ICRA assigns adequate safety rating to Escorts' NCD

THE INVESTMENT Information and Credit Rating Agency (ICRA) has assigned LA plus rating to the Rs. 150 crore long term NCD programme of Escorts (EL), indicating adequate safety. The rating takes into account the established position of EL in the competitive tractor industry, presence in a diverse range of horse power (HP) and geographical segments, which is likely to help it maintain its market share and expected inflows from proposed divestments in group/associate companies.

The rating also factors in the negative growth in tractor demand resulting in lower capacity utilisation, increased pressures on margins and higher working capital intensity which has adversely affected profitability and average coverage indicators of the company. The rating agency believes that over-capacity in the domestic market and moderate growth in medium to long term are likely to keep margins under pressure.

EL has repaid the Rs. 75 crore medium term rated NCD on maturity. Since, there are no outstanding against debentures, ICRA has withdrawn rating of MAA minus assigned to this programme.

The company in the past few years has been restructuring its operations by hiving off various divisions as separate companies in joint venture with established international players in order to infuse latest technology and also to focus on few identified core competence areas such as agri-machinery, telecom and healthcare. As part of the initial financial support, EL's fund- based exposure to group companies, including equity and loans and advances, is significant (more than 40 per cent of the asset deployed as on March 31, 2001).

The return on these investments by way of interest and dividends has been low. EL has already divested its (part/full) stake in Hughes Software Systems, Escorts JCB, Hughes Escorts Communication and Escorts Yamaha Motors. The company has utilised part of its divestment proceeds to reduce its debt. Further divestments in these businesses would be a source of funds for EL in the short to medium term.

The largest exposure of EL continues to be Escotel Mobile Communications (Escotel), which has licences to operate cellular service in Uttar Pradesh (West), Haryana and Kerala circles. Escotel is a small player in the telecom sector, which has witnessed a phase of consolidation in 2000-01. Escotel, which has been making losses achieved a cash breakeven in March 2001.

Additionally, Escotel has been able to restructure its off shore debts and has also obtained term lending from domestic financial institutions. In the new financial structure worked out for Escotel, no funding support is envisaged from EL.

The group in an effort to emerge as a strong player in the telecom sector has bid for eight fourth cellular operator licences through a subsidiary company. Funding for the new licences is to be arranged by raising debt/private placement of equity of Escotel. The Escorts group does not envisage any significant cash outflow from EL on account of this venture.

Even though EL has shown a negative growth of 13.5 per cent in 2000-01 as compared to negative growth of 9.5 per cent in the industry, it is still a dominant player in the tractor industry with a market share of about 19 per cent. EL has introduced new models of tractors and is also increasing its focus on the growing tractors markets in South India. These measures are aimed at improving its market share in the tractor industry in medium to long term.

The increase in trading sales made up for the decline in tractor sales. Despite improvement in productivity and reduction in raw material costs, EL's operating margin fell from 11.3 per cent in 1999-2000 to 9.8 per cent in 2000-01 due to decline in tractor sales and increase in selling costs.

The company earned an extra-ordinary income of Rs. 105 crores from divestment of stake in group company Escorts Yamaha Motors which enabled it to maintain its profit before tax (PBT) at Rs. 121.39 crores in 2000-01 as compared to Rs. 142.35 crores in 1999-2000.

Corporate Bureau

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