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Racl geartech limited

RACL GEARTECH

Market cap – 75 cr , CMP – 68 , Book Value – 65.5 , ROE – 16 % , ROCE- 17%

Promoter holding – 51.12% ( 28.54 % pledged)

Established in 1989 , based out from New Delhi

RGL (formerly Raunaq Automotive Components Limited) was incorporated in 1983 and is engaged in the business of manufacturing of transmission gears and shafts for automotive and industrial applications. The company was initially promoted by the Raunaq Group. However, due to financial difficulties the company was referred to Board for Industrial and Financial Reconstruction (BIFR) in 2001. Post-restructuring and with a new management team under leadership of Mr Gursharan Singh (CMD), RGL came out of the BIFR purview in November 2007.

RACL is engaged in the Business of manufacturing of automotive components Transmission Gears and Shafts and other types of gears related to power transmission to engine. RACL manufactures drive train parts for Tractors, Two Wheelers, Electric Car, Three Wheelers, Cargo Vehicles, Light and Heavy commercial vehicles etc.

The company has also expanded into sub-assemblies, industrial Gears for electrical switch Gears and Circuit Breakers, Winches and Cranes.

Manufacturing Plants – Grajuala ( UP) and Noida

Grajuala plant is 100 km from New Delhi , while Noida plant is 15 km away

350 employees are there in the company .

Snapshot of financial performance of company for last 10 years. ( from screener.in)

There has been a consistent rise in sales , margins and profits over time.

Compunded sales growth Compunded profit growth ROE
Last 10 years 12.71% 16.67% 11.87%
Last 5 years 12.78 % 39.19% 12.59 %
Last 3 years 17.37 % 38.22% 14.43%

Clientele: Caters mainly to OEMs like

BMW Motorrad, Germany,

Kubota Corporation (Japan, Thailand & USA),

I.T. Switzerland (SAME Group Company) ,

KTM AG (Austria),

Schneider Electric (Germany),

Dana (Italy & China)

Piaggio – Italy, Vietnam

BRP Rotax – Austria

In the domestic market - Yamaha India, Piaggio Vehicles, SML Isuzu , TVS Motors

Management Information and Remuneration:

RGL has a long track record of operations with established market position and reputed client base and long association with these clients.

RGL has more than 3 decades of presence in the automobile component industry. Mr Gursharan Singh, CMD of the company, joined the company as a plant head and has been associated with the company since its inception. He is a mechanical engineer with Post-Graduate Diploma in Export Management.
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This is the information of the top management of the company . One can see the vast amount of experience each one of them has in the given company.
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Management remuneration is very high

Exports as a percentage of sales is 58 % in FY 19 . The same was 17 % in FY 09 . Exports have steadily increased over the year as a percentage of revenue.

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
sales 58.42 65.15 82.7 98.72 95.05 102.95 107.5 117.74 123.61 138.79 189.95
exports 7.55 11.17 13.27 18.93 29.46 46.29 49.89 58.99 55.85 71.81 109.87
% exports 13% 17% 16% 19% 31% 45% 46% 50% 45% 51% 58%

Working capital management

The business is very working capital intensive .

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
DSO 43 40 40 46 68 55 58 27 32 107 98
DIH 60 66 71 65 79 75 86 82 79 87 69
DOP 0 0 0 46 54 81 72 44 46 55 41
CC 103 106 110 64 93 49 71 65 64 139 126

Although the working capital cycle was showing signs of improvement it has fallen back in the last 2 years to worse than previous levels. There are signs of competitive intensity in the business increasing , also shows better bargaining power of customers.

Ratio Analysis

Year RoCE RoE Sales growth PE PH Div Payout
2014 3 8 8% 5 55.98 -
2015 6 12 4% 6 51.07 -
2016 6 11 10% 8 51.1 -
2017 18 11 5% 8 51.07 -
2018 17 14 13% 8 48.47 -
2019 21 15 37% 6 51.12 -

The return ratios of the company have steadily improved over the years . that has been due to steadily improving operating margins. Valuation wise the market has not really given the company any value more than a single digit P/E . With improving ratios, and improving scale of the company there is a possibility of the company getting re rated by the market.

In smaller companies the client profile is of extreme importance . The clients of the company are some of the finest in the auto industry. The company is adding clients to its existing profile. For example TVS was added last year by the company( in FY 19). The company has a long standing relationship with some of the clients.

The company has much superior margins than the industry average. Having a 16 % OPM is not easy in this industry. For example Bharat Gears a competitior of the company has 8-10 % OPM.

The company has been growing at a pretty fast rate , much greater than the end industry it is servicing. These are signs of improving market share. The company maybe targeting to service the new launches by its clients , which may lead to much faster growth rate than the end industry.

Company is gearing up for providing drive train solutions to the EVs also. It has already invested substantial capital expenditure in the recent past and is ready to cater to high precision drive train components for E-mobility solutions.

Also the company will not be much affected by the EV disruption coming in the future. Autmotive gears and axles the main product of the company is pretty much used in the EV vehicles as well. The company has 66 % of its revenues from tractors and 2 wheelers. These segments will be the last to face the EV disruption.
The other division which contribute are- 3 wheelers( 14 % of sales) , recreational vehicles (13% of sales), CV - 5 % of sales.
It is good to see a diversified end user industry of the company’s products.

RISKS

  1. The business of the company is working capital intensive. The cash conversion cycle is over a 100 days. Also there is great competitive intensity among the suppliers to the auto industry. The clients also enjoy a good bargaining power in this industry leading to strecthed working capital cycles.

  2. The auto industry is cyclical in nature. The slowdown in the auto sector globally can dampen the growth at which company is growing.

Disc- Not Invested , Tracking

10 Likes

I had attended the EGM of RACL Geartech in June, 2019. Some of the points I noted in the discussion with the MD, Gursharan Sing, on the sidelines post AGM are given below:

• We went into BIFR in FY00 as our erstwhile promoters were not focused on the company only. We also felt that we are going down the drain. We had investment from UP Investment Corporation. We took the challenge to revive the company. Not many companies have come out of it. Everyone supported the company - employees and banks. We had the right strategy and we came out of BIFR in FY09 and did lot of changes in the company. I have been a technical guy throughout my life. We had sales of Rs.14 crore when we went into BIFR and have now reached around Rs.190 crore sales in FY19. I still remember that I went to IDBI Head Office in Mumbai for them to restructure our account and they had faith on the words I said. We were fully able to repay our loans post restructuring.
• We are growing our exports sales in a big way and export now contributes around 60% of our total sales in FY19. In exports, lot of shift is happening from China where environment issues and increase in labour costs have caused lot of shake up. In China, the situation is not that good as it used to be 10 years back. They paid really less and environmental issues were there. Pressure started on costs and lot of European customers which were there are looking for India as a source now. Many MNC’s are looking for shifting their base to India in manufacturing. China is way ahead of India in terms of technology.
• In domestic markets Euro VI will shake things a bit. Automobile markets have been shaken by Government policy also. Now government is also talking about EV market. I have been on ACMA body and knew about it. As a company we decided to focus more on exports and that strategy has worked out.
• During 2010 – 2015, we had invested a lot in building the company primarily in technology. Between those period there was not much growth but we invested in technology. We anticipated slowdown in domestic markets and exports have picked up. Those strategies are working. As a product, we chose niche product like luxury markets which doesn’t slow down. Our product is for bikes of 1 liter and above. It doesn’t cost less than 30,000 – 40,000 EUR. The person buying such product is not salaried class. Combination of all such factors helping us.

  • We have bought preferential issue as banks are facing issue and are conservative. They are asking for promoter funds which increases the confidence. Company also gets money. Will utilize the money for future expansion.
    • Pricing: Domestic OEMs face challenge on pricing. We also face some challenge. But in overseas OEMs the issue is different. Our market is niche and unlike domestic market OEMs, we don’t face that much issue. 1% - 2% doesn’t matter much. Whenever we sign an agreement with new customer, we also sign an agreement with customer to reduce pricing for first 3 years but after that there is not such issue. Our MNCs customers are not much under price pressure. There is not much issue here. Exchange rate is in our favour. Some customers have agreement to pass on forex fluctuations. Foreign buyers are more focussed on quality than prices. Their risk is more on quality as they procure product 7000 kms away. In India, there is not the case. Overseas buyers takes 3 – 4 months for procurement. They will never hurt you for 1 – 2% price. Their risk is more on 100% of confirmed quality and delivery. Their labour costs are high. If line dries up for 1 hour, they loose millions of dollar.
    • How did we acquire such prestigious customers? Main advantage is that I, top leadership, is an engineer. Normally, other cos have top management who just talk about numbers. BMW (for bikes) got confident meeting me. For those customers, main issue is the right product at the right time with right technology. We were offering them solution. We work with the customers to make product cheaper without compromising from technology. It always starts with humble nos.
    • We got Kubota as client while I met their procurement guy on flight. We started with just 2 components with them in 2004. First company in India to get export of gears from Japan. For first 4 years, we were supplying just 2 components to them. It was hardly contributing to our revenue. 100% of time with 100% quality. Today, we are supplying 110 different parts to Kubota. Now we supply to 4 locations in Japan, 1 in Thailand, 2 in USA and 1 in India. Likewise we participated in many trade shows and got customers from there. I am active in ACMA and got new customers.
    • We started with loose gears and now supply gear assemblies as well. At some time, we will supply gear boxes. Assemblies happen in our plant only. Some sub assembled shaft, we send them. We are into both engine and transmission gears. Except for differential, we are in all gears. Our product line in engine and transmission.
    • EV impact? First of all risk is there. No business is devoid of any risk. Fortunately for us, even if EV comes, EV is not without gear. Even E – rickshaw has 4 gears. They have reduction gears. We are supplying to EV cars model of the largest tractor manufacturer of India. We are supplying them gears. Value will come down for gears in EV but quality is many folds higher. Noise has to reduce for EVs. That is the reason we are investing a lot in technology. Even in fueled emission, noise emission is also a norm in EU and developed cos. We are investing in that so that when EV comes, we are present. We always think 2 3 years ahead of competition. In EV also, throughout the world when it comes – it will come in phased manners like public transport, passenger vehicles, commercial vehicles and then tractors (we are not sure if it will come or not). We are present in tractors and luxury bikes. When you bike 1.5 liter bike, you don’t buy for price or mileage, you buy for acceleration and noise. I asked the same question to BMW – they said that we have supply for the contract till 2033. Do they give committed volume? They have window of +/- 20%. Normally it doesn’t cross 5% change. For many of our customers, we are the sole suppliers for many of their products throughout their plant locations.
    • Break up of sales – 193 crore sales – 40% is two wheelers, we do everything. We do tractors, ATV etc. We are aware about cyclicality of all the segments and that is the reason we are present in all of them except cars. 40% two wheelers – all are luxury. Even in India we are present in Yamaha and Vespa. Vespa is luxury in India. We also supply to Yamaha primarily to high end bikes. .
    • How does the relationship work in scaling up products? BMW acquired one company in bike manufacturing in 2007. We were supplying to that company and they were happy with us. Their new platform was coming in 2009 in Germany and they gave order to us. Eventually the acquired company was sold. But we got entry into BMW through it. Scaling up takes time. We had also come out of BIFR. But now things are different. We are commanding our leadership.
    • We keep on adding new customers every year? BRP Rotax (subsidiary of Bombardier) we got new customer by acquiring them from other supplier from India. We believe in supplying good quality and product. BRP is for snow motors, ATVs, jet skis etc . They are into sea, snow and land and not impacted by EV. BRP is also into railways.
    • Growth that we are seeing, is it on account of old customer or new customers? Every year we keep on adding new customers. Last year we added Schaefler which is a big company. Have we been able to scale up relationship with new customers? All our clients are growing and none of our clients have left us. They are scaling up organically. They are buying parts for one particular parts, we are getting more parts. Now we entered into chasis parts, break parts, allied parts, safety parts. Existing customers are growing and we keep adding new customers. We are growing in humble and sustainable way. We don’t want to grow in short time and unsustainable way.
    • Domestic sales haven’t grown for us. Reason for it? The main reason is that we were late into Hero’s and Bajaj’s of the world and these companies have their family member’s company supplying to them. They have been established since long and we were in trouble in 1990s and 2000s. All OEMs are doing vendor consolidation. We missed boat because of that. When we took over, all these vendors had already consolidated. We have also taken strategic decision to not enter domestic mass markets in big way. There are few things where there is discussion happening. End of the day we have to ensure growth. Our focus is equally on domestic market also. Coming year, domestic market shape has to change in a big way. Electric mobility will come big way in mass bikes.
    • Schaefler – how do we scaling up the relationship? How have we got in there? What parts are we supplying? Our relationship with them is for European markets. There are certain strategies whether we can disclose in India. Certain new ranges where they have considered us. Not right to disclose it. Their annual requirement of gears is USD 500 dollars for Schaefler. They have given some component to us.
    • How much time does it take to scale up relationship? Minimum 2 years, it takes to scale. Our product is very complex product. KTM launched a vehicles in 2017 and we were given contract in 2014. First samples were given in 2014. They had to run the bike for 50,000 kms and ran across the globe. After 47,000 kms, one part failed which led to delay in launch by 6 months.
    • Other gear manufacturers like Sansera or Hero Motors doing well? Manufacturing is moving from China which is leading to shift towards countries like India. Not many technology manufacturers and we get advantage.
    • Receivable days have increased and debt has also increased? Receivables have increased coz of exports proportion increasing in sales because 60 days is the shipping time for exports. Receivables are including of GST leading to higher receivable days.
    • Fixed assets have increased – we have to invest in technology. Investing in high end technologies. In come years, there has to be paradigm shift in technology for gears. Whether its EVs and other vehicles, noise level has to reduce. We are investing in infrastructure also and upgradation and phase out of old technology also as our plant is 30 year hold. Major expansion we have done in 2 years? We grew our sales by 30% plus in FY19. We have to grow. Size does matter. Smaller companies will face more problems. Bigger cos will only be able to survive. Investment that we made, results are already visible.
    • Margin profile has also improved? Margins are sustainable? Marginally, some improvement. Fixed costs keep on getting amortized with increase in scale. We are doing technology upgradation. We have not removed any person from the company and have flat employee nos. Employee cost will come down as % of sales. Keep limited people but pay them well. There should be inclusive growth in the company whether it employee, shareholder etc. Trying to create value for money for all. Even entry level worker gets – 15,000 – 20,000 per month.
    • Expansion – advances from customers? Sometimes customers do support.
    • Siemens Financial – NBFC from which we are getting funding. Siemens has given us loan at low interest rate. Banks take more time for disbursal. Siemens sanctioned within 3 days and at lower interest rate. Let us create more pressure on them.
    • Competition? Hitech Gears, Bharat Gears – majorly mass market players. Hitech gears is getting into new products. Hero Motors is our competitor.
    • Noida plant is for Yamaha. Ghazrela plant is our main plant.
    • For BS VI, we have already developed products and technology. Quality levels will improve for BS VI. Business share has increased because of that. We in fact got more business because of BS VI.
    • None of our capacities is dedicated and is easily fungible.
    • Both exports and domestic demand is seasonal.

(Disclosure: Invested. This is not a recommendation or an advice to purchase the stock)

12 Likes

Hello Ankit,

Thanks for the summary.

Does that mean they are doing many parts other than gears?
Excuse my basic understanding but given their size and that they want to be doing technologically advanced stuff, wouldn’t it be more logical to stick to limited number of products.
Thanks

Hi Sarthak,

What I understand from the company is that their forte is precision and relationship with clients that they have been able to build over the years. Most of the products other than gears that the company is doing is on account of customers approaching them. These products don’t require additional machinery and existing machinery can be used to manufacture them. Furthermore, it helps them in diversifying into these products and reduce their dependence on gears.

5 Likes

Management quality sounds very well. I have found a video where Gursharan Singh talks about Racl Geartech Ltd. and Also in other video his son Prabh Mehar Singh.

2 Likes

Hello,

I am unable to understand the need for this resolution in AGM. Could you please help me understand. Do they think they will not have sufficient profits in near future to pay Mr. Gursharan Singh’s remuneration. Or is it because of
“Regulation 17 of the Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015 also requires approval of the members by Special Resolution for payment of
fee or compensation to the executive directors who are promoters or members of promoter group.”

Also, your thought on management compensation. How do I judge if it is too high or reasonable (looking at it as percentage of net profit, it appears very high).

Thanks

Amazing result by Racl Geartech in bad market especially being in Auto sector. I think this is the first ever dividend distributed by the company.

3 Likes

Thanks @Shikhar for the excellent OP. The export sales cagr and the increasing RoCE piqued my curiosity.

However, the below point from Ankit’s summary was very insightful.

Dumping the information gathered while researching about Kubota.

image

While M&M+Swaraj have gained significant YoY growth; it has lost in terms of Market Share. The biggest gainer in FY17-18 was John Deere! It has silently jumped from a Market Share of 6% in FY15-16 to 9% in FY17-18. Other gainers were Escorts & Sonalika who registered a Market Share of 11% & 12% respectively.
http://www.autopunditz.com/autopedia/tractor-sales-statistics-india/

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Kubota Agricultural Machinery India Pvt. Ltd. (KAI), the Indian subsidiary of Kubota Corporation, Japan, has achieved a phenomenal 35 per cent growth rate in India.

As per recent Tractor and Mechanization Association (TMA) data, Kubota has sold a total of 10877 units in the year 2018-19 viz-a-viz 8036 units in 2017-a growth rate of 35 per cent and making it fastest growing tractor company in India in the Tractor Industry across all companies.

“India is a strategic market for us foreseeing continuous growth in the tractor industry. Achieving this growth rate has re-assured us that we are heading in the right direction. Kubota has earned its position of leadership in global markets due to our superior products and reliability of quality along with service, which is scaling our growth,” said, Akira Kato, Managing Director, Kubota Agricultural Machinery India Pvt. Ltd.
https://www.business-standard.com/article/news-ani/kubota-becomes-the-fastest-growing-tractor-company-in-india-119041600532_1.html

In addition, report findings suggest that despite slowest growth, small tractor players’ hiked their market share in the last fiscal, squeezing the market share of the big ones.

Mahindra & Mahindra (M&M), the largest tractor maker in India experienced 1 per cent decline in market share to 40.2 per cent. Similarly, TAFE’s share contracted marginally by 0.2 per cent to 18.4 per cent.

“M&M and TAFE have lost 140 bps and 20 bps market share, respectively in FY2019 while Escorts and Sonalika have gained 110 bps and 40 bps share, respectively over this period. Smaller overseas players such as Kubota (+35 per cent yoy) and New Holland (+20 per cent yoy) have grown at a faster pace and have gained some market share. Mahindra has lost market share across all major markets except Bihar,” report added.

Market share in FY’18 (%) OEMs Market share in FY’19 (%)
41.6 M&M (with PTL) 40.2
18.6 TAFE (with Eicher Motors) 18.4
10.7 Escorts Ltd 11.8
11.8 Sonalika 12.2
17.3 Others (John Deere, New Holland etc) 17.5
100 Total 100

Source: Kotak Institutional Equities

https://auto.economictimes.indiatimes.com/news/automotive/farm-equipment/tractor-sales-growth-pace-hits-three-year-low-in-fy19/69093089

2016 Annual Newsletter of Kubota was dedicated to their Indian division.

The above report highlights the extensive market research that went into gathering the insights for making the design of MU5501 multi-purpose tractor which is a worthwhile read.

But more importantly it corroborates the points highlighted by Ankit’s AGM Notes.

Raunaq Automotive Components Ltd. has been supplying parts to the Kubota Group since the opening of its Delhi Office in 2006. With guidance from Kubota’s Procurement HQ, the company’s quality and production control improved dramatically. The company now supplies gear parts to Kubota Group factories in Japan and Thailand. It also became the first company to deliver mass-produced Indian-made gears to Japan. Raunaq Automotive Components Ltd. President Gursharan Singh looks back on those days.“I was surprised because Kubota’s approach to manufacturing from the material level and ensuring quality control was new to India. Kubota guided us to the achievement of quality levels that are standard in Japan. I feel that Kubota has raised us up.” The fact that Raunaq Automotive Components was supplying parts to a global brand quickly became known to other manufacturers. Backed by the credibility of dealing with Kubota, Raunaq Automotive Components started dealing with major European and American car manufacturers, and the company is growing rapidly. Today, roughly 50% of its sales is generated through export. Mr. Singh is expecting Kubota to establish a local production system in India as soon as possible. The supply chain for parts sourcing is already almost completed, and preparations for local production are progressing.

Kubota Global Sourcing Meet

Segmental Revenue Mix

FY13 FY14 FY15 FY16 FY17 FY18 FY19
2W 34% 48% 38% 35% 45% 45% 45%
Tractors 16% 20% 24% 29% 26% 21% 19%
3W 21% 19% 23% 21% 15% 13% 14%
CV 7% 8% 5% 9% 9% 6% 5%
Industrial 4% 3% 6% 3% 5% 5% 4%
Recreational
(ATV) 12% 1% 10% 13%
Others 6% 1% 4% 3%

Kubota is facing stiff competition with John Deere in US and declining demand in China which makes India and Africa more important for its growth.

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Kubota’s Ebitda margins have trailed Deere’s by 5 percentage points to 10 percentage points. Costs between the two largest competitors have diverged, with the Japanese equipment maker’s climbing to 73 percent of net sales, although both have been affected by tariff pressures on raw materials. Kubota has been behind in raising prices. While profit growth is chugging along, its return on equity is about 11 percent, compared with more than 20 percent for Deere.
A move into greener pastures such as India or Thailand could help. Kubota recently set up a joint venture in India, one of the world’s largest markets for farm tractors. Still, that won’t be enough to compensate for a drop in Chinese demand, which is already affecting the company’s Asian sales. Besides, Deere also has a large presence in India.
Kubota’s strategy has been as slow-moving as its signature vehicles. This tractor maker needs to find a higher gear if it’s going to close the gap.
https://www.bloomberg.com/opinion/articles/2019-01-21/deere-bests-kubota-as-u-s-tractor-sales-revive

Kubota first started exporting tractors to India in 2008, focusing on the southern end of the subcontinent, since the rice crops there aligned with the Japan-honed technology. In 2015, Kubota developed other models designed for hauling crops and other purposes outside of cultivation, in a bid to answer demand.
Kubota’s tractors have drawn buyers thanks to their fuel efficiency and low noise. During the first nine months of 2018, the company sold 6,700 units, a roughly 50% jump from a year earlier. But Kubota’s Indian market share still wallows at around 1%.

“We’ve been active there for a decade, but we have yet to reach cost competitiveness,” said President Masatoshi Kimata. Among tractors in the 50-horsepower range – the mainstream option in India – machines that Kubota imports from Thailand fetch a market price of about 800,000 rupees ($11,000) in the Mumbai area. That’s around 10% more expensive than similar offerings from Mahindra.

To better compete against Indian rivals, Kubota has formed a joint venture with Escorts, the country’s fourth-largest tractor seller. The partners will build a plant in the northern Indian state of Haryana, due to start mass production next June, with a goal of producing 50,000 units in 2022.

Kubota will reduce production costs 20% by utilizing Escorts’ component supply chain, and its sales network will double to 400 dealers by 2023, stretching to every corner of India. The company positions India as a key global growth market, with sales expected to soar 130% to 30 billion yen ($275 million) in 2022

Deere & Co., the U.S. maker of John Deere tractors, has carved out a 10% market share in India, earning it fifth place. After years of competing against both Kubota and Mahindra on its home turf, Deere decided to take the fight to India in 2000, where it formed a joint production venture with a local concern, later converting the venture into a fully-owned subsidiary in 2005. When it comes to branching out to India and launching local production there, Deere enjoys a substantial head start against Kubota.

Now, Deere plans to boost engine production to match its Indian tractor-manufacturing capacity, which amounts to over 130,000 units a year including export-bound goods, according to local new sources. That way, the company will not have to rely on imports. Deere also introduced a 28-horsepower small tractor into the market last month.

Other Japanese players have recently joined the fray. In a deal completed in 2017, Yanmar Holdings lifted to 30% its stake in International Tractors, India’s third-ranked tractor company, and the two are jointly developing new tractors. Iseki formed a collaboration last November with Tractors and Farm Equipment, India’s second-largest seller, to sell high-perfomance midsize tractors.

https://asia.nikkei.com/Business/Business-trends/Global-tractor-makers-seek-fertile-ground-in-Indian-market

Disc: Invested around 15% of pf over the last 2 months. Not a recommendation. Please do your own due diligence.

5 Likes

Thanks Vishnu for the detailed analysis.

Nice to see Mittal family snatched >1% stake. @ayushmit