Life Beyond Just Tractors
Engineering and farm equipment major Escorts Limited is aiming for a major transformation as it is aiming to metamorphose itself from a tractor maker into a holistic agro-solutions provider. Helmed by 44-year-old Nikhil Nanda, who recently took over as its CMD following his father Rajan Nanda’s demise, the company is rebooting its operations, which will enable it to build an ecosystem for its end customers (largely farmers). The third generation entrepreneur, who doesn’t mind disposing off loss-making verticals, is also excited about challenging the status quo in terms of its current business model.
Speaking to BW Businessworld exclusively at his corporate office in Faridabad, Nanda says, “The lesson at Escorts is we have to be much more agile than what we are today. That is one element I would like to see at Escorts. But other elements, in terms of being disruptive, question the current model, it is a debate that we will keep having. Few years later, it will be a different story but the purpose will remain the same.”
Rohtash Mal, who was heading Escorts’ Agri Division until 2012, echoes Nanda’s thoughts. “The current strategies of reinventing Escorts are not recent at all as this journey to recast one of India’s most iconic companies began in great earnest more than a decade ago, fired by Nikhil’s passion to rightfully reclaim the great legacy of the legendary H.P. Nanda (Nikhil’s grandfather),” says Mal, who is now Chairman, EM3 Agriservices. “Nikhil is driven, ambitious, and endowed with an exceptionally strong sense of purpose. This is the rocket fuel which will carry Escorts into another orbit.”
First Things First
Those in the services industry in the 1980s-90s will distinctly remember the legacy of Escorts. The Escorts Group , which operates in the sectors of agri-machinery, construction and material handling equipment and railway equipment, started operations in 1960 from its manufacturing base in Faridabad. After a turbulent journey, the company managed to transform itself from running a debt worth Rs 1,200 crore nearly 15 years ago (when Nikhil joined as its JMD) to a stage now where it is debt-free. The company reported a topline of Rs 5,000-plus crore last financial year and earned an all-time high profit of Rs 344 crore. Over the last five years, Escorts’ share price also skyrocketed tenfold from Rs 85 to a recent peak of nearly Rs 850, giving it a market cap of nearly Rs 10,000 crore.
To aggressively grow its marketshare, Escorts has now launched Vision 2022. The company has lined up some aggressive expansion plans for the agri-machinery arm, which accounts for 80 per cent of the group’s total business. Not only is the company looking to double its revenues from the division, Escorts Limited is also looking at augmenting its current marketshare of around 11 per cent in the domestic tractor market to around 13-14 per cent.
In the construction space, Escorts Limited is anticipating three times growth and for railways, the company is expecting a 4x growth from the FY17 level. At the group level, Escorts has projected a topline of Rs 10,000 crore by 2022, out of which 90 per cent would be derived from the domestic and the remaining 10 per cent from exports.
Nanda is not the one to limit his plans to just 2022. He says the company has also started working on Vision 2027, which will focus on turning the company from a product-oriented into a solutions-centric entity. The plan is to create and empower the customer of the future and help build the ecosystem. Plans are also afoot to make Escorts the No. 2 tractor firm in the country and among the top 5 globally (it is among the top 10 now). At the moment, Mumbai-based Mahindra & Mahindra and Chennai’s TAFE are leading the charts followed by Escorts at No. 3 in India.
“Vision is not just about numbers. It is about creating an experience, newer benchmarks, and newer levels of connectivity. That is the future,” says Nanda, who was one of five Indians selected as the Global Leaders of Tomorrow by the WEF in Geneva, in 2001. He further adds that to achieve those numbers and the agri-solutions target, Escorts will look at partnerships wherever needed and use both organic and inorganic growth to move ahead.
Future of Farming Solutions
Those who have tracked the company and researched their organisational structure for some time now strongly suggest that the company follow the strategic partnership route. Meenakshi Nagarajan, who is now Associate Professor with New Delhi’s International Management Institute (IMI), says, “Escorts can also explore the PPP (public-private partnership) model in the agriculture sector for growth and stronger links with the customer.” She further says that the company’s core competence has been a strong engineering base and manufacturing. “However, the next level of growth for the industry will be driven by technology-led solutions. Enhancing productivity is the key issue in Indian agriculture and smart agriculture using IoT-enabled sensors and drones will be the face of the future,” says Nagarajan, who has also co-authored papers on Escorts’ organisational structure and the hurdles it has faced in the past.
In its bid to gain a strategic foothold in the shared services platform, Escorts has also announced the rollout of Escorts Crop Solutions to offer end-to-end, state-of-the-art equipment for paddy farming under pay-per-use rental model. In addition, Escorts will also come up with Traxi, an application to aggregate farm equipment owners to rent out their equipment to small and marginal farmers. The company is also set to launch Smart Parts, a platform to offer genuine parts and skilled service at an affordable price; Digitrac, a front-end farmer interface for agri inputs and customised agri information; and Farm Power to provide advanced implements and equipment for efficient and productive farming.
“The future is about collaboration. I strongly believe that the companies of the future will not be about building balance sheet, but about earning profit and loss. It will be about aggregation, looking at how you can equitably bring in the platform whereby you can help each and everyone in the society to collaborate and do a win-win. In terms of their contribution, maximising the capacity of the equipment that they purchase in terms of a higher ROI. So, I think, the future is about working smartly,” says Nanda.
At the recently held company event Esclusive 2018, Escorts announced India’s first automated concept tractor, which the company claims will bring the power of next generation digital vehicle technologies aimed at precision-based farming. To be able to deliver this, Escorts has collaborated with seven technology giants such as Microsoft, Reliance Jio, Trimble, Samvardhana Motherson Group, Wabco, Bosch and AVL. The partnerships will enable development of a range of farm machines with electric transmissions, autonomous applications, remote vehicle management, data-based soil and crop management, and sensor-based guided farm applications.
“Disruption is not just about technology. It is about questioning and building the model disruptively in making it win, making it in such a manner that can add value to everyone who is a part of it, including the OEMs and the partners. Escorts is not doing differently. It is only challenging the model with which we are seeing the world of late and the world and the model we want to see it operate in the future,” said Nanda at the event.
“Esclusive 2022 or 2027 is about autonomous farming, smart tractors, how technology, tools, implements can be brought in a manner — through aggregation, ownership through aggregation, ownership — that is most profitable, digital at half the capex or investment that one has made in the past. So, we want to disrupt the model of the future and shared services will play a very important part of that disruption,” he added.
The Faridabad-based firm is now gearing up to commercially roll out its electric tractors by mid-2019. “Four years ago, we had debated internally about creating an electric tractor. Now, we have come to a level where we are going to do a commercial launch. So that is an element of the inflection point. It is not just the New Escorts Tractor Series (NETS) that you are talking about. NETS is an outcome of an inflection point. I think the inflection point that happened at Escorts was when each and every executive at the organisation understood that it is possible. Let’s innovate. Let’s change the rules of the game. And that ambition and disruption in the minds has led Escorts to a take-off. This is what we will continue for the journey of the future, be it 2022 or 2027.”
Critics not Optimistic
Plans aside, not everyone is on the same page when it comes to Nanda’s vision. While some say he is shooting in the dark, others feel there are too many high-maintenance executives at the top.
“In order to regain its marketshare, what the company needs to do now is to relook at the growing opportunity of involvement of youth and technology interface,” says New Delhi-based Vijay Sardana, an agri-business expert. “My advice to the company management is to work on technology platform that can be replicated globally, not just in India. There are many such opportunities and could change the fortunes of Escorts,” says Sardana.
A former senior official of Escorts, who requested anonymity, noted, “As a person in charge of steering the group, the leader has to exude confidence in the team and has to have his own opinion and not get swayed by the opinion of those around. Consultants can only learn and earn from you and hardly deliver something new that your own team cannot. The company is ring fenced by typical ‘yes men’ who wish to further their own cause. There is a very large old guard that is busy in whispering against young, dynamic and right thinking people. These old guards are also not tech-savvy.”
Business Outlook
All said and done, the BSE-listed company is gearing up to invest Rs 600 crore over the next two years, which includes Rs 250-300 crore for capacity expansion for tractors, which will be ramped up from 100,000 units to 150,000 units per annum by 2020. The remaining 50 per cent of the amount is earmarked for product development activities, routine capex and also for BS-IV emission requirements which is coming up in April 2020. Going ahead, running capex will be Rs 150 crore every year.
An industry analyst estimates that Escorts generated Rs 5,075.38 crore of revenue during FY18 with agri-machinery products which also includes over 225 tractor variants (25 to 75 HP) accounting for the predominant share. Escorts share in the domestic tractor market stood at around 14 per cent. This business segment also offers crop solutions, engines and gensets and lubricants; it is additionally engaged in the after-market sales of Escorts tractors. The agri-machinery segment’s revenue stood at Rs 3,957.9 crore, representing 79 per cent of the total revenue and growing at an average annual growth rate of nearly 17 per cent over the last two fiscals. The segment’s revenue is expected to be around Rs 5,200 crore by FY20, according to the analyst.
In addition, the company manufactures and markets a comprehensive range of construction equipment including cranes, backhoe loaders, compactors and forklifts. The company is also among the world’s largest manufacturers of pick-n-carry hydraulic mobile cranes.
The analyst also points out that by FY18, the construction segment’s revenue stood at Rs 780.34 crore, or 15.5 per cent of the operating revenue. This segment grew at a CAGR of 30.9 per cent during FY16-FY18 and is estimated to grow at 22 per cent CAGR to Rs 11,60 crore in FY20. The railway equipment segment accounted for around 5.5 per cent of the revenue in FY18. Sumeet Bagadia, Head of Research and Associate Director at Choice Equity Broking says, “The revenue from the segment is expected to increase at a 11 per cent CAGR to Rs 350 crore. Escorts’ RoE improved to 18.5 per cent in FY18 from 8.7 per cent in FY17, which it is likely to maintain in the coming two fiscals. EPS is likely to increase to around Rs 45 in FY20 compared to Rs 28.7 in FY18.”
Nagarajan says, “Shift from the product ownership model to the solution-centric model is what the customer desires. So strategic partnerships and acquisitions of agri-tech companies will be imperative for Escorts’ growth.”
In their 2006 paper titled ‘A Declining Market Mars A Historic Collective Bargaining Agreement: The Case Of Escorts ( Vikalpa, April-June 2006, Volume 31, Issue 2)’, authors Arun Kumar and Nagarajan write: “On assuming the chairmanship of the group in April 1994, Rajan Nanda undertook a major restructuring programme to give a sharper focus to the businesses. This involved building alliances with global players and improving market capitalisation which resulted in each business becoming an independent entity with defined partnerships, technology, customers, and business economics…”
On Nanda’s part, he has his visions set. And the young leader understands the undercurrents of both domestic and international business atmosphere. “The world that we are in will be a very different place and we have to keep reinventing ourselves,” says Nanda.
