Escorts hosted a conference call on Mar 20, 2020 to discuss allotment of preferential issue to Kubota. The management was represented by Bharat Madan - Group Chief Financial Officer & Corporate Head.

Key takeaways of the call

Escorts will issue and allot 12257688 equity shares through a preferential issue to Kubota at an issue price of Rs 850 per equity share, subject to shareholders' and necessary regulatory approvals.

Kubota's investment will constitute 9.1% the equity stake on a pre capital reduction or 10% on a post capital reduction basis for a total investment of Rs 10419034800. This price represents a premium of approx. 48.21% over the last traded price on March 19, 2020.

However the total equity share capital of Escorts remains unchanged as the Board of Directors of Escorts, has given an in principle approval to consider a reduction of 12257688 equity shares of Escorts held by the Escorts Benefit and Welfare Trust, subject to receipt of necessary approvals and upon completion of the preferential allotment to Kubota. This shall ensure that the total equity share capital of Escorts remains unchanged. Simultaneously with the Preferential Issue, Escorts will acquire 40% stake in Kubota Agricultural Machinery India Pvt. Ltd (KAI), the marketing and sales company of Kubota in India. The existing 60:40 Joint Venture between Kubota and Escorts, namely Escorts Kubota India Private Limited (EKl), will continue to operate.

Kubota will get rights to nominate 2 directors in the BoD of Escorts.

Proceeds from the preferential issue will be used to make investment in capacity, products as well as distribution channel. Proceeds from the issue will not be used for any special dividend.

This collaboration aims at leveraging R&D strengths of Kubota to offer cutting-edge products for domestic and export markets, serving customers in new markets and new product lines. With manufacturing expertise of Escorts and strong domestic distribution combined with collaboration with Kubota, the company aims to reach its objective of becoming the market leader in farm mechanization, and address the food security challenge. The potential is huge for this partnership.

This will be a win-win collaboration and benefit - Escorts from product innovation through indigenization of global R&D, production systems excellence, global supply chain, sales and distribution and act as a global sourcing hub for Kubota; and Kubota with assured supply of cost-effective products in and for India, joint product development for emerging and global markets, and expansion of product range through respective distribution networks. New avenues of growth in construction equipment and agriculture implements, leveraging strengths of both the parties, with focus on products including earth moving equipment & smart agriculture implements.

vShort listed some products both in agri equipments side as well as Construction equipment side for joint distribution as well as joint development.

Kubota is a global leader in mini excavators (2-3 tonne range). This market is not currently big in India but will evolve.

Firm investment plans of the company will be finalised only after business plans (for next 5 years) that are getting drawn up. The process of finalising business plan will be completed in next 3-4 months.

The initial investment in EKl is about Rs 300 crore for 50000 tractors capacity and the facility will be used to produce Kubota and Farmtrac tractors. The production line is flexible enough to produce both brands depending on demand. The company will make further investments if needed in EKl.

KAI had a turnover of Rs 520 crore in FY19 with tractor sales of about 1500 numbers. KAI gets revenue of about Rs 250 crore from components.

Any further investment by Kubota in Escorts will be speculative at current moment.