Escorts Limited

Instrument Amount (Rs. Crore) Rating Action (March, 2016) Fund based limits 478.00 (earlier 450.00) [ICRA]A-(Stable)/[ICRA]A1; Upgraded from [ICRA]BBB+ (Stable)/[ICRA]A2 Term loan facilities 257.00 (earlier 192.26) [ICRA]A-(Stable); Upgraded from [ICRA]BBB+ (Stable) Non-fund based limits 613.00 (earlier 603.00) [ICRA]A1; Upgraded from [ICRA]A2 Unallocated 73.00 (earlier 111.00) [ICRA]A-(Stable)/[ICRA]A1; Upgraded from [ICRA]BBB+ (Stable)/[ICRA]A2 Commercial Paper 25.00 [ICRA]A1; Assigned (CP)/short-term-debt (STD) programme

ICRA has upgraded the ratings for Rs. 1421.00 Crore (enhanced from Rs. 1356.26 Crore) bank facilities of Escorts Limited (EL) to [ICRA]A-/ [ICRA]A1 (pronounced ICRA A minus/ ICRA A one) from [ICRA]BBB+/ [ICRA]A2 (pronounced ICRA triple B plus/ ICRA A two)†. Outlook on the long-term rating is “Stable”.

ICRA has also assigned rating of [ICRA]A1 (pronounced ICRA A one) to the Rs. 25.0 Crore commercial paper (CP)/short-term-debt (STD) programme of the company.

The upgrade of the ratings of Escorts Limited (EL) considers the sustainable improvement in cost structure driven by cost reduction across the various business segments through management’s directed efforts towards optimization of supply chain through vendor consolidation, price renegotiation, product re-designing and other value analysis value engineering (VA-VE) efforts as well as rationalization of manpower. The rating upgrade also factors in the management’s intent to divest the loss-making auto components segment over the near term which is expected to support improvement in the operating margin. ICRA also notes that the government’s budgetary focus to provide positive impetus to farmer sentiment as well as infrastructure development would provide favourable tailwinds to the tractors and construction equipment segments over next few quarters which contribute to nearly 90% of the company’s sales revenue. In ICRA’s view long term growth prospects for the tractor industry as well as the construction equipment industry remains favourable.

The ratings continue to take note of EL’s long operating history, its strong brand franchise, vast dealer network as well as its diversified business mix. The ratings are, however, constrained by cyclicality associated with EL’s key business segments, tractors and construction equipment, and the current phase of demand downturn in the respective industries. Going forward, EL’s ability to divest the loss- making auto components segment without any substantial write-off or any major debt-funded inorganic expansion would remain key rating sensitivities. Further, any balance sheet adjustment, similar to write-offs from BRR in the past, is an event risk.

Recent Results In 9MFY16 EL’s (standalone) Net Sales at Rs. 2655.3 Crore reported a 15.7% de-growth over the corresponding previous year period. The company’s profit before depreciation, interest and tax declined from Rs.139.4 Crore in 9MFY15 to Rs 121.2 Crore in 9MFY16. Further, EL’s profit after tax declined to Rs 73.0 Crore in 9MFY16, reflecting a growth of 17.8% over that in 9MFY15.

†“For complete rating definition please refer to the ICRA website www.icra.in or any of the ICRA Rating Publications”

Company Profile Escorts Limited (EL) was incorporated as Escorts (Agents) Private Limited (EAPL) in Lahore (then a part of undivided India) in 1944. EL started off by manufacturing tractors under the Escorts brand name in the 25-40 horsepower (HP) range. In 1969, EL promoted Escorts Tractors Limited (ETL) as a joint venture with (FMC), USA for the manufacture of Ford Series of tractors in the 40-50 HP range. EL acquired the entire equity stake of ETL in August 1995, thus making ETL its subsidiary. Over the years, EL diversified into other products to emerge as a multi-business entity with interests in agri-machinery, automotive components, railway equipment, industrial and construction equipment, and telecom equipment and services. Till 1993-94, all these activities were carried out by the various divisions of EL. During the period 1994 to 1998, EL undertook a major re-organization exercise wherein it consolidated its agri-machinery business by merging ETL with itself, and hived off its various divisions into separate companies. EL’s cash flows came under pressure from 2001 onwards due to a downturn in the tractor industry, which was the main cash generator for EL. This resulted in high debt levels and a high interest burden on the company. Subsequently, EL decided to focus only on core businesses viz., Agri-Machinery and Construction Equipment and divested its non- core businesses viz., Telecom business in 2004, Healthcare in 2005, Software business in 2006 and its stake in joint venture with Carraro in 2006. Further, in 2012 the company merged its construction business with itself. At present, EL is primarily a manufacturer of tractors and construction equipment (besides auto suspension components and railway equipment) and a holding company for other subsidiary/ joint venture companies of the Escorts Group. EL’s manufacturing facilities are spread across four locations in () and a facility at Rudrapur (Uttaranchal) and Poland.

March 2016 For further details, please contact: Analyst Contacts: Mr. Subrata Ray (Tel. No. +91 22 6114 3408) [email protected]

Relationship Contacts: Mr. L. Shivakumar, (Tel. No. +91 22 6114 3406) [email protected]

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