Ind-Ra : Info Center : Press Releases

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15-Oct-2015

Industry Witnessing Decline in Volumes: The tractor industry saw a volume decline of around 13% in FY15 with the trend continuing in 1QFY16. Escorts saw a
volume decline of around 15% in FY15 primarily due to the higher concentration of revenue from northern and central region where the decline in volumes was
higher than in the overall industry. Tractor demand has a strong correlation with domestic agri sector output and rural demand both of which depend upon
monsoon, crop prices among other factors. A sustained decline in volumes could stress the profitability and credit profile in the near term. Escorts reported
revenue of INR39.9bn in FY15 (FY14 (18-month period): INR62.9bn) with EBITDA margins of 4% (6.1%) and net profit of INR747m (INR2,449m). In 1QFY16,
Escorts reported revenue of INR8.1bn (1QFY15: INR9.5bn) with EBITDA margins of 5.9% (5.0%) and net profit of INR363m (INR341m).

Initiatives to Improve Cost Structure across Segments: Escorts has initiated projects across its various segments to improve its cost structures by reducing
material consumption and labour costs, and improving supply chain efficiency. In FY15, it reported EBITDA losses of 20.6% (FY14: 12.4%) and 3.3% (2.7%) in its
auto ancillary and construction equipment segments, respectively. However, the agri machinery and railway products segment reported EBITDA margins of 8.1%
in FY15 (FY14: 10.3%) and 11.4% (7.7%). Ind-Ras analysis indicate that Escorts EBITDA margins are below the industry benchmarks primarily due to high
overhead and wage costs. However, the company has planned reducing wage costs through the voluntarily retirement scheme. Although this will impact the cash
outflow in the near term, it will help improve the cost structure in the long term.

Short Working Capital Cycle; Limited Capex: Escorts working capital cycle in its main agri segment is short, keeping the overall cycle short. With limited
capex, Ind-Ra expects the cash flow from operations (CFO) as well as free cash flow to improve, aiding deleveraging. CFO was positive but volatile over FY12FY15 due to varying working capital requirements. Free cash flow was also volatile during the same period owing to varying CFO.

Comfortable Credit Metrics; Legacy Issues Behind: Escorts adjusted debt/EBITDA was in the range of 1.4x-2.5x and gross interest coverage was in the
range of 1.9x-2.8x over FY11-FY15. The company has faced legacy issues which have impacted the financial profile in terms of write off of
inventory/assets/investments. In FY15, Escorts performed an inventory/debtors write-off of INR426.3m. However, Ind-Ra expects an improvement in the credit
metrics with the legacy issues largely resolved in FY15.

KEY RATING DRIVERS

The ratings reflect Escorts comfortable credit profile and Ind-Ras expectations of an improvement in the profile. The companys current initiatives on improving
the cost structure and product mix across all segments will aid its profitability and cash flow, leading to deleveraging. However, the tractor industry faced a volume
decline in FY15 and a continuation of the trend over FY16-FY17 could put stress on the profitability and credit profile of sector companies in the near term.
Nevertheless, tractor volumes are likely to bottom out in FY16, with a gradual improvement FY17 onwards.

Ind-Ra-New Delhi-15 October 2015: India Ratings and Research (Ind-Ra) has assigned Escorts Limited Long-Term Issuer Rating of 'IND A-.The Outlook is
Stable. A full list of ratings is at the end of this commentary.

India Ratings Assigns Escorts IND A-; Outlook Stable

India Ratings and Research Private Limited : India's Most Respected Credit Rating and Research Agency

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Associate Director

Chandan Sharma

Primary Analyst

Contacts:

- INR6580m non-fund-based working capital limits: assigned Long-term IND A-/Stable and Short-term IND A2+

- INR5060m fund-based working capital limits: assigned Long-term IND A-/Stable and Short-term IND A2+

- INR2961.9m term loans: assigned IND A-/Stable

- Long Term Issuer Rating: assigned IND A-; Outlook Stable

Escorts ratings:

15-Oct-2015

Escorts has an installed capacity of 100,000 tractors a year. It offers a wide range of tractors under two brands Farmtrac and Powertrac. The company has
presence in other segments such as construction equipment, auto and railway products. It has six plants in India, five of them in Faridabad, Haryana. It has an
international subsidiary in Poland with an installed capacity of 2,500 tractors a year. In FY15, the agri segment accounted for 80.6% of the revenue, construction
equipment accounted for 12.5%, railway equipment accounted for 4.4% and auto ancillary accounted for 2.5%. .

COMPANY PROFILE

Negative: A negative rating action could result from a decline in the revenue and profitability leading to the tightening of liquidity or deterioration of credit metrics
with the net adjusted debt/EBITDA being sustained over 2.5x.

Positive: The completion of the current cost initiatives with a sustained improvement in the profitability in the agri, construction and auto segments leading to an
improvement in the credit metrics and the stabilisation of volumes in the agri segment could lead to a positive rating action.

RATING SENSITIVITIES

Diversifying Geographical Presence: Escorts is also focussing on improving its product portfolio in the underpenetrated southern and western markets. It is
also focussing on exports to reduce impact of a downturn in the domestic industry. Exports volumes increased to 2,209 units in FY15 (FY14: 909 units).

Marginal Decline in Market Share: Escorts is the fourth-largest tractor manufacturer in India. Its market share marginally declined over FY13-FY15 driven by
increasing competition as well as limited presence in the southern markets. In particular, the company has lost market share in the 41-50 HP segment (FY15:
9.7%; FY13: 13.1%), which accounts for around 46% of the industry volumes. On an overall basis, the companys market share declined to 10.4% in FY15 from
11.6% in FY13. However, the company has launched specific products catering to haulage applications and to each of the industry sub-segment to capture
market share.

India Ratings and Research Private Limited : India's Most Respected Credit Rating and Research Agency

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15-Oct-2015

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ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE
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Applicable criteria, Corporate Rating Methodology, dated 12 September 2012, are available at www.indiaratings.co.in.

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to
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Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been
compensated for the provision of the ratings.

Media Relations: Mihir Mukherjee, Mumbai, Tel: +91 22 4035 6121, Email: mihir.mukherjee@indiaratings.co.in.

+91 11 4356 7246

Director

Salil Garg

Committee Chairperson

+91 11 4356 7246

Analyst

Bijoy Thomas

Secondary Analyst

New Delhi 110001

7 Tolstoy Marg, Connaught Place

6th Floor Prakashdeep Building

India Ratings and Research Pvt Ltd

+91 11 4356 7256

India Ratings and Research Private Limited : India's Most Respected Credit Rating and Research Agency

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15-Oct-2015

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