To become billion dollar company in terms of sales: Escorts

Excerpts from Bazaar on CNBC-TV18 Watch the full show »

Nikhil Nanda, the joint managing director of Escorts, tells CNBC-TV18 that the merger of three group companies with itself will help aid topline growth. "The merger will make Escorts a billion dollar company in terms of sales," he said.

Even though investors have shown their displeasure, Nanda says that they will be satisfied with the growth in profits going forward. "We believe we are building on core competencies, and in the medium to long term I do believe the investors should look out for exciting and profiting times on Escorts Limited," he said.

The merger combines Escorts Construction Equipment, Escorts Finance and Investments and Escotrac Finance Investments and Leasing to become a part of Escorts Ltd.

Below is an edited transcript of his interview with Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying video.

Q: Some of your investors are a little unhappy about the dilution and the contours of this merger. Could you take us through why it was required?

A: I think the most important factor we need to consider is that we are building one company around the fact that this Escorts core engineering strength is going to be evolving around agriculture and infrastructure. We believe combining the infrastructure and the agriculture story into one entity will provide a larger value in to long term.

There are many synergies that we see between tractors and construction equipment. In construction equipment, the growth that we have seen in the last four years is more than 25% year on year which we believe will continue for the next two to three years. So in terms of value, we will see build up in Escorts Limited for the next three to four years and the EBITDA will follow. I also believe that the EPS and the percentage in terms of net margins will stand to improve.

So from an overall perspective, while the investors might be disappointment by the dilution, the topline addition is of Rs 1000 crore in FY12. Escorts will be a billion dollar company in terms of topline, so I believe the topline growth for the next few years to come and the profits that we believe will come in will satisfy and meet expectations in terms of what investors expect from Escorts Limited.

Q: Can you just detail what kind of profitability these three companies enjoy and whether margins will remain comparable?

A: I wouldn't want to give you any forward number. I can say that in construction we have made entry into the earth moving segment and the growth is looking good, the products have been well accepted. The company is looking at adding newer products and we are working very robustly with our research and development team. There are many more products that are going to be planned in the next few months which are going to be announced in the market.

Similarly even within tractors we are looking at expanding the portfolio towards larger horsepower tractors. We are making entry into niche pockets where we are going to be providing products for specific crop solutions. So there is a combination in terms of products that are going to be rolled out between tractors and construction. If I may add even for railways, as you may know in the last few weeks we have made some announcements with a tie up with Honeywell.

So in combination if all the four divisions that we have in Escorts Limited, I believe with lot of conviction that we are providing and building a strong value. We are converting Escorts from a tractor company to an engineering company. We believe we are building on these core competencies and in the medium to long term I do believe the investors should look out for exciting and profiting times on Escorts Limited.

Q: Immediately how much does your EPS target get struck down by though with this 20% dilution?

A: If you look at the net worth, the current reserves are growing up. The debt-equity ratio is about 0.40 which is very insignificant. In terms of all the ratio of factors, I don't see them changing.

Even the two investment companies which have been merged, I think we would want to reflect the values of our investments in a balance sheet in its true value perspective. Therefore lot of entries will get cleaned up.

So the EPS I would believe would be about just 10-20 paisa, but in the medium to long term I believe this is the right decision we have taken. I think all the decisions in businesses will have to be taken from the medium to long term perspective and not from the short term perspective.