At a time when sluggish demand in the domestic market has adversely affected the sales of tractors and construction equipment, engineering conglomerate Escorts is banking on its railway business to tide over the crisis.
Revenue from the railway equipment division for the company went up by 26.2 per cent to Rs 244.8 crore in the first six months of the ongoing financial year, as against the declines of 16.5 per cent (at Rs 413.2 crore) and 6 per cent (at Rs 2087.7 crore) reported by its construction equipment and agri machinery divisions, respectively, in the same period.
“We undertook major cost-cutting exercises the past few years, which helped improve margins in the railway equipment business. We have made old products profitable,” said Dipankar Ghosh, chief executive officer (railway products division) at Escorts. “We did in-house research and development, collaborated for technology with firms in Europe, South Korea, Japan and seeded new products to help expand revenues and profit.”
EBIT (earnings before interest and tax) margin for the division stood at19.5 percent in the first half of the fiscal year.
Given the government’s push toward investment in infrastructure projects, the company now expects revenues from the railway division to more than double in the next three years. The railway segment’s contribution to the Escorts Group’s overall revenues is also expected to increase to 10-12 percent from the current 6-7 percent by FY23.
The NDA government, in its second stint, has announced investments to the tune of Rs 100 lakh crore in infrastructure projects over the next five years. Escorts clocked revenue of Rs 390 crore from the railway equipment business in the last financial year. It had earned revenue of about Rs 170 crore in 2013-14.
“Indian Railways’ assets have increased 22-25 percent in the last 70 years. Passenger and freight traffic has shot up 1300 percent and 1600 percent, respectively, in this period,” Ghosh said. “There is a huge gap between available infrastructure and actual need. There is tremendous headroom to grow.”
To cash in on potential demand, Escorts is expanding its product portfolio to supply more components to the Indian Railways. Apart from braking, coupling and suspension systems, the company is developing air conditioning and traction modules for railways.
Escorts expanded production capacity for railway components over the past six months. The group has a cluster of three railway production facilities currently, from one unit at the beginning of the year.
Besides meeting domestic demand, Ghosh said the company has started supplying railway equipment to China, Southeast Asia, Australia and New Zealand. While revenue from international business is miniscule at the moment, the aim is to expand this significantly. International sales constitute 5-6 per cent of revenues at the railway business division.
“We want to grow our international business significantly in the next 3-4 years. The technical collaborations we have globally are not only aligned at developing products for the Indian market. We source frugally and manufacture cost-effectively. There are some validation tests on…upon completion, our partners can buy back components from us,” Ghosh said.