The Escorts story: How the company almost lost its core business because of its telecom misadventure

It was around this time that the unravelling of the Escorts telecom story – which would end up severely wounding the main tractor business – started.

In his Chairman’s Message in the annual report of 2001-02, Rajan Nanda proudly declared that Escotel was all set to “become our strongest retail chain with the largest numbers of channel partners, customer base and third most popular brand recall”. The company had an operating profit of 40 per cent of revenues.

But when the time for bidding for more circles came, Escorts decided to go it alone. A wholly owned subsidiary, Escorts Telecommunications Ltd (ETL), was incorporated in 2001. Though First Pacific believed in the enormous potential of the Indian market, it was facing financial stress back home. Bringing in a third partner would have helped.

Nikhil Nanda also believed Escorts should limit its own exposure and bring in other investors. He, however, was unable to convince his father that 40 per cent of, say, a Rs 10,000 crore business was much better than 51 per cent of a Rs 1,000 crore one.

ETL bagged four circles – Punjab, Himachal Pradesh, Rajasthan and East Uttar Pradesh (UP-East). It had signed the licence agreement in October 2001 and had already done much of the preparatory work to roll out services in 2002-03. The licences, spectrum (the two were not bundled as had been the case when Escotel had got the first set of licences) and investment in infrastructure required an enormous amount of money. ETL had to resort to high levels of debt, which was guaranteed by Escorts.

The bank guarantees on the balance sheet of Escorts for the telecom business soon amounted to nearly Rs 1,200 crore. The tractors business, which was ailing at that time, needed a lot of infusion of funds, but there was none to spare. Rajan Nanda was advised against this move by many people within and outside Escorts. But he was firm on going down this route and made light of these concerns: “I’ve got the licences, this will bring in partners, everything is taken care of.”

That did not happen and eventually ETL never started operations in the four circles. First Pacific decided to exit Escotel for good, which meant Escorts had to find money to buy its stake. The 9/11 terrorist attack in New York threw global business in turmoil and the global telecom sector was particularly stressed. Escorts was negotiating with global investment banks, but was not getting the kind of valuation it thought it deserved. Then a deal was struck with the International Finance Corporation for $60 million in eight-year debt and $20 million for 49 per cent equity but ultimately this, too, did not go through.

Kohli quit Escotel in 2002 and joined Airtel. Things started to go downhill quite fast, with Escotel starting to post operational losses. Meanwhile, Escorts was facing a severe financial crunch, with banks refusing to lend money for working capital for the tractors business. “Sell telecom, get rid of the guarantees on your balance sheet and we will lend for tractors,” was a constant refrain Nikhil Nanda had to hear. There was no getting away from the fact that the telecom business – Escorts’s first big foray into the services sector – would have to be sold.

After Kohli left, Swaroop was put in charge of the telecom business. He had initiated the move into telecom in 1994; nine years later he was given the responsibility of closing it.

There were regulatory issues to be dealt with. The government had recently allowed licences to be sold. In one of the first moves to get out of telecom, ETL sold its Punjab licence to Hutchison Essar, the Indian arm of the Hong Kong-based investment company Hutchison Whampoa.

Simultaneously, the search for a buyer for the whole business continued. Three years earlier, Birla-AT&T and Tata Cellular had come together to form BATATA (which later became Idea Cellular) and this combine emerged as a serious buyer. Though an MoU was signed, BATATA took its own time in closing the deal.

Meanwhile, the financial crisis in the Escorts group deepened. Tractor production had plunged from 5,000 a month to 500 and salaries were getting delayed. There didn’t seem to be a solution in sight. One dull Friday afternoon, Nikhil Nanda was sitting in his office feeling very despondent. There were no lights – electricity supply had been cut off for non payment of bills.

“Is my dream of building upon this legacy going to die even as I am just starting my career?” he thought to himself.

Just then Umesh Banerji, the CFO, walked into his room. Banerji perhaps sensed Nikhil Nanda’s mood and said gently: “Nikhil, I am very sorry to bring you this news but we have tried everything and the telecom sale deal has been postponed to a point where the consortium bankers have told me they cannot give any more funds to keep the tractor numbers afloat. And if that can’t be done, then the revenues to keep the business going are not going to come.”

Nikhil remembers this as one of the darkest moments of his life. When he went home that evening, his wife, Shweta, reminded him about an invitation to dinner at a friend’s house. He told her: “My world is falling apart. The last thing I want to do is to dress up and go out and smile.”

Shweta sat him down and told him that she empathised with what he was going through but in a crisis situation he needed to be brave and toughen up. He then decided to go to the dinner. It turned out to be fortuitous – by the end of the dinner, Nikhil had a very exciting offer from a telecom giant. So thrilled was he that he called Banerji from there at 12.30 am to give him the news.

The next morning, Nikhil and Banerji were at that telecom company’s office for negotiations and the price agreed upon would have given Escorts far more than the Idea Cellular offer. Rajan Nanda and wife Ritu had been on a ten-day-long pilgrimage near Mangalore, where they could not be reached. When they returned, Nikhil presented him with a draft MoU setting out the broad contours of the sale. Rajan Nanda was very pleased and gave his son a rare compliment.

However, this deal could not be taken to its logical conclusion because of regulatory issues relating to the number of circles a player could be in. Later, Idea Cellular upped its offer. In 2004, Escotel and ETL went out of the Escorts fold. Escorts got Rs 205 crore and bonds worth Rs 175 crore payable by 2014. This was the first exit from the services space. The healthcare business was now to follow.

Excerpted with permission from Back From The Brink: Turning Escorts Around, Seetha and Sharad Gupta, HarperCollins India.