INSUBCONTINENT EXCLUSIVE:
Escorts stock has gained 9 per cent since Monday following the announcement of its joint venture (JV) with Japan’s Kubota to manufacture
The gain was over and above the 3.5 per cent drop in the stock price soon after the JV was announced
The fall reflected market’s concern over the possibility of margin dilution after the JV
However, the company management clarified the doubts during an investors’ call on Tuesday, which resulted in the positive sentiment
towards the stock.
Kubota will have equity participation of 60 per cent in the JV to set up a plant with a capacity of 50,000 units per year
for a total investment of Rs 300 crore
Of this, Escorts will invest Rs 120 crore and also provide the land
Each of the companies will have a dedicated capacity with some flexibility.
The market’s fear of margin reduction emanated from the
possibility of higher payment by Escorts on each tractor procured from the JV
However, it was put to rest after the management clarified that no top-up margin on such tractors will be paid
In addition, the cost difference between the JV production and Escorts’ tractors will be reduced by the earnings from leasing the land to
the JV.
A major benefit of the JV is that Escorts will add more capacity at lower capital expenditure
Currently, the capacity utilisation of Escorts’ plants is over 80 per cent
Given the massive cyclicality in the tractor volumes, contract manufacturing will help the company minimise business risk during the phase
Also, during a rising demand scenario, it can quickly ramp up production by increasing the proportion of its requirement from the JV.
The JV
production will be mainly catering to the high-end (more than 40 HP) segment and in the later stage can be used for lowerend tractors
Kubota will benefit from low-cost manufacturing as it sales nearly 10,000 units a year in India, which are imported currently from Thailand
and Japan.
Escorts will also be able to increase exports given the access to Kubota’s global distribution network
Escorts exported 2,000 units in FY18
It plans to export 8,000-10,000 units by FY22
Indian companies exported nearly 80,000 tractors in FY18
Exports grew 6.4 per cent annually in the past five years
Typically, the realisation from exports is higher compared with that of domestic sales.
The joint venture will develop new products for the
echnical expertise by manufacturing globally competitive products
The co-developed products may focus on 30-50 HP segment to target southern marts of India where Escorts has a low market share.
At
Wednesday’s closing price of Rs 657.6 on the BSE, the company’s stock was traded at 12.5 times the earnings in the next four quarters
compared with the five-year average of 13.7.
