Farm equipment major Escorts Limited recently unveiled India’s first hybrid concept tractor. The company has launched the tractor in the range of 70-75 HP which can be boosted up to 90 HP with the help of its hybridisation feature. The company also showcased hybrid concepts for a backhoe loader as well as a rural transport vehicle called Rider.
CNBC-TV18’s Areeb Sherwani spoke to Nikhil Nanda, Chairman and Managing Director, Escorts, about the company’s future plans amid a slowing market. Nanda says that although they had expected a slowdown, especially since the upcycle in the market was ending, a slump to this degree was unexpected. However, he remains hopeful that the festive season will prevent the decline in sales.
Edited excerpts from the interview: You have unveiled five new hybrid products. What scope do you see for these technologies going forward? Are you seeing early adopters coming in and at what stage of development currently are these products and what kind of traction do you see for them?
As you have seen in the hybrid, the emission norms are changing and the products are getting extremely expensive. We need to keep functionality, affordability and technology, all in the context of the consumers. With the kind of regulatory challenges that are coming on the emission side, we felt that we had to track it in an intelligent, technological but in a frugal manner.
So I am very proud that at Exclusive 2019 we have only showcased the concept of a hybrid tractor, which can drive on dual mode - a nice diesel engine and an electric 20 horsepower. So a 70 horsepower tractor, through a touch of a button, can become a 90 horsepower one.
So if a farmer is driving from location A to location B, till he gets to his farm, he can drive in an electric mode. So he doesn’t have to burn diesel. So he can drive up to 50 kilometres, maybe one-and-a-half hours, and when he reaches his farm, he can shift to diesel mode and the battery gets charged within 1-1.5 hours.
So, this entire package in terms of cost of ownership, the application in terms of productivity and the Power Take-off (PTO) power – once he gets into the farm land, he can increase the PTO power from 70 to 90 horsepower.
When we spoke in September last year, there was optimism, there was jubilance in the air that sales were doing well, your volume growth guidance was between 12 percent and 15 percent. You have lowered it significantly now, there is a clear slowdown in the sector, tractor sales are going down, how are you seeing the roadmap for the future, for the sector, going forward?
The entire market is seeing a slowdown and it is something that we foresaw, we predicted this probably a couple of months back but not to the degree of the slowdown that one is seeing. Agriculture tractor market is cyclical.
The last four years have been brilliant. You talk about a decline of 10-12 percent – but in the context of the three-four year robustness in terms of growth that you have seen, one should not ignore and should not measure only the de-growth of the last six months.
Having said that, we have to de-risk and Escorts has taken many steps in terms of launching technology and products and we are also looking at the international market. Our foray into a joint venture with Kubota for instance; we will have a global partnership, we will have access to the global channel of Kubota, we are looking at a joint brand outside India.
You did pre-empt my question in that sense that all the JVs that you have with Japanese majors -- you had a construction equipment JV with Tadano, for tractors you have with Kubota -- while in the exports space, there has been a 28 percent decline in first quarter for tractor sales in terms of exports. You have seen a 97 percent increase just for August, would you attribute that to these synergies that you are seeing coming in from Japanese players, JVs with Kubota for example?
Not as yet because Kubota relationship started only in December 2018 and our base is very small. So Escorts is not exporting as much as it should be exporting compared to our peers.
However, going forward, we have a phase I, II and III plan - phase I means neighbouring countries, Africa, Thailand then phase II getting to Europe, phase III getting to the United States. So there is a very deep plan that we have with Kubota in terms of how we complement our product portfolio in markets and geography and with that there is a very robust plan in terms of volume uptick that I believe will get significantly built up over a period of three to five years.
So the relationship with Kubota is very strategic because we don’t want to spend time in creating an ecosystem, we will rather spend time in creating product and technology. Having a partner like Kubota to give us the elbow room of entering into markets will help us de-risk in the future.
Are there any other JVs that you are looking at and especially seeing the market right now, since expectations for volume growth is not very high, would you kind of lay back a little, perhaps invest more in technology, may be look at acquisition as of now as the market steadies?
We have done what we have done. Everything that we have done till date is strategic. So one is not in a rush of doing joint ventures for the sake of it. We needed a partner in agriculture, we found Kubota, we are very fortunate to have a partner like them, Tadano in the case of construction, railway we are doing significantly on our own, we have done some great work on developing products. So far I don’t see any immediate joint ventures coming in. Now it is about consolidating, it is about growing the topline and doing so in a very profitable manner because cash and profit margins are extremely important for Escorts.
A recent CRISIL report that has just been released for the fiscal going forward predicts that there will be a 5-7 percent de-growth in tractor volumes. Keeping that in mind, why would you peg the volume growth guidance for Escorts going forward?
For the last six months, it has been 12-15 percent. We are getting into a season. So the mood is low. Navratri is starting, Diwali is starting, we are entering in September-October, so I don’t believe the numbers are going to be as negative as what the industry gurus were predicting.
But again, please keep my views considering a three-year period. Again when we narrow our six-monthly or five-monthly movement, then situation is very different. So the decline could be small single digits of 2-3 percent as compared to 12 percent of what we may have seen on a month-on-month, year-on-year comparative. However, for the entire year, yes, it is going to be a flat-to-decline of maybe 3-4 percent, which is fine.
We are prepared, we are a zero debt company and we are looking at margin and cost reduction initiatives, on which I believe my team has done a good job.
There are plenty of factors for the slowdown and they are fairly well-known. However, the festive season is coming. The monsoon, while it has been a little erratic and deficient early on, we have seen a spurt coming in in the latter part of the season. Do you expect all these factors to come together in a way to boost sales going forward?
I don’t know what the experience is for our peers. I can speak about what we are seeing from within Escorts in terms of the movement and the pulse we are picking up from the market.
The enquiry levels are very healthy. Customers are coming into our showrooms, they are enquiring and they are wanting to know which product and the challenge is predominantly on conversion. So conversion has aspects of retail financing. Now because industry has gone through what it has, perhaps there may have been a bit of a panic and to negativity that may have come on the financing side.
However, I believe that will also reduce because we are finding that partners are coming forward because tractor market has not been as badly hit as car industry and also Escorts has had a very good portfolio, we are among the lowest in our inventory levels and the quality of sale and the qualitative spread of our products across the region have been a good experience for us and our financial partners.
So I do believe things will improve in September-October. That is my personal perspective.
So dealers are not seeing any stress as far as financing for inventory is concerned?
As I said conversion is an issue. I have a customer who walks into the showroom but conversion is an issue – put the margin money, get the financial partner to come in with what he needs to and then call it a sale , so we have to manage that.
So, what is the solution going forward from here? What is it that you would like in terms of policy, which might alleviate the stress for now? We have seen some measures, for example like the increase in MSP for Kharif crops, there are Budget announcements for agriculture. Is there any other policy initiative that you think could alleviate the stress? Apart from policy, we have been very fortunate that we have got good rains. From a drought situation, from a scarcity situation, from a delayed monsoon, we are seeing a very different kind of maps and numbers and colours. Today we are absolutely on the other side, where we have got good rains; 95 percent of the country has received good rainfall, which means the next cycle is going to be very positive, which means the water levels have improved, which means the crops will get the nutrition they need. So, I think the next cycle should pick up the mood in many sense.
MSP is healthy, I think in terms of policy whatever had to be done has happened, I think it is now more inwards.
You mentioned that there has been an upcycle in the sector which is now coming towards the end. What would your prediction be for the future when we are in the down cycle of sorts? I believe the fundamentals are very strong. India only sees between 18-20 percent of tractorisaton, mechanisation we are in single digits, so there is enough potential for India in terms of being the food basket. So we also need to keep certain aspects of fundamentals, which are so strong for our country and I am also seeing that even the kind of projects that we are launching – digitisation, precision farming… even Escorts is moving away from tractorisation and bundling in terms of mechanisation and full-fledged solution to the customer. We are finding that there are some young farmers and a few pockets who are coming in like the orchid vineyards, we launched the compact tractors and I am happy to state, we have seen very good positive signs - younger farmers, the yield is good because they are selling not only in India but looking at export potential. Also there is an increase in awareness, do you see in models like pay-per-use, more contract farming etc. coming into play rather than the more traditional models?
In my view, the disruption in agriculture is just starting, I think we have a long way to go. We are also experimenting and offering contract farming through Escorts Crop Solutions. We have also talked about Uberisation in taxi that we have launched. At the end, a farmer is also looking at internal investment, he also wants to know how much input and how much output. But there is one thing I want to share with you, which I believe that from the policy point of view we need to spend more time on the output than the input. We give a lot of subsidy, which is fine but the moment the output in terms of yields and margin per acerage improves for the farmer, the money that goes into his pocket will allow him the power that he requires in terms of disposable income to do what he needs to do.We produce good amount of food but where do we distribute? What are the margins? Is there an export angle to it, quality angle to it? I think the qualitative model has to change and the P&L for a farmer in a manner that will disrupt and change his choice for the future.