How Japanese Kubota's Investment In Escorts Will Boost Investors' Fortunes 

Last year Japan's largest tractor maker Kubota became a majority partner in Escorts after investing Rs 9,400 crore. According to the shareholding pattern on stock exchanges, the Japanese company is now the single largest shareholder in Escorts, India's fourth largest tractor maker after Mahindra & Mahindra, HMT and Sonalika. 

Last month, the Escorts Kubota announced its medium-term business plan with three objectives. The first was that it would become the number one global tractor manufacturer in terms of volumes, followed by strategies to expand its revenue. Thirdly, it would improve profitability and promote farm mechanisation globally. 

To achieve these objectives, Escorts Kubota said it will establish a research and development centre to design new platforms for innovative machinery of up to 120 horsepower. It added that leveraging its frugal manufacturing capability and Kubota's global quality system will create competitive products at aggressive prices, enabling its Japanese ally to compete against brands exported from India and Korea. 

In step with its ally's plans

The company plans to make India a global manufacturing hub of tractors and farm equipment with these initiatives. It also aims to grow its volumes and market share in the US, Europe, Latin America and Africa. 

 "This will help Kubota increase its volumes and market share in the EU and US markets. India will emerge as Kubota's global manufacturing hub and supply India-made components to its international operations. The company is focused on expanding its existing business by leveraging three brands—Farmtrac, Powertrac and Kubota—to cater to all customer segments," Escorts said. 

It added that customers in Latin America and Africa are also looking for heavy-duty tractors that can tow heavy loads at a lower price than Kubota's lightweight and compact products specialty. This will allow the Japanese brand to compete at lower prices than it currently does. This will further enable its plans to expand its volume and share in the European and American markets. 

"By becoming Kubota's global production base, Escorts will be able to take advantage of its low-price cost structure, thus, ensuring higher profitability. It will also be able to supply Indian-made parts to factories across the globe," Escorts stated. 

Towed by good prospects

Highlighting that Escorts Kubota is one of the cheapest multinational company (MNC) stocks available in the Indian equity markets, Sanjiv Bhasin, director of IIFL Securities, is extremely bullish on the stock. He expects it to go up to Rs 3,000 during the year. 

"Kubota is one of the largest tractor makers in the world. It is infusing capital and coming up with a new range of products. This MNC stock is available at a 13 times one-year forward price-to-earnings ratio, which makes it one of the cheapest MNC stocks. I have a target of Rs 3,000 on the stock over the next nine to 12 months and will not be surprised if it also beats that target," Bhasin explains. 

Earlier this month, Escorts Kubota reported a 7 per cent rise in tractor sales at 6,111 units for August 2022. The company sold 5,693 tractors in the year-ago same period. 

Domestic tractor sales stood at 5,308 units against 4,920 units in August last year, up 8 per cent, the company said in a regulatory filing. Exports increased 4 per cent to 803 units from 773 tractors sold in August last year.

Kubota does not have any issues with the supply chain and semiconductors, Bhasin said adding that domestically it is expected to gain market share. 

"If it makes its base in India and exports from here, it will be another investment story similar to Maruti Suzuki," he noted. 

Escorts Kubota's net profit in the last fiscal came in at Rs 765 crore, down 12 per cent from Rs 874.06 crore in March 2021. Its net profit in March 2020 came in at Rs 484 crore at the end of the financial year 2019-20.