Will Kubota increase its stake in Escorts?

The buzz on the street is that the country’s fourth-largest tractor manufacturer is likely to consider a preferential issue to Kubota Corporation of Japan—which already owns over 9% of the company—at a board meeting convened today.

According to market sources, Kubota may acquire up to a 15% stake in the company. As per current rules, an open offer will be triggered only if the acquirer hits a 25% stake. Incidentally, the Japanese major had acquired a stake in Escorts in 2020 through a preferential allotment, and since then it has shown a keen interest in the company after their joint venture (Escorts Kubota India) began production of tractors last year. Escorts Kubota, a 60:40 joint venture, went into commercial production in September 2020.

Escorts had intimated to the stock exchanges that the meeting will consider raising funds by issuing bonds, debentures, nonconvertible debt instruments; and equity through an amalgam of a preferential issue on a private placement basis, qualified institutional placements, and rights issues. Incidentally, the company has scheduled a conference call with investors and analysts at 1700 hours today to discuss the outcome of the board meeting.

The stock has raced from ₹1,300 to ₹1,600 levels over the past couple of months, amid reports that Kubota is in talks to increase its stake. Currently, the Nandas hold over 36% stake (a significant stake is held in a trust), foreign portfolio investors own over 21%, domestic mutual funds hold 7.42%, and well-known investor Rakesh Jhunjhunwala holds 4.75%. Kubota and other investors, including the public, hold the remaining stake.

The current management, led by Nikhil Nanda, pulled the company from the brink by divesting its non-core loss-making businesses and paring down its debt—focusing on rigorous cost control in the core business to improve profitability and cash flows. As a result, the company regained its market share to 12% in tractors, after hitting a low of 10% in FY15, while its peak market share was 16% over FY07-FY08.

In FY21, Escorts clocked revenue of over ₹7,000 crore, generating a profit of ₹872 crore. The agri machinery business accounted for the bulk of the revenues at ₹5,667 crore, while the construction equipment and railway equipment business accounted for the remainder. Currently, the company’s three plants manufacture Farmtrac, Powertrac tractors and components—with a current production capacity of 120,000-plus tractors per annum. The company also has a 100% subsidiary in Poland, with an installed capacity of 2,500 tractors p.a, besides a 50,000-capacity plant under the JV with Kubota.

Interestingly, in 1983, Escorts had seen a hostile takeover bid by London-based expatriate businessman Lord Swraj Paul. However, HP Nanda, the founder of Escorts, thwarted the bid after a long-drawn legal battle against the government. Although Paul won the court case, he later sold the shares back to Nanda.