Street positive on Escorts as Kubota moves into the driver's seat

Expansion of product portfolio, sourcing base and export opportunity to drive growth

The stock of tractor major Escorts rose 10.6 per cent in trade on Thursday and hit its all-time high after it announced that joint venture partner Kubota Corporation of Japan will take a controlling stake in the firm. The Street appeared to be positive on the deal.

The Japanese agri machinery and construction equipment major, which has a 9.09 per cent stake, is expected to increase its holding to 53.5 per cent after a preferential issue of equity, open offer and equity reduction of Escorts Benefit and Welfare Trust (Escorts Trust). The Nanda family has 11.6 per cent stake, while the Escorts Trust has shareholding of 24.99 per cent in the company.

The first step in the process is the preferential issue of equity shares by Escorts to Kubota. The Japanese company will invest about Rs 1,900 crore for a 6.49 per cent stake. The price per share of the equity issue is Rs 2,000, which is at a 29.5 per cent premium to the floor price of Rs 1,544. The stock had closed at Rs 1,630 apiece on Wednesday. Kubota’s stake in the company will increase to 15 per cent after this transaction.

Kubota will make an open offer to acquire 26 per cent stake in the company at the same price of Rs 2,000 per share as was the case with the preferential offer. There will also be an open offer for listed subsidiary Escorts Finance. While the Japanese company will have majority control, the Nanda family’s stake will remain constant.

The response of larger institutions (mutual funds, foreign portfolio investors) which have over 30 per cent stake in the company to the open offer will be important as will large individual investors such as Rakesh Jhunjhunwala, who has a 4.75 per cent stake. With the existing promoters not participating in the offer, the minimum acceptance ratio is pegged at 51 per cent. At the current price, the risk-reward is favourable, according to Edelweiss Alternative Research.

In addition to the attractive offer price and takeover by a global group, given the low promoter holding in the company, the other trigger for the stock was expectations of optimum capital utilisation given that Escorts is sitting on Rs 3,000 crore of cash.

On the operational front, analysts are bullish about the prospects for the Kubota controlled entity to be renamed Escorts Kubota. Ashish Chaturmohta, director research, Sanctum Wealth, believes the takeover is positive for Escorts, as it will result in technology/new product support for the agri and construction equipment divisions of the company.

The deal also includes simplifying the multiple entities within Escorts and the two joint ventures it has with Kubota. All the Indian businesses will be brought under one entity, which should help align the interests of the two promoter entities and operations.

Shashank Kanodia, research analyst, ICICI Direct, believes the transaction will help Escorts expand its product offering across the farm equipment, mechanisation, and construction equipment spaces. Moreover, the single entity would also have access to a global sales network and be a component sourcing base for Kubota’s global operations.

After the announcement, Kubota said it will consider developing and manufacturing basic combine harvesters and construction machinery targeting India and other emerging markets.

While the deal is expected to be completed in the current financial year and news flow on this will have a bearing on the stock, market share loss, margin contraction for four consecutive quarters and a subdued tractor volume outlook for second half of FY22 may be key dampeners going ahead.