Make in India & how Escorts Kubota will grow 2.5 times by FY28

Nikhil Nanda, CMD, Seiji Fukuoka, Deputy MD, Escorts Kubota and Bharat Madan, Group CFO, Escorts Ltd in conversation with ET Now. Kubota would like to achieve with Escorts what Suzuki did with Maruti in India, says Fukuoka.


It is very rare to see an Indian promoter dedicated to professionalism and succession planning the way you have been. You have been rewarded by the stock markets. This year, the stock is up nearly 20% year to date. Let’s begin with the mid-term strategy plan that has been outlined where exports are going to be playing a big role. Let’s start with that.
Nikhil Nanda: In today’s context, we have to put our country before the organisation.This transaction with Kubota allows the company to have all the ingredients of strength between Escorts and Kubota to do what it must in terms of delivering value to the customers.

This partnership is going to bring in a lot of technology, a lot of strength of what Escorts had for the last 76 years. Kubota is a global major brand and their products and products complement one another. The mid-term basis plan that we have shared with our shareholders talks about two and a half times growth by FY28.

It is going to be a mix of all the products that we are going to develop, the products that we are going to develop vis-à-vis the differentiation which we believe will create those products in terms of the market ability that we believe will create the growth that we want for the domestic market.

Export-wise we are amongst the lowest compared to our peers. Kubota has a very large network across the global markets and we believe that we are going to design and develop those products which are going to complement and meet the growth aspiration of Kubota in global markets.

It is very rare for us to get a company management that provides targets for five years all the way to 2028 which is what you have done and you expect to grow revenues 2.5 times. Kubota is a Japanese giant that is going to be with Escorts. Can Kubota do with Escorts what Suzuki did with Maruti in India? Is that the plan?
Seiji Fukuoka: Of course I think we can do that. Maruti has left a very good example of success in India and if possible we would like to take Maruti as our ideal and go forward with this.

Nikhil Nanda: Maruti Suzuki is a very big example for all Indian corporations. We are so proud of that example and this partnership is more about the culture that will come from Japan and India. We are going to create products which are going to be required for the kind of solution that we would want to give to our end customers – be it lightweight, be it heavyweight, be it the kind of different products that we are going to create by the two cultures coming together.

This partnership is very strategic. We make heavy-duty tractors; Kubota makes lightweight tractors and we are also in our medium-term business plan talking about setting up a global R&D. We are going to compliment our skill sets and create products which are going to be different, unique and give the kind of solution and application to the Indian consumers and consumers outside India. So small, large, heavyweight, lightweight – whatever is required in the Indian and global context.

Will new R&D centres be set up and where?
Nikhil Nanda: In our medium term business plan, we are aspiring to grow 2.5 times and that growth will not come without products so technology is going to be one of the key focuses. So we are going to create a global research and development centres and a greenfield project. We will create a capacity up to 300,000 tractors till FY28. So product designs are going to happen in India. In the future, the global R&D will extend support to Kubota’s need for products for the global markets that would require their markets outside India. So there will be a combination of both domestic and international markets for all kinds of research.

How are you going to bridge the gap with M&M when it comes to market share in the domestic market?
Nikhil Nanda: So I do not want to speak about a specific competitor. We have deep respect for M&M and we have deep respect for all our competitors. Our philosophy is to focus on our own self in terms of the improvement that we can make as a company. We want to evolve, contribute and add to the products that we have. We want to learn from each other about Japanese and Indian culture. So much learning can happen and will happen between Escorts and Kubota.

This transaction is not just a mere transaction, this is a more strategic partnership that happened not only for the Indian market but for the global markets. Our growth will come in simply by satisfying the customer. We want to be unique, we do not want to be a me too player. I believe that vis-à-vis the partnership that has been announced between Escorts Kubota, this is an opportunity for Indian and Japanese engineers to create that wow experience for the customers. Once we have that belief and that connectivity with our customers – be it in India or outside India – that will take us towards the growth we want – in terms of shareholder returns and in market share.

I asked you about M&M because it is number one in the domestic market by market share. How are you going to bridge the gap with Sonalika?
Nikhil Nanda: My response is similar to the earlier one. Kubota brings in technology, process, quality; Escorts brings in frugality, agility, speed. We are going to use the skill sets to create the kind of products which will give us the compelling reasoning for having the customer turn towards us. That is where the strategy is going to deliver in our medium term business plan.

The growth is going to be about giving the right product at the right price, at the right place and the consumer is to know that as a product, it is uniquely different and I am extremely excited about the opportunity that Escorts and Kubota has by bringing in the skill sets. Our engineers are working together and the global research and development centres for all the kind of products that we are developing and we think about will happen in the Indian soils so we are going to be a company and Kubota is going to be a multinational company that is going to be local in its understanding and its design build up and execution. So for all our competitors the story is the same, we want to differentiate and we want to embrace our customers and get their respect.

It was said in the medium term strategy, nearly 5% of the net profits will be put aside for new R&D efforts and nearly 40% for return to the shareholders. What do you mean when you say maybe 40% for shareholder returns?
Bharat Madan: Escorts already had a dividend distribution policy in place which provides for distributing up to 20% of its net profits to the shareholders. Now obviously with this partnership with Kubota now Kubota has a global policy where they do 40% of the net profit as a distribution to the shareholder or through a buyback.

Our aspiration was since this is a partnership coming together with both the companies. We should also align our goals in line with the one Kubota has for its shareholders globally. That is why we are also given this aspiration of going up to 40% of our net profit which can be either distributed as dividend or can be a combination of buyback and dividend both.

Meaning buybacks are coming, at least one buyback?
Bharat Madan: As of now, the combined shareholding order does not allow us to do any more buyback because the listed entity requirement is to go up to 78% maximum for the promoters. So yes, there is a capital allocation phase which is underway and we expect that should get over within maybe five to six months time and then the merger of both joint ventures with Kubota is into place. Once that is done, the combined shareholding of promoters will be roughly over 68% and that gives some window to go for buyback of 6-7% in future depending on obviously the cash position of the company.

The first priority for the company definitely is the investment in the organic growth for the company and that will be the first priority because if we can deploy cash, nothing like it. If you can generate better returns there and obviously once we go to surplus money and surplus liquidity, that can be utilised for possible buybacks in the future.

I understand that for the various products that will be developed, engineered there will be a royalty. Has all of that been figured out already?
Bharat Madan: No, it will depend on a case-to-case basis. As you discussed there will be a joint product development exercise, now it depends on where that exercise happens now. If there is a product platform which is actually from Escorts side then there may not be a requirement to pay any royalty but if the product platform remains from Kubota side then because of the tax regulation and the transfer price regulation some royalty payout may happen but there is no tie-up, no understanding as of now. We will move as we go along and you see how the product development exercise happens in India and as and when it is required, we will take a call at that time.

The greenfield product, the capacity expansion has to take place. What kind of timelines are you working with? We know what the numbers have to look like by 2028 but in the runup to that, when will the new factory and R&D centre be up?
Nikhil Nanda: Our priority is to create the right kind of infrastructure capability because a lot of this plan is based on the capability of the R&D centre and for them to design the products and give us the products for the three brands that we have – namely Powertrac, Farmtrac and Kubota.

Our current capacity is already stated in the balance sheet and to deliver the aspiration that we have for the domestic market and for the exports, we would definitely need to add the capacity and therefore the intent of putting up a greenfield project. I do not have a specific timeline but I can only assure our shareholders that we are very mindful and preparations are happening. We are scouting for locations and when we are ready, we will announce all that needs to be announced. It will happen sooner than later.

How conscious are you that you are trying to do something which will also be part of the government’s China plus strategy that we hear about so much, about the make in India initiatives, build in India, build for the world?
Nikhil Nanda: I want to compliment the government and it is a reflection of the policy that multinational companies are now investing in India and this partnership is echoing the principles and the strategy of Make in India and as you can see in our medium-term basis plan. Export is going to play a very significant role and part in supporting the brands of the products that we have had in Escorts and now Escorts Kubota even to support the Kubota brand in the overseas market.

So Make in India for tractor and other farm equipment products and as we have stated in the medium term basis plan, we are going to create a global sourcing hub to support Kubota for their component requirements as that will be required for their global need. So it is a combination of components and products which would be a hub from India catering to the requirements.

Would you like to elaborate a little bit more on that because we know that you want to export nearly 20% of sales and increase your revenues by two-and-a-half times. But to grab such a big share from the global market is certainly going to be a really challenging and is there a global procurement hub that will have to be perfect?
Nikhil Nanda: Global procurement is a strategy to support Kubota in terms of their China-India strategy and what India can support and also support…

But it will have a downstream effect and impact and tailwind for Escorts Kubota too?
Nikhil Nanda: Once we have the scale, it adds to the margins and our shareholders can benefit from that. But is your question about global sourcing or…

Yes the global sourcing hub. How is that going to go up from your perspective?
Nikhil Nanda: In our medium term basis plan, we are creating capacity up to 300,000 tractors and that is going to be one of the largest hubs even for Kubota’s group companies across the globe. Given that kind of scale, it is but natural that the scale will have a lot of advantage even for the global sourcing and for additional volume that Kubota may need for their location and plants across the globe. In addition to the global R&D, we are going to create a global sourcing centre to do exactly that so it will have a positive effect for Kubota and for EKL.