Bharat Madan on Escorts’ falling market share, margin levels & Kubota synergy

hiked prices to protect margins and we have a loss in market share. That is what the Street is trying to grapple with. Going forward, what would you like? Channel checks are showing that Mahindra as well as regional players have gained share?
As you mentioned, there has been some disappointment on the market share front in certain pockets, especially in strong markets and that came as a surprise. In certain pockets of UP and Bihar, which were our strongholds, a drop has been seen in the market share.

We have been looking into the reasons for what has happened and what went wrong and obviously corrective actions have been put into place in the last two weeks. So we hope to get back to the normal margin levels. This has nothing to do with the price hikes because the price hikes had been in line with the industry group. We did not do any extraordinary price hike and this is a normal trend and even now, the industry is carrying some inflation and it is the same with us.

So that has nothing to do with the market share gain or loss but there were certain disruptions in certain pockets, especially in the stronger markets which the company is cognisant of and we are taking corrective actions to make sure that gets corrected in the balance of the months.

You are saying you will regain it. Can you tell us a little bit about how that is going to be? Should the Street expect a gradual recovery of the lost market share? Of course, you have Kubota also now and so a lot of tech expertise?
Kubota integration is yet to start happening. Obviously that will be gradual and slow. The movement will happen on that but both having worked on the product side as well as the tech side, I think the action which you are talking about it was in the short to midterm, which the company has taken and it is cutting across all categories – on the channel side, on the trade policy side, on the product rationalisation side versus what was selling and what is not selling.

So, it will be a mix of all factors which have been put into place now in these pockets. That is why I think we should be able to get back and we do not see a major issue in brand loyalty from the customer perspective which can be of any concern. This is more a short-term impact which has been there and the corrective action the company is proposing now should help us be able to get back to normal levels.

There is a fear in the market right now that the company is going to sacrifice margin gains in the near term to try and gain back market share. Is that valid?
I would not say that because what we are doing is going to be in line with the industry. We are not going to go for any aggressive incentivisation or discounting for the products to gain market share. That has never been the strategy which the company will follow.

But yes, in the past, there was more focus on the margin also because in the last five, six years, the company has turned around on the profitability front. So that was one of the focus areas but now there will have to be a correct balance between the right level of profitability and the market share which is what the company’s mantra is going to be going forward.

The other thing I wanted to understand was what happens to Kubota Escorts synergies because they are yet to play out? The market wants a little bit of clarity on this.
The integrations are yet to happen. The company is in the process of working out the midterm business plans which internally we expect should get approved by September and in Q3 we should be able to make it public. Post that, once the merger happens through the JV, the real integration work will start happening.

Right now, we are still operating as separate entities and the process is on and may be in another month or so, we should be able to really take that forward to and then things will start working on. We will be working on the real integration strategy in the second half of this year, once the midterm business plan is through. Then we will get down to the aggregation part and see how best we can do that.

A lot of brokerages have cut their earnings estimates for FY23 and FY24 by 20-25%. Do you think brokerages are being over critical here?
In the short term we do expect an impact on the margins because the inflation is still there and in the first quarter, the effect has been very high on the margin and that will take some time before we stabilise. Only by Q4, we expect to be able to go back to the normal level of margins. And so next year, we do not see an impact really on the margin front.

So, it is more short term in nature and maybe the next quarter or two, depending on how the deflation plays on the commodity side and how well we are able to really go back on to suppliers. In the midterm or the next year, we do not see any major impact on the margins.

What are the macro factors at play? Can these be a real headwind for you?
Definitely. I think the monsoon will play a big role. We have seen that there are certain pockets especially in the eastern side, in Bihar where the monsoon has been slow. That will impact the paddy belt which is the highest sowed grain in the country.

But even if the monsoon is good in the rest of the country, which are more rain fed, we expect the second half at least to see a better outlook for the industry. We are still hoping the industry this year registers a low to mid single digit growth compared to last year.