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Japan’s heavy equipment leader Kubota may raise stake in Escorts

INTERNATIONAL DESK: Japanese agriculture and heavy equipment firm Kubota Corp is in talks with the Nanda family – promoters of India’s Escorts NSE -0.77 % Ltd – to increase its stake and eventually become a controlling shareholder in the tractor maker and engineering construction company, said people aware of the matter.

This is part of the Osaka-based conglomerate’s strategy to double down on the growth potential of the tractor market in India.

The Faridabad-based Escorts Group is exploring a complete sale of the promoter holding, although this could happen in stages, said the people cited above.

The Nanda family led by chairman Nikhil Nanda held 36.59% of the listed Escorts at the end of June. Of this, 24.99% is owned via the Escorts Benefit & Welfare Trust.

As per plan, Kubota Corp intends to initially pick up around 15% from the promoters, said the people mentioned above.

Escorts Shares Surged 30% in Last 3 Months

Shares in Escorts have surged 30% in the last three months, outperforming the benchmark Sensex, which gained 12.05% in the same period. The stock closed at Rs 1,519.45, up 3.1%, on the BSE Wednesday, for a market value of Rs 20,487.44 crore. Based on this, the promoter holding will be valued at Rs 7,496.35 crore.

“Eventually, the Nanda family will sell the firm out completely to Kubota. However, as of now, the Japanese are also slightly cautious and are not in a hurry,” said one of the people cited above. “Most probably, these shares would be brought from the Escorts Benefit & Welfare Trust.”

Escorts told ET, “This was market speculation. As a matter of company policy we do not comment on speculations or rumours.”

Kubota didn’t respond to queries sent on Tuesday.

Takeover Bid
Escorts was at the heart of one of India’s early hostile takeover attempts in the early 1980s when UK-based Swraj Paul sought to acquire it. The bid failed after a fierce judicial and political battle. Paul’s other target at the time was DCM Ltd. Escorts used to manufacture Yamaha motorcycles and also had its own Rajdoot motorcycle brand.

The company, founded by brothers Har Prasad Nanda and Yudi Nanda in pre-Independent India, is the fourth-largest tractor maker in the country with 11.3% market share in FY21. The group also has business interests in construction equipment and the railways space. Escorts started its agri machinery manufacturing plant in Faridabad in 1960.

In March last year, Kubota acquired about 9.9% of Escorts through preferential allotment. Escorts allotted 12.3 million equity shares through a preferential issue to Kubota at an issue price of Rs 850 per equity share, the company said in a regulatory filing in March 2020. Subsequent to the preferential allotment to Kubota, Escorts undertook a cut in its share capital from the shares held by the Escorts Benefit and Welfare Trust.

Having started operations in 1890, Kubota is engaged in the production of tractors, agricultural equipment, engines, construction equipment, vending machines, pipe, valves, cast metal, pumps and equipment for water purification, sewage treatment and air conditioning. The company has plans to expand in rural India, considering the growth potential.

Right Timing

Analysts say this is the right time for Kubota as the tractor market is currently booming.

“Kubota aims to establish a joint research and development centre with Escorts to develop products that are optimised for the local market and shorten the development period,” said an industry insider.

Escorts reported a net profit of Rs 185.2 crore in the June quarter, doubling from a year ago but down from Rs 271.3 crore in the March quarter.

“Unlocking has helped in building demand across farming community and we certainly hope that with sustained government efforts, tractor and agri equipment industry and construction equipment industry will be back on a growth path,” said Nikhil Nanda, CMD of Escorts, at the time of announcing the last quarterly results.

The demand outlook is turning murky, which raises uncertainties over the next 12-15 months, though the Kubota joint venture, a leaner cost structure, recovery in railways/construction equipment, and a strong balance sheet will dilute impact on the P&L, according to a Motilal Oswal report. (The Economic Times)