Escorts Kubota Ltd:Annual Report 2023-24 Analysis

Escorts Kubota Ltd.: A Comprehensive Overview #

About the Company #

Year of Establishment and Founding History: Escorts Group was founded in 1944 by H.P. Nanda and Yudi Nanda. Initially focused on importing and distributing railway equipment, Escorts diversified into agricultural machinery and automotive components over time. In 2022, Kubota Corporation increased its stake in Escorts, resulting in the company being renamed Escorts Kubota Limited.

Headquarters Location and Global Presence: The headquarters are located in Faridabad, Haryana, India. Escorts Kubota has a significant presence in India and exports its products to various international markets, including Africa, Southeast Asia, and Latin America.

Company Vision and Mission: While a specific publicly stated vision and mission statement may not be readily available, the company’s actions suggest a commitment to:

• Providing innovative and reliable agricultural and construction machinery solutions.
• Enhancing farmer productivity and improving infrastructure development.
• Contributing to the economic growth of India and other developing countries.
• Sustainable and responsible business practices.

Key Milestones in Their Growth Journey:

• 1944: Founding of Escorts Group.
• 1960s: Introduction of tractors, marking a major shift to agricultural machinery.
• 1980s: Expansion into automotive components.
• 2000s: Focus on technological advancements and international expansion.
• 2022: Kubota Corporation increases stake, leading to the renaming of the company to Escorts Kubota Limited, marking a significant strategic partnership.

Stock Exchange Listing Details and Market Capitalization: Escorts Kubota Limited (EKL) is listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). The stock symbol is ESCORTS. Market capitalization fluctuates based on market conditions.

Recent Financial Performance Highlights: Refer to the most recent annual reports and quarterly results available on the Escorts Kubota website or financial news sources for up-to-date information.

Management Team and Leadership Structure: The leadership team includes key personnel from both Escorts and Kubota. Bharat Madan serves as the Chief Financial Officer.

Their Products #

Complete Product Portfolio with Categories:

• Tractors: A wide range of tractors catering to different farming needs.
• Construction Equipment: Backhoe loaders, compactors, cranes, and other infrastructure development machinery.
• Railway Equipment: Brake systems, couplers, and other components for railway wagons and locomotives.

Flagship or Signature Product Lines: The tractor range, particularly the Farmtrac and Powertrac series, are considered flagship products.

Key Technological Innovations or Patents: Escorts has focused on introducing technologies such as:

• Fuel-efficient engines
• Precision agriculture solutions (e.g., GPS-guided tractors)
• Operator comfort and safety features

Manufacturing Facilities and Production Capacity: Escorts Kubota has multiple manufacturing facilities across India. Exact production capacity figures are typically not publicly disclosed.

Quality Certifications and Standards: Escorts Kubota adheres to international quality standards such as ISO 9001.

Any Unique Selling Propositions or Technological Advantages:

• Strong brand recognition and reputation in the Indian market.
• Wide distribution and service network.
• Focus on providing value-for-money products.
• Technological collaboration with Kubota for advanced features and performance.

Recent Product Launches or R&D Initiatives: Information about recent product launches can be found on the Escorts Kubota website or in press releases.

Primary Customers #

Target Industries and Sectors:

• Agriculture: Farmers, agricultural cooperatives.
• Construction: Infrastructure development companies, contractors.
• Railways: Indian Railways and private railway operators.

Geographic Markets (domestic vs. international): Primarily focused on the Indian domestic market, with increasing exports to international markets in Africa, Southeast Asia, and Latin America.

Major Client Segments (agricultural, industrial, residential, etc.): Predominantly serves the agricultural sector, followed by the construction and railway sectors.

Distribution Network and Sales Channels: Escorts Kubota has an extensive distribution network consisting of dealers and service centers across India and in export markets.

Major Competitors #

Direct Competitors in India and Globally:

• India: Mahindra & Mahindra, TAFE (Tractors and Farm Equipment Limited), Sonalika, John Deere India.
• Globally: Kubota (pre-existing relationship now a part of Escorts Kubota), John Deere, CNH Industrial (Case IH, New Holland), AGCO Corporation (Massey Ferguson).

Comparative Market Share Analysis: Market share data is typically tracked by industry research firms.

Competitive Advantages and Disadvantages:

• Advantages:
  • Strong brand reputation in India
  • Extensive distribution network
  • Kubota’s technological expertise and global reach
• Disadvantages:
  • Intense competition in the tractor market
  • Vulnerability to commodity price fluctuations and economic downturns

How They Differentiate From Competitors: Escorts Kubota differentiates itself through a combination of:

• Value-for-money offerings
• Strong after-sales service
• Technological collaboration with Kubota for advanced features.

Industry Challenges and Opportunities:

• Challenges:
  • Fluctuations in agricultural output and farmer income
  • Rising input costs
  • Increasing competition
  • Evolving emission norms and environmental regulations
• Opportunities:
  • Increasing mechanization in agriculture
  • Government initiatives to support agriculture and infrastructure development
  • Growth in rural infrastructure
  • Expansion into new markets.

Market Positioning Strategy: Escorts Kubota aims to be a leading provider of agricultural and construction machinery solutions in India and emerging markets, focusing on value, reliability, and technological innovation.

Future Outlook #

Expansion Plans or Growth Strategy: Escorts Kubota’s growth strategy involves:

• Expanding its product portfolio
• Strengthening its distribution network
• Increasing its exports
• Investing in R&D to develop advanced technologies

Sustainability Initiatives or ESG Commitments: Escorts Kubota is likely to be focusing on ESG matters, potentially involving:

• Reducing the environmental impact of its products.
• Promoting sustainable agricultural practices.
• Corporate social responsibility initiatives in the communities where it operates.

Industry Trends Affecting Their Business:

• Increasing adoption of precision agriculture technologies
• Growing demand for fuel-efficient and environmentally friendly machinery
• Government support for agricultural mechanization
• Rise of farm-as-a-service models

Long-term Vision and Strategic Goals: The long-term vision is to become a globally competitive player in the agricultural and construction machinery industries by leveraging its strengths and the synergies with Kubota Corporation.

Financial Performance Overview #

3-Year Trend Analysis of Key Financial Metrics #

• Revenue from Operations: Grew from ₹8,428.7 crores in FY2022-23 to ₹8,849.6 crores in FY2023-24, a 5% increase.
• EBITDA: Increased from ₹777.5 crores in FY2022-23 to ₹1,166.7 crores in FY2023-24.
• Consolidated Profit After Tax (PAT): Increased from ₹636.6 crore in FY2022-2023 to ₹1,049.1 in FY2023-2024
• Operating Profit Margin: Increased from 9.14% in FY2022-23 to 13.38% in FY2023-24.
• Net Profit Margin: Increased from 7.55% in FY2022-23 to 11.86% in FY2023-24.
• Debt-Equity Ratio: Remained negligible.
• Basic EPS: Increased from 7.27 to 11.82.

Business Segment Performance #

• Agri Machinery Business Division: Revenue decreased by 3.3% from ₹6,316.1 crores in FY2022-23 to ₹6,110.1 crores in FY2023-24. Tractor sales volume decreased by 7.2%, from 103,290 units to 95,858 units. EBIT increased from ₹587.4 crores to ₹778.3 crores. Domestic market share increased slightly from 10.1% to 10.3%.
• Construction Equipment Business Division: Revenue increased by 45.0%, from ₹1,179.0 crores in FY2022-23 to ₹1,709.7 crores in FY2023-24. Equipment volume increased by 42.2%, from 4,620 units to 6,548 units. EBIT increased significantly from ₹34.1 crores to ₹158.9 crores.
• Railway Equipment Business Division: Revenue increased by 12.9% to ₹950.4 crores in FY2023-24, up from ₹841.9 crores in FY2022-23. EBIT increased from ₹115.9 crores to ₹179.2 crores. Order book stood at ₹950 crores at the end of March 2024.

Major Strategic Initiatives #

• Restructuring of Agri-Machinery Business Division into separate profit centers.
• Partnership and merger with Kubota Corporation to expand into agricultural solutions.
• Shift from outsourcing IT services to a hybrid IT model to optimize costs and improve productivity.
• Engine business sold over 12,000, besides its captive use.

Risk Landscape Changes #

• Identified threats include potential policy changes, supply chain disruptions, intense market competition, adverse climate conditions, and geopolitical maneuvers impacting supply and demand.
• Supply chain issues might affect the Company’s production process.

ESG Initiatives and Metrics #

• Carbon Neutrality: Aiming for carbon neutrality by 2050, with a 4.12% reduction in Scope 1 + Scope 2 emission intensity in FY2023-24. Baseline year FY 2022-23: 46,060.5 tCO 2 e, FY 2023-24: 46,445.56 tCO 2.
• Renewable Energy: Targeting a 3x improvement in renewable energy share by 2030, with a ~20% year-on-year increase in FY2023-24.
• Gender Diversity: Increased to 7.14% in FY2023-24, up by 214 bps from the FY2020-21 baseline of 5%.
• Water Positive Organization: Targeting to be water-positive by 2030, with a 26.23% reduction in total water consumption in FY2023-24.
• Zero Waste Landfill: Aims for zero landfill waste by 2027, reducing waste sent to landfill from 304.14 MT in FY2022-23 to 257.04MT in FY2023-24.
• CSR Spend: ₹17.72 crores spent on CSR activities in FY2023-24, impacting ~50,000 lives.
• Sustainability Awareness & Training: Over 1,000 employees participated in ESG awareness.
• Value Chain ESG Assessment: Started in January 2024

Management Outlook #

• Agri Machinery: Expects growth due to increased investment in agricultural infrastructure and adoption of modern farming practices.
• Construction Equipment: Anticipates continued growth momentum and margin improvement due to increased infrastructure development and cost reduction efforts.
• Railway Equipment: Projects sustained growth driven by global strategic partnerships, product development, and localization of import content to enhance margins.
• The Company expects to strengthen cost-optimization measures.

Detailed Analysis #

Financial Analysis of Escorts Kubota Limited #

Agri Machinery Segment #

3-Year Comparative Analysis (Consolidated) #

(₹ in crores)

Significant Changes in Major Line Items (>10% YoY) #

• Segment Assets increased by 19.07%.
• Segment Liabilities increased by 35.38%.
• Segment revenue decreased by 3.26% from FY23 to FY24, and by 6.35% from FY22 to FY23.

Working Capital Trends #

• Not directly calculable from available segment data. Consolidated data indicates a rise of 26.79% in Net Capital Turnover Ratio.

Asset Quality Metrics #

• Impairment details specific to the Agri Machinery segment are not fully disclosed, preventing a comprehensive asset quality analysis.

Construction Equipment Segment #

3-Year Comparative Analysis (Consolidated) #

(₹ in crores)

Significant Changes in Major Line Items (>10% YoY) #

• Segment Assets increased by 19.16%.
• Segment Liabilities increased by 25.70%.
• Segment revenue increased by 45%.

Working Capital Trends #

• Not directly calculable from available segment data.

Asset Quality Metrics #

• No impairment details provided for this segment.

Railway Equipment Segment #

3-Year Comparative Analysis (Consolidated) #

(₹ in crores)

Significant Changes in Major Line Items (>10% YoY) #

• Segment Assets increased by 17.62%.
• Segment Liabilities increased by 49.39%.
• Segment Revenue increased by 12.9%

Working Capital Trends #

• Not available from segmented data.

Asset Quality Metrics #

• No impairment information provided.

Operating Performance #

Income Statement #

Revenue Breakdown by Segment/Geography with Growth Rates: #

• Agri Machinery: FY2023-24 revenue was ₹6,110.1 crores, a decrease of 3.26% from FY2022-23’s ₹6,316.1 crores. Domestic tractor sales decreased by 5.3%, and export tractor sales declined by 30.0%.
• Construction Equipment: FY2023-24 revenue was ₹1,709.7 crores, an increase of 45% from FY2022-23’s ₹1,179.0 crores. Segment volume increased by 42.2%.
• Railway Equipment: FY2023-24 revenue was ₹950.4 crores, an increase of 12.9% from FY2022-23’s ₹841.9 crores.
• Consolidated Revenue (FY 2023-24): ₹8,849.6 crores, a 5% increase compared to FY2022-23’s ₹8,428.7 crores.
• Geographical Revenue (Consolidated):
  • Domestic: FY2023-24 revenue was ₹8,273.44 crores, a 6.99% increase from FY2022-23’s revenue of 7,732.44
  • Export: FY2023-24 revenue was ₹567.14 crores, a decrease of 21.52% from the last FY’s revenue of 722.70

Cost Structure Analysis: #

• Material Costs (Standalone): FY2023-24 were ₹6,072.8 crores, a slight decrease from FY2022-23’s ₹6,153.2 crores.
• Raw Material Consumption (Standalone): FY2023-24 was ₹5,017.6 crores, a slight decrease from FY2022-23’s 5,143.0 Crores.
• Employee Benefits Expense (Standalone): FY2023-24 was ₹444.8 crores, an increase from FY2022-23’s ₹416.5 crores.
• Other expenses (standalone): FY2023-24 was increased to 1,119.6, a decrease of 1.47% from last FY’s 1,136.3.

Margin Analysis (Gross, Operating, Net) with Trends: #

• Operating Profit Margin (Standalone): FY2023-24 was 13.32%, an increase from FY2022-23’s 9.35%.
• Net Profit Margin (Standalone): FY2023-24 was 11.82%, an increase from FY2022-23’s 7.27%.
• EBIT Margin (Agri Machinery): Increased from ₹587.4 crores to ₹778.3 crores in FY2023-24.
• EBIT Margin (Construction Equipment): Increased to 9.3% in FY2023-24, up 640 bps from 2.9% in FY2022-23.
• EBIT Margin (Railway Equipment): Increased to 18.9% in FY2023-24, up from 13.8% in FY2022-23.

Non-Recurring Items: #

• Exceptional Items (Standalone): FY2022-23 included a loss on the sale of an investment in a joint venture (₹72.76 crores) and impairment of investments in a subsidiary (₹24.40 crores).

EPS Analysis (Basic/Diluted): #

• Basic EPS (Standalone): FY2023-24 was ₹87.99, an increase from FY2022-23’s ₹53.74.
• Diluted EPS (Standalone): FY2023-24 was ₹87.85, an increase from FY2022-23’s ₹53.67.
• Basic EPS (Consolidated): FY2023-24 was ₹95.29, an increase from FY2022-23’s ₹57.92.
• Diluted EPS(Consolidated): FY2023-24 was ₹95.12, an increase from FY2022-23’s 57.84.

Cash Management Analysis #

Dividend and Share Buyback Trends #

• Dividend: A final dividend of ₹7.00 per share was paid for FY2022-23.
• Share Buyback: 21,442,343 shares were cancelled during the year, related to the Escorts Benefit and Welfare Trust.

Debt Service Coverage #

• The Consolidated Debt Service Coverage Ratio for FY 2023-24 is 33.63x, showing an important increase compared to 9.92x in FY 2022-23.
• Segment-wise debt service coverage ratios are not calculable due to the lack of detailed interest expense and principal repayment data for each segment.

Liquidity Position #

• The group has a Current Ratio for FY2023-24 of 2.38.

Financial Analysis: Escorts Kubota Limited #

Profitability Ratios (3-Year Trends) #

Escorts Kubota Limited (Consolidated) #

• Net Profit Margin: FY24: 11.86%, FY23: 7.55%, FY22: 7.27%. An increasing trend, indicating improved profitability.
• Return on Net Worth/Equity: FY24: 11.44%, FY23: 7.78%, FY22: 7.20%. A consistently increasing trend, reflecting better returns for shareholders.
• Operating Profit Margin: FY24: 13.38%, FY23: 9.14%, FY22: 9.35%. Indicates an increase from the previous year.

Agri Machinery Segment #

• EBIT margin increased to 778.3 crores.

Construction Equipment Business Division #

• EBIT margin went up by 640 bps to 9.3% as against 2.9% in the previous fiscal year.

Railway Equipment Business Division #

• The EBIT margin for the year ended March 2024 stood at 18.9% as against 13.8% in the previous year.

Liquidity Metrics #

Escorts Kubota Limited (Consolidated) #

• Current Ratio: FY24: Current Assets (5,509) / Current Liabilities (1,955) = 2.82, FY23: Current Assets (4,853) / Current Liabilities (1,440) = 3.37. A slight decrease but still a very strong liquidity position.

Efficiency Ratios #

Escorts Kubota Limited (Consolidated) #

• Inventory Turnover Days: FY24: 72, FY23: 73. A slight improvement in inventory management.

Agri Machinery Segment #

• Total Capacity Utilization in FY24: ~80%.
• Plant in India for Tractor and Components, manufactured in Faridabad, Haryana has the capacity to produce 1,20,000 Tractors per Annum.
• Plant under JV with Kubota: 50,000 Tractors per Annum

Construction Equipment Business Division #

• Plant at Ballabhgarh, Haryana has units capacity in Multi-Shift Operations of 10,000
• 70% Capacity Utilization in FY24

Leverage Metrics #

Escorts Kubota Limited (Consolidated) #

• Debt-Equity Ratio: FY24: 0.00, FY23: 0.00. The company is virtually debt-free.
• Interest Coverage Ratio: FY24: 161.91x, FY23: 55.09x. Extremely high coverage, showing the company’s strong ability to meet interest obligations.

Industry Comparison & Deviations #

• Escorts Kubota Limited has significantly higher liquidity and lower leverage ratios than what is generally considered typical, signifying a strong financial health.
• Profit margins have significantly improved, with notable increase.

Escorts Kubota Limited Business Segment Analysis #

Agri Machinery Business Division #

Revenue and Profitability #

• FY2023-24 revenue: ₹6,110.1 crores, a decrease of 3.26% from FY2022-23 (₹6,316.1 crores).
• Tractor sales: 95,858 units in FY2023-24, down 7.20% from 1,03,290 units in FY2022-23.
• Domestic tractor sales decreased by 5.28%, export sales declined by 29.97%.
• EBIT: ₹778.3 crores in FY2023-24, up from ₹587.4 crores in FY2022-23.
• Engine business sold over 12,000 units.

Market Share and Competitive Position #

• Domestic market share increased to 10.3% in FY2023-24, up from 10.1% in FY2022-23 (a 23 basis point increase).

Key Products/Services #

• Products are offered under Farmtrac, Powertrac, Steeltrac, Farmpower, and E Kubota brands.
• Restructuring into Tractor Business Division, Agri Solutions Business Division, Services & Spare Parts Business Division, and Engine Business Division.
• Agri Solutions includes products like Combine Harvesters and Rice Transplanters.

Geographic Distribution and Market Penetration #

• Nationwide network of over 1,200 dealers in India.
• Products are used in more than 80 countries.
• 5,619 tractors export in FY24.

Operational Efficiency #

• Tractor production capacity utilization: ~80% in FY2023-24.
• Plants located in Faridabad, Haryana.
• Joint venture capacity with 50000 per annum, Poland 100% subsidiary.

Growth Initiatives and Challenges #

• Growth initiatives: Focus on increasing farm mechanization, leveraging global partnerships (Kubota), and introducing new products.
• Challenges: Erratic rainfall, reduced rural cash flows, and supply chain issues.
• Strategic restructuring into separate profit centers to promote autonomy and accountability.

Construction Equipment Business Division #

Revenue and Profitability #

• FY2023-24 revenue: ₹1,709.7 crores, up 45% from ₹1,179.0 crores in FY2022-23.
• Sales volume: 6,548 machines, a 42.2% increase from 4,620 machines in FY2022-23.
• EBIT margin: 9.3%, up 640 bps from 2.9% in FY2022-23.
• EBIT: 158.9 Crs vs 34.1 crs in previous year.

Key Products/Services #

• New product launches: EC 5250 Plus (Compactor), Digmax 3E/3EP (Backhoe Loader), F 20 Piling Master (Crane).

Geographic Distribution and Market Penetration #

• Focus on material handling, earthmoving, and road building segments in India.

Operational Efficiency #

• Multi-Shift operations capacity 10,000, 70% capacity utilisation.

Growth Initiatives and Challenges #

• Growth initiatives: Capitalizing on increased infrastructure development projects, adoption of advanced technologies.
• Challenges: Rising labor costs, stringent emission regulations, and need for significant capital investments in infrastructure projects.

Railway Equipment Business Division #

Revenue and Profitability #

• FY2023-24 revenue: ₹950.4 crores, up 12.9% from ₹841.9 crores in FY2022-23.
• EBIT margin: 18.9%, up from 13.8% in FY2022-23.
• EBIT: 179.2 Crs vs 115.9 Crs in previous year.
• Order book at the end of March 2024: ₹950 crores.

Market Share and Competitive Position #

• Supplies to Indian Railways, Metro organizations, Freight Wagon Builders, and rolling stock manufacturers globally.

Key Products/Services #

• Products include Brake Systems, Couplers, Suspension Systems, Friction products, HVAC’s, Electrical Panels, Automatic Plug Doors, and Vacuum Toilet Systems.
• New product launches: Electrical Control Panels and Brake Pads for Metro coaches, Dampers for Vande Bharat Coaches.

Growth Initiatives and Challenges #

• Growth initiatives: Focus on lean manufacturing, product innovation through global technology collaborations, expanding product portfolio for domestic and overseas markets.
• Challenges: Longer gestation periods before launching new products, emergence of new competitors.

Escorts Kubota Limited: Segment-Wise Financial Analysis #

Agri Machinery Business Division #

Strategic Risks #

• Severity: High. Revenue decreased by 7.2% year-over-year, though EBIT increased.
• Likelihood: Medium. Increasing competition.
• Trend: Increasing competition.
• Mitigation Strategies: New product development, global partnerships, and strengthening distribution.
• Control Effectiveness: Partially Effective. Market share increased from 10.1% to 10.3%.
• Financial Impact: EBIT increased to ₹778.3 Crores.

Operational Risks #

• Severity: Medium. Production capacity utilization was ~80% in FY2023-24.
• Likelihood: Medium. Supply chain disruptions.
• Trend: Stable.
• Mitigation Strategies: Combat climate change through carbon footprint reduction.
• Control Effectiveness: Moderate.
• Potential Financial Impact: Unspecified, but could cause fluctuations in profit.

Financial Risks #

• Severity: Low. Commodity price softening and efficient cost control positively impacted EBIT.
• Likelihood: Medium. Volatility in input costs.
• Trend: Commodity price, improved price, and cost control, were benificial.
• Mitigation Strategies: Cost optimization projects, strategic materials sourcing.
• Control Effectiveness: Effective, as indicated by EBIT margin improvement.
• Financial impact: EBIT rose from ₹587.4 crores to ₹778.3 crores.

Compliance/Regulatory Risks #

• Severity: Medium.
• Likelihood: Medium. Changes in government policies.
• Trend: Stable
• Mitigation Strategies: Monitoring of regulatory changes.
• Control Effectiveness: Not specified.
• Potential Financial Impact: Sudden policy changes can disrupt short-term growth.

Construction Equipment Business Division #

Strategic Risks #

• Severity: Low. Strong growth, with a 42.2% increase in equipment volumes and a 45% increase in revenue year-over-year.
• Likelihood: Low.
• Trend: Decreasing.
• Mitigation Strategies: New product launches.
• Control Effectiveness: High, revenue, and EBIT growth.
• Potential Financial Impact: EBIT margin went up by 640 bps to 9.3%.

Operational Risks #

• Severity: Medium. Capacity utilization was 70% in FY2023-24.
• Likelihood: Medium. Dependent on infrastructure development projects.
• Trend: Increasing dependance on goverment investment.
• Mitigation Strategies: Operational efficiency improvements, cost reduction efforts.
• Control Effectiveness: Improving, as indicated by margin improvement.
• Financial Impact: EBIT went up to 158.9 crores.

Financial Risks #

• Severity: Low.
• Likelihood: Low.
• Trend: Decreasing, as evidenced by significant revenue and EBIT margin growth.
• Mitigation Strategies: Goverment focus on project execution and advance technologies.
• Control Effectiveness: EBIT margin increased to 9.3%

Compliance/Regulatory Risks #

• Severity: Medium, particularly related to emission norms.
• Likelihood: Medium. Subject to regulations such as the Customs Act of 1962.
• Trend: Stable.
• Mitigation Strategies: Production-Linked Incentive (PLI) scheme.
• Control Effectiveness: Not directly specified.
• Financial impact: ICEMA urged to provide measures.

Emerging Risks #

• Severity: High. Adoption of Generative AI for the design process
• Likelihood: Medium.
• Trend: Increasing.

Railway Equipment Business Division #

Strategic Risks #

• Severity: Low. Achieved highest-ever yearly revenue, with a 12.9% increase year-over-year.
• Likelihood: Low.
• Trend: Decreasing.
• Mitigation Strategies: Launch of new products.
• Control Effectiveness: High, as indicated by the order book of ₹950 crores at the end of March 2024.
• Financial impact: EBIT margin was 18.9%

Operational Risks #

• Severity: Medium.
• Likelihood: Medium. Faces competition, and new product launches involve gestation periods.
• Trend: Increasing.
• Mitigation Strategies: Focus on lean manufacturing, global technology collaborations, and in-house manufacturing.
• Control Effectiveness: Improving.
• Financial Impact: Division Revenue increased by 12.9% rising from ₹841.9 crores in FY 2022-23 to ₹950.4 crores in FYThe EBIT margin for the year ended March 2024 stood at 18.9% as against 13.8% in the previous year.

Financial Risks #

• Severity: Low.
• Likelihood: Low. Demonstrated consistent sales growth, with a 5-year CAGR of 19.3%.
• Trend: Decreasing, positive financial performance.
• Mitigation strategies: Focus on lean manufacturing.
• Control Effectiveness: High, as indicated by the EBIT margin increase.
• Financial Impact: EBIT margin went up to 18.9%

Compliance/Regulatory Risks #

• Severity: Medium.
• Likelihood: Medium.
• Trend: Stable.
• Mitigation Strategies: Holds IRIS ISO TS/22163 certification.
• Control Effectiveness: High.
• Financial impact: No information given.

Emerging Risks #

• Severity: High. Adoption of 5G can enhance the convenience of infrastructure monitoring.
• Likelihood: Medium.
• Trend: Increasing.

Escorts Kubota Limited: Financial Analysis by Division #

Agri Machinery Business Division #

Long-Term Strategic Goals and Progress #

• Aims to become a global leader in agricultural equipment.
• Progress is demonstrated through the expansion into separate profit centers (Tractor, Agri Solutions, Services & Spare Parts, and Engine Business Divisions) to enhance autonomy and profitability.
• Goal of achieving carbon neutrality by 2050.
• Leveraging relationship with Kubota and expanding into global markets.

Competitive Advantages and Market Positioning #

• Operates under established brands (Farmtrac, Powertrac, Steeltrac, Farmpower, and E Kubota), with over 2.2 million customers globally.
• Strong nationwide dealer network of over 1,200 dealers.
• Market share increased to 10.3% in FY 2023-24, despite a decline in domestic tractor sales.

Innovation Initiatives and R&D Effectiveness #

• Emphasis on innovation, with the Agri Solutions Business Division expanding to include Combine Harvesters and Rice Transplanters.
• Partnership with Kubota to introduce improved Agriculture solutions.

M&A Strategy and Execution #

• Upcoming merger with Kubota Corporation.
• Restructuring of Agri-Machinery Business Division into separate profit centers.

Management’s Track Record in Execution #

• FY24 saw a decrease of 7.2% in overall sales and a decrease of 5.3% of domestic sales.
• EBIT increased from ‘587.4 Cr to ‘778.3 Cr.
• Market share increased slightly.
• Shows signs of adaptability to the changing market conditions.

Capital Allocation Strategy #

• Investments are directed towards expanding the product range (Combine Harvesters, Rice Transplanters) and restructuring for greater autonomy and profitability.

Organizational Changes and Their Impact #

• Restructuring into separate profit centers (Tractor, Agri Solutions, Services & Spare Parts, Engine) is designed to drive autonomy, accountability, and profitability.

Construction Equipment Business Division #

Long-Term Strategic Goals and Progress #

• Aims to be a leading global manufacturer of pick-and-carry hydraulic mobile cranes.
• Capacity utilization of 70% at the Ballabhgarh, Haryana plant.

Competitive Advantages and Market Positioning #

• Strong position in material handling, earthmoving, and road building segments.
• Focus on specific product niches (pick-and-carry hydraulic mobile cranes).

Innovation Initiatives and R&D Effectiveness #

• New product launches (EC 5250 Plus Compactor, Digmax 3E/3EP Backhoe Loader, F 20 Piling Master Crane).

Management’s Track Record in Execution #

• Division Revenue is up 45% to 1,709.7 Cr.
• Volume rose 42.2%.
• EBIT margin is up 640 bps to 9.3%.

Capital Allocation Strategy #

• Investments are directed towards expanding product lines and serving growing infrastructure development.

Railway Equipment Business Division #

Long-Term Strategic Goals and Progress #

• Aims to expand its product portfolio for domestic and overseas markets.
• Goal to localize import content to enhance margins.

Competitive Advantages and Market Positioning #

• Established supplier to Indian Railways, Metro organizations, and freight wagon builders.
• Product range includes brake systems, couplers, suspension systems, and other specialized components.

Innovation Initiatives and R&D Effectiveness #

• Launch of three new products (Electrical Control Panels, Brake Pads, Dampers for Vande Bharat Coaches).

Management’s Track Record in Execution #

• A five-year CAGR for revenue increase of 19.3%.
• Division revenue increased by 12.9%.

Capital Allocation Strategy #

• Focus on product development through global technology collaborations and in-house manufacturing/testing facilities.

Engine Business Division #

Long-Term Strategic Goals and Progress #

• Sold over 12,000 engines, in addition to supplying their own products.

Competitive Advantages and Market Positioning #

• Focus on captive use and selling engines externally.

Management’s Track Record in Execution #

• Successfully sold over 12,000 engines

Capital Allocation Strategy #

• Captive use of production is high priority.

Organizational Changes and Their Impact #

• Became it’s own divison within the larger Agri-Business.

ESG Analysis of Escorts Kubota Limited #

Environmental Metrics and Targets #

• Company-wide: Carbon neutrality target set for 2050, with a Scope 1+2 emissions reduction target of 25% by 2030. Baseline year FY 2022-23: 46,060.5 tCO2e, FY 2023-24: 46,445.56 tCO2e, marking a 4.12% reduction in Scope 1 + Scope 2 emission intensity.
• Aim to improve Renewable Energy share by 3x by 2030.
• FY 2023-24: ~20% increase Year-on-Year in Renewable Energy share.
• Targets to achieve water positive organization by 2030.
• Total Water Consumption reduced by 26.23% in FY 2023-24 (257 KL) compared to the baseline year FY 2022-23 (349 KL).
• Aim to achieve zero landfill waste by 2027.
• Waste sent to landfill decreased from 304.14 MT (FY 2022-23) to 257.04 MT (FY 2023-24).
• Over 1,000 employees took part in ESG awareness quizzes.

Social Responsibility Programs #

• Company-wide: FY 2023-24 CSR spending was ’ 17.72 Crores, impacting approximately 50,000 lives. Focus areas include agricultural development, environmental sustainability, and empowerment of socially vulnerable groups.
• Gender diversity increased to 7.14% in FY 2023-24, a 214 bps increase from the baseline year (FY 2020-21: 5%), with a target of 7.5% by 2025.
• Value chain assesment was started in January 2024.

Governance Structure and Effectiveness #

• Company-wide: The Board of Directors and senior management conduct regular policy reviews and updates, ensuring alignment with ESG principles. The Board reviews business responsibility performance annually. A CSR Committee oversees social performance, and a Risk Management Committee assesses and reviews identified risks.

Sustainability Investments and ROI #

• Qualitatively, investments are directed towards transitioning to Gas Gensets (increased from 5 in FY2022-23 to 6 in FY 2023-24) to minimize emissions and improve efficiency.

Regulatory Compliance and Future Preparations #

• Company-wide: The company reports compliance with environmental laws/regulations/guidelines in India, including the Water (Prevention and Control of Pollution) Act, Air (Prevention and Control of Pollution) Act, and Environment Protection Act. Compliance with ISO-9001, ISO-14001, and ISO-45001, and IRIS is used to demonstrate governance.
• The reporting also covers SEBI’s Business Responsibility and Sustainability Report (BRSR) requirements.

Escorts Kubota Limited: Segment-Wise Financial Analysis #

Agri Machinery Business Division #

Management Guidance and Assumptions #

• Management has restructured the Agri-Machinery Business Division into separate profit centers: Tractor Business, Agri Solutions, Services & Spare Parts, and Engine Business. This is to drive autonomy, accountability, profitability, and operational excellence.
• The company will be merged and become a dominant force in the agricultural solutions sector.

Market Growth Forecasts #

• The domestic tractor industry saw a 7.4% decline in FY2023-24.
• Tractor exports declined by 21.4% in FY2023-24.
• The Indian tractor industry expects growth in FY2024-25, supported by an anticipated normal monsoon and government initiatives like PMKSY and the Soil Health Card scheme.
• The Indian agri solutions market is experiencing an upswing, driven by technology and sustainable practices.

Planned Strategic Initiatives #

• Focus on capturing a larger market share via innovative products, strategic distribution partnerships (Kubota, Farmtrac, Powertrac), targeted marketing, and attractive financing options.
• Expand product offerings to include Combine Harvesters and Rice Transplanters.
• Leverage the partnership with Kubota Corporation for growth in agricultural solutions.
• Aim to continue its focus on lean manufacturing and product innovation.

Efficiency Improvement Targets #

• Operational initiatives will focus on cost optimization, materials sourcing, refining manufacturing processes, and lowering overhead expenses.
• Optimizing margins, reducing fixed costs, maximizing productivity, monitoring quality, and in-house design & developments.

Potential Challenges and Opportunities #

• Challenges: Sudden policy changes, supply chain issues, intensifying pricing competition, diminished yields, climate and weather risks, and changes in demand and supply.
• Opportunities: Access to a global network, substantial government incentives for agriculture, growing purchasing power, increasing population, urbanization, and government focus on enhancing product quality and safety.

Construction Equipment Business Division #

Management Guidance and Assumptions #

• Management anticipates continued growth momentum in FY2024-25 and beyond.
• Gradual improvement in segment margins is expected, driven by cost reduction and operational efficiency.

Market Growth Forecasts #

• India’s construction equipment market is estimated at USD 7.30 billion in 2024.
• Growth is driven by road construction, urbanization, and infrastructure investments.
• The backhoe loaders segment will grow at 22.6%, cranes at 52.3% and compactors at 42.1%

Planned Strategic Initiatives #

• Focus on faster project execution and adoption of advanced technologies.
• Continue efforts to reduce costs and enhance operational efficiency.

Capital Expenditure Plans #

• The Indian government plans to invest USD 1.3 trillion in infrastructure projects under the National Infrastructure Pipeline (NIP).

Efficiency Improvement Targets #

• Continuous efforts to reduce costs and enhance operational efficiency.

Potential Challenges and Opportunities #

• Challenges: Increasing labor costs, strict emission regulations, financial requirements for projects, absence of clear frameworks, employee safety, natural disasters.
• Opportunities: Government incentives (NIP), renewable energy projects, Production Linked Incentive (PLI) scheme, public and private investments, FDI inflows, and the construction of schools, universities, hospitals, and medical facilities.

Railway Equipment Business Division #

Management Guidance and Assumptions #

• The company forecasts a consistent growth trajectory driven by global strategic partnerships, product development, and customer service.
• Order book as of March 2024 was ’ 950 crores.
• The Company will continue to localize import content to enhance margins.
• The Company aims to expand its global customer base.

Market Growth Forecasts #

• The Indian rail components market is projected for steady growth, driven by government investments in railway infrastructure and the introduction of new rolling stock.

Planned Strategic Initiatives #

• Focus on lean manufacturing and establishing benchmarks in product innovation.
• Expand product portfolio for domestic and overseas markets.
• Localize import content to enhance margins.

Capital Expenditure Plans #

• Substantial government investments are planned in railway infrastructure.

Efficiency Improvement Targets #

• Continue its focus on lean manufacturing.

Potential Challenges and Opportunities #

• Challenges: Longer gestation periods before launching new products, the emergence of new competitors.
• Opportunities: Accelerated development of the Indian rail network, increased urbanization, rising per capita income, modernization of Indian railways, ‘Make in India’ and ‘Atmanirbhar’ initiatives.

Scenario Analysis and Sensitivity #

• Monsoon Dependency (Agri Machinery): A below-normal monsoon could negatively impact rural incomes and, consequently, tractor sales. Conversely, an above-normal monsoon could boost sales.
• Government Policy Changes: Government policy has boosted optimism. Policy regarding agricultural and related sectors may have significant impact.
• Commodity Prices (All Segments): Softening of commodity prices improved EBIT for the Agri Machinery segment. Fluctuations can directly impact profitability.
• Interest Rates (Construction Equipment): Stable interest rate regime will improve growth. Rising interest rates could impact infrastructure project financing and, consequently, demand for construction equipment.
• Geopolitical Instability and Macro Economic conditions: These will directly affect trade.

Audit and Compliance Analysis #

Auditor’s Opinion and Qualifications #

• The auditor issued an unmodified opinion on the consolidated financial statements, indicating compliance with Indian Accounting Standards (Ind AS) and other generally accepted accounting principles in India.
• The auditor did not audit the financial statements of six subsidiaries and relied on the reports of other auditors. One subsidiary’s financial statements, located outside India, were prepared under different accounting principles and converted by the Holding Company’s management.
• The auditor’s report mentions that one joint venture used an accounting software without an audit trail (edit log) feature, and another joint venture’s payroll software provider did not provide an audit trail report.
• Annexure A to the Auditor’s report contains details of qualifications and/or adverse remarks by the respective auditors.

Key Accounting Policies and Changes #

• Revenue recognition follows a 5-step process as per Ind AS 115.
• Property, plant, and equipment are depreciated using the straight-line method, with some assets having useful lives different from those prescribed under Schedule II of the Companies Act, 2013, based on management’s belief.
• Investment properties are measured at cost, with fair value disclosed.
• Intangible assets are amortized on a straight-line basis over their estimated useful lives.
• Leases are accounted for under Ind AS 116, recognizing right-of-use assets and lease liabilities.
• Financial instruments are measured initially at fair value, with subsequent measurement at amortized cost or fair value.
• Impairment of financial assets is assessed using the Expected Credit Loss (ECL) model.
• Inventories are valued at the lower of cost and net realizable value.
• The Group consolidated Farmtrac Tractors Europe Sp. Z.o.o using translation of foreign operations; exchange differences are credited to other comprehensive income and recognized in the currency translation reserve in equity.
• There were no new standards or amendments to the existing standards applicable to the company.

Internal Control Effectiveness #

• The auditor’s opinion states that the Holding Company, its subsidiary companies, its associate company, and joint venture companies, which are covered under the Act, have adequate internal financial controls with reference to financial statements, and such controls were operating effectively.
• The auditor relied on the reports of other auditors for the internal financial controls of three subsidiary companies, one associate company, and two joint venture companies.
• Internal control systems are in place to ensure recoverability of other financial assets, but no specific trend analysis is applied.
• The Group used an accounting software without an audit trail feature for a part of its books.

Regulatory Compliance Status #

• The consolidated financial statements comply with Ind AS.
• Remuneration to directors was paid in accordance with the Companies Act, 2013.
• Section 197 of the Companies Act (managerial remuneration) is not applicable to two subsidiaries and three joint ventures (non-public companies). One subsidiary and one associate did not pay managerial remuneration.
• The Group is compliant with applicable environmental laws/guidelines.
• MSME disclosures have been provided to the extent parties have been identified.
• The Group has not traded or invested in cryptocurrency or virtual currency.
• The Group has complied with the number of layers of subsidiaries.
• The Group has not been declared a willful defaulter.
• No charges or satisfactions are pending registration with the ROC beyond the statutory period.
• No proceedings are pending against the Parent Company under the Benami Transactions (Prohibition) Act, 1988.

Legal Proceedings and Their Potential Impact #

• There are pending tax demands raised by the Income Tax Department, disputed by the Group.
• Contingencies exist for cases under litigation related to personnel and other matters.
• Claims not acknowledged as debts are disclosed.
• A Scheme of Amalgamation of subsidiaries is pending approval.
• An Escrow account is related to a guarantee provided as part of disposal of a former subsidiary.

Related Party Transactions #

• Transactions and outstanding balances exist with the holding company, subsidiaries, associates, joint ventures, key management personnel, and entities controlled by key management personnel.
• These transactions are in the ordinary course of business and on an arm’s length basis.
• Details of transactions are disclosed in note 44 and 45 of the standalone financial statements.

Subsequent Events #

• The Scheme of Amalgamation, as detailed in note 42, is subject to approvals.
• A Scheme of Arrangement and Amalgamation had become effective on October 12, 2012.
• Kubota Corporation has become a joint promoter of the company.
• Selective capital reduction completed.

Analysis of Accounting Quality #

• The use of the straight line depreciation for all assets and having a useful life different from the companies act for some assets based on management’s belief is a potential area of estimation uncertainty.
• Use of estimates for allowances for doubtful debts, obsolete inventories, and product warranties are inherent in the accounting process.

Regulatory Risk Assessment #

• Pending legal and tax disputes represent regulatory risk.
• Reliance on other auditors for subsidiaries and joint ventures increases complexity in assessing overall Group compliance.
• The lack of an audit trail feature in the accounting software represents a control risk.