Rationale

The reaffirmation of the ratings factors in the continuation of Escorts' healthy operational performance, driven by robust volume and profitability expansion in its key business division of agri-machinery. Over the past few years, Escorts has been able to report a sustained healthy operational performance across business divisions, which has aided it in recording strong cash accruals. In FY2021, despite the adverse impact of the lockdowns following the spread of Covid-19, the company posted healthy topline growth of more than 20%. Revenues from its agri-machinery segment (EAM) and railway equipment division (RED) grew by27.7% and 0.4% YoY, respectively, while that from the construction equipment segment (ECE) declined by 7.6% YoY. Escorts benefitted from an overall improved scale of operations and saw a healthy improvement in operating profit margins (expansion of ~467 basis points in FY2021). The EAM and ECE divisions are likely to record growth in revenues in the current fiscal on expectations of a continuation of healthy farm sentiments and strong infrastructure push by the government. The strong performance of the EAM division, in particular, will help Escorts offset any impact of a relatively weak performance of the ECE segment (impacted by the lockdown measures in Q1 FY2022) and the railway equipment division (order book inflow hit by the adverse impact of the pandemic on railways' operations)), while also helping it maintain healthy profitability and return indicators. The ratings assigned continue to take into account the healthy financial risk profile of the company, characterised by robust capitalisation and coverage metrics (Debt/OPBDITA at 0.1 time and interest coverage at 84.5 times in FY2021). Strong cash and liquid investments of Rs. 2,826.3 crore and significant working capital buffer as on March 31, 2021 provide additional comfort. ICRA notes the inherent cyclicality in both the EAM and ECE divisions, which remain the company's key business segments. However, the ratings assigned continue to take comfort from the company's established market share (11.3% market share in FY2021) and strong brand franchise in the EAM division, especially in the northern and central markets. Escorts continues to be a leading tractor manufacturer in the country, aided by a well-entrenched dealer network, financing tie-ups, regular product launches/refreshes and targeted marketing efforts. While the company's market share in the southern and western markets in India islimited, its efforts to expand its dealership network in these regions are likely to support volume growth in these regions over the medium term. Even as the company's presence in the exports market remains relatively low, its collaboration with Kubota Corporation is expected to help it strengthen its business profile and ramp up exports over the medium term Over the recent past, the company has been on the lookout for acquisitions to enhance its product profile, especially in the railway equipment division. As a part of its collaboration with Kubota Corporation, the company could also undertake significant investments in the agri-machinery/construction equipment segments to enhance its product profile. More clarity on the same is expected to emerge in the near future. The impact of any major investments/inorganic growth steps undertaken by the company on its credit profile would continue to be monitored. The Stable outlook on the long-term rating reflects ICRA's opinion that Escorts would be able to report a moderate-to-healthy revenue and earnings growth over the medium term, benefitting from its established market position, collaboration with Kubota Corporation and the government's plans to increase agricultural income and promote infrastructure investment. The same is likely to help the company maintain a strong credit profile.