Back From the Brink

In the summer of 2003, Nikhil Nanda, Chairman and Managing Director of Escorts Group, found himself perspiring in the CEO's cabin of the company's factory in Faridabad on outskirts of the national capital. Despite the heat, the reason for the power cut sent a chill down his spine - the power department had stopped electricity supply as the company had not paid its bills. For a manufacturing company, it represented a point of no return, the proverbial last nail in the coffin.

"Those were really dark days. I still shudder a bit when I recount them," says Nanda, who was executive director of the company then. He was elevated as joint managing director in 2007 and then managing director in 2013 in the company founded by his grandfather more than seven decades ago.

There were many reasons for the crisis at Escorts, the largest tractor maker in the country in the 1980s. One was the huge debt it had piled up after a wave of ill-advised diversification into unrelated and capital intensive businesses like telecom and healthcare. Then, as the economy liberalised, foreign players began to go solo in the core automotive business, intensifying competition. Escorts found itself on the backfoot. By the turn of the century, jittery bankers lost faith and suggested an honourable exit for the promoters, the Nanda family.

Nikhil Nanda had barely cut his teeth in the business back then and the task ahead was uphill. The group was still in black but heavily indebted. To pare down the debt, it exited a number of non-core businesses - selling its motorcycle JV that used to make Rajdoot cruisers to partner Yamaha in 2001, auto components JV with Mahle group and construction equipment JV with JCB of the UK. But that was not enough. Even by 2004, debt was high, around Rs 1,200 crore. Escorts needed an overhaul.

"We were confused. There were too many distractions in business. We were stretching ourselves and our resources by trying to do too many things," he says. "We lacked focus and in business that is a recipe for disaster."

A slow and steady comeback followed. In mid-2000s, it sold the distractions - Escotel and Escorts Heart Institute. This reduced debt and freed up some capital for the core tractor business. By the time Nanda became joint MD, a plan had started taking shape. Escorts needed to get its mojo back in tractors. "I realised early that customers still had a lot of respect for the brand and our products. They were forgiving and were willing to trust us provided we had the products. So, the plan was clear," he says.

The first green shoots emerged in 2011. Between fiscals 2008 and 2020, the company invested a record Rs 986 crore, mostly into product development. The outcome was a new range of tractors - Farmtrac, a range of high-power tractors that opened up a new market for the company, and Powertrac, with superior fuel economy. Domestic sales doubled from 21,011 units in FY03 to about 45,000 units in FY08. They zoomed to over 80,000 units by FY18.

At the same time, Nanda worked hard to make the company leaner, more streamlined and frugal. The efforts showed up in EBITDA margin, a barometer of a company's efficiency. Between fiscals 2008 (12 months) and 2014 (18 months), consolidated top line grew from Rs 2,653 crore to Rs 6,502 crore. EBITDA margin, negative between 2003 and 2006, rose to 6 per cent in 2014.

"We sunk in a lot of investments in research and development. The products needed to speak for themselves on the farm. Our motto was simple, don't overpromise, but overdeliver," says Nanda. "We also instilled the feeling that we needed to earn our salaries and it had to start from me. I do not believe I own Escorts. Just because I am the promoter's son does not justify my position. I needed to show it through results."

The story has only become sweeter in the last six years and particularly in the last three years. In FY19, tractor sales came close to the psychological 1,00,000 mark. In the last five years, revenues have grown by an average of 22 per cent per annum while EBITDA margin, a subject of much obsession for Nanda, has risen to 11 per cent. The target is to improve it to 15 per cent, the best in the business.

"From being a company weighed down by debt, to becoming a net zero debt firm, to now sitting on cash, it has been a satisfying journey. Similarly, we have turned the corner from negative EBITDA to single digits and now double digits. Our next stop is 15 per cent, but it doesn't end there. We want to be the benchmark in EBITDA in this industry," he adds.

The remarkable turnaround and the sheer weight of the numbers on the back of stellar growth in last three fiscals has earned Nanda BT's Best CEO award in the automotive sector. The story has been closely tracked by peers from across sectors and they are impressed. "What Nikhil has done is inspirational. He has galvanised and transformed his company into a sharply focussed entity that has taken a life of its own," says Anil Rai Gupta, the Chairman and Managing Director of Havells India who is himself a second time winner in the consumer durables category.

And the story is only getting better. Two consecutive good monsoons have ushered in strong growth in agriculture-led rural sectors that promises to provide a big upswing to the tractor industry. While all other sectors are counting losses in FY21, a year ravaged by the pandemic, the tractor industry may be in black this year. "Given the strong traction in the rural economy on the back of a bountiful crop season last year, we expect that the start of the next tractor upcycle may last another two years. We believe Escorts will be in a better position to reap benefits of this upcycle like never before," Vishal Srivastav, a research analyst at Edelweiss, said in a report in July. "We expect its tractor business to grow 11-12 per cent a year during FY20-23 due to strong focus on exports, coupled with near-term expectations of healthy growth in the domestic market."

Nanda says while he had anticipated an upswing in demand for tractors based on the cyclicity of the business, the strong demand during the lockdown was pleasantly surprising even for him. Though the company has two other business verticals, railways and construction equipment, the fortunes of the company are mostly linked with agriculture as farm equipment accounts for 80 per cent of revenues. Nanda is also planning to exploit export opportunities for which he has tied up with Japan's Kubota. It has also expanded its other agri-led businesses such as seeding, planting and harvesting equipment. It is even upping the ante in the industry with advanced technology products with an eye on the future. In 2017, it unveiled its first electric tractor concept, showcasing its readiness for the future. Similarly, in 2019, it launched its Digitrac brand of high-power tractors that are available only through online channel. This has served the company well in the pandemic. The tie-up with Kubota, besides aiding exports, will also help the company in future growth. The Japanese firm has also bought a 10 per cent stake in Escorts for Rs 1,042 crore, improving the liquidity of the company. Nanda has great expectations from the rural economy. "The cyclicity in the farm sector is shrinking. The way agriculture is changing in this country, it is going to surprise us all. The next few years are going to be phenomenal," he says.

Even if Nanda's optimism does not materialise - a drought year can scuttle best-laid plans - analysts believe there is significant growth potential in the company's other two businesses which can act as a cushion in the event of a downturn in agriculture.

"The next leg of growth for Escorts can come from the non-tractor business. Railways and construction equipment currently account for 23 per cent of its top line, a modest growth from 19 per cent in FY16," says Srivastav of Edelweiss. "The share of these businesses in overall EBIT has grown considerably to 18 per cent from negative in FY16. Improving profitability and growing top line of these businesses will be a significant advantage for Escorts as it will provide a cushion from the cyclicality of the tractor business."

Bankers now line up outside Nanda's Faridabad office not as recovery agents but to offer fresh loans. There is no shortage of electricity either. He may have been born with a silver spoon but has earned not only his salary but stripes too.

@sumantbanerji