Faltoo Tractors Case Mr. Dolly Dasgupta is the CEO of Faltoo Tractors India Ltd.

The company is a leading tractor manufacturer and has interests in the farm equipment industry as well. Off late though Mr. Dasgupta is facing a tough time coping with several issues afflicting his company. Some members of the senior management suggested that he appoint a team of consultants to come up with solutions for the problems faced by the company. Thus, Mr. Dasgupta writes to the Lakeside Partners, a leading consulting firm, and asks for their assistance in answering some puzzling questions. As a team representing the Lakeside Partners, help Mr. Dasgupta in clearing the mess. Exhibit 1: The Letter from CEO From: dolly.dasgupta@faltootractors.com To: partners@lakesidepartners.com Date: 28/09/2009 Sub: Achieving superior operational performance and enhancing shareholder value in Faltoo Tractors India Ltd. Dear All, You might have received several mails like this in the past. I am in the difficult situation of having to balance the two strongest pillars of my organizations success. As a leading manufacturer of tractors, we have seen our revenue slide due to the lackluster performance of our top model and hence, we need to ramp up support for this product in terms of marketing and promotional support. On the other hand, product innovation which has been our core strength too has come up with a game-changing solution, with huge revenue opportunities. However, in these times of financial turmoil, the cost of funds is prohibitive and hence, I need to choose one of these for now and keep the other on the back burner. I need your help in making this choice. Apart from our tractor business, we also have trouble with our farm equipment business and there is proposed solution to start our own distribution channel to give improved visibility to our products, which are not doing very well right now. I also request you to evaluate this course of action. It is also imperative to understand that the shareholder interests have to be kept in mind and one false step will lead to catastrophe in the stock market, ruining years of built-up reputation.

With all these considerations, I seek your advice on the above mentioned areas and promise complete cooperation from my organization towards this effort. Regards, Dolly Dasgupta

Exhibit 2: About the company Faltoo Tractors India Ltd. is among the leading tractor makers in the country. It was launched as Fully Faltoo Tractors India Ltd. in the year 1965 by Mr. Champu Chakravarty, with collaboration in machinery and technology from Russia (then USSR). Later on as the firm outgrew its Russian roots, the company rechristened itself as Faltoo Tractors India Ltd and began aggressive marketing of its products apart from devoting considerable resources to product R&D. The companys growth coincided with the Green Revolution in the country and thus, a spiraling demand for its products. Over the years, the company produced many reliable models and thus, created a positioning as a quality manufacturer of tractors. The company reached out to its customers through a network of distributors spread across the country, with a concentration in the northern parts of the country. The distributors were also point of sales for making various other purchases related to agriculture like fertilizers, pesticides, equipments etc. Due to its successful branding and superior performance over the years, the company had built a good rapport with the distributor network as well. The company was listed on leading exchanges on the country in the year 2004 and performed steadily, with the backing of a booming economy, healthy monsoons and correlated growth in agricultural output. In January 2008, the company announced its plans of entering into the farm equipment industry as they felt that the industry had considerable synergies with their existing line of business. Though the prices of the companys stock plummeted with this announcement, it was presumed that this was primarily due to the meltdown experienced by the markets. The company went ahead as planned into the farm equipment business with expansion plans for the future. The company expected to carry its high-quality image into the new line of business and create a space for itself in the largely diffused marketplace. However, the company faced losses in the farm equipment venture in the first 6 months of operation. The members of the sales force attributed this to lack of awareness among consumers regarding the product and requested for improved marketing budgets and discount-based promotional programs. Though this program created an initial upsurge in topline, the sales became flat once again after the end of the schemes, clearly showing that these programs had no impact on sustainable growth.

The sales force came back saying that since the market is highly competitive, it would be advisable to launch our own set of stores or points of sale, which will sell both tractors as well as farm equipment and give their products improved visibility. The sales force envisions a complete package solution for the customers for all their agricultural needs. Exhibit3: About the tractor industry and its market in India The tractor industry in India is different from other industries in the world because of the following reasons: a. the average size of land holding is smaller in India, hence, requiring smaller sized tractors unlike other countries b. significant intervention by Government in the industry as it directly impacts livelihood of a significant proportion of the population The industry in India has the following major players: a. Mahindra and Mahindra Ltd market share 27% b. Escorts 24% c. Faltoo Tractors Ltd 23% d. TAFE 6% Other players make up the remaining share of the market. While modernization came late in Indian agriculture, the learning curve has been pretty steep. The tractor purchases are carried out mainly by village co-operative unions in conjunction with the demands expressed its constituent members. Overtime these unions have developed considerable expertise and power in analyzing product quality and performance. Besides these unions are also hard bargainers and try to get significant mark downs for their purchases, which are duly passed on to the manufacturers, further pinching their margins. More over the business of making tractors requires high capital investment and superior engineering capability, the latter being achieved only over a period of time. Another major factor that impacts the profitability of the tractor manufacturers is the price of steel, a critical raw material in the manufacturing process. The industry is does not act in a cyclical fashion and the average age of the product is 6 years, while product rollout takes at least a years time. Exhibit4: About the farm equipment industry in India The farm equipments consisted of products like irrigation sprinkler components, fogger nozzles etc. The nature of the product usage was such that these were required in phases for a limited time during the farming activity and did not last

more than a year in use. The products provide extremely low value addition and are easily replaceable in case of damage. The marketplace was littered with multiple players, each producing a certain category of equipment and specializing within that category. Even within individual categories, a low capital requirement ensured a good number of manufacturers were vying for a piece of the revenue pie. The mode of selling these farm equipments to the end users is through distributor and dealer networks, which stock these farm equipments but are primarily involved in selling tractors and other major farm equipments like harvesters. Faltoo Tractors saw an opportunity for the presence of a premium brand, with presence across all major categories of equipments and hence, decided to enter into this business. Exhibit5: Cost breakup for Faltoo Tractors India Ltd. (As a %age of selling price to customers) Cost of Goods Sold Administrative Overhead Sales and Marketing Expenses Total Margin to Distributor Margin to Company Markdown to Unions Selling price to Customer Exhibit6: Product Information Faltoo Tractors has traditionally come up with a number of highly popular products in the past. The first model was FAC, which was later upgraded to CAC. These successful models were followed by OM-I and OM-II, which remained their most successful products for long after which the company launched FM-I, though FM-I was followed by FM-II the model proved a disaster and the company took its first major hit. The current product stable has 4 major models, named VMAC, CorpStrat, SADMA and MR, out of which VMAC accounts for 70% of their sales. VMAC was launched in the year 2005 and was an instant hit. However, lately the model has been witnessing a gradual decline in sales, partly due to increased competition and also to some extent due to cannibalization by the other 3 models, which are relatively newer. The company plans to tackle this by improving margins to distributors on the product as well as by enhanced marketing of the VMAC model. 65 9 7 81 9 8 2 100

The R&D department has also come up with a new product concept, currently called SAPM, which can revolutionize the tractor market in terms of efficiency and productivity of the machine. However, the team is waiting for a go ahead from the CEO to pursue the idea further as it involves substantial investments. Exhibit7: Financial Information According to the latest financial reports Tractors business EBITDA Rs 25 crores Return on Capital Employed = 16% Farm Equipment business EBITDA Rs 0.3 crores Return on Capital Employed = 7.8% The value weighted cost of capital for Faltoo Tractors is 12%