In late 2012, Blackstone Capital Partners invested Rs 520 crore in the relatively unknown International Tractors Ltd (ITL), valuing the makers of the Sonalika brand of tractors at Rs 4,200 crore. Industry may have taken note with interest, perhaps even surprise, at the time, but today, the private equity (PE) firm will get congratulated on a smart investment.
From all accounts, it also deserves to be applauded for perseverance.
An 18-month pursuit to convince the promoters of a company to accept their money was, simply put, an unusual experience for one of the world’s largest PE players. In most cases, promoters are only too glad to invite the marquee investor, with $68 billion under its management, into their companies. But ITL’s promoters, headed by Chairman LD Mittal, were not as easily persuaded.
When Blackstone India approached ITL, they got a surprisingly cold response. While Vice Chairman AS Mittal and Managing Director Deepak Mittal, sons of the family patriarch LD Mittal, were happy to meet the Blackstone team and talk business, “they said they don’t need the money”, recalls a top Blackstone executive who did not want to be named.
But the PE firm was not giving up. Its interest in ITL which, despite its success, was not as high-profile as domestic peers Mahindra Tractors and TAFE (Tractors and Farm Equipment), had a solid foundation.
The company, based in Hoshiarpur, Punjab, was a comparatively young player in the Indian tractor industry—it sold its first machine in 1996. But despite its ‘youth’, Blackstone’s own research had shown that ITL’s 20 percent Ebitda margin was the best among its peers. A study conducted for Blackstone by consulting firm Boston Consulting Group and marketing research company Francis Kanoi showed that “Sonalika has a very good product, [needed] low maintenance, [had] good power [essentially torque] and good fuel efficiency”. The survey sample included 15,000 farmers from different parts of India.
Blackstone was interested in India’s rural story and had already invested in Nuziveedu Seeds, India’s largest hybrid cotton seed company. “ITL is intrinsic to India’s efforts in enhancing agricultural productivity and enriching its farmers. Favourable macro economic trends such as rising minimum support prices and rising labour costs are leading to increased adoption of mechanisation by farmers,” said Akhil Gupta, then senior managing director and chairman of Blackstone India, during the announcement of the deal. He is now non-executive chairman of Blackstone India.
The investors finally got the green signal after the senior Mittal convinced his sons to agree to the Blackstone deal. He offers a simple rationale for his change of mind. “We have pan-India and global ambitions and given Blackstone’s experience, it [the deal] will help us scale up,” he told Forbes India in a meeting at his Delhi office in late 2013.
Dividends And Growth
And it has been so far, so good for the partnership that is less than two years old. ITL has already given two rounds of dividend payments to Blackstone. It stands to reason then that the company has done well: It sold nearly 60,000 Sonalika tractors in FY2013, the number up 23 percent from the previous year. This is a remarkable performance given that the industry grew by a miniscule 3 percent. ITL’s revenues rose by nearly 30 percent to Rs 2,911 crore, again beating the industry average growth which was about half of that.
It has quickly emerged as the fourth largest company in the sector, behind Escorts but ahead of multinational biggies like John Deere and New Holland—this is as per 2013 figures. The company has also increased its market share over the last two years, from 7.8 percent (in 2011) to 9.9 percent in 2013. “This year, we will become the third largest tractor company in the country,” says Raman Mittal, son of Deepak Mittal and an executive director at ITL who handles the company’s marketing vertical. He estimates that ITL’s share in the nearly 6 lakh-unit per year market will increase to 10.3 percent in 2014, while Escorts’ share will drop to 10.1 percent.
After including exports, ITL is expected to sell 80,000 tractors in 2014 and touch the one lakh mark in 2015. “We have increased our share across the states and across the HP [horse power] range,” says AS Mittal.
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(This story appears in the 07 February, 2014 issue of Forbes India. To visit our Archives, click here.)
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There is a new factor at work on the world`s farms. It concerns the Planet`s resources . It is fossil-fuel cost sensitive and it is particularly soil-sensitive. From a finite volume of soil , the Planet has to use its available resources to DOUBLE FOOD PRODUCTION IN THE WORLD BY 2050on Jul 20, 2014
The export markets of the world should be where the competition between Mahindra tractors and Sonalika tractors should be compared. The Indian market of Mahindra was started when they bought the Bradford UK factory of International tractors soon after the end of WW2. International Tractors are a commendable growth tractor maker in the Indian market that started late but were able to take advantage of some lower-cost manufacturing benefits in the states where they manufacture. The approach of Mahindra tractors in the export markets has been reasonably successful because they chose the Hobby or weekend farmers of USA as their market and this meant they could make and sell a cheap and simple tractor like the ones they make in thousands in India The problem for both companies is that they do not have Designs that can compete in the export markets of the world when the competition is Deere,Claas,Fiat,Claas Same-Deutz,Argoon Jul 20, 2014
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