Can Kubota do with Escorts what Suzuki did with Maruti in India?

Nikhil Nanda, CMD, Seiji Fukuoka, Deputy MD, Escorts Kubota and Bharat Madan, Group CFO, Escorts Ltd in conversation with ET Now.

"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 its heavy weight, be it the kind of different products that we are going to create by the two cultures coming together. This partnership is very very strategic, says Nikhil Nanda, CMD, Escorts Kubota.

Can Kubota do with Escorts what Suzuki did with Maruti in India?
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.

Maruti did that by making a small is beautiful, which was the Maruti 800. We know Kubota is a global leader when it comes to small and light tractors. Is that going to be the big strategy?
Nikhil Nanda: So, Maruti Suzuki is a very big example for all Indian corporate, we are so proud of that example, and I think this partnership is more about the culture that will come of Japan and India. So 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 its heavy weight, be it the kind of different products that we are going to create by the two cultures coming together. This partnership is very very strategic.

So we make the heavy-duty tractors, Kubota as you rightly mentioned makes the lightweight tractors, and we are also in our medium-term business plan talking about setting up a global R&D, so we are going to complement our skill sets and creating 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 absolutely small, large, heavyweight, lightweight all of it is whatever is required for the Indian context and the global context.

So can I ask you because you brought up the R&D centre that will be coming to you from your headquarters in Faridabad where there is an R&D centre will new ones be set up, where?
Nikhil Nanda: So 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 center, and we have also given our aspiration of setting up a Greenfield project. So we will create a capacity of up to 300,000 tractors till FY28, so product, designs are going to happen in India also in the future, the global R&D will extend support to Kubota’s need for the global markets for products that they would require in their markets outside India so a combination of both domestic and international markets of all kind of research.

It was also said in the medium-term strategy that nearly 5% of the net profits will be put as far as new R&D goes and nearly 40% for return to the shareholders. I will begin with the latter first I know our viewers will be wanting to know a bit more about that, what do you mean when you say maybe 40% for shareholder returns?
Bharat Madan: See Escorts already had a dividend distribution policy in place, which provides for distributing up to 20% of its net profits to the shareholders. Now, this partnership with Kubota, has a global policy where they do 40% of the net profit as a distribution to the shareholder or through a buyback. So our aspiration was since this is a partnership coming together both companies so we should also align our goals in line with what Kubota has for its shareholders globally so which is why we also gave this aspiration of going up to 40% of our net profit which can be either distributed as dividend or it can be a combination of buyback and dividend both.

Meaning buybacks are coming, at least one buyback?
Bharat Madan: See as of now if you know I think the combined shareholding order does not allow you 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 that is underway and we expect that should get over within maybe five to six months, and then the merger of both joint ventures with Kubota is in place. Once that is done the combined shareholding of promoters will be roughly over 68% so that gives some window to go for a buyback of 6-7% in the future depending on obviously the cash position of the company.

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

The September quarter was not what the markets expected, it was not what shareholders expected or what the analysts expected and that was reflected soon after in the share prices a knee jerk reaction, is the worst behind when it comes to the headwinds that have been faced whether it is on margins, inflation, all of that?
Bharat Madan: Well yes, we hope so because if you see in the last seven to eight quarters the inflation and the raw material prices have been extraordinary. We have never seen this sort of unprecedented inflation in commodity prices and especially with this geopolitical situation in Europe and with Russia so obviously that has created more issues.

So till Q1, we were facing very strong headwinds in sort of inflation and that is why the possibility to pass it on to customers was very limited. Even now we are carrying some bit of unabsorbed inflation on our books which probably be by the end of Q4 we expect will get neutralized. So hopefully FY24 should give us a good trajectory back to the normal level of margin though it is not going to be very sudden because the way you have seen the margin declining over the last seven or eight quarters it will take a similar period may be to gradually increase the margin.

Seven to eight quarters of normalization?
Bharat Madan: It will be a gradual improvement that will happen and which we will notice probably in the coming two years.

When you institutionalized the company when you announced this partnership are you also factoring in what the fourth generation’s role is going to be within the company, will we see maybe Kubota hiking stake?
Nikhil Nanda: So talking about purpose firstly I am very proud of the founder of Escorts. Mr HP Nanda who was a refugee always put the institution to serve the nation and Escorts has always been to do and contribute to society. He was a botany major not, an engineer, and his wish was to contribute in his own small, humble manner of creating mechanization and that is how we got into tractors.

So this partnership also reflects that and my grandfather always mentioned that he wants to bring the world’s best to India and offer India’s best to the world. So Kubota which is the world’s best is coming to India to bring in the kind of mechanization which is purpose-led towards productivity and contribution to the Indian farming community.

As far as the third generation is concerned I have been working in the company for the last 25 years and in the last six years, I was very very certain that Kubota is a partner that one must go towards because they are the world’s largest and they can bring so much good to India. And to the question that you asked about Maruti Suzuki, I do believe in my heart that this is another such moment where Indian consumers can experience something different.

This is again about Japan and India coming together. As for the generations is concerned we will see, it is a very professional company and if they would want to be part of the organization it would be discussed and seen in the later part.