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S. Muralidhar

TAFE's proposed acquisition of the tractor division of Eicher Motors, along with the latter's engines and gears manufacturing facilities could make the combined entity the second biggest tractor manufacturer in the country.

The acquisition, if and when put through, will give TAFE a toehold in some of the north and central Indian states such as Uttar Pradesh, Haryana and Madhya Pradesh with a brand like Eicher, which can count considerable customer loyalty as one of its strengths.

TAFE does not have a big presence in the low horsepower tractors segment and only produces two main models in the 25HP and 30HP categories. Eicher, on the other hand has more than four models in the 20 HP to 35 HP range.

This, clubbed with the fact that Eicher's tractors are more suitable for use in loamy, sandy, barren land and black cotton soil conditions make the acquisition more attractive for TAFE's foray into the key markets up north. Eicher also has a range of engines starting from as low as 20 HP to a 45 HP diesel, many of which have been co-developed with Ricardo of UK.

However, two important issues will be key to the acquisition being a good fit with TAFE's long-term plans.

One, the acquisition of the tractor unit may not give TAFE any significant reduction in logistics and transportation costs. Since the three component units of Eicher are spread out, geographically speaking, and since a number of other components also have to be sourced from units in the south and west, the savings from having an assembly unit in the north may not be that high for TAFE.

Further, TAFE will also have distribution issues to deal with, if there a mix of both the brands is contemplated at a later date.

For Eicher, there couldn't be a better time to divest the tractors business.

The division has reported a strong growth in profits during the nine months ended December 2004 and as such valuation of the division and the engine and gear manufacturing assets can be expected to be higher now than about two years ago.

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