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The Escorts story: Can it be saved?
Suveen K Sinha in New Delhi
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September 10, 2005

Three days ago, the friendly request of an old contact at Escorts shattered the somnolent air of chairman Rajan Nanda's office, where two matronly secretaries share a space big enough to host an NBA match.

"Please don't screw up with the article. We are going through difficult times," said the old contact.

His demeanour was in sharp contrast to the sanguine and buoyant air of Nanda. Minutes ago, the chairman - his office finished in wood and leather, smoke from an imported cigarette brand wafting across the huge table - had loosened the collars of his Ralph Lauren shirt, squared his shoulders, raised his hands, palms towards the sky, and declared, "I
haven't changed. Only the circumstances have... I am going to be the number two tractor company again."

The two declarations do not really gel. The circumstances have changed so much that the goal sounds rather ambitious. Can Nanda bring his group back from the brink like his father did, twice?

The group started small
H P Nanda as Escorts Agents in 1944 in Lahore, moved to Delhi after independence, took the franchise for the distribution of Massey Ferguson tractors in 1949, started manufacturing its own brand of tractors with technology from Ursus of Poland in 1959, and quickly rose to number one in the business in partnership with Ford.

In 1983-84, HP took on the Indira Gandhi government as well as the Reserve Bank of India [Get Quote], as he thought both were aiding non-resident raider Swaraj Paul in his bid to acquire Escorts. He later thwarted that attempt. Around that time, HP was one of just two first-generation entrepreneurs - the other being Dhirubhai Ambani - to be counted among the country's business elite.

Then things began to change. In the early 1990s, the economy opened up, as did new sectors. Escorts could not stay untouched. It decided to tap the opportunities thrown up by the new economy Nineties. This was a sort of
fourth coming for the group, after the first one in Pakistan, the second in India, the third the escape from Paul's talons.

This time, however, things were different. Nanda Sr had begun to withdraw from active business, more so after the death of his wife in 1990. Rajan, forceful in personality but described by those close to the family as very different from his father, was in charge. The other son, Anil, was focused primarily on auto component company Goetze.

Rajan, just like the peer business groups, led Escorts into new ventures of software and telecom to diversify and spread the risk. It's a decision that generations of the Nandas may rue.

The beginning was encouraging
Escotel Mobile Telecommunications [Get Quote], a 51:49 per cent joint venture between Escorts and First Pacific Company of Hong Kong, bagged the cellular mobile licences for Uttar Pradesh (West), Haryana and Kerala.

While it could not get any of the lucrative metro licences, which entailed minuscule licence fee payments, its three circles were much better than what some others (most notably Reliance [Get Quote], which got much of the East) could manage. Escotel became one of the first cellular networks to achieve financial closure in August 1997. But it was a downhill ride after that.

Telecom needed a continuous infusion of sizeable capital to increase penetration and spread the geographical coverage. This was not much of a problem so long as the agri-business was doing well. Things changed around
the turn of the century.

After three successive monsoon failures, the entire tractor industry went into a downward spiral. To compound the problem, many new players, including multinationals with deep pockets, entered the tractor industry, which continued to be perceived as lucrative in the long term.

The Nandas made another valiant attempt to get scale by bidding for, and obtaining, four more cellular circles in 2001. That was a solo effort, as First Pacific stayed away.

Then the business environment changed again. The government succumbed to the persuasive powers of Reliance's Mukesh Ambani and allowed mobile telephony based on code division multiple access (CDMA) to mount a
formidable challenge to existing cellular operators that operated on the GSM (global system for mobile communication) technology. The CDMA licences came free with basic telephony licences, while the GSM operators paid
dearly for their's.

Question marks cropped up over the viability of the GSM operators. By the time the playing field was somewhat levelled for the two technologies, it was too late. The Nandas had failed to operationalise any of the new
acquisitions for lack of funds.

Eventually, desperate to get rid of its telecom business, Escorts sold the white elephant to Idea Cellular [Get Quote] in the middle of 2004. Net net, Escorts came out of telecom creaking under a loss of Rs 176 crore (Rs 1.76 billion).

Since then, Escorts has retired debt worth over Rs 100 crore (Rs 1 billion) incurred on the telecom business. Of the rest, a major chunk has been used to make payments to one of the financial institutions, whose name the company
would rather not reveal. "Without making this payment, the company could not have sold its telecom business," says chief financial officer Shailendra Tandon.

Today, even as this article is being written, the group is pondering ways to raise Rs 500 crore, which is all the money that, according to Tandon, it needs to dig itself out of the hole it now occupies.

All the directors on the board of Escorts, except chairman Rajan Nanda, have had to resign because the company has not been able to make debenture-related payments worth Rs 50 crore (Rs 500 million) to ICICI Bank [Get Quote], and another Rs 20 crore (Rs 200 million) to others, for nearly a year.

Among the resignations was one from Nanda's son and heir-apparent, Nikhil, who has just been appointed the groups' chief operating officer and will be on the board of the other group companies to ensure the presence of the
family on each.

Under Section 274(1)(g) of the Companies Act, had the default period exceeded a year, the directors of Escorts would lose their positions on the board of any other company.

In the last four years, the group has shrunk dramatically (see box). Rajan Nanda is left with the flagship Escorts, with its business of agriculture machinery, auto suspension and shock absorbers, railway equipment, and engine and transmission systems, Escorts Construction Equipment, which makes cranes, slew cranes, road rollers and road compactors, and Escorts Heart & Research Institute, which has a hospital each in Delhi, Faridabad
and Amritsar, and another coming up in Jaipur. There are two others, software company Escosoft and V-SAT operator Hughes Escorts, about which there is little to say.

What's more, the healthcare business, facing stiff competition from Max India [Get Quote], Apollo and Fortis, needs an infusion of capital. Dr Naresh Trehan, the face of the Delhi hospital, is building his own MediCity. Nanda admits to an immediate need to raise funds, but denies that the business is up for sale - lock, stock and Trehan. The group has a term debt burden of Rs 650 crore (Rs 6.5 billion), plus mounting needs of working capital and fixed-deposit

"When I joined Escorts in 1970, I was extremely proud to be a part of it. It was the one Indian company closest to MNCs in work ethic and professionalism. But I must say that it is no longer a prestigious company," says Murad Ali Baig, who left the company in 1990 and has been acknowledged by Nanda Sr in his autobiography as a trusted lieutenant in the fight against predator Paul.

So, what happened?
According to a former executive, Nanda has to take the blame for Escorts' decline. "Mr Rajan Nanda has a powerful personality. But he was reluctant to get his feet dirty in the market or fingers dirty in manufacturing."

Was he?
Nanda responds with equanimity: "I can interpret the criticism this way: In the last five-six years, I have been so troubled by telecom that I could not give enough time to the core business of tractors. But I am on my way back."

You can't help asking how, failing to hide dollops of scepticism. After all, Escorts has slipped to number three and is mired in losses even as Mahindra & Mahindra is comfortably perched at the top and TAFE, having
acquired Eicher's tractor business, is number two. "I'm more bullish than ever today because I know I have everything to become a leader," Nanda says.

Escorts, he claims, has the most efficient tractor engines, built at its own plant. Using its design capability, costs are being brought down. The manufacturing is becoming market-specific.

There is a plan to sell the engines in the market. The number of employees has been reduced. The company has good capabilities in the largest tractor market segments of 25-35 horse power. What's more, India is one of the largest tractor markets in the world and growing.

Why is the money such a problem then? It's only because the existing lenders, says Nanda, have refused to extend the term of the loans. "If the existing lenders give me a fresh term, I can retire the debt in four years. They are not ready, so, I'll have to raise the money myself."

Seconds CFO Tandon: "It's just a question of when you arrest the negative. Once that is done, we can quickly change the direction." Exactly how will be revealed in two weeks. We'll wait, trying not to screw up.

The undoing telecom

A finance whiz with a leading telecom company is incredulous. "How could they have made losses?" he asks, reacting to the Rs 176.6 crore (Rs 1.76 billion) loss that Escorts booked in selling its telecom business.

Escorts is perhaps the only one that came out of telecom burdened with losses. Everyone else, from early sellers (such as the BK Modi group in Kolkata) to the most recent (BPL), made profits.

"Escorts followed a strategy way beyond its limitations," says another top executive with a rival company, pointing out that the brand was strong only in the rural areas and its partner, First Pacific, was not very well
known even in native Hong Kong.

To begin with, Escorts had Uttar Pradesh (West), Haryana and Kerala. It bled in the 1990s, like every other cellular operator at that time. However, it failed to capitalise on the sugary deal offered by the New Telecom Policy of 1999. It was a good time to sell. Escorts, on the other hand, bid for, and obtained, four more licences in the fourth round of
bidding in 2001.

Finally, when Escorts decided to sell, Idea Cellular was the only buyer. The others had already spread themselves through earlier acquisitions and the fourth round of licences.

Tata and Reliance were focusing on CDMA. As happens in a fire sale, Idea cut a good deal by paying Rs 205 crore (Rs 2.05 billion) upfront and another Rs 175 crore (Rs 1.75 billion) to be paid in 2014.

To rub salt into the wound, points out Rajan Nanda, the valuations shot up a mere eight months later as India became one of the fastest growing telecom markets in the world.

The one that went away - Anil Nanda
As H P Nanda wanted to give all his time to the business, his sons Rajan and Anil were brought up in boarding schools. Neither went to college, opting for practical training instead.

Anil was very different from elder brother Rajan. While Rajan married filmmaker Raj Kapoor's daughter Ritu and took charge of the group, Anil, called Atom Bomb by his mother, chose to stay in his parents' house and remain unmarried, even though it was his mother's wish to see him married. He retained his single status even after moving to his own luxurious house, where he has gained the reputation of an excellent host.

Once Nanda Sr passed away in 2000, Anil appeared to have lost interest in staying united with the family. He chose to walk away with automotive component maker Goetze India, in which he bought Escorts' holding.

In 2003, when Rajan wanted to sell a chunk of Escorts Heart and Research Institute, Anil waged a public battle against his brother until the move was scuttled.

Today, Anil is sitting pretty. Goetze, in which he owns close to 30 per cent equity, is financially sound, leaving enough for him to indulge his finer tastes - such as embroidered jeans.

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