Escorts Limited - Playing for Margin Expansion

Even I have been doubting continuation of high growth rate for last few months, but both Mar and Apr’18 growth has surprised me big time…keenly waiting for may’18 no as it comes against a good base month as may17 was the fourth highest month in 2017-18!!
Entered at 130 sold at 200 reentered at 300!

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Anyone still tracking or holding the stock? Seems October sales number is encouraging after few months of muted sales performance.

Extensive analysis by Dr. Vijay Malik


Concall Summary

Normally, the company has higher market share in 4Q due to its strong-hold
markets, such as the North, East and Central region, having higher demand (v/s
the South and West) due to Rabi crop and the festive season (Navratras).

 However, its market share has declined to 13.1% in 4QFY20 (v/s 15% in 4QFY19)
due to the ongoing lockdown.

 Company is witnessing pent up demand, which would reflect in Jun-Oct’20 sales.
Management expects the industry to be back on the growth path from Jul’20
onwards more clarity on FY21 outlook by 2QFY21.

 Leads are 90% of the normal -– the on-ground situation is highly positive on the
back of good Rabi crop and very good reservoir levels; if monsoons are normal,
it would take care of demand for the next two years.

 ESC has started operations from 13th May’20 and is operating at 20% utilization,
which should reach 50% by mid-Jun’20 and get near-normal by Jul’20. However,
the company has adequate inventory to tide through till end-Jun’20, as it had
bumped inventory ahead of Navratras (seasonally strong month). The period Jul-
Aug is the weakest time for the tractor industry.

 Dealerships: 65% of its dealerships are open for sale and 90% of workshops are

 Currently, the company is more worried about supply rather than demand as a
tractor has 3,000 parts, which is sourced from across India. However, most of
ESC’s labor is local and it can work with 75% of labor based on the current

 Tractor mix: Farmtrac: Powertrac ratio was stable in 4QFY20 at 41:59 v/s 41:59
YoY v/s 39:61 QoQ. ‘40HP & above’ tractor contribution in 4QFY20 was at 51%
(v/s 47% YoY).

 Financing: There are no issues on credit availability currently. Feedback from
banks indicates that focus is high on agri due to decreasing opportunities ther sectors. The market share ratio for financiers – NBFC: private bank is 2:1 40% of customers in tractor financing have availed moratorium.

 Non-agri usage: In FY20, the company was facing bottlenecks and hurdle. It started improving in Jan-Feb’20. ESC expects demand to return as most projects that were banned (like mining) have now opened up.

 Tractor EBIT margin expansion was driven from higher production (2pp), which could not be sold and was sitting in inventory, leading to higher fixed cost absorption. This impact would reverse in 1QFY21.
 Subsidy-based sales are expected to return in FY21 and could be higher than FY19 (11-12% of industry volumes).

 Kubota JV SOP is estimated by 3QFY21, it has been delayed due to the lockdown.

Construction Equipment

 In 4QFY20, addressable Construction Equipment industry stood at -24% (v/s -
2.2% for Escorts with 50% sales decline in month of Mar’20). In FY20, industry was down 23% (v/s Escorts’ decline of 25.3%). Industry in 4QFY20: BHL down 25%, Crane down 27% and compactors down 17%.

 Industry FY20: Backhoe loader was down 23%, compactor down 22% and cranes were down 24%.

 4QFY20 capacity utilization was at 40% and RoCE at 29.1%

 PBIT margins saw lesser decline (-55bp QoQ) as compared to the decline in volume (-32% QoQ). This is due to structural changes with (1) fixed cost changing to variable cost, and (2) mix improvement. Breakeven utilization is 30%.


 Order book at ~INR4b as of Mar’20 to be executed in the next 12-15 months.

 EBIT margins are down QoQ/YoY due to impact of high share of NPD products,which has ~40% import content. Localization plans are in place, but testing and
validation would take 18-24 months since it is a braking system.

 Received approval for Microprocessor Controlled Brake System (MCBS), which
would be commercialized in FY22E after testing for 12 months.

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deal with Kubota can be really beneficial: access to Japanese technology and footprint in south India.

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One of the rare meaningful AGM.

Disc: Invested

Escorts Limited (EL) has been informed by Escorts Kubota India Private Limited (EKI) - a 60:40 Joint Venture between Kubota Corporation, Japan and Escorts Limited, that they have started the commercial production of Kubota Tractors from today i.e. September 25, 2020.

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I dug into Escorts for the first time last week and here are my notes.

Only 20 years ago in 1991, over 60% of those employed in India worked in farms. That figure today is just 40%. The same figures for China are 50% in 1991 and 25% today. The industrial revolution moved people out from agriculture to manufacturing and mining. The technology revolution is moving people out to jobs in the services industry. But the trend is unmistakeable – fewer and fewer people are working our farms. But food production has been on the uptrend. From about 150 million metric tons of food produced in the early nineties our country now produced a record 300 million metric tons of food grains last year. Thanks to better water management, warehousing facilities and government intervention in the form of minimum support prices, our country is able to feed most hungry mouths. But our yield per hectare, the actual amount of food produced per acreage, is by far one of the lowest in the world.

And if the historic trend is anything to go by, this will also change.

Fewer hands working the farms has meant that farmers have had to increasingly rely on tractors & agricultural machines to do the job. The abundance of credit availability has meant farmers have managed to buy them quite easily.

Last year alone (2019-20) over 7 lakh agricultural tractors were manufactured and sold in India (about 30%-35% of worldwide production and sales). The overall growth in tractor sales in India has witnessed an obvious trend.

While the industry saw a small blip last year in terms of number of tractors sold, this year’s demand has made a roaring come back.

How many more tractors can India really buy per year? Maximum?

Average replacement cycle for a tractor is about 10 years. Given that figure and annual sales of 7 Lakhs tractors last year, the total number of tractors in use at any one point in time is about 70 lakhs. India has a total of 16 crore hectares of arable agricultural land. This indicates we have 4.3 tractors per square km of arable agricultural land. The same figure for China is 6. Data for other countries is hard to come by. But a study by World bank places that figure for other developed countries as below.

This data suggests that our stock of tractors in comparison to our total arable land has some way to go. Should tractor density go up to China levels, tractor sales per year could equal 9 Lakh units per year. That would be a growth of 30% from current levels. Should tractor density go up to levels seen in the EU, the industry size could double.

But food production is also slated to increase. In 2015, an average Indian consumed 2,455 Kcal per day. The same figure for an American was 3,639 Kcal and a British citizen was 3,440 Kcal. As the country’s economy develops, more people move out of poverty and consume more food. This suggests that Indian farmers will need to produce at least 30%-40% more food to keep the population well fed.

Putting these two together, the maximum industry size could be between 1.8X - 2.5X today’s figures. If sales grows at 7% per year, this industry might hit saturation in the next 10-15 years. So, we have a LONG way to go.

Industry structure

Looking into the landscape of tractor manufacturers, there are primarily 5 manufacturers who control over 90% of the market share.

Only 2 of these are currently listed in the Indian stock market - Mahindra & Mahindra and its smaller rival Escorts.

Escorts - The business

Established in 1944, Escorts is primarily a tractor and farm equipment manufacturer. They have 3 divisions.

  1. Agri-machinery which makes tractors under 2 brands – Farmtrac (higher power range) and Powertrac (lower power range) – This division is 77% of their business.
  2. Construction equipment, which makes pick n carry cranes, earth movers and road construction equipment – This is 15% of their business, but suffers from low profit margins
  3. Railway equipment, which makes specialist parts like brakes, coupler systems etc. for trains. This constitutes 8% of their business and is highly profitable.

This is how their revenue has grown over the years.

Here is the trend of their operating profit margin and net profit over the years. All metrics have grown significantly over the years.

The Escorts business as I see it today looked nothing like this 10 years ago. A book titled ‘Back from the brink’ records the company’s slide into ‘coma’ and how it resurrected itself from it. The man behind it all – The Wharton B-school educated founding family member and new kid in the block, Nikhil Nanda . Over the years since its inception, the group had expanded into telecom, IT and healthcare businesses which dragged the company into a whole lot of debt. Nikhil sold off these low margin/losses making entities to focus on the company’s core capability – Making engineering products for the heavy utility/mobility industry.

At the end of FY 2008, the business had Rs.840 crores in debt and made Rs.(-37) crores in losses. More than a decade on at the end of FY20, the business had Rs.6 crores in debt and made Rs.477 crores in profits. Return on capital employed improved from 6% to 19% during the same time. (The same ratio for Mahindra and Mahindra today is 8.23%). All of because of one thing – good capital allocation decisions.

The business generated Rs.2,100 crores in cash over the last 10 years of which Rs.650 crores was used to pay off loans, Rs.200 crores was used to pay dividends and the balance of Rs.1,250 crores was invested back in the business. The market cap of the business during this same time went up by Rs.14,235 crores indicating a 11X return on capital invested into the business.

The company has partnership agreements with 2 Japanese firms called Kubota and Tadano who offer technology support and collaborate with Escorts in exporting their product lines to other countries. Escorts makes significant investments each year into developing their R&D capabilities and their products are starting to stand out.

The company is predominantly present in north and central India with very low market shares in the west and south. But this is changing. The company today has about 1035 dealers and they think they need a total of 1,200 dealers in total for optimal distribution. So, they are going after new dealers. They are changing the distribution model too. Competitors like M&M have large dealers managing large areas/regions. In contrast, Escorts is adopting a low-investment dealer model where several small dealers are recruited with very low upfront investment required to manage smaller regions. Escorts is also trialling out a pay per hire model for their tractors to widen adoption.

But I really wanted to get a feel of what the farmers thought about it all. So, I went to find out. On Youtube! I looked up for Mahindra vs Escort on Youtube and a whole load of competitive tractor stunt videos came up. And here are just a few of the most liked comments I found.

  • Sabke ma hod dega escart trectar
  • Escort is super
  • Escort sabka baap hai
  • escort is best
  • Escort jhota hai bhai iski gel panga mat leve
  • Bhai escort se panga mat lo ye bahut hi powerful hota h
  • mahindra ki to fati ja rahi hai…

And this love for their products shows in their market share gain over the years.


Escorts is in an excellent footing today with over Rs.2,000 crores in cash & liquid investment investments and two industry partnerships with leading Japanese manufacturers in the tractor and construction equipment division. The promoters’ recent history of good capital allocation decisions gives me confidence about the future for this business. At a time when food production is slated to grow and mechanisation of farms is catching up due to wider credit availability, Escorts looks poised to capture this opportunity profitably . The construction equipment and the rail businesses while small are also positioned in industries that have a lot of growth momentum left in them.

But what is the asking price? Valuation?

The business is valued at 34X trailing PE against a median historic PE of 25.

Mahindra & Mahindra is selling for 1X total revenue, while Escorts is selling for 3X.

So, it is expensive.

But we need to pay a big premium to acquire good businesses, no? Perhaps so. But a good business does not really mean a good investment for us.

Think about it this way. Escorts’ market cap today is roughly Rs.17,000 crores. Let’s get a bank loan and buy the whole business at market price. Then use the cash & liquid investments they have of Rs.2,000 crores to part close that loan. So, for a net purchase price of Rs.15,000 crores, we own a business which generated about Rs.500 crores in profit (FY20) - 3.33% return on investment. It really is expensive.

The market has recognised the business and it wants a premium for a piece of Escorts. As a buyer, we want maximum value for our money. But markets aren’t always rationale.

So for now, I will just keep a tab on the company and its stock price. When I get a sweet deal, I will not say no.

Disclaimer - I hold a tracking position in Escorts stocks. My views may be biased. I am not a registered investment advisor and this is not a buy or sell recommendation for the stock. Please consult with your financial advisor before investing.


Source: Tractor Manufacturers Association


Recently started tracking this company, can anyone provide info regarding recent promotor selling in sep 2020 ? The new shareholding is 36.6% from 40.3% now.

Escorts shareholding has a significant thing, that investors need to note. The largest shareholder in Escorts is a TRUST i.e. “ESCORTS BENEFIT AND WELFARE TRUST”, this is a TRUST owned by the company and was a result of some prior mergers of subsidiaries. So basically the company owns its own shares through the TRUST. This Trust is also classified as a Promoter (some might disagree with this manner of disclosure).

Mar 2020 shareholding was 27.49%, in Sep 2020 it reduced to 24.99%. This was due to extinguishment of ~10% shares of the TRUST shares, in exchange for issuing similar # of new shares to KUBOTA. Its a complex 2 steps deal, where Escorts issued NEW “9.09% or 1,22,57,688” shares to KUBOTA. and then cancelled same number of shares from TRUST to prevent equity dilution. The company got the money as share issuance money, and did not have to pay any tax on the TRUST shares :slight_smile:

This above transaction resulted in reduction of promoter stake. Hope that answers your query.


I certainly wouldn’t mind such kind of ownership reduction :grinning: :wink:

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Escorts Ltd Q4FY21 Con-call Update

Outlook: Positive in long term
• Revenue for tractor grew by 64.3% YoY to Rs. 1738.8 Cr with sales of 32558 units as against 20108 units YoY (62.1% YoY and 3.3% QoQ). The company witnessed a drop in market share by 13 bps at 12.9% on a YoY basis but it was an increase of 132 bps sequentially
• EBIT margin at 17% up by 120 bps (15.8% YoY) due to better product mix, better operating leverage and cost reduction and leaner operations
• The Agri-Machinery segment (79% of the revenue mix in Q4FY21) grew by 61.8%YoY and 2.9% QoQ with commercial tractors (higher HP) usage witnessing a sharp increase and capacity utilization at 100%.
• Construction Equipment segment (15% of the revenue mix in Q4FY21) up by 62.7% at 1604 units YoY and 27.9% QoQ due to better product mix, price increase and cost optimization. with a capacity utilization at 50%
• Railway division (7% of the revenue mix in Q4FY21) revenue at Rs. 146.5 Cr up by 35.6% YoY with 43% revenue from conventional segment and 58% from New Product Development.
• EBIT for rail division is at Rs. 28 Cr, up by 85.2% and margin of 19.1% up by 57ps YoY
• Indian Railways is still not running its full operations, due to unprecedented COVID19 pandemic situation and has done revision in the production plan, affecting fresh order tendering and order inflow

• The company has had two price hikes, one in mid-November of around 2% and around 3% in early April and is also expecting another price hike in Q2FY22
• Supply chain had been smoothening but due to the second wave of Covid leading to lockdowns in various states has once again affected the supply chain negatively
• The company expects an inflation of 8-10% of current commodity prices
• The order book for Railway division as of Mar’21 is at Rs. 340Cr and has an execution time of 6-8 months. Due to the pandemic, fresh order tendering and order inflow has been adversely impacted
• Capex for FY22 to be up to Rs. 300-325 Cr which will be utilized for increasing capacity in various plants
• The JV with Kubota, Escorts Kubota India have started commercial production of Kubota Tractors and has entered in the markets but with a small volume of 5400 units which is increasing month on month.
Share is trading at P/E of 13.8x FY22E EPS


Strong results by Escorts. Good management. Commentary was realistic. I am unable to understand the reason for market giving such low PE for a company that used to trade at premium valuations despite strong argument towards growth in rural economy. Would be great to understand perspectives.

Matter of days as the second wave has hit in mostly rural areas and its almost showing signs of peeking.

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Escorts has 1665 crores in current investments, 105 crores in cash and another 1060 crores it received from Kubota as part of equity proceeds which is 2330 crores of liquidity.
Did the management share any kind of information on what they are going to do with so much of liquidity? Capex or Acquisitions or something else?

Disclosure: Tracking


With the infra expansion bound to happen in India and the support from Kubota’s expertise in heavy machinery, It seems Escorts can be a huge beneficiary.

Not many players in the listed space with excellent financials growth and future outlook.

Can be used for inorganic expansions since heavy machinery is going for a decent expansion due to the infra push by govt and overall economy expansion this decade.

Disc - Invested

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Nice write-up. Would appreciate your views as of today w.r.t Escorts, especially after the Q2 results.


Can anyone please explain how does open offer work, can I buy shares now and tender my shares in open offer ?