Escorts - Excel Through Re-Engineering
While the agriculture sector may not be major contributor to India’s GDP, India still ranks second worldwide in farm output. HP Nanda knew that the country which runs on agriculture can make his fortune by manufacturing product related to it (tractor). When tractors came to India through imports and later indigenously manufactured with the help of foreign collaborations, HP Nanda started the company in 1944 at Lahore before the independence of India. Currently, Escorts growth is dependent on the tractors business after venturing into other businesses. As of now 80 % revenue of escorts limited is contributed by Farm Equipment Business and the second main contributor is from Contraction equipment business with 15% contribution.
SCOPE OF THE TRACTORS INDUSTRY:
The tractor penetration level in India is very low as compared to the world standards. The penetration levels are also not uniform throughout the country. While the northern region is now almost saturated in terms of new tractor sales, the southern region is still under penetrated. The medium horse power category tractors, 31-40 HP, are the most popular in the country and fastest growing segment. The tractor industry progress depends on the progress of the farmer also. When the monsoon season is good the tractor industry will also flourish or when there is better policy for the farmer by the govt. this industry will see good growth. If the company is able to tap this opportunity, it will help to increase the value of the stakeholders.
WHO IS GIVING THE TOUGH COMPETITION / WHY NEED OF WORD RE ENGINEERING?
Escorts is the third largest producer of tractor in India after Mahindra & Mahindra and TAFE (Tractor and Farm Equipment). These two players have given tough competition to the Escorts in the past few years. It has resulted in the slow growth, loss in the market share which has also lead to decrease in the market value of the company. Ironically the management says now they will have the direct competition with the John Deere which is in the high range product.
STRATEGY BY THE COMPETITOR:
Once the country's most profitable tractor company, with its 'Swaraj' brand renowned throughout north India, PTL had suffered due to poor management, which had reduced it from being the second biggest player in the industry at the turn of the century to fifth place. Which was acquired by Mahindra & Mahindra in the year 2005. In the same year in May, Chennai-based Tractor and Farm Equipment bought Eicher Motors's tractor division. The competitors have grown the business thorough combination of organic and inorganic growth. They have maintained the position with the acquisition strategy. Whether this will be followed by the Escorts group one will have to wait and watch. Currently the company is running out of the cash which is also not helping them to expand the business.
WHAT IS REVAMPING/RE ENGINEERED?
The strategy followed by one of the competitor i.e. Mahindra & Mahindra, when they acquired the Punjab Tractors Limited “An important shorter goal was also set, called '3-2-3' - in three years, the revenue should double and the profits, treble”. To achieve they had taken steps like liquidating the stock, improving the collection securitization of debt and salaries were raised to align them with the market. Escorts strategy is also on the same path. It main focus would be on Cash, Cash and cash, which will help to expand the business. The company has already taken the action by reducing the credit period of receivable from 40days to 30days. Reducing the employee strength and from 1577 to 1250 employee and consolidating the 12 division into the main fours division that will be Farm equipment business, Construction equipment business, Railways product business and Auto products Business.
Escorts have also tied up with Ferrari to distribute and sell the specialty Ferrari brand tractors in India. It brings tractor technologies to India that the country has never seen before. These include the all four equal-sized wheels, oscillating chassis system, all-time 4 wheels - drive, front-engine mounting for super-low turning radius and an ideal weight distribution. With this it is trying to target the young aspiring farm entrepreneurs. It is also in the process of the automation which will improve the efficiency and the production capacity. As the company customer base is generally in the north region, it mayo focus on south and west to expand the Top Line.
In the current scenario when the company is facing the various problem viz. fall in market, fall in revenue growth, etc. one more step was to invest in the People. In the last few years Escorts have inducted experienced professional to head each of the four divisions.
Two brand approaches are also being used by the Escorts as mentioned below. Will it be successful for ESCORTS? The same was used by Bajaj to better position themselves, which we have covered in our article for the month of Nov 2012:
Product with Brand Name
M&M and TAFE
ACTION STARTED REFLECTION
Escorts has managed to maintain the profit even in the falling revenue, which is due reduction in the finance cost and fall in other expenditure. Some more cost cutting is expected in the near future.
OTHER BUSINESS SEGMENT:
After the farm equipment business, the construction equipment business is the main contributor to the revenue. And in order to meet the ambitious infrastructure demands the company has significantly revived up, manufacturing facilities and product portfolio. To get the synergy benefits the Escorts group has merged the construction equipment business in Escorts (The parent Company). The company is eyeing huge market potential for their products with the govt. planning to invest in $1 trillion in infrastructure development. The Railway Parts Business has also good growth potential with the govt. 12th five year plan has planned radical modernization process viz. Setting up of dedicated Railway Safety Authority, introduction of high-speed trains, new generation locomotives/coaches, installation of green toilets, capacity augmentation, manufacturing state-of-the-art railway technologies, components and equipment for global markets.
Escorts’ once turn around the life of the farmer with the Jai Kisan Initiative is now the process of turnaround of itself, with new series of Tractors. Escorts is in the business of tractor and will be in the tractor business with new product and new strategy to recoup the market lost to competitors. Earlier the Two Brand Approach was followed by the Bajaj which has led them to position at the number one. Now Escorts will be attempting to repeat the same.
Escorts have been concentrating on the farm equipment business now it’s the time to expand in other segments which have better potential in the coming years.