The proposed acquisition of Escorts’ railway parts business will likely provide a further fillip to this endeavour, since it will give the company a toehold in the railways. Sona Comstar’s decision to acquire the railway equipment division (RED) of Escorts Kubota, announced late last month, is expected to not just expand the former’s green mobility portfolio but also boost its profitability. Sona provides mission critical systems for electrified and non electrified powertrains to Battery Electric Vehicles (BEVs) as well as ICE vehicles, in India and many markets across the world. The company has been increasing its focus and revenues from the BEV segment steadily, in a bid to expand its green mobility footprint. The proposed acquisition of Escorts’ railway parts business will likely provide a further fillip to this endeavour, since it will give the company a toehold in the railways, one of the greenest forms of transport anywhere in the world.
As per the terms of the acquisition, Sona has agreed to acquire the RED business from Escorts for INR 1600 crore. And it has already termed the RED business “EPS accretive” from the first year itself. This should be music to the ears of investors of the company and those tracking the Indian auto component space, since the railway business allows Sona to enter a product segment where margins are healthy and where entry otherwise is a tough and long winded process.
Escorts is the market leader in railway brakes in India, says Sona’s MD & Group CEO Vivek Vikram Singh. Couplers, suspension systems, friction and rubber products are the other components in the RED portfolio of Escorts. The revenue of this business has more than trebled in just three years, from FY21 to FY24.
“And we believe that with the right investment and the right focus, it has the capability to become one of the market leaders globally as well,” Singh said.
The Indian Railways has a fairly hard barrier for entry of component suppliers due to a very strict vendor approval process, especially for critical safety parts like brakes. Escorts had a six decade experience in this business and has been a long term partner with the Railways for supplying these components. These twin factors would likely work to Sona’s advantage after the acquisition is completed, which Escorts says could take up to September next year.
The railway brakes segment is a three player market, with Singh referring to a “big American and a big European company” as Escorts’ competitors. How tough would it have been for Sona to enter this market without acquiring the existing business of Escorts? “The product validation process is super strict, the entry barriers are very high and the three companies (Escorts, the European and the American) compete with each other. Sometimes cost, sometimes technology, depends on which generation of product you are in.”
The acquisition of the RED business of Escorts finds an echo in the acquisition of Comstar by the Sona group in 2019 - both the acquisitions have led to diversification into new businesses. The revenue from the RED business of Escorts last year was about INR 900 crore and EBIT (Earnings before Interest and Tax) were 18%. Singh said that the RED business of Escorts has logged a “very very high growth rate” in the last few years.
Rising BEV share:
The share of BEV business in total revenues of Sona has been increasing quarter on quarter. It went up from 27% in the first six months of last fiscal to 35% in the same period this fiscal. In other words, BEVs now account for a third of overall revenues of the company, up from just about a fourth in FY22. In rupee terms, BEV revenues have grown by a whopping 53% to INR 600 crore and Singh said the growth in BEV revenues in the first half of the current fiscal has been seven times of the growth in non-BEV revenues.
At the end of September this year, Sona’s net order book stood at INR 23100 crore. The largest market for the company is the USA, which accounts for 44% of revenues, followed by India at 28%. Sona has manufacturing facilities in China, Mexico and USA apart from India and has earmarked up to INR 1200 crore as capital expenditure for the next two-three years.
