Escorts plans to launch products in premium segment

Encouraged by 40 percent jump in tractor sales in April, Faridabad based Escorts plans to focus on high value premium offerings going forward, said  joint managing director Nikhil Nanda.

In past few months the tractor manufacturer has merged its materials, manufacturing excellence, human resources and finance departments to combine value addition work it does.

"Principally speaking, Escorts wants to position itself into the high end of its product chain," Nanda said.

Also read: Escorts Q2 net profit up 61% at Rs 37.5cr

The company wants to enrich its product mix across business categories whether it its farm machinery like tractors, auto products, railways products or construction equipment. "The point is that this trend is common to all the businesses that Escorts will do. Our obsession is profit and that is what we are driving and internalizing in our management at Escorts," Nanda said.

Below is the verbatim transcript of the Nanda’s interview

Q: What is the general trend that you are seeing in the tractor industry? Are there signs of improvement that you are seeing in sales? Give us an indication of what kind of sales or volume run-rate do you think Escorts can clock within this calendar year.

A: The last two years have been very difficult years for the agricultural industry per se. We have seen some signs of revival especially in Minimum Support Prices (MSP) since last two months. As you just rightly mentioned the monsoon predictions being normal, we are hopeful that the industry should have some spikes of pick up.

Our entire emphasis at Escorts is now on higher value positioning of products for the premium segment. In April we have seen some significant increase in the volumes and the penetration of new products. Off course we cannot control things such as monsoons and the initiative from the government. I feel confident that gains in volumes should continue.

Q: You clocked around 31,870 units in the first half of FY13 in terms of your total tractor volumes. Can you give us an estimate in terms of whether you expect a possible continued momentum in the second half in terms of exact volumes? What would your internal estimates be?

A: I do not want to particularly speak about any forward numbers. What I would like to say is that the game plan and the initiative and actions are very, very clear to our sales and marketing department. We are confident with those actions and those actions are resulting results. We have seen some good growth in April. May and June is similar trend that we are seeing. This is against all odds in terms of the environment that we see.

The competitive pressures and the discounting still unfortunately is continuing from competitors. From a value proposition Escorts does not believe in discounting its products. Our strategy is very clear that we want to position our brand and our products on the premium side of the segment. With the value that we are bringing to the customer and the new launches of products that we have made in the recent past few weeks we have been able to pull and get some interesting pull from the customers which are resulted to the growth that we are seeing for our company.

Q: You have been undertaking some price hikes as well in the quarter gone by if I am not wrong. Are you seeing a lot of pricing comfort going ahead? Will there be more price hikes? Will point you made about the premium segment and increasing your presence there help you to see better realisations, because in the quarter gone by you were sitting on realisations of about Rs 5 lakh per tractor. Do you think you can better that because of these initiatives that you are taking?

A: I firmly believe that price is an aspect of a value that a customer understands. If a customer understands the value that he is getting from any purchase that he makes, in this case a tractor, price becomes a secondary aspect. Again going back to the wholesome experience that we are wanting to give to our customer which is beyond just giving him an idea of using a tractor, but an equipment and an recognised product that is giving him multiple yields.

That is what we have done in the past few weeks. We are propositioning the customer in a manner that he looks at this entire experience as a productivity tool Entire emphasis is just not tractors, but a crop solution. The crop solutions vertical that is being propositioned along with the tool of a tractor is giving some fantastic results to the customer. With that value being established, Escorts is very confident on value proposition.

Q: We want to know what exactly the trajectory will be from hereon, first in terms of realisations and whether you will be able to do better than the Rs 5 lakh per tractor realisations that you are sitting on?

A: I do not want to comment on the future volumes. Our fiscal is from September to October. On the margin front that is our key focus. At Escorts in the past few quarters we are seeing some significant increase in our EBITDA margin. So we have been very skeptical and bearish in wanting to discount the product.

We have taken calls along with the new products that we have launched both in the Farmtrac and Powertrac of taking some additional bite into the pricing. That will continue with a few more launches that we are planning. I am positive about the plans and the initiative that we have, that the volume trends that you are seeing in Escorts should continue. All I am saying is we are very confident.

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Q: You did mention that EBITDA margins will be your focus in terms of the company's strategy going forward. You have clocked blended margins of around 5.4 percent. Just give us some perspective in terms of the auto ancillary division. That actually dragged down the blended margins this quarter. Do you expect a pick up or maybe a turn into the black on the Profit Before Interest and Taxes (PBIT) level and what would your focus be in terms of blended margins as a percentage of sales?

A: Let me answer this slightly differently. We are looking at Escorts of how we can make Escorts more intelligent, more lean. We are looking at compression of a lot of cost. In the last few months we have taken some significant decisions in wanting to merge a lot of value addition work that we do in our company. To be specific, the materials department, the manufacturing excellence, human resources and finance departments have been merged. We are shrinking the size of value addition and support that we can give to our four businesses and auto being one of the businesses. Principally speaking, Escorts wants to position itself into the high end of its product chain.

If you look at agriculture business which is a crop solution vertical that we have not spoken about but will emerge in the future; the construction business where we are participating in the material handling and we are market leaders with 53-54 percent market share that we are going to retain and build by bringing in larger technological products.

Earth moving is a segment where we have made an entry in the last two years with our presence in the backhoe loader and we will be adding more products. The same trend will also apply to the auto products or any business that Escorts does. Now to answer your question, whether the trends will change? Most definitely yes. We are now again looking at a high-end product chain for the auto component business. We are looking at European companies, South American companies. Our engineers spend more of their time in technologies and products that we have not seen in India. I cannot give you names of some of the customers with whom we are working, but with the kind of products that are into development process, I do believe that the company is going to enrich its product mix. The point is that this trend is common to all the businesses that Escorts will do. Our obsession is profit and that is what we are driving and internalizing in our management at Escorts.

Q: Can you give us a bird's eye view of how the tractor sector is looking? You have been a part of this industry for very long. You have seen the up cycles and the down cycles. Do you think the worst of the down cycle is behind us in the tractor industry itself? Going forward in this fiscal what kind of a growth do you think the industry can eke out? Will it be a 10 percent growth or will it be higher than that, mid-teens perhaps?

A: In India we are quite obsessed with volumes and the growth that we see as a percentage on that volume. Let me put a different frame to the context of understanding agriculture market and agricultural trends in this country. In terms of units India is by far the largest in the world in terms of 525,000-540,000 tractors. But in terms of value it is nowhere near to the trends of what we see in European countries. For example, 70 percent of Germany’s agriculture equipment value is equal to the total value of what we see in India.

Your point and your question is very relevant in terms of how we or other participants in this industry see as a growth. Growth will come in many different aspects now, one in terms of volume, in terms of the current size of the kind of equipment that we see whether it is tractors or other farm equipment that a farmer is requiring today in terms of entire mechanisation drive. That of course is taking a total paradigm shift or a similar trend to what we have seen in Europe and in the United States.

So the farmer is looking for larger sizes of equipment which will build the larger value content to what we see in the European countries. In the tractor industry in India when you see growth you can go up to 16-20 percent growth and when you see decline then you go into the negatives and then you go into a flat decline. As I said earlier in my interview in last two to two and half years we have seen some severe shocks and the industry has been flat.

Having said that, I personally feel that the chances of revival are higher than before. I would say this even more so now with the monsoon coming in and this predictability of it being normal. If we close the month of June the way we expect to close for our own numbers and for the industry volumes then I can most definitely say things will be positive from now onwards.