Railway business was too volatile for us – Escorts Kubota CFO

Escorts Kubota, a key player in the Indian tractor and construction equipment sector, recently made headlines with the announcement of a big-ticket disinvestment of its high-margin railway business portfolio to auto component giant Sona Comstar.

The Faridabad-based company, a joint venture between India's Escorts Ltd and Japan's Kubota, has undertaken a significant strategic shift as it streamlines operations with a sharper focus on what it believes it can do best - core customer-driven sectors of agriculture and construction.

In an exclusive interaction with Autocar Professional, Escorts Kubota's Chief Financial Officer, Bharat Madan, shared his insights on the company's vision, the rationale behind the sale of the railway business, the growth prospects of the tractor industry, as well as how the new upcoming emission norms would impact the industry. He also discussed the company's focus on the agriculture and construction equipment businesses, risks associated with the railway business, capacity expansion plans, export and market share growth targets and the impact of TREM-5 norms. Here are the edited excerpts: 

What is the rationale behind your recent railway divestment with Sona Comstar?

Both Escorts Ltd and Kubota Ltd are not involved in the railway business globally. We want to focus more on our core strengths - the agriculture and construction sectors. Also, the revenue from the railway segment has been declining over the past few years.

As part of our strategic focus and streamlining our operations, we believe that the railway business does not fit into our long-term growth plans. We decided to partner with Sona Comstar as they have significant expertise in components, and we believed they could unlock the full potential of the railway business.

The divestment will allow us to focus on growing our tractor business and other high-potential areas.

What other strategic factors outweighed the railway business's high margin potential while taking a call to offload it?

While the railway business does have attractive margins, it also comes with substantial risks. Its performance is heavily dependent on government spending, which can be very volatile, and it requires longer working capital cycles.

Our strategy, moving forward, is to focus more on sectors that are customer-driven, like agriculture and construction, where we can mitigate such risks and have more control over our operations.

What are the contributions of different segments in your business, and how will it be going forward?

In our business, agriculture, which includes both tractors and non-tractor agricultural equipment, contributes about 73%. Construction equipment contributes around 17-18%, and the railway sector contributes around 8-9%. However, with the exit from the railway business, the new sector mix will be approximately 80% agriculture and 20% construction.

Within the agriculture sector, we are expanding into different verticals, such as global sourcing and agri-solutions, which include a wide range of non-tractor equipment like harvesters, transplanters, and cultivators. These areas are of growing importance for us.

With the railway business now set to be out of the picture, which segment -- agriculture or construction -- will receive a larger focus?

Both agriculture and construction will remain important focus areas for us. The backend for both sectors is quite similar, as we use the same engine and transmission technology for both tractors and construction equipment.

Many global players in the tractor business also operate in the construction equipment segment. While agriculture---especially tractors---will remain our bread and butter, construction will also continue to be a key area of focus for us.

Currently, exports account for only 5% of our total sales. However, we aim to grow this to 15% by the end of 2028-29. This will require expanding our product portfolio, strengthening our distribution network, and using Kubota's global network.

How do you see the tractor industry performing in 2024-25? By when can we expect the industry to hit a new peak in volumes?

The first six months of this financial year were more or less flat for the industry. However, there has been good growth in October and the momentum is likely to continue in the coming months. This year, we estimate the domestic tractor industry to grow in mid-single-digit numbers.

There is a possibility of the new emission norms (TREM-V) coming into effect from April 1, 2026. If that happens, there will be significant pre-buying of the old emission norm tractors both by customers and the channel. This means the third and fourth quarters of the next financial year will see good pre-buying.

So, in the next financial year, the tractor industry could hit a new peak with a good monsoon and the expected pre-buying .

What is Escorts Kubota's current market share in the tractor market, and how do you see it in the next few years?

Currently, Escorts and Kubota hold a combined market share of 12-13%. Our goal is to double this share over the next 5-6 years. A significant part of this growth will be driven by robust product development, expanding the distribution network, and launching a new financing company, which will help strengthen our ecosystem and drive future growth.

What is the current production capacity, and how do you plan to increase it to meet anticipated demand growth?

Our annual production capacity for tractors currently stands at 170,000 units, whilst our actual production is around 125,000-130,000 units.

We plan to double this capacity with a greenfield facility. We presented our intent to the Rajasthan government, but it did not work out. Now, we have reached out to the Uttar Pradesh government, and things are moving forward. If the land is allotted to us, we expect to finalise the deal in the next six months.

We will focus on tractor production in the initial phase of the new facility. Later we plan to localise Kubota's engine manufacturing and then expand to the production of construction equipment. With the idea of leveraging Kubota's global network and using India as a hub for sourcing products and components, the facility will support export initiatives.

If the land acquisition process goes smoothly as planned, we anticipate the new facility to be operational by FY27-28.

Are you actively pursuing any inorganic opportunities to strengthen your position in the tractor market?

Our current focus in the tractor segment is on organic growth; we are not actively looking for any inorganic growth in the sector. Kubota may explore global acquisitions. These could indirectly benefit Escorts Kubota, especially if those acquisitions have a presence in India. However, we're primarily focused on organic growth.

Where does Escorts Kubota stand on the electrification of tractors?

We were the first to launch an electric tractor certified by the Automotive Research Association of India. We have been exporting these tractors to markets in the US and Europe.

However, in India, the adoption has been slow due to the higher cost of electric tractors, which is nearly double the cost of diesel-powered tractors. While the export portfolio for these tractors is small, we are also exploring alternative fuels like hydrogen, CNG, and biogas, as these may offer more practical solutions for our customers.

What will be the impact of transitioning to TREM-V emission norms, and what could be the impact on emissions and farmers?

The shift towards the TREM-V emission norm is in line with the environmental goal to reduce carbon emissions. However, the transition will result in an increased total cost of ownership for farmers, in terms of the initial price of the tractor and the cost of servicing.

The cost of tractors is expected to increase by 15% with the new norms. Additionally, TREM-V tractors will require specialised workshops rather than local mechanics. These additional costs will have to be passed on to customers. We are advocating for a balance between reducing emissions and not burdening farmers too much, as it could lead to overall inflation in the economy.

Will there be a need to optimise the product portfolio to meet the upcoming stringent emission norms?

To comply with the new regulations, we will have to focus more on higher-selling models, and we might have to phase out the less popular models. The engines will have to be upgraded across all platforms to ensure minimal technological disparities. Overall, our product portfolio could be reduced by about 30% with more focus on models that have strong market demand and better quality control.