two and a half years, the company has reduced its headcount to 1,044 from 1,400. “As we go along, we have to keep getting lighter on our feet,” said Nanda.

The third-largest in pecking order in the Indian tractor market, with an 11% market share, Escorts sells the Powertrac, Farmtrac and Escort brands. Nanda, however, is not worried about market share and has his eyes firmly set on profits. This is one of the reasons the firm chose to exit from the lower-horsepower segments which yield wafer-thin margins and instead focus on the segment above 50 horsepower, he said.

“There is a good market for premium tractors in India and is likely to expand at a faster pace. Hence the strategy to focus on the premium products bodes well,” said an analyst at a domestic brokerage declining to be identified.

Apart from the Indian market, Escorts is also targeting the eastern and western European markets—a big, diverse market for high-horsepower tractors which other tractor makers including market leader Mahindra and Mahindra Ltd and Tractors and Farm Equipment Ltd are also making inroads into.

“This will put us in a different league and help us get into the bottom end of Europe, ” said Nanda.

As part of the distribution agreement with Ferrari, Escorts launched the premium, speciality tractors in India last year in seven of the grape-growing districts of Maharashtra. Priced at `8 lakh, Nanda claims the tractors “flew off” the shelf and, in less than a year, one or more Ferrari tractors have been delivered in about 40 villages in these districts. Most Ferrari owners, he said, are medium or high acreage farmers focused on the production of export-quality grapes.

Encouraged by the response, Escorts is in talks with Ferrari to manufacture the tractors locally. “We would be setting up a dedicated facility within Escorts’ eco-system,” said Nanda. He refused to divulge whether the new agreement will involve equity infusion by each partner in a separate company or something else. “The discussions are in progress and we should be able to conclude it in another two months,” he said.

Local manufacturing will ensure the tractors are more competitively priced.

Since taking charge seven years ago, Nanda, 40, an alumnus of the Wharton School of the University of Pennsylvania in the US, has been focusing on the company’s core business of agricultural machinery besides construction equipment and railway accessories, after moving out of eight non-core segments such as motorcycles, transmission axles, healthcare and telecom.

The strategy seems to be paying off. From a loss of `6.44 crore in the business year ended 30 September 2007, Escorts swung to a profit of `11.87 crore in the following year.

The company, which recently moved from a financial year ending in September to a financial year ending in March, reported a net profit of `45 crore for the year ending 31 March. The farm segment contributed more than 80% of the revenues.

Lately, the firm has also been offering complete crop solutions to farmers through various farm machines that assist them in various stages of cultivation.

Analysts are positive about the company given the cost reduction initiatives under way. “Due to its focus on fixed costs reduction, we expect margin to improve to 7% in fiscal 2015,” wrote Umesh Karne, analyst at Tata Securities Ltd in a recent report. He expects tractor volumes to expand 12% on the back of new model launches.

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