Rakesh Jhunjhunwala makes a killing in Escorts

The man with the Midas touch is at it again, this time showing his magic with Escorts—the country’s fourth-largest tractor manufacturer that is changing hands from the Nanda family to Kubota Corporation of Japan. On an estimated cumulative investment of ₹141 crore for 1.25 crore shares, Rakesh Jhunjhunwala has set the cash register ringing, with a gain of 11.68 times. This number excludes the dividend income of ₹17 crore that the Big Bull took home over the past eight years.

Based on historical data beginning from his first purchase of Escorts shares through a bulk deal in September 2013, to date, Fortune India arrived at the closest possible acquisition cost, the gains on his current holding, and the shares sold. Including the entry price of ₹88.23, and the average price of the shares in the quarters that Jhunjhunwala increased his holding, the per-share cost works out to ₹113.68.

Of his ₹141 crore investment, Jhunjhunwala has sold shares worth ₹69 crore, pocketing a gain of ₹450 crore and, on the remaining ₹72 crore investment, the Big Bull is sitting pretty with ₹1,197 crore of profit, based on Escorts’ closing price (₹1,870.45/Nov 26) on the BSE.

The saga in Escorts began when Jhunjhunwala bought 621,789 shares through a bulk deal on August 14, 2013, at ₹88.23 a share. In the same quarter (Q2FY14), he bought an additional 43.78 lakh shares, ending with a holding of 4.08%. The trend continued in the following quarters (Q3FY14 and Q4FY14) as Jhunjhunwala mopped up 10 lakh shares and 7 lakh shares, respectively, thus ramping up his stake to 5.47%.

The Big Bull’s growing confidence was a reflection of the changing fortunes in the company which was at the fag of its restructuring phase and was set to reap the benefits of a turnaround in the coming years. That’s when Big Bull nearly doubled down on his bet—increasing his stake to 8.14% as he bought 32.75 lakh shares in the March quarter of FY15. The last round of purchase (25 lakh shares) came in the second quarter of FY16—when his holding spiked to 10.18%.

Between the first purchase in 2013 and the last purchase in Q2 FY16, the share price of Escorts went up more than 4x to ₹375 levels. The performance came on the back of an impressive turnaround as Escorts’ return on capital employed—a ratio that measures how efficiently a company is using its capital—surged five-fold from an average of 4% over FY08-FY15 to 16% by the beginning of FY17.

In the ensuing years, the purple streak continued for Escorts with the return ratio surging to nearly 30% (as of March 2021). During this period (FY17 to end of Q3FY21), the stock went up 86% from ₹677 to ₹1,260. That’s also the period when Jhunjhunwala began cashing in on the gains. Between Q3FY17 and Q3FY21, he sold 60.75 lakh shares in the open market—pocketing an estimated gain of ₹450 crore against the acquisition cost of ₹69 crore.

Currently, Jhunjhunwala holds 64 lakh shares (4.75%) and is raking it in with the stock surging 48% YTD. While the pace of appreciation in the share price may get slower, the gains for Jhunjhunwala will keep compounding. It’s unlikely that the Big Bull will tender his shares under the open offer to Kubota given that under a new owner, the prospects of Escorts would only get better, including the possibility of an eventual exit by the Nanda family.

The Japanese major is increasing its holding from 9% to 53.4% through a preferential allotment at ₹2,000 per share; infusing ₹1,870 crore into the company. Following this, Kubota will make an open offer for 26%. After the transaction, Kubota will become a joint promoter along with the Nanda family, holding 11.8% of the company, which will be renamed Escorts Kubota. While Escorts’ market share in tractors has bounced back to 12% after hitting a low of 10% in FY15, Kubota wants to double the number to 25%. This target is higher than the company’s historical peak market share of 16% during FY07-FY08.

According to a report by brokerage house Emkay Global, Escorts can benefit from a takeover by a company like Kubota in terms of technical support, access to a global sales network, and opportunity for component manufacturing. Kubota, on the other hand, would gain from a stronger foothold in the Indian tractor and construction equipment markets. Post the takeover, Kubota will merge its agricultural machinery business and a JV with the Nandas into Escorts.

Interestingly, Escorts is the second instance, after Crisil, of a company in Big Bull’s portfolio being bought out by a multinational.