ICRA has revised the long term rating of Escorts Limited (EL) from LA+ (pronounced L A plus) to LA (pronounced L A). The revised rating also indicates adequate safety. However, the relative degree of safety regarding the timely servicing of interest and principal as per terms has declined marginally since the earlier rating was assigned. The rating of the company's Commercial Paper programme of Rs.75 crores has been retained at A1 (pronounced A one). The revision in rating factors in the pressures in the tractor industry, EL's high exposure to the group's telecom business which has increased with new circles obtained under fourth operator bidding in 2001-02, delay in divestment of its telecom stake, and increase in overall exposure to group companies in 2001-02. The rating also factors easing of working capital pressures in 1Q FY2003 through reduction in dealer stocks and expected divestment of its stake in its harvester combine and heavy equipment joint ventures in the short term.

Tractor industry demand, which declined further by 12% in 2001-02 (-5% in 2000-01), is expected to witness negative growth during 2002-03. Significant increase in pipeline stocks in 2001-02 and lower demand on account of weak monsoon is expected to result in pressure on tractor sales volumes during 2002-03. EL recorded a 15.5% decline in tractor sales in FY 2002, aided by a sales push in the 4Q reflected in higher pipeline (dealer) stock position and substantial increase in debtors as on 31.3.2002. Subsequently, EL has reduced its dealer stock, which is reflected in sales decline of 59% in Q1 of FY 2003. EL's ability to improve upon its volumes for the year on account of new product launches and revamped marketing strategy would be constrained by weak industry prospects. While ICRA expects a moderate industry growth in the long term, demand supply imbalance within the industry is expected to result in the competitive pressures being sustained in the long term.

EL's fund based exposure to group companies has increased by about Rs 90 crores during FY 2002 taking the total exposure to Rs.899 crores (45% of assets deployed). About 38% of the EL's total fund based exposure to group companies is in the Telecom businesses. Escotel Mobile Communications Ltd., which is the largest telecom exposure of EL, is yet to achieve a net break even despite an improvement in operating performance in 2001-02. EL's non-fund based exposure to telecom has also increased by Rs 330 crore to Rs.835 crores as on 31.3.2002 with the extension of short term guarantees to enable Escorts Telecommunications Limited (ETL) fund its fourth operator license.

Escort group's telecom funding strategy is yet to be finalised as a result of the delay in bringing in a financial partner, which has resulted in a increase in the financial risk profile of EL. The company however expects to bring down the guarantees extended for funding of fourth operator licenses by the 3Q of FY2003.

EL's financial performance has deteriorated significantly in 2001-02, as result of decline in tractor volumes and lower divestment proceeds compared to the past. PBT of EL fell from Rs 121 crores in FY 2001 to Rs 5 crore in FY 2002. EL's return on capital employed declined from 16% in 2000-01 to 8.5% in 2001-02. Gearing, increased from 0.73 time as on 31.3.2001 to 0.96 time as on 31.3.2002 because of increase in debts to fund increased working capital requirements and group companies. Coverage indicators also declined significantly in 2001-02. ICRA expects the profitability and debt coverage of EL to be dependent on its ability to divest stake in its group companies at high valuations.

While EL's cashflow situation is expected to improve in the short term with divestment in stake in joint ventures (Escorts JCB, Escorts Mahle and Escorts Claas) in the current year, ability to improve cashflows on a sustained basis in the long term remains to be seen. ICRA expects EL's financial performance to be constrained by moderate returns from the tractor operations, expected funding requirements for the telecom business and low returns from investments in other group companies.

August 22, 2002